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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-4
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GOLDEN SKY DBS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 4841 43-1839531
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(816) 753-5544
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrants' 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:
KAREN C. WIEDEMANN, ESQ.
REBOUL, MACMURRAY, HEWITT, MAYNARD & KRISTOL
45 ROCKEFELLER PLAZA
NEW YORK, NY 10111
(212) 841-5700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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(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. [ ]
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE
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13 1/2% Senior $193,100,000 53.0% $102,335,308 $28,450
Discount Notes, Principal Amount
due 2007, Series B At Maturity
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(1) Estimated solely for the purpose of calculating the registration fee based
on the aggregate accreted value of the 13 1/2% Senior Discount Notes due
2007, Series A, as of April 16, 1999.
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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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PROSPECTUS
GOLDEN SKY DBS, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
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MATERIAL TERMS OF THIS EXCHANGE OFFER
- - We are offering to exchange our new 13 1/2% Senior Discount Notes due 2007,
Series B, for our outstanding 13 1/2% Senior Discount Notes Due 2007, Series
A, which we sold in a private offering on February 19, 1999,
- - Unless we extend it, this exchange offer expires at 5:00 p.m., New York City
time, on , 1999,
- - We will accept for exchange all outstanding notes that are properly tendered
and not validly withdrawn prior to the expiration of this exchange offer,
- - Outstanding notes that are tendered may be withdrawn any time prior to the
expiration of this exchange offer,
- - Unlike the outstanding notes, the new notes will have been registered under
the Securities Act of 1993,
- - The terms of the new notes are identical in all material respects (including
principal amount at maturity, yield to maturity and maturity) to the terms of
the outstanding notes, except that the new notes do not contain the transfer
restrictions or registration rights relating to the outstanding notes,
- - Although we have agreed to pay all the expenses of this exchange offer, we
will not receive any proceeds from it, and
- - If you do not tender your outstanding notes in this exchange offer, they will
remain outstanding and will be entitled to substantially all of the same
rights and subject to the same limitations, including restrictions upon
transfer, applicable to them now.
Following this exchange offer, we will have no further obligation to register
outstanding notes under the Securities Act. To the extent that outstanding notes
are tendered and accepted in this exchange offer, the ability to resell
outstanding notes that are not tendered could be adversely affected. See "Risk
Factors -- Consequences of the Exchange Offer to Holders of the Outstanding
Notes" and "The Exchange Offer -- Terms of the Exchange Offer."
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THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL THAT YOU ARE RECEIVING WITH
IT CONTAIN IMPORTANT INFORMATION. YOU ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER YOUR
OUTSTANDING NOTES FOR NEW NOTES PURSUANT TO THIS EXCHANGE OFFER.
This prospectus, together with the accompanying letter of transmittal, is
being sent to all registered holders of outstanding notes as of ,
1999.
We are not making this exchange offer to, nor will we accept tenders from,
or on behalf of, holders of outstanding notes in any jurisdiction in which the
making or acceptance of this exchange offer would violate applicable law.
SEE "RISK FACTORS" ON PAGE 17 FOR A DESCRIPTION OF SOME RISKS THAT YOU
SHOULD CONSIDER BEFORE YOU DECIDE TO TENDER YOUR OUTSTANDING NOTES FOR NEW NOTES
IN THIS EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
COMPLETENESS OR TRUTH OF THIS PROSPECTUS. ANY STATEMENT TO THE CONTRARY IS
AGAINST THE LAW.
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The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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PAGE
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Additional Information...................................... 1
Forward-Looking Statements.................................. 2
Sources of Material Information............................. 3
Summary of the Prospectus................................... 4
Risk Factors................................................ 17
Use of Proceeds............................................. 31
The Exchange Offer.......................................... 31
Capitalization.............................................. 37
Pro Forma Financial Statements.............................. 38
Selected Consolidated Financial Data........................ 43
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 45
Business.................................................... 55
Management.................................................. 69
Principal Stockholders...................................... 74
Certain Relationships and Related Transactions.............. 78
Description of Other Indebtedness........................... 81
Description of the New Notes................................ 85
Book Entry; Delivery and Form............................... 116
Certain Federal Income Tax Considerations................... 119
Plan of Distribution........................................ 123
Legal Matters............................................... 123
Experts..................................................... 123
Index to Financial Statements............................... F-1
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ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 with respect to the new notes. This prospectus does not
contain all the information described in such registration statement and its the
exhibits and schedules. The registration statement and its exhibits and
schedules may be inspected and copied at prescribed rates at
(1) the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
(2) the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048,
(3) the regional offices of the Commission located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, or
(4) the Public Reference Section of the Commission located at 450
Fifth Street, N.W., Washington, D.C. 20549.
The Commission also maintains a Web site that contains reports, proxy
statements and other information regarding companies, including ours, that
electronically file such information with the Commission. The address of the
Commission's Web site is http://www.sec.gov.
Because we registered the new notes with the Commission, we are now subject
to the reporting requirements of the Securities Exchange Act of 1934. As
provided in the Exchange Act, we are required to file periodic reports and other
information with the Commission. Our obligation to file this information with
the Commission under the Exchange Act may be suspended if the new notes are
owned in the name of less than 300 holders at the beginning of any of our fiscal
years, other than the fiscal year in which the
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registration statement becomes effective. However, the indenture governing the
notes provides that we must file with the Commission and provide you with copies
of annual reports and the other information, documents and reports specified in
Sections 13 and 15(d) of the Exchange Act as long as any of the outstanding
notes or new notes remain outstanding.
Important business and financial information about our company is deemed to
be a part of this prospectus even though it is not included in, or delivered
with, this prospectus. This information is available without charge to you upon
written or oral request to us at 4700 Belleview Avenue, Suite 300, Kansas City,
Missouri 64112, Attention: Investor Relations, (816) 753-5544. To obtain such
information, you must request the information no later than five business days
prior to the expiration date of the exchange offer.
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FORWARD-LOOKING STATEMENTS
This prospectus forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to known and unknown
risks, uncertainties, and assumptions about us, including
- uncertainties regarding our acquisition strategy,
- our dependence on our service providers and agreements to deliver our
programming services,
- trends in our industry, including continued growth of the direct-to-home
television industry, upgrading of cable systems, continued consolidation,
increased competition with other subscription television providers and
the development of new technologies,
- uncertainties regarding our ability to continue to grow and retain our
subscriber base, including unforeseen increases in the cost to acquire
new subscribers,
- an unexpected interruption of our business or the collection of our
revenues due to the failure of parties other than us to remediate Year
2000 issues,
- our reliance on satellite transmission technology,
- government regulation of our business, and
- general economic and business conditions.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether from new information, future events or otherwise. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur.
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SOURCES OF MATERIAL INFORMATION
This prospectus contains information obtained from sources other than us
concerning, among other things,
- our industry and markets,
- our principal direct and indirect suppliers of services,
- DIRECTV, Inc. (DIRECTV),
- the NRTC (as defined in the first paragraph of the "Summary of the
Prospectus" section below),
- Rural DIRECTV Markets (as defined in the first paragraph of the "Summary
of the Prospectus" section below), and
- the NRTC's relationship (contractual and otherwise) with DIRECTV.
Such information is material to understanding our business and prospects.
Specifically, while our sole business is the offering of DIRECTV services, we
have no direct contractual relationship with DIRECTV relating to our principal
markets and obtain those services through the NRTC. The NRTC receives DIRECTV
services pursuant to arrangements with DIRECTV, the terms of which have been
kept confidential by the NRTC. We rely upon the NRTC to have accurately
represented the scope and term of its arrangements with Hughes Communications
Galaxy, Inc., DIRECTV's predecessor-in-interest (Hughes) and DIRECTV. Under our
arrangements with the NRTC, the NRTC provides substantial services to us,
including billing and customer authorization, and we rely upon the NRTC to
provide us with accurate and complete information concerning our customers.
Information concerning 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. Except where otherwise indicated, information regarding
numbers of households and/or subscribers in Rural DIRECTV Markets is based upon
information compiled by Claritas, Inc., which we have supplemented where
necessary with information compiled by the U.S. Postal Service. Other
industry-related information has been derived from Sky Report and DBS Digest.
While we believe these and other third-party sources of information to be
reliable, we have not independently verified such information and are not in a
position to do so. We make no representation as to the accuracy or completeness
of such information. See "Risk Factors -- Our Reliance Upon the NRTC."
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) and DirecPC(R).
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SUMMARY OF THE PROSPECTUS
This summary may not contain all the information that may be important to
you. We urge you to carefully read the entire prospectus, including the
financial data and related notes, and the other documents to which it refers to
fully understand the terms of the notes and the exchange offer. Golden Sky DBS,
Inc. (Golden Sky DBS), the issuer of the notes, is a newly-formed holding
company whose sole asset is the capital stock of Golden Sky Systems, Inc.
(Systems), its operating subsidiary. The terms "our company," "us," "we," "our"
and "ours" as used in this prospectus refer to Golden Sky DBS, its parent
company, Golden Sky Holdings, Inc. (Holdings), and its subsidiaries as a
combined entity, except where it is clear from the context that such terms refer
only to Golden Sky DBS, the issuer of the notes. We also use other defined terms
in this prospectus, including the following: "NRTC" refers to the National Rural
Telecommunications Cooperative, an organization whose members are engaged in the
distribution of telecommunications and other services in rural America and
"Rural DIRECTV Markets" mean those areas in the United States in which the NRTC
and some of its members and affiliates (including our company) have the
exclusive right to provide DIRECTV services to residential customers. In
addition, there are statements in this prospectus which include forward-looking
statements that involve risks and uncertainties. See "Forward-Looking
Statements."
OUR COMPANY
We are the second largest independent provider of DIRECTV. DIRECTV is the
leading Direct Broadcast Satellite (DBS) company serving the continental United
States. We market and provide DIRECTV programming on an exclusive basis to
residential customers in our Rural DIRECTV Markets and on a non-exclusive basis
to residents of multiple dwelling units and commercial customers. We have
obtained the exclusive right to provide DIRECTV programming to homes in our
Rural DIRECTV Markets under agreements with the NRTC. The NRTC and its DBS
members and affiliates (including our company) provide DIRECTV programming in
Rural DIRECTV Markets pursuant to an agreement between the NRTC and Hughes. We
estimate that the Rural DIRECTV Markets comprise approximately 9.0 million
households, or approximately 9% of total U.S. television households, but account
for approximately 1.0 million or approximately 22%, of total DIRECTV customers.
Since June 1996, when we were formed by management through March 31, 1999,
we have
- acquired 52 Rural DIRECTV Markets in 23 states with approximately 1.8
million households and 134,700 subscribers at the dates of acquisition,
- increased our subscriber base in these markets by approximately 92% in
the aggregate, to approximately 258,900, achieving a subscriber
penetration rate of approximately 14% through aggressive marketing and a
local, service-driven approach to our customers,
- commenced marketing and distributing DIRECTV programming to approximately
4,600 commercial and multiple dwelling unit customers in five cities near
our Rural DIRECTV Markets, with rights to provide such services on a
non-exclusive basis nationwide, and
- raised $87.4 million of equity capital from several institutional venture
capital firms and our management, secured $150.0 million of senior bank
financing, issued $195.0 million of Systems' senior subordinated notes
and raised $100.0 million gross proceeds from the offering of the
outstanding notes.
Our revenue has increased rapidly due to internal subscriber growth and a
low average annual subscriber disconnect (churn) rate (approximately 9% for the
twelve months ended December 31, 1998). Net internal subscriber growth in our
Rural DIRECTV Markets during 1998 totaled approximately 80,300. This represented
approximately 7% of DIRECTV's net new subscribers nationwide for the period,
although total households in our Rural DIRECTV Markets approximated just 1.5% of
all television households in the continental United States. Although we incur
substantial costs to add subscribers, we have relatively low recurring costs to
service them. We believe these factors provide us an opportunity to increase our
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operating leverage and provide strong growth in EBITDA. We had EBITDA (as
defined in this summary under the heading "Summary Historical and Pro Forma
Financial and Other Data") of approximately negative $5.4 million and negative
$20.0 million for the years ended December 31, 1997 and 1998, respectively.
We believe that our exclusive right to provide DIRECTV programming in our
Rural DIRECTV Markets is attractive for the following reasons:
- we believe that marketing DIRECTV, the country's leading DBS provider,
gives us a competitive advantage over providers of other subscription
television services;
- competition from cable television providers in Rural DIRECTV Markets is
often limited;
- as a local provider of DIRECTV programming, we are supported by DIRECTV's
national marketing campaigns and extensive retail distribution network.
Additionally, three major consumer electronics manufacturers currently
compete to provide our customers with satellite receivers and related
equipment required to receive DIRECTV programming; and
- we have had, and we continue to have, an opportunity to grow through
acquisitions, rationalize operations and realize operating leverage
because ownership of Rural DIRECTV Markets has historically been, and
continues to be, fragmented.
We intend to leverage our competitive strengths by
- emphasizing direct sales and local customer service, which we believe
generates rapid subscriber growth, higher customer satisfaction and lower
churn,
- acquiring additional Rural DIRECTV Markets to continue the expansion of
our core business, and
- developing related business opportunities that rely on our existing local
sales and service organization.
In addition to our business in Rural DIRECTV Markets under agreements with
the NRTC, we have developed other business relationships with DIRECTV and its
affiliated companies. For example, we were chosen in January 1998 by DIRECTV as
a master system operator to market and provide DIRECTV programming nationally to
residents of multiple dwelling units and commercial establishments. In February
1998, we began marketing and providing DIRECTV programming to residents of
multiple dwelling units and commercial establishments in five major metropolitan
areas near our rural territories. We intend to focus our multiple dwelling units
and commercial activities in high-growth urban areas near our Rural DIRECTV
Markets to create a larger universe of potential subscribers while maintaining
our fixed cost base. Also during 1998 we began test marketing DirecPC, a
satellite-based Internet access service.
RECENT DEVELOPMENTS
On December 14, 1998, Hughes announced that it will acquire United States
Satellite Broadcasting Company (USSB) for approximately $1.3 billion. On January
22, 1999, DIRECTV announced that it will acquire certain of Primestar Inc.'s and
one of its affiliates' assets for approximately $1.8 billion. The completion of
each of these acquisitions is dependent upon the occurrence or non-occurrence of
certain events and we cannot assure you that either will be completed. We are
not yet able to assess the effect of either acquisition on our future business,
financial position or results of operations. The information contained in this
offering memorandum related to the number of households and subscribers in our
Rural DIRECTV Markets does not reflect the impact, if any, of these announced
acquisitions. We cannot yet determine whether and how these acquisitions, if
consummated, would affect our rights in our Rural DIRECTV Markets or our capital
requirements.
Since December 31, 1998, we have acquired seven rural DIRECTV Markets.
These territories include approximately 116,000 households and 17,200
subscribers. The aggregate purchase price for these recent
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acquisitions was approximately $31.4 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.
Golden Sky DBS was formed on February 2, 1999 for the purpose of issuing
the outstanding notes. Immediately before the outstanding notes were issued,
Golden Sky DBS became an intermediate holding company for our operating
subsidiary, Systems.
RISK FACTORS
There are risks associated with owning the notes. Some of the risks of an
investment in the notes are described below.
- During our limited operating history we have generated net losses and
negative EBITDA and we may continue to do so.
- Our substantial indebtedness could have material adverse consequences to
the holder of the notes.
- Holders of the notes have no direct claim against our subsidiaries.
- Restrictions on dividends in our subsidiaries' debt instruments may
prevent them from providing us with adequate cash to make interest
payments on the notes.
- To service our indebtedness, we will require a significant amount of
cash. Our ability to generate cash depends on many factors beyond our
control. To make required payments on the notes, we may need to refinance
the notes.
- The restrictive terms of our debt instruments may impair our ability to
pursue our business objectives. If we fail to comply with those terms,
our debt can be accelerated and there may be insufficient assets to meet
our obligations.
- Our actual cash requirements may materially exceed our estimates of our
capital requirements and our available capital.
- We might not be able to realize the expected benefits of past and future
acquisitions. Also, we may not be able to identify suitable future
acquisition candidates.
- We may be adversely affected by any material change in the assets,
financial condition, programming, technological capabilities or services
of DIRECTV or Hughes.
- Our ability to offer DIRECTV programming depends upon agreements between
the NRTC and Hughes. The NRTC's interests may differ from our interests.
We rely on the NRTC in numerous ways in the conduct of our business.
- We may not be able to acquire DBS services or sell our subscriber base
after the expiration of our agreements with the NRTC.
- We may not have the ability to improve our operational procedures and
hire personnel capable of managing our rapid growth. Such inability may
have a material adverse effect on our financial condition and results of
operations.
- The holders of the notes may suffer adverse tax consequences because the
outstanding notes were issued at a discount from their principal amount
at maturity.
- Currently there is no active market for the outstanding notes and we
cannot assure you that one will develop for the new notes.
- Consummation of this exchange offer may have materially negative
consequences for non-tendering holders of the outstanding notes.
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You should consider carefully all of the information contained in this
prospectus prior to tendering your outstanding notes for new notes in this
exchange offer. In particular, you should carefully consider each of the factors
set forth under "Risk Factors" beginning on page 17 of this prospectus.
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Our principal executive offices are located at 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112. Our telephone number is (816) 753-5544.
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THE OFFERING OF THE OUTSTANDING NOTES
Outstanding Notes.......... We sold the outstanding notes on February 19, 1999
to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities
LLC, Donaldson, Lufkin & Jenrette Securities
Corporation and Fleet Securities, Inc. as
contemplated by a purchase agreement, dated
February 11, 1999. These initial purchasers
subsequently resold the outstanding notes to
qualified institutional buyers pursuant to Rule
144A under the Securities Act and pursuant to
offers and sales that occurred outside the United
States within the meaning of Regulation S under the
Securities Act.
Registration Rights
Agreement.................. Pursuant to the February 11, 1999 purchase
agreement, we and the initial purchasers of the
outstanding notes entered into a registration
rights agreement, dated February 19, 1999. The
registration rights agreement grants certain
exchange and registration rights to the holders of
the outstanding notes. We are making this exchange
offer to satisfy our obligations under the
registration rights agreement. Upon the completion
of this exchange offer, your exchange rights under
such agreement will terminate.
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer......... We are offering to exchange up to $193,100,000
aggregate principal amount at maturity of our
13 1/2% Senior Discount Notes due 2007, Series B,
for the same amount of our 13 1/2% Senior Discount
Notes due 2007, Series A. The terms of the new
notes are identical in all material respects
(including principal amount, yield to maturity and
maturity) to the terms of the outstanding notes.
The new notes, however, do not contain the transfer
restrictions or the registration rights relating to
the outstanding notes. See "Description of the New
Notes." The issuance of the new notes is intended
to satisfy our obligations contained in the
registration rights agreement relating to the
outstanding notes.
Expiration Date; Withdrawal
of Tender.................. Unless we extend it, this exchange offer will
expire at 5:00 p.m. New York City time, on ,
1999. Any tender of outstanding notes pursuant to
this exchange offer may be withdrawn at any time
prior to such expiration.
Accretion of the New Notes
and the Outstanding
Notes.................... Cash interest will not accrue or be payable on the
new notes prior to March 1, 2004. Thereafter,
interest will accrue at the rate of 13 1/2% per
year, payable semi-annually on each March 1 and
September 1 beginning September 1, 2004.
Outstanding notes which are validly tendered and
accepted for exchange will continue to accrete in
principal amount at a rate of 13 1/2% per year to,
but excluding, the date of issuance of the new
notes. Any outstanding notes not tendered or
accepted for exchange will continue to accrete in
principal amount at the rate of 13 1/2% per year in
accordance with their terms. The accreted value of
the new notes upon issuance will be the same as the
accreted value of the outstanding notes accepted
for exchange immediately prior to the issuance of
the new notes.
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Procedures for Tendering... Each holder of outstanding notes wishing to accept
this exchange offer must
- complete, sign and date the letter of transmittal
which accompanies this prospectus, or a facsimile
of the letter of transmittal, in accordance with
the instructions contained in the letter of
transmittal and this prospectus, and
- mail or otherwise deliver the letter of
transmittal, or a facsimile of the letter of
transmittal, together with any other required
documentation, to United States Trust Company of
New York, as exchange agent, at the address
contained in the letter of transmittal and this
prospectus.
If you sign and return the letter of transmittal
you will be making a representation that, among
other things,
(1) you are receiving the new notes in the
exchange offer in the ordinary course of your
business,
(2) You have no arrangement with another person
to participate in the distribution of the new
notes received by you,
(3) you are not an "affiliate" (as defined in
Rule 405 under the Securities Act) of ours,
and
(4) if you are a broker or a dealer (as defined
in the Exchange Act), you acquired your
outstanding notes for your own account as a
result of market-making or other trading
activities, and that you have not entered
into any arrangement with us or any of our
affiliates to distribute the new notes to be
received by you in the exchange offer.
In the case of a broker-dealer that receives new
notes for its own account in exchange for
outstanding notes that were acquired by it as a
result of market-making or other trading
activities, the letter of transmittal will also
include an acknowledgment that the broker-dealer
will deliver a copy of this prospectus in
connection with the resale by it of any new notes
received pursuant to this exchange offer. See "Plan
of Distribution."
Guaranteed Delivery
Procedures................. Holders of outstanding notes who wish to accept
this exchange offer and cannot complete the
procedures for tendering on a timely basis may
effect a lender according to the guaranteed
delivery procedures described in "The Exchange
Offer -- Procedures for Tendering."
Federal Income Tax
Consequences............. The exchange of outstanding notes for new notes
will not result in any income, gain or loss to you
or us for Federal income tax purposes. See "Certain
Federal Income Tax Considerations."
Exchange Agent............. United States Trust Company of New York is serving
as the exchange agent in connection with this
exchange offer. The address and telephone number of
the exchange agent are shown in "The Exchange
Offer -- Exchange Agent."
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Consequences of Exchanging
Outstanding Notes
Pursuant to the Exchange
Offer.................... Based on interpretations by the staff of the
Commission, we believe that new notes issued in
this exchange offer may, in most circumstances, be
offered for resale, resold and otherwise
transferred by you without compliance with the
registration and prospectus delivery provisions of
the Securities Act. You will not, however, be free
to resell or otherwise transfer the new notes if
(1) you are an "affiliate" of our company (within
the meaning of Rule 405 under the Securities
Act), or
(2) you did not acquire the outstanding notes in
the ordinary course of your business, or
(3) you have an arrangement with any person to
participate in the distribution of such new
notes.
In addition, if you are a broker-dealer that
receives new notes for your own account pursuant to
this exchange offer, you must acknowledge that you
will deliver a prospectus in connection with any
resale of those new notes. The letter of
transmittal which accompanies this prospectus
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for
outstanding notes so long as such outstanding notes
were acquired by the broker-dealer as a result of
market-making or trading activities. See "Plan of
Distribution."
To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for
sale or register the new notes prior to offering or
selling such new notes. We do not currently intend
to register or qualify the sale of the new notes in
any such jurisdictions.
Outstanding Notes Which Are
Not Tendered............. Following this exchange offer, holders of
outstanding notes eligible to participate but who
do not tender their outstanding notes will not have
any further exchange rights. The transfer of
outstanding notes which are not tendered will
continue to be restricted. This could adversely
affect the ability of holders of outstanding notes
to transfer them later.
Consequences of Failure to
Exchange................. If you do not exchange your outstanding notes for
new notes pursuant to this exchange offer, such
outstanding notes will continue to be subject to
the restrictions on transfer contained in the
legend which appears on the outstanding notes. In
general, they may not be offered or sold unless
they are registered under the Securities Act.
Offers or sales of the outstanding notes will only
be allowed pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and
applicable state securities laws. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Book Entry; Delivery and
Form....................... The new notes will initially be available only in
book-entry form. We expect that the new notes
issued in this exchange offer will be issued
10
<PAGE> 13
in the form of one or more global notes, which will
be deposited with, or on behalf of, The Depository
Trust Company (DTC) and registered in its name or
in the name of Cede & Co., its nominee. Beneficial
interests in the global note representing the new
notes will be shown on, and transfers thereof will
be effected through, records maintained by DTC and
its participants. After the initial issuance of
such global note, new notes in certified form will
be issued in exchange for the global note only upon
the terms described in the indenture governing the
notes. See "Book Entry; Delivery and Form."
11
<PAGE> 14
SUMMARY DESCRIPTION OF THE NEW NOTES
The form and terms of the new notes will be identical in all material
respects to the outstanding notes, except for transfer restrictions and
registration rights relating to the outstanding notes. The indebtedness to be
represented by the new notes is the indebtedness currently represented by the
outstanding notes. The new notes will be governed by the same indenture as the
outstanding notes. The new notes and the outstanding notes will be entitled to
the same benefits under the indenture, which will treat all the notes as a
single class of debt securities. See "Description of the New Notes."
Issuer..................... Golden Sky DBS, Inc.
4700 Belleview Avenue, Suite 300
Kansas City, Missouri 64112
(816) 753-5544
Notes Offered.............. $193,100,000 aggregate principal amount at maturity
of 13 1/2% Senior Discount Notes due 2007.
Maturity Date.............. March 1, 2007.
Yield and Interest......... 13 1/2% per year (calculated on a semi-annual bond
equivalent basis) calculated from February 19,
1999. Cash interest will not accrue on the notes
prior to March 1, 2004. Thereafter, cash interest
on the notes will accrue at a rate of 13 1/2% per
year and be payable on March 1 and September 1 of
each year, commencing September 1, 2004. For United
States federal income tax purposes, holders of the
notes will be required to include amounts in gross
income in advance of the receipt of cash payments
to which the income is attributable. See "Certain
Federal Income Tax Considerations."
Ranking.................... The notes are unsecured and will effectively rank
below all liabilities of our subsidiaries. Our
ability to pay interest on these notes when
interest becomes due and to redeem these notes at
maturity will depend on whether our subsidiaries
can pay dividends and other distributions to us
under the terms of their indebtedness and
applicable law.
After giving effect to this offering and our use of
the offering proceeds, at December 31, 1998, we
would have had $346.3 million of consolidated
indebtedness outstanding. On the same basis, at
December 31, 1998, our subsidiaries would have had
$246.2 million of indebtedness.
Optional Redemption........ We may redeem the notes, in whole or in part, at
any time, on or after March 1, 2004, at the
redemption prices (expressed as percentages of
principal amount at maturity) set forth below, plus
accrued and unpaid interest, if any, to the
redemption date, if redeemed during the
twelve-month period beginning on March 1 of the
years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2004...................................... 106.750%
2005...................................... 103.375%
2006 and thereafter....................... 100.000%
</TABLE>
Public Equity Offering
Optional Redemption........ On or prior to March 1, 2002, we may redeem up to
35% of the originally issued aggregate principal
amount at maturity of the notes
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<PAGE> 15
with the net proceeds of one or more public equity
offerings that yields gross proceeds of at least
$40 million, if at least 65% of the originally
issued aggregate principal amount at maturity of
the notes remains outstanding following such
redemption. The redemption price would be equal to
113.5% of the then accreted value of the notes. See
"Description of the New Notes -- Optional
Redemption."
Change of Control.......... Upon specific changes of control we must make an
offer to repurchase all or a portion of the notes
at a purchase price equal to 101% of the accreted
value of the notes, plus accrued and unpaid
interest, if any, to the purchase date. See
"Description of the New Notes -- Change of
Control."
Original Issue Discount.... The notes bear original issue discount for United
States federal income tax purposes. Thus, although
cash interest will not be payable on the notes
before September 1, 2004, the holders of the notes
that are subject to U.S. federal income taxation
(including holders that account for their taxable
income on a cash basis) will be required to include
such original issue discount in their income on a
constant yield-to-maturity method basis, before
they receive the cash payments to which such income
is attributable. See "Certain Federal Income Tax
Considerations."
Certain Covenants.......... The indenture governing the notes contains
covenants that, among other things, limits our
ability and the ability of our subsidiaries to
- incur additional indebtedness,
- pay dividends on, redeem or repurchase our
capital stock,
- make investments,
- issue or sell capital stock of restricted
subsidiaries,
- create specific types of liens,
- sell assets,
- engage in transactions with affiliates, and
- consolidate, merge or transfer all or
substantially all our assets and the assets of
our subsidiaries on a consolidated basis.
These covenants are subject to important exceptions
and qualifications, which are described under the
heading "Description of the New Notes" in this
prospectus.
For additional information regarding the new notes, see "Description of the New
Notes."
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<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table presents our financial and operating information for
the periods indicated. The information presented below is taken from our audited
consolidated financial statements for the periods ended December 31, 1996, 1997
and 1998. The financial and operating information for the businesses we have
acquired was taken from the historical financial statements of the acquired
entities.
The following pro forma statement of operations data present our financial
position adjusted for
(1) acquisitions we have completed during or after the period presented and
related financings, but excluding 11 acquisitions that are immaterial
individually and in the aggregate,
(2) System's offering of $195 million in aggregate principal amount of
12 3/8% Senior Subordinated Notes due 2006,
(3) the amendment of our credit facility that became effective at the same
time as the closing of the offering of the outstanding notes, and
(4) the offering of the outstanding notes and the application of those
offering proceeds.
Such information is presented as if each of these events had occurred at
the beginning of 1998.
The following pro forma balance sheet data present our financial position
adjusted for
(1) the amendment of our credit facility that became effective at the same
time as the closing of the offering of the outstanding notes, and
(2) the offering of the outstanding notes and the application of those
offering proceeds.
Such information is presented as if each of these events had occurred as of
December 31, 1998.
These summary pro forma data do not present the results of operations that
would have been achieved had such transactions been closed as of the assumed
dates. In addition, this pro forma information is not intended to predict future
results of operations. 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 Results of Operations and Financial Condition," and the individual financial
statements and notes thereto of certain acquired businesses appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
INCEPTION TO ------------------------
DECEMBER 31, YEAR ENDED PRO FORMA
1996 DECEMBER 31, 1997 HISTORICAL AS ADJUSTED
------------ ----------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services................................ $ 219 $ 16,452 $ 74,910 $ 86,786
Lease and other............................. 36 944 1,014 1,140
------- -------- -------- --------
Total revenue................................. 255 17,396 75,924 87,926
Costs and expenses:
Cost of DBS services........................ 130 9,304 45,291 52,861
System operations........................... 26 3,796 11,021 12,843
Sales and marketing......................... 73 7,316 32,201 32,600
General and administrative.................. 1,035 2,331 7,431 7,470
Depreciation and amortization............... 97 7,300 23,166 29,475
------- -------- -------- --------
Total costs and expenses...................... 1,361 30,047 119,110 135,249
------- -------- -------- --------
Operating loss................................ (1,106) (12,651) (43,186) (47,323)
Net interest expense.......................... (61) (3,133) (18,964) (43,197)
------- -------- -------- --------
Net loss before extraordinary charge.......... $(1,167) $(15,784) $(62,150) $(90,520)
======= ======== ======== ========
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
PRO FORMA
DECEMBER 31, 1997 HISTORICAL AS ADJUSTED
----------------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.............................. $ 13,632 $ 4,460 $ 72,352
Restricted cash(1):
Current.............................................. -- 28,083 22,741
Long-term............................................ -- 23,534 23,534
Working capital........................................ 3,827 15,204 77,754
Total assets........................................... 156,236 328,071 393,184
Total debt............................................. 69,113 278,204 346,253
Stockholder's equity................................... 70,449 15,922 12,986
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
INCEPTION TO -----------------------
DECEMBER 31, YEAR ENDED PRO
1996 DECEMBER 31, 1997 HISTORICAL FORMA
------------ ----------------- ---------- ----------
(IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA
EBITDA(2)..................................... $(1,009) $ (5,351) $ (20,020) $ (17,578)
Net cash used in operating activities......... (790) (3,099) (36,588)
Net cash used in investing activities......... (3,231) (120,729) (159,921)
Net cash provided by financing activities..... 4,500 136,981 187,337
Capital expenditures.......................... 105 998 3,317 3,317
Aggregate purchase price of acquisitions...... 5,256 129,725 124,844 135,729
OPERATING DATA
Households at end of period(3)(4)............. 22,000 1,135,000 1,727,000 1,767,000
Subscribers acquired in acquisitions(4)....... 3,000 65,700 55,300 61,000
Subscribers added in existing Rural DIRECTV
Markets(4).................................. 200 22,000 80,300 80,300
Subscribers at end of period(4)(5)............ 3,200 90,900 226,500 232,300
SAC per gross subscriber added(4)(6).......... $ 290 $ 280 $ 320
Penetration at end of period.................. 14.7% 8.0% 13.1% 13.1%
Ratio of earnings to fixed charges(7)......... -- -- --
</TABLE>
- ---------------
(1) Represents the amount placed in escrow in connection with the offering of
System's 12 3/8% notes to fund, together with the interest received thereon,
the first four scheduled interest payments on such notes. Also includes $5.3
million deposited with the administrative agent under the credit facility to
fund a contingent reduction of availability under the term loan facility
that did not occur under the terms of our credit facility, as amended in
connection with the offering of the outstanding notes.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, extraordinary items and non-recurring charges. EBITDA is not a
measure of performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net income (loss)
as a measure of performance, or as a substitute for cash flow as a measure
of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized
measure of performance in the communications industry and is the basis for
many of our financial covenants. Further, we believe that EBITDA provides
useful information regarding an entity's ability to incur and/or service
debt. Increases or decreases in EBITDA may indicate improvements or
decreases, respectively, in our free cash flows available to incur and/or
service debt and cover fixed charges. Notwithstanding the above, 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.
Management expects that, because EBITDA is commonly used in the
communications industry as a measure of performance, investors may use this
data to analyze and compare other communications companies with our company
in terms of operating performance, leverage and
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<PAGE> 18
liquidity. EBITDA, as we calculate it is not necessarily comparable to
similarly captioned amounts of other companies.
(3) Pro forma households include all households acquired since our inception as
of the later of December 31, 1998 or acquisition date.
(4) Household and subscriber data reflect 100% of the households or subscribers
comprising our Rural DIRECTV Markets, including two Rural DIRECTV Markets in
which we acquired less than 100% ownership. We receive 100% of the revenue
generated by all subscribers in our Rural DIRECTV Markets.
(5) Pro forma subscriber data includes all subscribers acquired in acquisitions
since our inception as of the later of December 31, 1998 or acquisition
date.
(6) Represents subscriber acquisition costs (SAC) on a per gross new subscriber
activation basis (excludes acquired subscribers and does not net out
disconnected subscribers).
(7) The ratio of earnings to fixed charges is determined by dividing the sum of
operating loss and a portion of rent expense representative of interest by
the sum of interest expense and such portion of rent expense. For the
periods ended December 31, 1996, 1997 and 1998, the deficiency of earnings
to fixed charges was $1.2 million, $15.8 million, and $63.7 million,
respectively.
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<PAGE> 19
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to exchange outstanding notes for new notes
in the exchange offer.
NET LOSSES AND NEGATIVE EBITDA -- DURING OUR LIMITED OPERATING HISTORY WE HAVE
GENERATED NET LOSSES AND NEGATIVE EBITDA AND WE MAY CONTINUE TO DO SO.
We have operated for only a limited period of time. During this time we
have generated both net losses and negative EBITDA. Such results are due
primarily to the costs we have incurred to
- acquire additional Rural DIRECTV Markets,
- integrate acquired operations into existing operations, and
- expand our sales and marketing activities, including the creation of our
direct sales force.
We had a net loss of approximately $15.8 million for the year ended
December 31, 1997 and a net loss of approximately $64.7 million for the year
ended December 31, 1998. We also reported EBITDA of approximately negative $5.4
million for the year ended December 31, 1997 and negative $20.0 million for the
year ended December 31, 1998. The extent to which we actually experience
positive EBITDA or generate net income in the future will depend upon a number
of factors, including
- our ability to acquire new Rural DIRECTV Markets,
- limiting the time and expense required to integrate new operations and
implement adequate systems and controls,
- our ability to generate internal subscriber growth and introduce new
products and services,
- the degree of competition we encounter,
- limiting the time it takes us to train direct sales and other personnel,
- limiting the cost of programming services, and
- general economic conditions.
Given these factors, we cannot assure you that we will be able to generate
or sustain positive EBITDA or net income in the future, or if so, when.
SUBSTANTIAL INDEBTEDNESS -- OUR SUBSTANTIAL INDEBTEDNESS COULD HAVE MATERIAL
ADVERSE CONSEQUENCES TO THE HOLDERS OF THE NOTES.
We have a significant amount of indebtedness. We expect to increase our
indebtedness as we pursue further acquisitions. The degree to which we are
indebted could have adverse consequences to you, including
- limiting our ability to internally fund or obtain financing for future
acquisitions, working capital, operating losses, capital expenditures and
other general corporate purposes,
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate,
- placing us at a disadvantage compared to our competitors that have less
debt,
- increasing our vulnerability to general adverse economic and industry
conditions, and
- reducing the cash flow available from our subsidiaries to service
interest payments on the notes.
In addition, borrowings under our credit facility bear interest at variable
rates. This makes us vulnerable to increases in interest rates generally. See
"Management's Discussion and Analysis of Results of Operations
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<PAGE> 20
and Financial Condition -- Liquidity and Capital Resources" and "Description of
Other Indebtedness -- Credit Facility."
The following are important credit statistics that we are presenting to you
assuming we had completed the offering of the outstanding notes and applied the
net proceeds from that offering as of December 31, 1998:
<TABLE>
<S> <C>
Total consolidated long-term indebtedness (including the
current portion thereof).................................. $346.3 million
Consolidated long-term indebtedness (including the current
portion thereof) as a percentage of total
capitalization............................................ 96%
</TABLE>
On such an adjusted basis, our earnings for the year ended December 31, 1998
would have been insufficient to cover our fixed charges by approximately $63.7
million. Also, we would have had the ability to incur additional borrowings
under our revolving credit facility. We expect to use such additional borrowings
principally to fund acquisitions of Rural DIRECTV Markets.
HOLDING COMPANY STRUCTURE -- HOLDERS OF THE NOTES WILL HAVE NO DIRECT CLAIM
AGAINST OUR SUBSIDIARIES.
Golden Sky DBS, the issuer of the notes, is a newly-formed holding company.
We derive all of our operating income from our wholly-owned operating
subsidiary, Systems, and its subsidiaries. The notes will be our obligation
alone and will not be guaranteed by our parent company or our operating
subsidiary. You will have no direct claim against any of our subsidiaries and,
under the indenture, you will waive any right to assert a substantive
consolidation in a bankruptcy proceeding involving us and/or Systems. Our
recourse to the assets of our subsidiaries derives solely from our equity
interest in such companies. In the event that any of our subsidiaries become
insolvent, liquidates, reorganizes, dissolves or otherwise winds up, the assets
of that subsidiary will be used first to satisfy the claims of its creditors,
including its trade creditors. Our equity interests in Systems have been pledged
to secure our guarantee obligations to the lenders under our credit facility.
Consequently, to the extent that any funds are available to Golden Sky DBS
following any reorganization, bankruptcy or insolvency proceeding involving
Systems and all amounts under the credit facility have not been repaid, any
amounts received in respect of such equity interests will first satisfy
remaining obligations under our credit facility. Consequently, your claims will
effectively rank below all of the indebtedness of our subsidiaries.
IMPACT OF SUBSIDIARY DEBT INSTRUMENTS ON OUR ABILITY TO SERVICE THE
NOTES -- RESTRICTIONS ON DIVIDENDS IN OUR SUBSIDIARIES' DEBT INSTRUMENTS MAY
PREVENT THEM FROM PROVIDING US WITH ADEQUATE CASH TO MAKE INTEREST PAYMENTS ON
THE NOTES.
As a holding company, we must rely on dividends and other payments from our
subsidiaries to generate the funds necessary to meet our obligations, including
our obligations on the notes. The ability of our subsidiaries to pay dividends
and make other distributions and advances to us will be dependent upon, among
other things, the terms of their debt instruments and applicable law. Our credit
facility does not permit Systems to pay dividends to us if a default or event of
default has occurred and is continuing under the credit facility. The credit
facility contains numerous financial and other restrictive covenants, including
a maximum leverage ratio, minimum interest coverage ratio and minimum subscriber
levels, that must be complied with in order for Systems to pay a dividend. We
cannot assure you that we will be in compliance with these covenants at the time
of a required interest payment on the notes. Systems' 12 3/8% notes also include
a limitation on Systems' ability to pay dividends to us that is substantially
similar to the restricted payments covenant to be included in the indenture for
the notes. We currently expect it may be difficult to generate the necessary
dividend capacity under the indenture governing Systems' 12 3/8% notes to make
the initial cash interest payments on the notes. Our ability to generate
sufficient dividend capacity under the indenture governing Systems' 12 3/8%
notes to service the notes and to comply with the financial and other covenants
in our credit facility will depend upon the extent to which we pursue
acquisitions, incur additional indebtedness (for which we will have substantial
capacity under the notes indenture), incur operating expenses, make capital
expenditures and generate adequate subscriber revenues, among other
18
<PAGE> 21
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. For example, if we determine
to more aggressively grow our subscriber base or commit more capital to grow our
business, we could delay the time at which we generate positive EBITDA (if at
all) and/or increase our interest expense, which would reduce our dividend
capacity. In addition, there are many factors affecting our future results that
are beyond our control. It is inherently speculative to forecast whether or not
we will be able to pay dividends at the time that cash interest payments become
due on the notes. However, any significant adverse developments would likely
preclude us from being able to access Systems' cash flow for these initial
interest payments.
If Systems is unable to make available to us the cash required to make
payments on the notes, we will be required to seek a waiver or consent from the
applicable creditors or to refinance some or all of our debt. Our ability to do
so will be subject to factors beyond our control and may be unduly expensive. We
cannot assure you that we will be successful. See "-- Restrictions Imposed by
Terms of Indebtedness" for further risks associated with the restrictive
covenants in our present and future debt instruments and "-- Ability to Service
Indebtedness and Refinance Notes" for further factors affecting our ability to
generate the cash flow to meet our debt obligations and to refinance our debt
obligations.
ABILITY TO SERVICE INDEBTEDNESS AND REFINANCE NOTES -- TO SERVICE OUR
INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO
GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. TO MAKE REQUIRED
PAYMENTS ON THE NOTES, WE MAY NEED TO REFINANCE THE NOTES.
Our ability to make payments on and to refinance our indebtedness,
including our ability to pay interest on the notes when such interest becomes
due and payable and to redeem the notes at maturity, will depend upon our
ability to generate cash in the future. We may not be able to generate
sufficient cash flow to service required interest and principal payments on or
to redeem any of our indebtedness, including the notes, when such indebtedness
becomes due.
Our ability to generate such cash flow is, to a certain extent, subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control, such as future relations with the NRTC.
Borrowings of revolving loans under our credit facility will be available
to us until September 2005, but revolving loan commitments and outstanding
revolving loans under our credit facility are subject to quarterly reductions
commencing March 31, 2001. Outstanding term loans under our credit facility are
required to be repaid in 16 consecutive quarterly installments commencing March
31, 2002, with the balance due December 31, 2005. In addition, Systems' 12 3/8%
notes mature on August 1, 2006. To the extent we do not have sufficient
available resources to repay indebtedness under our credit facility and Systems'
12 3/8% notes at such times as required, we may find it necessary to refinance
such indebtedness. We cannot assure you that such refinancing would be
available, or available on reasonable terms.
Among the factors that will affect our ability to refinance the notes are
financial market conditions and the value of our company and our performance at
the time of such refinancing, which in turn may be affected by many factors,
including economic and industry cycles. We cannot assure you that any such
refinancing can be successfully completed. In the event such refinancing cannot
be successfully completed, we would be required to consider alternative
financing options in order to be able to repay the notes, such as renegotiating
the covenants under the terms of our subsidiaries' existing indebtedness or
selling assets. We cannot assure you that any such transactions could be
arranged on a timely basis or on terms that would enable us to repay the notes.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS -- THE RESTRICTIVE TERMS OF OUR
DEBT INSTRUMENTS MAY IMPAIR OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVES. IF WE
FAIL TO COMPLY WITH THOSE TERMS, OUR DEBT CAN BE ACCELERATED AND THERE MAY BE
INSUFFICIENT ASSETS TO MEET OUR OBLIGATIONS.
Our debt instruments (including our credit facility, Systems' 12 3/8% notes
indenture and the indenture governing the notes) contain numerous restrictive
covenants that limit our discretion with respect to
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<PAGE> 22
certain business matters. We may be unable to pursue attractive business
opportunities due to these restrictive covenants. Moreover, our financial
flexibility will be impaired by these requirements.
Among other things, the covenants governing our indebtedness limit our
ability to
- incur substantial indebtedness,
- pay dividends on, redeem or repurchase our capital stock, including for
the purpose of making interest payments on the notes,
- make investments,
- issue or sell capital stock of restricted subsidiaries,
- create specific types of liens,
- sell assets,
- engage in transactions with affiliates, and
- consolidate, merge or transfer all or substantially all our assets and
the assets of our subsidiaries on a consolidated basis.
The covenants governing our indebtedness also require us to meet certain
financial ratios and financial conditions. We must satisfy these covenants and
maintain a minimum subscriber base in order to access the total amount of
borrowings available to us under our credit facility. Our ability to meet these
covenants and conditions can be affected by events beyond our control. We cannot
assure you that we will meet such covenants and conditions. We may incur future
indebtedness that contains financial or other covenants more restrictive than
those currently applicable to our company. If we fail to comply with our
obligations under these instruments, the holders of such indebtedness could
elect to declare all amounts outstanding under those instruments to be
immediately due and payable. Our assets may not be sufficient to repay such
indebtedness, including the notes, if such holders elected to accelerate such
indebtedness.
SUBSTANTIAL CAPITAL REQUIREMENTS -- OUR ACTUAL CASH REQUIREMENTS MAY MATERIALLY
EXCEED OUR ESTIMATES OF OUR CAPITAL REQUIREMENTS AND OUR AVAILABLE CAPITAL.
Our operations require and will continue to require substantial capital to
- finance acquisitions of Rural DIRECTV Markets,
- finance the costs associated with integrating acquired operations into
our existing operations,
- expand our sales and marketing activities into new markets, and
- meet our general working capital requirements and operating expenses.
Our actual cash requirements may materially exceed our estimated capital
requirements and available capital. Also, our ability to access the total
availability of borrowings under our credit facility depends on our meeting
specified financial and operating covenants. If we do not satisfy these
covenants, we may be unable to draw funds under our credit facility and may be
unable to finance planned acquisitions and to continue to develop our
operations.
The amount of capital we will require depends 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 need additional financing to meet our capital requirements, we might not
be able to obtain such financing on satisfactory terms or at all.
In addition, we are not yet able to assess whether and to what extent the
acquisitions by Hughes of USSB or by DIRECTV of Primestar may affect our future
capital requirements.
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<PAGE> 23
RISKS ATTENDANT TO ACQUISITION STRATEGY -- WE MIGHT NOT BE ABLE TO REALIZE THE
EXPECTED BENEFITS OF PAST OR FUTURE ACQUISITIONS. ALSO, WE MAY NOT BE ABLE TO
IDENTIFY SUITABLE FUTURE ACQUISITION CANDIDATES.
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 consummate future acquisitions is dependent upon a number of factors, some of
which are beyond our control, including the attractiveness of acquisition
prices, the negotiation of acceptable definitive agreements governing such
acquisitions and obtaining the necessary approvals, including the approval of
Hughes and the NRTC.
The price we pay to consummate acquisitions is a function of numerous
factors, including
- the demographics of the particular Rural DIRECTV Market,
- the extent of market penetration by the prior operator and other pay
television in such market, and
- the extent of competition for the particular acquisition.
We are aware of at least one other DIRECTV programming provider that is
currently pursuing an acquisition strategy similar to ours that is targeted on
Rural DIRECTV Markets. We may not have the financial resources to compete with
such other provider in making additional acquisitions.
Even if we consummate future acquisitions, the process of integrating
acquired operations into our existing operations may
- result in unforeseen operating difficulties,
- divert managerial attention, and
- require significant financial resources that could otherwise be used for
the ongoing development or expansion of our existing operations.
Each of our acquisitions is subject to the negotiation of a definitive
agreement with the seller and the prior approval of Hughes and the NRTC. Such
approvals are beyond our control. See "-- Our Reliance Upon the NRTC" for a
discussion of the risks attendant to securing NRTC approval of acquisitions. In
addition, each acquisition is subject to typical conditions, including
conditions beyond our control.
Future acquisitions may require us to incur additional debt and contingent
liabilities. The incurrence of such additional debt and liabilities could have a
material adverse effect on our financial condition and results of operations.
DEPENDENCE UPON DIRECTV AND HUGHES -- WE MAY BE ADVERSELY AFFECTED BY ANY
MATERIAL CHANGE IN THE ASSETS, FINANCIAL CONDITION, PROGRAMMING, TECHNOLOGICAL
CAPABILITIES OR SERVICES OF DIRECTV OR HUGHES.
We obtain substantially all of our revenue through the distribution of
DIRECTV programming. As a result, we may be materially adversely affected by any
material change in the assets, financial condition, programming, technological
capabilities or services of DIRECTV or Hughes. Such material adverse effects
could result from 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. Some of DIRECTV's FCC licenses expire
and are subject to renewal in December 1999.
We rely upon DIRECTV to continue to provide programming services on a basis
consistent with its past practice. Any change in such past 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 us from
continuing to provide DBS services and could have a material adverse effect on
our financial condition and results of operations.
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OUR RELIANCE UPON THE NRTC -- OUR ABILITY TO OFFER DIRECTV PROGRAMMING DEPENDS
UPON AGREEMENTS BETWEEN THE NRTC AND HUGHES. THE NRTC'S INTERESTS MAY DIFFER
FROM OUR INTERESTS. WE RELY ON THE NRTC IN NUMEROUS WAYS IN THE CONDUCT OF OUR
BUSINESS.
We depend greatly upon the NRTC for
- maintaining valuable rights that it has with DIRECTV because our ability
to offer DIRECTV programming derives from those rights,
- providing us with accurate information concerning its relationship with
DIRECTV because we do not have direct access to that information
ourselves, and
- providing us with certain essential services on a timely and effective
basis.
Our interests and those of the NRTC may conflict. 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. We are not members
of the NRTC. We are a non-voting affiliate. The NRTC may be expected to act
solely in the interests of its members, whose interests may diverge from our
own.
Our Rights to Offer Programming are Based Solely Upon the NRTC
Agreements. Virtually all of our business is comprised of the distribution of
DIRECTV programming to residential households and commercial establishments in
rural markets pursuant to the NRTC Agreements. The NRTC has obtained such rights
pursuant to an agreement with Hughes (the "Hughes Agreement"). Under the NRTC
Agreements, the NRTC has granted us the exclusive right to market, sell and
retain revenue from most DIRECTV programming to identified geographic areas. We
do not have a direct contractual relationship with Hughes, apart from our
systems operator and commercial licenses (which have not generated material
revenue to date). The NRTC has declined to make available to us a copy of the
Hughes Agreement. We rely upon the NRTC to have accurately represented the scope
and terms of its rights and obligations and to diligently perform all of its
obligations under the Hughes Agreement, as well as pursue any rights and
remedies which it may have against Hughes.
The NRTC Agreements provide that, in general, upon a default or breach by
the NRTC under the Hughes Agreement, we have the right to acquire DIRECTV
programming directly from DIRECTV either, at Hughes' option, by the assumption
by Hughes of the NRTC's obligations under the NRTC Agreements or under a new
agreement between us and Hughes on terms no less favorable to us than those in
the NRTC Agreements. We cannot assure you as to the existence or scope of such
right under the Hughes Agreement or as to our ability to timely and successfully
exercise such right. We cannot assure you that the NRTC will act in a manner
that will preserve our ability to offer DIRECTV programming on a basis
consistent with past practice. Although Hughes is contractually entitled to
enforce the NRTC's rights under the NRTC's agreements with us, we are not
entitled to enforce or preserve any rights that the NRTC may have under its
agreement with Hughes.
We would be materially and adversely affected by the termination of the
NRTC Agreements prior to their expiration. The NRTC is permitted to terminate
its agreements with us
- as a result of the termination of the Hughes Agreement,
- if we fail to make a payment due to the NRTC or otherwise breach a
material obligation in such agreements, which failure or breach continues
unremedied for more than 30 days after notice from the NRTC, and
- if we fail to keep or 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.
If the NRTC Agreements are terminated by the NRTC, we would no longer have
the right to provide DIRECTV programming in Rural DIRECTV Markets. We cannot
assure you that we would be able to obtain similar DBS services from other
sources.
Changes in NRTC Policies May Adversely Affect Us. The NRTC Agreements also
require us to comply with the policies of the NRTC adopted from time to time. We
and other NRTC-affiliated
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DIRECTV providers have disputed certain 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 on 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 affiliated
DIRECTV providers. The NRTC Agreements provide that NRTC affiliates, including
us, have "substantial proprietary interests" in and rights to the information
and data regarding their subscribers. We have differed with the NRTC, as have
other affiliates, 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.
We Rely Upon the NRTC for Certain Services and Information. Our agreements
with the NRTC require that we use the NRTC for certain support services
including subscriber information and data reporting capability, retail billing
services and central office subscriber services. These services are critical to
the operation and management of our business. The cost of the services the NRTC
provides us may or may not be greater than other alternatives.
In addition to the fees paid upon signing of the NRTC Agreements, we are
required to pay the NRTC monthly operating fees, monthly security fees, monthly
programming fees (based on accepted cable industry rate cards) and a "reasonable
margin" on the cost of providing DBS services to us. If the NRTC is unable to
provide these services for whatever reason, we would be required to acquire
these services from other sources or provide them for ourselves. We cannot
assure you that our cost of acquiring these services elsewhere or providing them
internally would not 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 under the NRTC Agreements.
The NRTC Agreements do not provide for direct or complete access to or
control by us of the management information systems of the NRTC, including
certain management information systems data concerning our individual
subscribers. As a result, while we are entitled to verify the accuracy of
individual customer financial accounts, we must rely upon the NRTC to accurately
provide detailed general demographic and other information regarding
subscribers. This information is critical to the growth and development of our
ongoing sales and marketing strategy.
OUR ABILITY TO ACQUIRE DBS SERVICES FROM THE NRTC AND DIRECTV AFTER EXPIRATION
OF NRTC AGREEMENTS -- WE MAY NOT BE ABLE TO ACQUIRE DBS SERVICES OR SELL OUR
SUBSCRIBER BASE AFTER THE EXPIRATION OF THE NRTC AGREEMENTS.
The DIRECTV programming we offer is acquired pursuant to the NRTC
Agreements. The NRTC, in turn, acquires the services pursuant to the Hughes
Agreement. The NRTC Agreements (and presumably the Hughes Agreement) expire when
Hughes removes its current satellite(s) from their assigned orbital locations.
Although, according to Hughes and USSB, which owns five transponders on the
first DIRECTV satellite, the three DIRECTV satellites have estimated orbital
lives of approximately 15 years from their respective launches in December 1993,
August 1994 and June 1995, we cannot assure you as to the longevity of the
satellites and, therefore, as to how long we will be able to obtain DBS services
pursuant to the NRTC Agreements. We are not certain whether the NRTC is entitled
to services from all three DIRECTV satellites as a contractual matter and,
therefore, whether it will receive services for the life of all three
satellites. All of these uncertainties may render it more difficult to refinance
the Notes and other indebtedness, if necessary, and affect our ability to secure
additional financing, if necessary or desirable.
We believe that the Hughes Agreement provides the NRTC with a right of
first refusal to obtain DBS services (other than programming services) in
substantially the same form as such DBS services are provided under the existing
Hughes Agreement in the event that Hughes elects to launch one or more successor
satellites upon the removal of the present satellites from their assigned
orbital locations. The
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NRTC Agreements do not expressly provide an equivalent right of first refusal
for the NRTC members to acquire DBS services through the NRTC should the NRTC
exercise any right of first refusal under the Hughes Agreement. The NRTC is not
obligated to exercise any right of first refusal. We cannot assure you that,
upon removal of the current satellites from their orbital locations at the end
of their useful lives (estimated to be in 2008 or 2009), we would continue to
have access to DIRECTV programming or the exclusive right to control or dispose
of our interest in our subscriber base. See "-- Our Reliance Upon the
NRTC -- Our Rights to Offer Programming are Based Solely Upon the NRTC
Agreements."
Any right of first refusal in the Hughes Agreement may not be available to
the NRTC if Hughes does not launch a successor satellite, which may be the case,
for example, if Hughes ceases to own the FCC licenses necessary to transmit from
its existing orbital locations. Such right of first refusal also may not be
available to the NRTC if the NRTC is in default under the Hughes Agreement or if
the NRTC is unable to raise sufficient funds from its then existing members or
others to purchase rights in any successor Hughes satellite. Whether or not a
right of first refusal exists, the terms and conditions, including the financial
terms, of any continuing relationship between the NRTC and Hughes following the
expiration of the NRTC Agreements cannot be predicted. Moreover, the terms and
conditions, including the financial terms under which the NRTC may make
available such rights to us and other NRTC members and affiliates is unknown,
which may impact the economics of our business and our ability to meet our
obligations, including in respect of the Notes. In the event we are unable to
acquire DIRECTV programming through Hughes and the NRTC after the expiration of
the NRTC Agreements, we would be required to acquire DBS services from others,
or to attempt to sell our subscriber base to one or more other DBS providers
(which we may be unable to do for contractual or other reasons) and cease or
fundamentally change our business operations.
ABILITY TO MANAGE GROWTH EFFECTIVELY -- WE MAY NOT HAVE THE ABILITY TO IMPROVE
OUR OPERATIONAL PROCEDURES AND HIRE PERSONNEL CAPABLE OF MANAGING OUR RAPID
GROWTH. SUCH INABILITY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 do so, our financial condition and
results of operations could be materially 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. Such
acquisitions have placed and will continue to place a significant strain on our
management, operating systems and procedures, financial resources, employees and
other resources. Our rapid growth affected the preparation of financial and
operating information in the past. To address this concern we have hired
additional personnel and implemented additional accounting practices and
procedures.
DEPENDENCE ON KEY PERSONNEL -- IF WE ARE UNABLE TO RETAIN KEY PERSONNEL,
INCLUDING RODNEY A. WEARY, SUCH INABILITY MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our future success may depend to a significant extent upon the performance
of a number of our key personnel, including Mr. Rodney A. Weary, our Chief
Executive Officer. The loss of Mr. Weary or other key management personnel or
the failure to recruit and retain additional qualified personnel could have a
material adverse effect on our financial condition and results of operations. We
have employment and non-competition agreements with Mr. Weary and seven other
executives. We maintain "key-man" insurance on the life of Mr. Weary.
RELIANCE ON SATELLITE TRANSMISSION TECHNOLOGY -- WE MAY BE FORCED TO BEAR THE
COSTS OF CHANGES IN DIGITAL COMPRESSION TECHNOLOGY. ANY LOSS OF OR DAMAGE TO THE
SATELLITES UPON WHICH WE RELY MAY RESULT IN A MATERIAL ADVERSE EFFECT.
Loss of, damage to, changes in or reductions in the longevity of satellites
as a result of acts of war, anti-satellite devices, electrostatic storms or
collisions with space debris could have a material adverse effect on our
business, financial condition and results of operations. While we do not believe
that the loss of a single satellite would adversely affect our operations, the
loss or two or more satellites could have a
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material adverse effect on DIRECTV and on us. Furthermore, the digital
compression technology used by DBS providers is not standardized and is
undergoing rapid change. Such changes or other technological changes or
innovations may require modifications to ground station programming uplink
facilities, satellites and subscriber equipment. Such modifications could be
costly. These costs would likely be passed through by DIRECTV or the NRTC to us
and would be borne by us to the extent we could not pass such costs through to
our subscribers in the form of higher fees.
There are numerous risks associated with satellite transmission technology,
in general, and DIRECTV's delivery of DBS services, in particular. Satellite
transmission of video, audio and other data is highly complex and requires the
manufacture and integration of diverse and advanced components that may not
function as expected. Although the DIRECTV satellites used to provide its DBS
services have estimated orbital lives of approximately 15 years from their
respective launches in December 1993, August 1994 and June 1995, we cannot
assure you as to the longevity of the satellites.
RISK OF SIGNAL THEFT -- OUR REVENUE COULD BE ADVERSELY AFFECTED IF DIRECTV'S
SIGNAL ENCRYPTION TECHNOLOGY IS COMPROMISED IN A MANNER THAT IS NOT PROMPTLY
CORRECTED.
The delivery of subscription programming requires the use of encryption
technology. Signal theft or "piracy" in the C-band DTH, cable television and
European DBS industries has been widely reported. The encryption technology used
by the DBS equipment may not remain totally effective.
COMPETITION AND TECHNOLOGICAL CHANGE -- WE COMPETE AGAINST A BROAD RANGE OF
COMMUNICATION AND ENTERTAINMENT COMPANIES. SOME OF THESE COMPETITORS HAVE
SIGNIFICANTLY MORE FINANCIAL AND MARKETING RESOURCES THAN WE DO. THEIR ABILITY
TO UTILIZE AND INTEGRATE VARIOUS TECHNOLOGIES UNDER DEVELOPMENT COULD RESULT IN
INCREASED COMPETITION.
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 (DTH) programming providers, wireless cable
operators, broadcast television networks and home video products companies, as
well as companies developing new technologies. Certain of these competitors and
potential competitors are well established companies and have significantly
greater financial and marketing resources than we do.
Cable operators generally have large installed customer bases, and many
cable television operators have significant investments in, and access to,
programming. We anticipate that many cable systems in the United States will be
upgraded to provide better quality programming and a better signal than are
currently available through cable, but that cable's programming and signal will
remain inferior to those available through DBS services. We believe that due to
the expense of upgrading less densely populated areas such as those within the
Rural DIRECTV Markets, cable systems in Rural DIRECTV Markets in general will be
upgraded more slowly (if at all) than those in more densely populated areas.
However, in order to substantially increase our subscriber base, we may find it
necessary to attract customers who currently subscribe to cable.
We also compete with companies offering DTH programming through various
satellite broadcasting systems. Currently, DIRECTV, USSB and EchoStar are the
only domestic DBS operators. On December 14, 1998, Hughes announced that it will
acquire USSB for approximately $1.3 billion. On January 22, 1999, DIRECTV
announced that it will acquire certain of Primestar's and one of its affiliates'
assets for approximately $1.8 billion. Each of these acquisitions is subject to
conditions and we cannot assure you that either will be consummated. We are not
yet able to assess the effect of either acquisition on our ability to compete in
the future.
Primestar and all other domestic DTH operators currently transmit from low
power or medium power satellites, which generally require the use of larger and,
in the case of low power DTH broadcasting, more expensive dishes. Certain
regional telephone operators have also expressed an interest in becoming
subscription television providers. The entry of these competitors into the
subscription television market could increase competition substantially and may
have a material adverse effect on our financial condition and results of
operations.
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In addition, changes in technology, including, among others, the expansion
of the Internet to include and use developing video and audio compression
technologies to develop the "information superhighway," may force us to make
significant changes in our business strategy. For example, such technological
changes could lower the cost of competitive services to a level where our
services will become less competitive or force us to reduce our service prices
in order to remain competitive.
PRIMETIME 24 LITIGATION -- THE OUTCOME OF THE PRIMETIME 24 LITIGATION COULD
AFFECT THE ABILITY OF OUR SATELLITE PROVIDERS TO CONTINUE TO SERVICE US AND,
THEREFORE, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
The Satellite Home Viewer Act of 1994 (the "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. In the
case of broadcast network programming, the compulsory license established by the
SHVA is applicable only to DTH retransmission 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. Until recently,
a number of satellite providers, including DIRECTV (and its distributors,
including NRTC members and affiliates like us) received ABC, CBS, NBC and Fox
network programming from PrimeTime 24 Joint Venture. Certain television
broadcast networks and their affiliates have commenced litigation against
PrimeTime 24 alleging that the network programming offered by PrimeTime 24 has
been retransmitted in violation of the "unserved households" limitation of the
SHVA.
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 (discussed below) will have a material adverse effect on our financial
results or our ability to attract new subscribers, we cannot assure you that our
inability to provide network services to certain subscribers will not have such
effects. In addition, the costs of compliance with those interpretations could
be material should we elect to continue to offer network services. Our
inability, along with that of DIRECTV, to provide network programming to
subscribers in Rural DIRECTV Markets could adversely affect our average revenue
per subscriber and subscriber growth and churn. See "Business -- Regulation."
The litigation commenced against PrimeTime 24 has resulted in the issuance
of permanent injunctions by courts in North Carolina and Florida prohibiting
PrimeTime 24 from providing the programming of certain broadcast networks to
subscribers in certain designated geographic areas. In North Carolina, the court
issued a permanent injunction 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. The Florida injunction applies
nationwide and requires PrimeTime 24 to disconnect those customers for CBS and
Fox programming that are able to receive "a signal of Grade B intensity" (based
on Longley-Rice signal strength propagation maps) unless the local network
consents to continued service or a signal-strength test proves that a certain
quality of off-air service is unavailable to the customer. The Florida court
established February 28, 1999 as the deadline for compliance with the injunction
with respect to customers who first began receiving PrimeTime 24's network
programming after March 11, 1997; for customers who first received service
before that date, the compliance deadline is April 30, 1999. Additional
litigation against PrimeTime 24 alleging violations of the 'unserved households'
limitation, brought in Texas by an NBC affiliate, is currently pending.
In February 1999, DIRECTV announced that it was discontinuing
retransmission of the four broadcast networks received from PrimeTime 24 and
would instead distribute a different package of network affiliates to its
existing subscribers. On February 24, 1999 CBS, NBC, ABC and Fox asked the same
Federal District Court in Florida that had issued an injunction against
PrimeTime 24 to grant a temporary restraining order, preliminary injunction, and
contempt finding against DIRECTV for violating
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the SHVA. On February 25, 1999, the court granted the requested temporary
restraining order requiring DIRECTV (and its agents and those who act in active
concert or participation with DIRECTV) not to deliver CBS or Fox programming to
subscribers who do not live in "unserved households." (For purposes of
determining whether a subscriber is "unserved," the court referred to a modified
version of the Longley-Rice signal propagation model; the modifications reflect
an order adopted by the FCC on February 2, 1999 (see below)). 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 with a local network affiliate's "Grade A" signal strength
contour as of June 30, 1999 and to terminate retransmission of such 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.
A subscriber's eligibility to continue to receive network programming from
DIRECTV will be determined using the Individual Location Longley-Rice technology
approved by the FCC in a rulemaking order adopted on February 2, 1999. The FCC's
rulemaking order was adopted in a proceeding commenced in response to petitions
for rulemaking filed by the NRTC and other satellite providers. Although the FCC
declined to changed the definition of a signal of Grade B intensity, the agency
did adopt a standardized method for predicting signal strength at individual
locations that could be used in place of taking actual measurements. EchoStar
has filed a petition for reconsideration of the FCC's order.
In October 1998, EchoStar filed a lawsuit in the United States District
Court of Colorado seeking a declaratory ruling establishing a predictive model
for determining whether a household is "unserved" for purposes of the SHVA based
on a "Longley-Rice" predictive model that applies a criteria of 95% of the
locations receiving a Grade-B signal 95% of the time with a 50% degree of
confidence. The lawsuit, which was transferred on March 24, 1999 to the same
Florida court which is hearing the PrimeTime 24 and DIRECTV litigations, also
asks the court to clarify the particular means (e.g., antenna height and
orientation) for measuring signal strength. The effect of the FCC's February 2,
1999 rulemaking on this litigation cannot be predicted.
REGULATION -- DIRECTV IS SUBJECT TO REGULATIONS THAT COULD RESULT IN A MATERIAL
INCREASE IN THE FEES THAT WE WOULD HAVE TO PAY IN ORDER TO CONTINUE TO PROVIDE
SERVICES TO OUR CUSTOMERS.
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. Legislation to extend the SHVA has been introduced in
Congress. We cannot assure you that any such legislation will be passed. This
legislation also provides for a reduction in the royalty rates payable under the
SHVA and establishes new rules regarding the retransmission of distant and local
broadcast television stations by satellite carriers.
Unlike cable operators, DBS operators such as DIRECTV are free to set
prices and serve customers according to their business judgment, without rate of
return and other regulation. However, there are laws and regulations that affect
DIRECTV and, therefore indirectly, 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 DBS
satellite licenses.
WE COULD LOSE REVENUES IF WE HAVE OUT-OF-TERRITORY SUBSCRIBERS -- WE ARE NOT
ALLOWED TO HAVE CUSTOMERS OUTSIDE OUR TERRITORIES. IF WE DO, WE COULD BE
REQUIRED TO DISCONNECT SUBSCRIBERS.
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 our company are prohibited by law from providing DIRECTV programming
outside the United States. Despite our subscribers' assurance that they
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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
receive services outside our Rural DIRECTV Markets, our financial condition and
results of operations could be adversely affected.
DEPENDENCE ON THIRD PARTY PROGRAMMERS -- WE ARE DEPENDENT ON THIRD PARTIES TO
PROVIDE HIGH-QUALITY PROGRAMMING THAT APPEALS TO MASS AUDIENCES.
DIRECTV's programming agreements have terms that expire on various dates
with different renewal and cancellation provisions. Such agreements may not be
renewed or may be canceled prior to expiration of their original term. In the
event any such agreements are not renewed or are canceled, DIRECTV may not be
able to obtain or develop substitute programming, or that such substitute
programming would be comparable in quality, marketability or cost to our
existing programming. 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. See "Business -- DIRECTV."
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992 (the "Cable Act") and the FCC's rules, programming developed by vertically
integrated cable-affiliated programmers generally must be offered to all
multi-channel video programming distributors on nondiscriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit certain exclusive
programming contracts. We anticipate that DIRECTV will continue to purchase a
substantial percentage of its programming from cable-affiliated programmers.
Certain of the restrictions on cable-affiliated programmers will expire in 2002
unless extended by the FCC or Congress. As a result, any expiration of,
amendment to, or interpretation of, the Cable Act and the FCC's rules that
permits the cable industry or programmers to discriminate in the sale of
programming against competing businesses, such as that of DIRECTV, could
adversely affect DIRECTV's ability, and therefore our ability, to acquire
programming or acquire programming on a cost-effective basis.
LIMITED CONSUMER ADOPTION OF SATELLITE TELEVISION -- THE COST OF THE EQUIPMENT
REQUIRED TO RECEIVE DIRECTV PROGRAMMING MAY DELAY GROWTH OF OUR SUBSCRIBER BASE.
We believe that one of the largest hurdles to the mass market adoption of
DBS has been the cost to the subscriber of purchasing the DBS equipment. This
equipment generally costs between $99 to $299, depending upon the level of
features desired and number of television sets to be connected. While the cost
of such equipment has decreased over time, and we believe that the suppliers of
the subscriber equipment have strong incentives to supply equipment at
affordable prices as the subscriber base expands and as competition increases
among equipment vendors, such costs may not continue to decrease. We believe
that if the cost of the equipment remains an obstacle to increased demand for
our satellite services, the growth of our subscriber base could be delayed,
which could have an adverse effect on our financial condition and results of
operations.
Another potential hurdle to widespread adoption of DBS is that subscribers
do not receive local news and sports as part of DIRECTV's programming. In order
to make such programming available to our subscribers, we can install an off-air
antenna upon request by the subscriber. While all of the major DBS providers,
including DIRECTV, offer broadcast network channels on an a la carte or package
basis, it is unclear whether FCC regulations prohibit satellite providers from
selling network programming to households that can receive a signal from that
network's local affiliate station using traditional off-air antennae. Certain
subscribers may not be willing to purchase DBS because of this uncertainty. See
"-- PrimeTime 24 Litigation."
ORIGINAL ISSUE DISCOUNT -- THE HOLDERS OF THE NEW NOTES MAY SUFFER ADVERSE TAX
CONSEQUENCES BECAUSE THE OUTSTANDING NOTES WERE ISSUED AT A DISCOUNT FROM THEIR
PRINCIPAL AMOUNT AT MATURITY.
The outstanding notes were issued at a substantial discount from their
principal amount at maturity. The new notes will accrete in value on terms which
are identical to those of the outstanding notes. Consequently, the holders of
the new notes generally will be required to include amounts in gross income for
federal income tax purposes before receiving the cash payments to which such
income is attributable.
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See "Certain Federal Income Tax Considerations" for a more detailed discussion
of the U.S. federal income tax consequences to the holders of the new notes of
the ownership and disposition of such notes.
If a bankruptcy case is commenced by or against us under the U.S.
Bankruptcy Code after the issuance of the notes, the claim of a holder of the
notes with respect to the principal amount at maturity thereof may be limited to
an amount equal to the sum of the initial offering price of the outstanding
notes and that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
original issue discount that was not amortized as of any such bankruptcy filing
would constitute "unmatured interest." To the extent that the U.S. Bankruptcy
Code differs from the Internal Revenue Code in determining the method of
amortization of original issue discount, a holder of the notes may realize
taxable gain or loss upon payment of such holder's claim in bankruptcy.
YEAR 2000 COMPLIANCE -- THE SOFTWARE PRODUCTS WE CURRENTLY USE MAY NOT CONTAIN
ALL NECESSARY DATA CODE CHANGES.
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 Year 2000 compliance of our internal systems and believe
that such systems are Year 2000 compliant. However, we cannot assure you that
all of the software products currently used by us 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. Additionally, 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.
We are significantly reliant on contracted data processing services from
the NRTC and DIRECTV for customer service, billing and remittance processing
pursuant to our contractual relationship with the NRTC. The NRTC has informed us
that the computer systems that provide such services are not currently Year 2000
compliant, but that the majority of such systems will be compliant by September
1999. With respect to the NRTC's billing and authorization systems, the NRTC has
informed us that a small number of Year 2000 issues exist, and that the
appropriate changes have been requested and scheduled for development action. We
are reliant on DIRECTV for distribution of our DBS programming services. The
NRTC has informed us that DIRECTV expects to establish Year 2000 compliance for
its billing and authorization systems by the end of the second calendar quarter
of 1999. In addition to the NRTC and DIRECTV, we are significantly reliant on
other parties (such as its suppliers of DBS equipment) for the successful
conduct of our business. As previously described, we are in the process of
ascertaining the Year 2000 readiness of these third-parties.
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 impact on our
operations. There can be no assurance that the systems of the NRTC, DIRECTV and
other companies with which our systems interact or depend will be compliant by
the end of 1999, or that any such third party failure would not have an adverse
effect on our business or our 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 certain third party failures, especially in high-
technology industries such as the DBS industry, due to the lack of alternate
suppliers. However, 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 mid-1999. There can be no assurance that
29
<PAGE> 32
such contingency plans will successfully mitigate any adverse effects that the
Year 2000 issue may have on our operations.
LACK OF PUBLIC MARKET -- CURRENTLY THERE IS NO ACTIVE MARKET FOR THE OUTSTANDING
NOTES AND WE CANNOT ASSURE YOU THAT ONE WILL DEVELOP FOR THE NEW NOTES.
The new notes are being offered in exchange for the outstanding notes. The
outstanding notes were sold to their initial purchasers on February 19, 1999.
Those initial purchasers resold the outstanding notes to Qualified Institutional
Buyers (as defined in Rule 144A under the Securities Act) and pursuant to offers
and sales outside the United States within the meaning of Regulation S under the
Securities Act. The outstanding notes are eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages (PORTAL) market. The
new notes are securities for which there is currently no trading market. If the
new notes were to trade, they may trade at prices that may be lower than their
then accreted value depending on many factors, including prevailing interest
rates and the markets for similar securities, general economic conditions and
our financial condition, performance and prospects.
We do not intend to apply for listing of the new notes on any securities
exchange or the Nasdaq National Market. Accordingly, we cannot assure you that a
liquid trading market will develop for the new notes.
CONSEQUENCES OF THE EXCHANGE OFFER TO HOLDERS OF THE OUTSTANDING
NOTES -- CONSUMMATION OF THE EXCHANGE OFFER MAY HAVE AN ADVERSE EFFECT ON YOUR
ABILITY TO TRANSFER YOUR OUTSTANDING NOTES TO THE EXTENT THAT THEY REMAIN
OUTSTANDING.
When we issued the outstanding notes we entered into a registration rights
agreement pursuant to which we agreed to register the outstanding notes under
the Securities Act. If this exchange offer is completed, we will have fulfilled
such obligation and we will no longer be required to register any remaining
outstanding notes. To the extent that you are a holder of outstanding notes that
remain outstanding after this exchange offer, you will have to rely on
exemptions from the registration requirements of applicable securities laws to
resell such outstanding notes. In addition, after this exchange offer, the new
notes and the outstanding notes will contain identical terms, except that the
outstanding notes will continue to be subject to the existing transfer
restrictions. Therefore, if you do not tender your outstanding notes in this
exchange offer, your ability transfer such outstanding notes in the future may
be diminished.
30
<PAGE> 33
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes. We
did, however, receive proceeds, after deducting the initial purchasers' discount
and fees and expenses of such offering, of $95.3 million from the February 19,
1999 issuance of the outstanding notes. Approximately $53.0 million of such net
proceeds were used on February 19, 1999 to repay outstanding indebtedness under
our credit facility. The remainder of such net proceeds will be used to:
- to finance the acquisition of Rural DIRECTV Markets and related costs and
expenses, and
- for our general corporate purposes and working capital needs.
Pending such use, the offering proceeds will be invested in short-term
money market instruments and other similar investments.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Holders of the outstanding notes are entitled to registration rights under
the registration rights agreement that we entered into in connection with the
issuance of those notes. Pursuant to that registration rights agreement, we must
file with the Commission a registration statement covering an offer by us to
exchange new registered notes for the outstanding notes. This exchange offer, if
completed, will satisfy our obligations under the registration rights agreement.
Upon the terms and conditions described in this prospectus and in the
accompanying letter of transmittal, we will accept all outstanding notes
properly tendered for exchange and not withdrawn prior to 5:00 p.m., New York
City time, on the , 1999, or a later date to which we extend our
offer. We will issue $1,000 principal amount at maturity of new notes in
exchange for each $1,000 principal amount at maturity of outstanding notes
accepted in this exchange offer. Holders may tender some or all of their
outstanding notes under this exchange offer.
Based on an interpretation by the staff of the Commission that is set forth
in no-action letters issued by the staff to third parties, we believe that the
new notes may, in most circumstances, be offered for resale, resold and
otherwise transferred by their holders without compliance with the registration
and prospectus delivery provisions of the Securities Act. A holder of new notes
must, however, comply with the registration and prospectus delivery provisions
of the Securities Act in order to offer for resale, resell or otherwise transfer
its new notes if:
(1) that holder is an "affiliate" (within the meaning of Rule 405
under the Securities Act) of ours;
(2) that holder's new notes are acquired outside the ordinary course
of its business; or
(3) that holder has any arrangement with any person to participate in
the distribution of its new notes. See Morgan Stanley & Co., Inc., SEC
No-Action Letter (available June 5, 1991), Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988), and Shearman &
Sterling, SEC No-Action Letter (available July 2, 1993).
If any person were to participate in this exchange offer for the purpose of
distributing securities in a manner not permitted by the Commission's
interpretation, that person
- could not rely on the position of the staff of the Commission enunciated
in Exxon Capital Holdings Corporation or similar interpretive letters,
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction.
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<PAGE> 34
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of new notes received
in exchange for outstanding notes where the outstanding notes were acquired by a
broker-dealer as a result of market-making activities or other trading
activities. See "Plan of Distribution."
On the date of this prospectus, there was $193,100,000 aggregate principal
amount at maturity of outstanding notes outstanding. This prospectus, together
with the letter of transmittal, is being sent to all registered holders of
outstanding notes on the date of this prospectus.
We shall be deemed to have accepted validly tendered outstanding notes
when, as and if we have given written notice of acceptance to the exchange agent
under the indenture. The exchange agent will act as agent for the tendering
holders of outstanding notes for the purposes of receiving the new notes from us
and delivering those new notes to the exchanging holders.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, certificates for any unaccepted outstanding notes will be
returned, without expense, to the tendering holder as promptly as practicable
after the expiration date of this exchange offer.
If outstanding notes are not tendered, they shall remain outstanding and
shall continue to accrete in value from their date of issue, February 19, 1999,
at a rate of 13 1/2% per year.
If the exchange offer is completed, we will no longer be required to
register the outstanding notes. If so, holders of outstanding notes seeking to
sell them would have to rely on exemptions from the registration requirements of
the securities laws, including the Securities Act. See "Risk Factors --
Consequences of the Exchange Offer to Non-Tendering Holders of the Outstanding
Notes."
To extend the expiration date of this exchange offer, we will notify the
exchange agent of any extension by written notice and will mail to the record
holders of outstanding notes an announcement, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
That announcement would state that we are extending the exchange offer for a
specified period of time.
In addition, we will issue notice of each extension by press release or
other public announcement as contemplated by the provisions of Rule 14e-1 under
the Exchange Act of 1934.
ACCRETION OF THE NEW NOTES
Cash interest will not accrue or be payable on the new notes until March 1,
2004. Prior to March 1, 2004, the new notes will accrete in value at a rate of
13 1/2% per year. Thereafter, cash interest on the new notes will be payable
semiannually on March 1 and September 1 of each year, commencing September 1,
2004, at a rate of 13 1/2% per year. Outstanding notes which are validly
tendered and accepted for exchange will continue to accrete in principal amount
at a rate of 13 1/2% per year to, but excluding, the date of issuance of the new
notes. Any outstanding notes not tendered or accepted for exchange will continue
to accrete in principal amount at the rate of 13 1/2% per year in accordance
with their terms. The accreted value of the new notes upon issuance will be the
accreted value of the outstanding notes accepted for exchange immediately prior
to issuance of the new notes.
PROCEDURES FOR TENDERING
Your tender to us of outstanding notes under one of the procedures
described below will constitute an agreement between you and us for the exchange
of outstanding notes for new notes on the terms and conditions set forth in this
prospectus and in the letter of transmittal which accompanies this prospectus.
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<PAGE> 35
You may tender your outstanding notes by
(1) properly completing and signing the letter of transmittal or a
facsimile of it and delivering one of the two, together with the
certificate or certificates representing the outstanding notes being
tendered and any required signature guarantees, to the exchange agent at
its address shown on the back cover of this prospectus on or before the
expiration date for this offer (or complying with the procedure for
book-entry transfer described below) or
(2) complying with the guaranteed delivery procedures described below.
If tendered outstanding notes are registered in the name of the signer of
the letter of transmittal and the new notes to be issued in exchange for them
are to be issued (and any untendered outstanding notes are to be reissued) in
the name of the registered holder (which term, for the purposes described
herein, shall include any participant in the Depository Trust Company whose name
appears on a security listing as the owner of outstanding notes), the signature
of such signer need not be guaranteed. In any other case, the tendered
outstanding notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to us and duly executed by the registered holder.
In addition, the signature on the endorsement or instrument of transfer must be
guaranteed by one of the following (each an "Eligible Institution"):
- a commercial bank or trust company located or having an office or
correspondent in the United States, or
- by a member firm of a national securities exchange or of the National
Association of Securities Dealers, Inc., which firm must also be a member
of or participant in the Securities Transfer Agents Medallion Program,
the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program.
If the new notes and/or outstanding notes not exchanged are to be delivered to
an address other than that of the registered holder appearing on the note
register for the outstanding notes, the signature in the letter of transmittal
must be guaranteed by an Eligible Institution.
The method of delivery of outstanding notes and all other documents is at
the election and risk of the holder. If sent by mail, it is recommended that
registered mail, return receipt requested, be used, proper insurance be
obtained, and the mailing be made sufficiently far in advance of the expiration
date to permit delivery to the exchange agent on or before the expiration date.
The exchange agent will make a request promptly after the date of this
prospectus to establish accounts with respect to the outstanding notes at DTC
for the purpose of facilitating the exchange offer. Subject to the establishment
of those accounts, any financial institution, that is a participant in DTC may
make book-entry delivery of outstanding notes by causing that book-entry
transfer facility to transfer outstanding notes into the exchange agent's
account with respect to the outstanding notes in accordance with DTC's
procedures for transfer. Although delivery of outstanding notes may be effected
through book-entry transfer into the exchange agent's accounts at DTC, an
appropriate letter of transmittal with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the exchange agent. These documents should be sent to the exchange
agent at its address set forth on the back cover page of this prospectus on or
before the expiration date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided for those procedures.
If a holder desires to accept the exchange offer, and time will not permit
a letter of transmittal or outstanding notes to reach the exchange agent before
the expiration of the exchange offer, or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if the
33
<PAGE> 36
exchange agent has received at its office shown on the back cover of this
prospectus on or before expiration, a letter, telegram or facsimile transmission
from an Eligible Institution setting forth:
- the name and address of the tendering holder,
- the names in which the outstanding notes are registered, and
- if possible, the certificate numbers of the outstanding notes to be
tendered.
This letter, telegram or facsimile must state that the tender is being made by
this means. In addition, the letter, telegram or facsimile must guarantee that
within five New York Stock Exchange trading days after its transmission by the
Eligible Institution, the outstanding notes, in proper form for transfer (or a
confirmation of book-entry transfer of the outstanding notes into the exchange
agent's account at the book-entry transfer facility), will be delivered by the
Eligible Institution together with a properly completed and duly executed letter
of transmittal (and any other required documents). Unless outstanding notes
being tendered by the above-described method are deposited with the exchange
agent within the time period described above (accompanied or preceded by a
properly completed letter of transmittal and any other required documents), we
may, at our option, reject the tender. Copies of a notice of guaranteed delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the exchange agent.
A tender will be deemed to have been received on the date that
(1) the tendering holder's properly completed and duly signed letter
of transmittal accompanied by the outstanding notes (or a confirmation of
book-entry transfer of the outstanding notes into the exchange agent's
account at the book-entry transfer facility) is received by the exchange
agent, or
(2) A notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect (as provided above) from an Eligible
Institution is received by the exchange agent. Issuances of new notes in
exchange for outstanding notes tendered pursuant to a notice of guaranteed
delivery or letter, telegram or facsimile transmission to similar effect
(as provided above) by an Eligible Institution will be made only against
deposit of the letter of transmittal (and any other required documents) and
the tendered outstanding notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of outstanding notes will be
determined by us. Our determination will be final and binding. We reserve the
absolute right to reject any or all tenders not in proper form or the acceptance
for exchange of which may, in our counsel's opinion, be unlawful. We also
reserve the absolute right to waive any of the conditions of this exchange offer
or any defect or irregularity in the tender of any outstanding notes. None of
our company, the exchange agent or any other person will be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give such notification.
By tendering, you will represent to us that, among other things,
(1) the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of your business,
(2) you have no arrangement with any person to participate in the
distribution of such new notes,
(3) you are not an "affiliate," as defined under Rule 405 of the
Securities Act, of ours, and
(4) if you are a broker or a dealer (as defined in the Exchange Act),
that you acquired the outstanding notes for your own account as a result of
market-making on other trading activities and that you have not entered
into any arrangement or understanding with us or any affiliate of ours to
distribute the new notes received in the exchange offer.
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<PAGE> 37
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date of this tender offer.
To withdraw a tender of outstanding notes, a written transmission notice of
withdrawal via telegram, telex, facsimile transmission or letter must be
received by the exchange agent at its address set forth herein prior to 5:00
p.m., New York City time, on the expiration date of the exchange offer. Any
notice of withdrawal must
- specify the name of the person having deposited the outstanding notes to
be withdrawn,
- identify the outstanding notes to be withdrawn (including the certificate
number or numbers and principal amount at maturity of such outstanding
notes),
- be signed by the person having deposited the outstanding notes to be
withdrawn in the same manner as the original signature on the letter of
transmittal by which those outstanding notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the trustee with respect to those outstanding notes
register the transfer into the name of such depositor withdrawing the
tender, and
- specify the name in which those outstanding notes are to be registered,
if different from that of such depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of withdrawal notices will be determined by us. Our determination shall
be final and binding on all parties. Any outstanding notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer. No
new notes will be issued with respect to outstanding notes which are withdrawn
unless the outstanding notes so withdrawn are validly retendered. Any
outstanding notes that have been tendered but that are not accepted for exchange
will be returned to the holder without cost to the holder as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn outstanding notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the expiration of the exchange offer.
CONDITIONS
This exchange offer is not dependent upon the occurrence or non-occurrence
of any events or conditions other than that the exchange offer does not violate
applicable law or any applicable interpretation of the staff of the Commission.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as exchange
agent for this exchange offer. Questions and requests for assistance and
requests for additional copies of this prospectus or of the letter of
transmittal and deliveries of completed letters of transmittal with tendered
outstanding notes should be directed to the exchange agent addressed as follows:
<TABLE>
<S> <C> <C>
By Overnight Courier and by
Hand By Hand Delivery to 4:30 PM: By Registered or Certified
delivery after 4:30 PM on United States Trust Company Mail:
Expiration Date: of New York United States Trust Company
United States Trust Company 111 Broadway, Lower Level of New York
of New York Attn: Corporate Trust Window P.O. Box 844, Cooper Station
770 Broadway, 13th Floor New York, New York 10006 Attn: Corporate Trust Services
Attn: Corporate Trust Services New York, New York 10276-0844
New York, New York 10003
</TABLE>
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<PAGE> 38
FEES AND EXPENSE
The expenses of soliciting tenders pursuant to this exchange offer will be
borne by us. The principal solicitation for tenders contemplated by this
exchange offer is being made by mail. Additional solicitations may be made by
our officers and regular employees and affiliates in person, by telegraph or
telephone.
We will not make any payments to brokers, dealers, or other persons
soliciting acceptances of this exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will reimburse
the exchange agent for its reasonable out-of-pocket expenses in connection with
this exchange offer. We may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this prospectus, letters of transmittal and related
documents to the beneficial owners of the outstanding notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting and
legal fees, but not including transfer taxes, if any, relating to the sale or
disposition of the outstanding notes by a holder of the outstanding notes, will
be paid by us, and are estimated in the aggregate to be $200,000.
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<PAGE> 39
CAPITALIZATION
The following table presents our cash and total capitalization as of
December 31, 1998
(1) on a historical basis,
(2) on a pro forma basis to give effect to the amendment to our credit
facility effected in connection with the offering of the outstanding
notes, and
(3) on a pro forma as adjusted basis to give further effect to the offering
of the outstanding notes and the application of those offering proceeds
to repay amounts outstanding under our revolving credit facility.
The information set forth below should be read in conjunction with our
consolidated financial statements and notes related thereto, the financial
statements related to certain of the acquisitions and the pro forma financial
statements and notes related thereto included elsewhere in this prospectus. See
"Use of Proceeds," "Pro Forma Financial Statements," "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and "Description
of Other Indebtedness."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 4,460 $ 4,460 $ 72,352
======== ======== ========
Restricted cash(1).......................................... $ 51,617 $ 51,617 $ 46,275
======== ======== ========
Long-term debt (including current maturities):
Bank debt................................................. $ 67,000 $ 77,789 $ 35,000
Seller notes payable...................................... 15,407 15,407 15,407
Other..................................................... 797 797 797
12 3/8% Notes............................................. 195,000 195,000 195,000
13 1/2% Notes............................................. -- -- 100,049
-------- -------- --------
Total long-term debt.............................. 278,204 288,993 346,253
Stockholder's equity:
Common Stock, par value $.01; 1,000 shares authorized, 100
shares issued and outstanding.......................... -- -- --
Additional paid-in capital................................ 97,600 97,600 97,600
Accumulated deficit....................................... (81,678) (81,678) (84,614)
-------- -------- --------
Total stockholder's equity........................ 15,922 15,922 12,986
-------- -------- --------
Total capitalization.............................. $294,126 $304,915 $359,239
======== ======== ========
</TABLE>
- ---------------
(1) Includes the amount placed in escrow in connection with Systems' offering of
12 3/8% notes to fund, together with the interest received thereon, the
first four scheduled interest payments on Systems' 12 3/8% notes. For the
historical presentation, includes $5.3 million deposited with the
administrative agent under our credit facility to fund a contingent
reduction of availability under the term loan facility that did not occur
under the terms of our credit facility, as amended in connection with the
offering of the outstanding notes.
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<PAGE> 40
PRO FORMA FINANCIAL STATEMENTS
GENERAL
Golden Sky DBS was formed on February 2, 1999 for the purpose of issuing
the outstanding notes. Upon formation, Golden Sky DBS issued 100 shares of its
common stock to Holdings in exchange for $100 and all of the capital stock of
Systems, Holdings' wholly-owned operating subsidiary.
The following pro forma statement of operations data present our results of
operations adjusted for
- acquisitions completed during the applicable period (excluding 11
acquisitions that were immaterial individually and in the aggregate) and
related financings,
- Systems' offering of 12 3/8% notes,
- the amendment to our credit facility that became effective at the same
time as the closing of the offering of the outstanding notes, and
- the offering of the outstanding notes and the application of those
offering proceeds.
These pro forma statements of operations data are presented as if such
transactions had occurred at the beginning of 1998.
The following pro forma balance sheet data present our financial position
adjusted to reflect
- the amendment to our credit facility that became effective at the same
time as the closing of the offering of the outstanding notes, and
- the offering of the outstanding notes and the application of those
offering proceeds.
The pro forma balance sheet data is presented as if such transactions had
occurred as of December 31, 1998.
Our historical information for the year ended December 31, 1998 was taken
from our audited consolidated financial statements included elsewhere in this
prospectus. The financial information for the businesses we have acquired was
taken from the historical financial statements of those acquired businesses.
These pro forma financial statements and notes thereto are provided for
informational purposes only. They do not and cannot predict the actual or future
results had such transactions been completed on the dates indicated.
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<PAGE> 41
GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
13 1/2%
1998 PRO FORMA NOTES PRO FORMA
HISTORICAL ACQUISITIONS(1) ADJUSTMENTS(2) PRO FORMA OFFERING(3) AS ADJUSTED
---------- --------------- -------------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ 74,910 $11,876 $ -- $ 86,786 $ -- $ 86,786
Lease and other................... 1,014 126 -- 1,140 -- 1,140
Other............................. -- 28 (28)(4) -- -- --
-------- ------- -------- -------- -------- --------
Total revenue....................... 75,924 12,030 (28) 87,926 -- 87,926
-------- ------- -------- -------- -------- --------
Costs and Expenses:
Cost of DBS services.............. 45,291 7,570 -- 52,861 -- 52,861
Other costs of revenue............ -- 21 (21)(4) -- -- --
System operations................. 11,021 1,822 -- 12,843 -- 12,843
Sales and marketing............... 32,201 399 -- 32,600 -- 32,600 (12)
General and administrative........ 7,431 39 -- 7,470 -- 7,470
Depreciation and amortization..... 23,166 490 (490)(5) 29,475 -- 29,475
6,309 (6)
-------- ------- -------- -------- -------- --------
Total costs and expenses............ 119,110 10,341 5,798 135,249 -- 135,249
-------- ------- -------- -------- -------- --------
Operating income (loss)............. (43,186) 1,689 (5,826) (47,323) -- (47,323)
Non-operating items:
Interest and investment income.... 1,573 222 (222)(7) 1,573 -- 1,573
Interest expense.................. (20,537) (139) 139 (7) (33,963) (14,007)(10) (44,770)
(13,426)(8) 3,200 (11)
Gain on sale of wireless TV
rights......................... -- 1,956 (1,956)(4) -- -- --
Net profit on asset disposal...... -- 8,421 (8,421)(4) -- -- --
-------- ------- -------- -------- -------- --------
Total non-operating items........... (18,964) 10,460 (23,886) (32,390) (10,807) (43,197)
-------- ------- -------- -------- -------- --------
Net income (loss) before income
taxes............................. (62,150) 12,149 (29,712) (79,713) (10,807) (90,520)
-------- ------- -------- -------- -------- --------
Income taxes...................... -- (3,074) 3,074 (9) -- -- --
-------- ------- -------- -------- -------- --------
Net income (loss) before
extraordinary charge.............. $(62,150) $ 9,075 $(26,638) $(79,713) $(10,807) $(90,520)
======== ======= ======== ======== ======== ========
</TABLE>
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<PAGE> 42
- ---------------
(1) Includes the operations of the 1998 acquisitions from January 1, 1998
through the acquisition dates.
(2) Includes pro forma adjustments to effect the acquisitions and the amendment
to our credit facility effected in February 1999.
(3) Reflects the impact of the issuance of the outstanding notes as if such
issuance had occurred at the beginning of the period.
(4) To eliminate the results of operations not acquired.
(5) To give effect to the elimination of historical amortization of intangible
assets.
(6) To give effect to the amortization of intangible assets recorded in
purchase accounting. Intangible assets consist of non-compete agreements,
customer lists, and DIRECTV distribution rights. The non-compete agreements
are amortized over the contract period (three years), while customer lists
are amortized over five years. DIRECTV distribution rights are amortized
over the remaining useful life of satellites (expiring in 2008) generally
10-12 years depending upon the date of the acquisition.
(7) To give effect to the elimination of interest income and expense related to
operations not acquired.
(8) To give effect to interest expense on borrowings under Systems' 12 3/8%
notes, seller notes payable and our credit facility assumed to be incurred
to finance acquisitions as if such borrowings had occurred at the beginning
of the period at their respective historical interest rates.
(9) To give effect to the elimination of historical income tax expense
(benefit) of acquired entities.
(10) Reflects aggregate interest expense and amortization of deferred financing
costs associated with the offering of the outstanding notes.
(11) To give effect to the reduction of interest expense as a result of the
paydown of debt from the contribution of the proceeds from the offering of
the outstanding notes.
(12) Includes net equipment and installation subsidies of $15,059 (proceeds from
the sale and installation of DBS equipment of $11,648, net of related costs
of $26,707).
40
<PAGE> 43
GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
13 1/2%
NOTES PRO FORMA
HISTORICAL OFFERING AS ADJUSTED
---------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 4,460 $ 63,300 (1) $ 72,352
(750)(2)
5,342 (3)
Restricted cash, current portion....................... 28,083 (5,342)(3) 22,741
Subscriber receivables, net............................ 8,632 -- 8,632
Other receivables...................................... 2,465 -- 2,465
Inventory.............................................. 10,146 -- 10,146
Prepaid expenses and other............................. 1,859 -- 1,859
-------- -------- --------
Total current assets..................................... 55,645 62,550 118,195
Restricted cash, net of current portion.................. 23,534 -- 23,534
Property and equipment, net.............................. 4,994 -- 4,994
Intangible assets, net................................... 233,139 -- 233,139
Deferred financing costs................................. 10,541 (2,563)(2) 13,104
Other assets............................................. 218 -- 218
-------- -------- --------
Total assets............................................. $328,071 $ 65,113 $393,184
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable................................. $ 13,539 $ -- $ 13,539
Current maturities of long-term obligations............ 8,916 -- 8,916
Unearned revenue....................................... 5,574 -- 5,574
Interest payable....................................... 11,009 -- 11,009
Accrued payroll and other.............................. 1,403 -- 1,403
-------- -------- --------
Total current liabilities................................ 40,441 -- 40,441
Long-term obligations, net of current maturities:
12 3/8% Notes.......................................... 195,000 -- 195,000
13 1/2% Notes.......................................... -- 100,049 (1) 100,049
Bank debt.............................................. 67,000 (32,000)(1) 35,000
Seller notes payable................................... 6,912 -- 6,912
Other notes payable and obligations under capital
leases.............................................. 376 -- 376
Minority interest...................................... 2,420 -- 2,420
-------- -------- --------
Total long-term obligations, net of current maturities... 271,708 68,049 339,757
-------- -------- --------
Total liabilities........................................ 312,149 68,049 380,198
Total stockholder's equity............................... 15,922 (2,936)(2) 12,986
-------- -------- --------
Total liabilities and stockholder's equity............... $328,071 $ 65,113 $393,184
======== ======== ========
</TABLE>
41
<PAGE> 44
- ---------------
(1) To give effect to the offering of the outstanding notes.
(2) To give effect to deferred financing costs of $4,749 associated with the
offering of the outstanding notes and deferred financing costs of $750
associated with the February 1999 amendment to our credit facility, net of
the write off of the unamortized balance of deferred financing costs of
$2,936 associated with our credit facility prior to its amendment.
(3) To reflect the release, upon effectiveness of the amendment of our credit
facility in February 1999, of amounts deposited with the administrative
agent to fund a contingent reduction of availability under the term loan
facility that was not required under the terms of the amendment.
42
<PAGE> 45
SELECTED CONSOLIDATED FINANCIAL DATA
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 following information should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and our consolidated financial statements and notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services.......................................... $ 219 $ 16,452 $ 74,910
Lease and other....................................... 36 944 1,014
------- ---------- ----------
Total revenue........................................... 255 17,396 75,924
Costs and Expenses:
Cost of DBS services.................................. 130 9,304 45,291
System operations..................................... 26 3,796 11,021
Sales and marketing................................... 73 7,316 32,201
General and administrative............................ 1,035 2,331 7,431
Depreciation and amortization......................... 97 7,300 23,166
------- ---------- ----------
Total costs and expenses................................ 1,361 30,047 119,110
------- ---------- ----------
Operating loss.......................................... (1,106) (12,651) (43,186)
Net interest expense.................................... (61) (3,133) (18,964)
------- ---------- ----------
Net loss before extraordinary charge.................... $(1,167) $ (15,784) $ (62,150)
======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1996 1997 1998
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents............................... $ 479 $ 13,632 $ 4,460
Restricted cash(1):
Current............................................... -- -- 28,083
Long-term............................................. -- -- 23,534
Working capital......................................... (1,948) 3,827 15,204
Total assets............................................ 6,383 156,236 328,071
Total debt.............................................. 4,450 69,113 278,204
Stockholder's equity (deficit).......................... (1,166) 70,449 15,922
</TABLE>
<TABLE>
<CAPTION>
INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
(IN THOUSANDS, EXCEPT SUBSCRIBER
AND HOUSEHOLD DATA)
<S> <C> <C> <C>
OTHER FINANCIAL DATA
EBITDA(2)............................................... $(1,009) $ (5,351) $ (20,020)
Net cash used in operating activities................... (790) (3,099) (36,588)
Net cash used in investing activities................... (3,231) (120,729) (159,921)
Net cash provided by financing activities............... 4,500 136,981 187,337
Capital expenditures.................................... 105 998 3,317
Aggregate purchase price of acquisitions................ 5,256 129,725 124,844
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
(IN THOUSANDS, EXCEPT SUBSCRIBER
AND HOUSEHOLD DATA)
<S> <C> <C> <C>
OPERATING DATA
Households at end of period(3)(4)....................... 22,000 1,135,000 1,727,000
Subscribers acquired in acquisitions(4)................. 3,000 65,700 55,300
Subscribers added in existing Rural DIRECTV
Markets(4)............................................ 200 22,000 80,300
Subscribers at end of period(4)(5)...................... 3,200 90,900 226,500
SAC per gross subscriber added(4)(6).................... $ 290 $ 280 $ 320
Penetration at end of period............................ 14.7% 8.0% 13.1%
Ratio of earnings to fixed charges(7)................... -- -- --
</TABLE>
- ---------------
(1) Represents the amount placed in escrow in connection with the offering of
System's 12 3/8% notes to fund, together with the interest received thereon,
the first four scheduled interest payments on such notes. Also includes $5.3
million deposited with the administrative agent under the credit facility to
fund a contingent reduction of availability under the term loan facility
that did not occur under the terms of our credit facility, as amended in
connection with the offering of the outstanding notes.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, extraordinary items and non-recurring charges. EBITDA is not a
measure of performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net income (loss)
as a measure of performance, or as a substitute for cash flow as a measure
of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized
measure of performance in the communications industry and is the basis for
many of our financial covenants. Further, we believe that EBITDA provides
useful information regarding an entity's ability to incur and/or service
debt. Increases or decreases in EBITDA may indicate improvements or
decreases, respectively, in our free cash flows available to incur and/or
service debt and cover fixed charges. Notwithstanding the above, 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.
Management expects that, because EBITDA is commonly used in the
communications industry as a measure of performance, investors may use this
data to analyze and compare other communications companies with our company
in terms of operating performance, leverage and liquidity. EBITDA, as we
calculate it is not necessarily comparable to similarly captioned amounts of
other companies.
(3) Pro forma households include all households acquired since our inception as
of the later of December 31, 1998 or acquisition date.
(4) Household and subscriber data reflect 100% of the households or subscribers
comprising our Rural DIRECTV Markets, including two Rural DIRECTV Markets in
which we acquired less than 100% ownership. We receive 100% of the revenue
generated by all subscribers in our Rural DIRECTV Markets.
(5) Pro forma subscriber data includes all subscribers acquired in acquisitions
since our inception as of the later of December 31, 1998 or acquisition
date.
(6) Represents subscriber acquisition costs (SAC) on a per gross new subscriber
activation basis (excludes acquired subscribers and does not net out
disconnected subscribers).
(7) The ratio of earnings to fixed charges is determined by dividing the sum of
operating loss and a portion of rent expense representative of interest by
the sum of interest expense and such portion of rent expense. For the
periods ended December 31, 1996, 1997 and 1998, the deficiency of earnings
to fixed charges was $1.2 million, $15.8 million, and $63.7 million,
respectively.
44
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 DIRECTV Markets. We are a non-voting affiliate of
the NRTC. We acquired our first Rural DIRECTV Market in November 1996. Since our
inception, through March 31, 1999 we have acquired 52 Rural DIRECTV Markets
serving approximately 1.8 million households. The aggregate purchase price for
these acquisitions totaled approximately $267.1 million, or approximately $149
per household. Following each acquisition, we created a strong local presence in
such Rural DIRECTV Market. We have established 71 offices in our territories and
have established dealer relationships with over 350 local retailers of 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.
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 operating
cash flows from operations since our inception. These operating 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
expense 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 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 churn (our 1998 annual churn rate was
approximately 9%), we believe that our investment in building our subscriber
base rapidly will enhance our EBITDA and operating results in the longer term.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, extraordinary items and nonrecurring charges. EBITDA is not a
measure of performance under generally accepted accounting principles and should
not be construed as a substitute for consolidated net income (loss) as a measure
of performance, or as a substitute for cash flow as a measure of liquidity.
Nevertheless, we believe that EBITDA is a commonly recognized measure of
performance in the communications industry and is the basis for many of our
financial covenants. Further, we believe that EBITDA provides useful information
regarding an entity's ability to incur and/or service debt. Increases or
decreases in EBITDA may indicate improvements or decreases, respectively, in our
free cash flows available to incur and/or service debt and cover fixed charges.
Notwithstanding the above, 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. Management expects that, because EBITDA is commonly used
in the communications industry as a measure of performance, investors may use
this data to analyze and compare other communications companies with us in terms
of operating performance,
45
<PAGE> 48
leverage and liquidity. EBITDA as calculated by us is not necessarily comparable
to similarly captioned amounts of other companies.
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 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.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
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
INCEPTION TO DECEMBER 31,
DECEMBER 31, ---------------
1996 1997 1998
------------ ----- -----
<S> <C> <C> <C>
Revenue:
DBS services.............................................. 85.9% 94.6% 98.7%
Lease and other........................................... 14.1 5.4 1.3
------ ----- -----
Total revenue............................................... 100.0% 100.0% 100.0%
Costs and Expenses:
Costs of DBS services..................................... 51.0% 53.5% 59.7%
System operations......................................... 10.2 21.8 14.5
Sales and marketing....................................... 28.6 42.0 42.4
General and administrative................................ 405.9 13.4 9.8
Depreciation and amortization............................. 38.0 42.0 30.5
------ ----- -----
Total costs and expenses.................................... 533.7 172.7 156.9
------ ----- -----
Net interest expense........................................ (23.9) (18.0) (25.0)
Net loss.................................................... (457.6)% (90.7)% (81.9)%
====== ===== =====
</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.
46
<PAGE> 49
Sales and Marketing. Sales and marketing expenses include such costs as
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, as well as the cost 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 our statement of operations. We
invest significantly to develop our sales and distribution systems and to
acquire new subscribers. A large part of sales and marketing expense is
comprised of costs related to the addition of new subscribers. Although we
anticipate continuing to incur such 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
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. Systems elected Subchapter S Corporation status in 1996. As
an S Corporation, it was generally not directly subject to income taxation and
recognized no income tax expense or benefit as an S corporation. On February 12,
1997, Systems terminated its Subchapter S Corporation status, and became subject
to income taxation as a C Corporation 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.
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 those
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
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 and $280 during
the years ended December 31, 1998 and 1997, respectively.
47
<PAGE> 50
While there can be no assurance, during 1999 we expect that our subscriber
acquisition costs, on a per new subscriber activation basis, generally will
approximate 1998 levels. However, such costs may exceed historical levels to the
extent that:
- competition for new subscribers intensifies and we decide to increase our
subscription acquisition costs as a result thereof;
- we participate in DIRECTV national promotions that result in higher
subscriber acquisition costs than those we typically experience; and
- we opt to increase our subscriber acquisition costs in response to
specific business opportunities (such as the conversion of Primestar
subscribers -- see "-- Liquidity and Capital Resources").
Advertising expenses totaled $5.1 million during the year ended December
31, 1998, compared to $1.4 million during 1997. The increase in advertising
expenses of $3.7 million resulted from our increased size and marketing
activities.
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. 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.
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 have resulted
from our acquisition of additional Rural DIRECTV Markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998 and $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 our operating for all of 1997 as opposed to
only a portion of
48
<PAGE> 51
1996, and from the increase in subscribers. The average number of subscribers
during 1997 increased to approximately 33,600, compared to approximately 3,000
during the 1996 Period.
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 our operating for all of
1997 as opposed to only a portion of 1996 and corresponds to the large increase
in 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 and $26,000 for the 1996 Period. These expenses
rose as a result of our being operational during all of 1997 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 and $73,000 for the 1996 Period. The increase
of $7.2 million in sales and marketing expenses resulted from our operating for
all of 1997 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 and $1.0 million
for the 1996 Period. The increase of $1.3 million in general and administrative
expenses resulted from our operating for all of 1997 and from our growth.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
the year ended December 31, 1997 totaled negative $5.4 million, compared to
EBITDA of negative $1.0 million during the 1996 Period. This increase in
negative EBITDA principally resulted from our operating for all of 1997 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 our operating for all of
1997.
Interest Expense. Interest expense amounted to $3.2 million for the year
ended December 31, 1997 and $62,000 for the 1996 Period. The increase in
interest expense of $3.1 million resulted primarily from our operating for all
of 1997 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.
49
<PAGE> 52
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial amounts of capital for
- the acquisition of additional Rural DIRECTV Markets,
- financing subscriber growth (including subsidizing DBS equipment and
installation, marketing and selling expenses),
- investments in, and maintenance of, field offices in our Rural DIRECTV
Markets,
- financing 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 $128.2 million and $130.7 million during the years ended
December 31, 1998 and 1997, respectively, and $5.4 million during the 1996
Period, respectively. During those same periods, net cash flows used in
operations totaled $36.6 million, $3.1 million and $790,000, respectively.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under our bank credit facilities, proceeds from Systems
offering of 12 3/8% 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 year ended December 31, 1998 net cash flows from financing
activities totaled $187.3 million, which was comprised of:
- net proceeds of $189.2 million from the offering of Systems' 12 3/8%
notes;
- net borrowings of $7.0 million under our bank credit facilities;
- deferred financing costs of $5.2 million; and
- $3.7 million of repayments on our other indebtedness.
In 1997 net cash flows from financing activities totaled $137.0 million,
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 our bank credit facilities and
other indebtedness.
Credit Facility
In May 1998, we entered into our credit facility, which 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). In connection with
our February 1999 13 1/2% notes offering, we entered into an amendment to such
credit agreement. After completion of our 13 1/2% notes offering, we had (1)
fully utilized the entire $35.0 million of term loan availability, (2) utilized
approximately $12.9 million of the letter of credit sub-facility and (3) had no
outstanding borrowings under the revolving credit line.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings reduces by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under our credit facility
bear interest at variable rates calculated on a base rate, such as the prime
rate or LIBOR, plus an applicable margin with reductions, under certain
circumstances, based on leverage. See "Description of Other Indebtedness."
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Our credit facility contains a number of significant covenants that, among
other things, limit our ability to incur additional indebtedness and guaranty
obligations, create liens and other encumbrances, make certain payments,
investments, loans and advances, pay dividends or make other distributions in
respect of our capital stock, sell or otherwise dispose of assets, make capital
expenditures, merge or consolidate with another entity, create subsidiaries,
make amendments to our organizational documents or transact with affiliates.
Our credit facility also contains a number of financial covenants that will
require us 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 ratios. Availability
under the revolving credit line of our credit facility depends upon satisfaction
of the various covenants as well as minimum subscriber base requirements. As of
December 31, 1998, we were in compliance with all of our covenants under our
credit facility.
For additional information regarding our credit facility, see "Description
of Other Indebtedness."
12 3/8% Notes
On July 31, 1998, Systems consummated an offering of 12 3/8% Senior
Subordinated Notes, which mature on August 1, 2006. Interest on Systems' 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 offering of Systems'
12 3/8% notes resulted in net proceeds 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 offering of Systems' 12 3/8% notes were placed in an interest reserve
account to fund the first four semi-annual interest payments (through August 1,
2000) on Systems' 12 3/8% notes.
The 12 3/8% notes are unsecured senior subordinated obligations of Systems
and are subordinated in right of payment to all of its existing and future
senior indebtedness. 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 unconditionally
guaranteed, on a senior subordinated basis, as to payment of principal, premium,
if any, and interest, jointly and severally, by Systems' wholly-owned
subsidiaries, Argos Support Services Company and PrimeWatch, Inc., and may,
under certain circumstances, be guaranteed in the future by other subsidiaries
of Systems.
Systems' 12 3/8% notes are redeemable, in whole or in part, at our 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, we may, at our option, redeem up to 35% of the originally
issued aggregate principal amount of Systems' 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 Holdings or Systems 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 Systems' 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 Systems' 12 3/8% notes contains restrictive
covenants that, among other things, impose limitations on our 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 our subsidiaries to pay dividends
or make certain payments to us, merge or consolidate with any other person or
sell, assign,
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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 Systems' 12 3/8% notes, each holder of the 12 3/8% notes will have the
right to require us 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. See "Description of Other
Indebtedness -- The 12 3/8% Notes."
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the offering of our
outstanding 13 1/2% Senior Discount Notes due 2007, Series A. This offering
resulted in net proceeds of approximately $95.3 million. Approximately $53.0
million of such net proceeds were used to repay outstanding indebtedness under
our credit facility. The remainder of these net proceeds will be used to finance
the acquisition of additional Rural DIRECTV Markets and for our general
corporate purposes and working capital needs.
The terms of the outstanding notes are identical in all material respects
(including principal amount at maturity, yield to maturity and maturity) to the
terms of the new notes. However, the outstanding notes, to the extent they are
not tendered in this exchange offer, will continue to be subject to the transfer
restrictions contained in the legend that appears on each respective note. After
the consummation of this exchange offer, the aggregate principal amount at
maturity of any non-tendered outstanding notes and the new notes will be
$193,100,000. See "Description of the New 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 such future subsidies 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 thereto. 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 our acquisitions of Rural DIRECTV
Markets and to expand our marketing efforts in our existing markets in order to
increase our subscriber penetration.
Since December 31, 1998, we have acquired seven Rural DIRECTV Markets.
These territories include approximately 116,000 households and 17,200
subscribers. The aggregate purchase price for these recent acquisitions was
approximately $31.4 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 are not yet able to assess whether and to what extent the acquisition by
Hughes of USSB or by DIRECTV of Primestar may affect our future capital
requirements. We are not yet able to assess whether and to what extent the
acquisition by Hughes of USSB or by DIRECTV of Primestar may affect our future
capital requirements. Subsequent to DIRECTV's 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. Consequently, beginning in February 1999 we 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 estimate that our
subscriber acquisition costs relative to converted Primestar subscribers may
approximate as much as
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$400 on a per converted subscriber basis. We are unable to estimate the number
of Primestar subscribers we may be able to convert to our DIRECTV service.
We are highly leveraged and expect to increase our leverage as we pursue
further acquisitions of Rural DIRECTV Markets by borrowing additional funds
under our credit facility or otherwise, and by the issuance of other
acquisition-related notes payable. The approximately $15.4 million of seller
notes payable outstanding at December 31, 1998 mature as follows: $8.5 million
in 1999, $1.9 million in 2000, $2.0 million in 2001, $2.0 million in 2002 and
$1.0 million in 2003. See "Description of Other Indebtedness."
As a holding company, Golden Sky DBS must rely on dividends and other
distributions from its subsidiaries to meet its 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. Our credit facility and the indenture governing Systems' 12 3/8%
notes contain restrictive covenants that limit the ability of our subsidiaries
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 the notes. We currently expect it may be difficult to generate the requisite
dividend capacity to make the initial cash interest payments on the notes. Our
ability to generate sufficient dividend capacity under the indenture governing
Systems' 12 3/8% notes to service the notes and to comply with the financial and
other covenants in our credit facility will depend upon the extent to which we
pursue acquisitions, incur additional indebtedness (for which we will have
substantial capacity under the notes indenture), 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 Systems'
cash flow for these initial interest payments. See "Risk Factors -- Impact of
Subsidiary Debt Instruments on Our Ability to Service the Notes" for a
discussion of this and other factors affecting our ability to do so.
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, as well as from additional competition, among other things.
Additional financing also may be required to meet our debt service requirements.
There can be no assurance that such additional financing would be available on
terms acceptable to us, or at all, and if available, that the proceeds of such
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 Year 2000 compliance of our internal systems and believe
that such systems are Year 2000 compliant. However, we cannot assure you that
all of the software products currently used by us 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. Additionally,
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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.
We are significantly reliant on contracted data processing services from
the NRTC and DIRECTV for customer service, billing and remittance processing
pursuant to our contractual relationship with the NRTC. The NRTC has informed us
that such computer systems that provide such services are not currently Year
2000 compliant, but that the majority of such systems will be compliant by
September 1999. With respect to the NRTC's billing and authorization systems,
the NRTC has informed us that a small number of Year 2000 issues exist, and that
the appropriate changes have been requested and scheduled for development
action. We are reliant on DIRECTV for distribution of our DBS programming
services. The NRTC has informed us that DIRECTV expects to establish Year 2000
compliance for its billing and authorization systems by the end of the second
calendar quarter of 1999. In addition to the NRTC and DIRECTV, we are
significantly reliant on other parties (such as its suppliers of DBS equipment)
for the successful conduct of our business. As previously described, we are in
the process of ascertaining the Year 2000 readiness of these third-parties.
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 impact on our
operations. There can be no assurance that the systems of the NRTC, DIRECTV and
other companies with which our systems interact or depend will be compliant by
the end of 1999, or that any such third party failure would not have an adverse
effect on our business or our 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 certain third party failures, especially in high-
technology industries such as the DBS industry, due to the lack of alternate
suppliers. However, 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 mid-1999. There can be no assurance that
such contingency plans will successfully mitigate any adverse effects that the
Year 2000 issue may have on our operations.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 is effective
for fiscal years beginning after June 15, 1999. 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 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 we have previously
expensed all such costs, the adoption of SOP 98-5 is not expected to have a
material effect on our results of operations or financial position.
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BUSINESS
GENERAL
We are the second largest independent provider of programming by DIRECTV.
DIRECTV is the leading DBS company serving the continental United States. We
market and provide DIRECTV programming on an exclusive basis to residential
customers in certain Rural DIRECTV Markets and on a non-exclusive basis to
residents of multiple dwelling units and commercial customers. We have obtained
the exclusive right to provide DIRECTV programming to homes in our Rural DIRECTV
Markets under agreements between the NRTC and our company. The NRTC and its DBS
members and affiliates (including our company) provide DIRECTV programming in
Rural DIRECTV Markets pursuant to an agreement between the NRTC and Hughes. We
estimate that the Rural DIRECTV Markets comprise approximately 9.0 million
households or approximately 9% of total U.S. television households, but account
for approximately 1.0 million, or approximately 22%, of total DIRECTV customers.
Since June 1996, when we were formed by management, through March 31, 1999,
we have
- acquired 52 Rural DIRECTV Markets in 23 states with approximately 1.8
million households and 134,700 subscribers at the dates of acquisition,
- increased our subscriber base in these markets by approximately 92% in
the aggregate, to approximately 258,900, achieving a subscriber
penetration rate of approximately 14% through aggressive marketing and a
local, service-driven approach to our customer, and
- commenced marketing and distributing DIRECTV programming to approximately
4,600 commercial and MDU customers in five cities near its Rural DIRECTV
Markets, with rights to provide such services on a non-exclusive basis
nationwide.
To date, we have raised an aggregate $87.4 million of equity capital in
financings led by investment funds affiliated with Burr, Egan, Deleage &
Co./Alta Communications, Spectrum Equity Investors, L.P., BancBoston Ventures
Inc., Norwest Equity Partners and HarbourVest Partners LLC. and including an
aggregate $2.5 million investment by our management. We have also secured $150.0
million of senior bank financing, $195.0 million gross proceeds from the
offering of Systems' 12 3/8% notes and $100.0 million gross proceeds from the
offering of our outstanding notes. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions."
Our revenue has increased rapidly due to internal subscriber growth and a
low average annual churn rate (approximately 9% for the twelve months ended
December 31, 1998). Net internal subscriber growth in our Rural DIRECTV Markets
during 1998 totaled approximately 80,300. This represented approximately 7% of
DIRECTV's net new subscribers nationwide for the period, although total
households in our Rural DIRECTV Markets approximated just 1.5% of all television
households in the continental United States. 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 EBITDA. We had EBITDA of approximately negative $5.4
million and negative $20.0 million for the years ended December 31, 1997 and
1998, respectively.
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 more channels than
competing services at a comparable price, including a wide variety of
programming, exclusive sports packages (such as 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 over 50% of all DBS subscribers nationwide.
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- Limited Competition in Rural Markets. Competition from cable television
providers in Rural DIRECTV Markets is often limited. Many households in
rural markets are not passed by traditional cable systems or are served
by analog systems with a small channel capacity (i.e., less than 40
channels) and poor quality signal relative to DBS service. Given the
relatively low housing density in these markets, the build-out of new
systems or upgrade of existing systems may not be cost-effective. Other
entertainment options, such as theaters, movies and sporting events, may
also be limited. We believe that this market environment contributes to a
subscriber penetration rate within the Rural DIRECTV Markets that is
currently nearly three times the penetration rate for DIRECTV in other
U.S. markets.
- National Marketing, Distribution and Manufacturing Support. DIRECTV
supports local providers, such as our company, with a national marketing
campaign, including television and print advertising, and through
alliances with strategic partners such as 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.
- Consolidation Opportunity. Ownership of Rural DIRECTV Markets has
historically been fragmented, creating an opportunity for us to grow
through acquisitions, rationalize operations and create operating
leverage. Because most of the operators from whom we have acquired or may
acquire Rural DIRECTV Markets have not engaged in significant marketing
efforts, we believe we have the potential to increase subscriber
penetration significantly following such acquisitions.
Pursuant to our agreements with the NRTC, we have the exclusive right to
provide DIRECTV programming in our Rural DIRECTV Markets, and receive the
monthly service revenue from all DIRECTV subscribers in such markets regardless
of the subscribers' original point of purchase.
In addition to our business in Rural DIRECTV Markets under agreements with
the NRTC, we have developed other business relationships with DIRECTV and its
affiliated companies. For example, we were chosen in January 1998 by DIRECTV to
market and provide DIRECTV programming nationally to residents of MDUs and
commercial establishments as a master system operator. In February 1998, we
began marketing and providing DIRECTV programming to residents of multiple
dwelling units and commercial establishments in five major metropolitan areas
near our rural territories. We intend to focus our multiple dwelling units and
commercial activities in high-growth urban areas near our Rural DIRECTV Markets
to create a larger universe of potential subscribers while maintaining our fixed
cost base.
STRATEGY
We intend to leverage our competitive strengths by pursuing the following
strategies:
- Emphasize Direct Sales and Local Customer Service. We believe a
commitment to a strong local presence generates rapid subscriber growth,
higher customer satisfaction and lower churn, and ultimately greater
revenue and EBITDA. We have created a highly decentralized operating
structure that permits managers to respond quickly and flexibly to local
needs. We believe that 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 63
offices in our Rural DIRECTV Markets. We provide sales, installation and
customer service directly through these offices and in conjunction with
more than 350 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
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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 television
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 approximately 100 Rural DIRECTV
Markets, comprised of approximately 2.0 million households, are still
owned by original NRTC members.
- Develop Related Business Opportunities. We plan to leverage our local
sales and support infrastructure by expanding our base of potential
customers and product offerings. We have commenced marketing to MDUs and
commercial establishments in five cities near our Rural DIRECTV Markets,
including Dallas/Ft. Worth, Texas; Denver, Colorado; Ft. Myers, Florida;
Kansas City, Missouri; and Las Vegas, Nevada. As of March 31, 1999, we
had access to approximately 32,000 MDUs via "right of entry" agreements,
with approximately 4,600 active subscribers. In addition, we are
evaluating other telecommunications products and services that could be
offered to customers using our existing marketing and distribution
infrastructure. In May 1998, we commenced test marketing of DirecPC, a
satellite-based 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.
Direct Sales Force
We have established direct sales forces in all of our Rural DIRECTV
Markets, and we own full service retail stores located in substantially all our
Rural DIRECTV Markets. We currently have approximately 250 direct salespeople
and support our direct sales staff and local offices with an advertising
campaign that we believe is both creative and consistent. We also seek to
develop close relationships with independent dealers of DBS equipment and
provide marketing, subscriber authorization, installation and customer service
support to enhance subscriber additions from such dealers. 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 certain equipment sold through the indirect dealer network,
we 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 some DTH providers have, 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. These other distribution channels include
- 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.
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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 monthly
programming revenue associated therewith, regardless of what outlet originally
sold DIRECTV programming to the subscriber.
MARKETING
We believe that DBS services can compete favorably with medium and low
power 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, to date, there has been no significant
local presence to drive such 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, such as offering new subscribers an initial
month's service at no charge, have been implemented to motivate customers to
purchase such plans, and we 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. We offer various types of DBS equipment and
accessories through our direct sales force and retail locations. We are able to
take advantage of volume discounts in purchasing this equipment from the NRTC
and other vendors. In addition, dealers are motivated to lower the prices at
which they offer DBS equipment and installation by our volume-based commission
structure.
CUSTOMER SERVICE
We provide customer service from each of our local offices. Generally, our
offices are staffed from 9 a.m. to 7 p.m., six days a week. Local managers are
responsible for managing customer accounts receivable and churn. We believe we
can sustain our historically low 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 DTH INDUSTRY
DTH services encompass all types of television transmission from satellites
directly to the home. The FCC has authorized two types of satellite services for
transmission of television programming: Direct Broadcast Satellite Services
(commonly referred to as "DBS"), which operate at high power (120 to 240 watts
per frequency channel) in the Ku-band, and Fixed Satellite Service (commonly
referred to as low power and medium power DTH), which includes low power
services transmitting in the C-band, as well as medium power (20 to 100 watts
per frequency channel) services transmitting in the Ku-band. Both DBS and medium
power DTH satellites are used for digital satellite television services. DBS
provides high quality video and audio signals and can be received by an 18-inch
dish. Medium and low power DTH signals require home satellite dishes of 27
inches to six feet in diameter (depending on the geographical location of the
dish and wattage per frequency channel). See "-- DIRECTV." DIRECTV, USSB and
EchoStar are the only current domestic providers of DBS services. All other DTH
domestic satellite television providers currently provide medium or low power
DTH services. See "-- Competition."
A DBS system consists of an uplink center, one or more orbiting satellites
and the 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
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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 decoder box to unscramble
programming signals.
DBS providers are afforded technological and regulatory advantages over
medium and low power DTH services. The FCC requires the satellites used to
provide DBS services to be spaced at greater intervals than medium and low power
DTH satellites (nine degree orbital spacing over North America compared to two
degree orbital spacing). The greater orbital spacing is intended to ensure that
the signals transmitted by DBS providers can be received by a small dish, free
of interference from adjacent satellites. The closer medium and low power DTH
satellite orbital spacing requires the use of a larger, 27-inch to six foot dish
to eliminate interference from nearby satellites. See "-- Competition -- Other
DTH Providers." In addition, DBS satellites are allowed to broadcast with much
higher power levels than medium and low power DTH satellites. The combination of
greater orbital spacing and higher power enables providers of DBS services to
obtain 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 near laser disc quality video and CD-quality audio programming, and
transmits via three high-power Ku band satellites (only two are needed to
support transmission of DIRECTV programming), each containing 16 transponders.
As of March 31, 1999, there were approximately 4.8 million DIRECTV subscribers.
We believe that DIRECTV services are superior to those provided by other
DTH service providers and that DIRECTV's extensive programming, including up to
80 channels of pay-per-view movies and events, various sports packages and the
exclusive NFL SUNDAY TICKET(TM), will continue to contribute to the growth of
DIRECTV's subscriber base and DIRECTV's market share for DTH services in the
future. In addition, we believe that DIRECTV's national marketing campaign
provides us with significant marketing advantages over other DTH competitors.
DIRECTV's share of current DBS and medium power DTH subscribers was
approximately 51.1% as of February 28, 1999. DIRECTV added approximately 1.2
million new subscribers (net of churn) during the twelve months 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. Although DIRECTV's share of new subscribers can be expected to
decline as existing and new DTH providers aggressively compete for new
subscribers, we expect DIRECTV to remain the leading provider of DBS and medium
power DTH services in an expanding market.
The equipment required for reception of DIRECTV programming (DBS equipment)
includes an 18-inch satellite antenna, a digital receiver approximately the size
of a standard VCR and a remote control, all of which are used with standard
television sets. Each digital receiver includes a "smart card" that is uniquely
addressed to it. The smart card, which can be removed from the receiver,
prevents unauthorized reception of DIRECTV services and retains billing
information on pay-per-view usage, which information is sent at regular
intervals from the DBS receiver telephonically to DIRECTV's authorization and
billing system. The small size of the dish makes it more acceptable to housing
communities and organizations that prohibit the installation of larger dishes
due to their appearance. The digital receiver captures and translates the signal
and interfaces with an easy to use on-screen electronic program guide which
includes a parental locking/ratings control function.
DBS equipment also enables subscribers to receive USSB programming. USSB is
a DBS service providing 28 channels of video programming transmitted via five
transponders it owns on DIRECTV's first satellite. USSB primarily offers Time
Warner and Viacom premium satellite programming services, such as multiple
channels of HBO and Showtime, which are not available through DIRECTV but which
are
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generally complementary to DIRECTV programming. As of March 31, 1999,
approximately 50% of DIRECTV's 4.8 million subscribers received USSB
programming.
On December 14, 1998, Hughes announced that it will acquire USSB for
approximately $1.3 billion. Hughes said it will combine its DIRECTV business
with USSB's assets and satellite slots to expand its DBS programming lineup
through the addition of premium multi-channel movie services such as HBO and
Showtime. Hughes also announced that it plans to use certain of the DBS
satellite frequencies to be acquired for the delivery of Spanish-language
programming services. On January 22, 1999, DIRECTV announced that it will
acquire certain of Primestar's and one of its affiliates' assets for
approximately $1.8 billion. We are not yet able to assess the effect of either
acquisition on our future business, financial position or results of operations.
DBS equipment is now 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 $99 to
$299, depending upon the generation of the equipment, the level of features 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 (major professional league sports packages, including
the exclusive NFL SUNDAY TICKET, regional sports networks and seasonal
college sports packages) 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.
- Plus DIRECTV: Package of 16 video channels, 31 CD audio channels and
access to up to 55 channels of pay per view movies and events. Plus
DIRECTV consists of channels not typically offered on most cable systems
and is intended to be sold to existing cable subscribers to augment their
cable or other satellite services.
- NFL SUNDAY TICKET: 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.
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Other sports programming packages include:
- Sports Choice: Package of 24 channels (including over 18 regional sports
networks) and five general sports networks (the Golf channel, NewSport,
Speedvision, Classic Sports Network and Outdoor Life).
- 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.
- ESPN Game Plan: 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.
RELATIONSHIP WITH THE NRTC AND DIRECTV
The NRTC acquired the right to provide DIRECTV programming to residential
households in 1992 and commercial establishments located in the Rural DIRECTV
Markets in 1994, pursuant to the Hughes Agreement. The NRTC subdivided its
rights to provide such services into approximately 250 geographically based
Rural DIRECTV Markets, then sold a portion of its rights to the individual Rural
DIRECTV Markets to NRTC members pursuant to the NRTC Agreements. We have
acquired from the NRTC the exclusive right to provide DIRECTV programming in
each of our Rural DIRECTV Markets pursuant to an NRTC Agreement. Each such
Agreement was assigned to us with the consent of the NRTC and DIRECTV when we
acquired such Rural DIRECTV Market.
Pursuant to 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 pursuant to 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
the assignment or transfer by the NRTC member party thereto of its rights or
obligations under the NRTC Agreements, which consent shall not be unreasonably
withheld. The NRTC Agreements also contain termination provisions which allow
the NRTC to terminate such agreements
- as a result of 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 breaches a
material obligation of the NRTC Agreement and such failure or breach
continues for more than 30 days after written notice from the NRTC, or
- 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 certain 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
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material adverse financial consequences to our company. 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 our
company, 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.
Pursuant to the NRTC Agreements, we have obtained from the NRTC the
exclusive right in our Rural DIRECTV Markets to market, sell and retain all of
the revenue from subscribers derived from the sale of most programming
transmitted by the DIRECTV satellites over the 27 frequencies owned by Hughes.
We pay the NRTC for the wholesale cost of such programming and a fee to DIRECTV
based upon 5% of the programming revenue. The NRTC has the right to choose to
provide certain non-select services, such as 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 such 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 its subscribers
and remits the balance to DIRECTV.
The NRTC Agreements (and presumably the Hughes Agreement) expire when
Hughes removes its current satellite(s) from their assigned orbital locations.
According to Hughes and USSB, the DIRECTV satellites have estimated orbital
lives of at least 15 years from their respective launches in December 1993 and
1994. We believe that the Hughes Agreement provides the NRTC with a right of
first refusal to obtain DBS Services (other than programming services) in
substantially the same form as such DBS Services are provided under the existing
Hughes Agreement in the event that Hughes elects to launch one or more successor
satellites upon the removal of the present satellites from their assigned
orbital locations. The NRTC Agreements do not expressly provide an equivalent
right of first refusal for the NRTC members to acquire DBS Services through the
NRTC should the NRTC exercise any right of first refusal under the Hughes
Agreement. We are an affiliate of the NRTC. See "Risk Factors -- Our Ability to
Acquire DBS Services from the NRTC and DIRECTV after Expiration of NRTC
Agreements."
COMPETITION
We face competition both for acquisitions of Rural DIRECTV Markets from one
other company, and 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 and service and cost will be the key bases of competition. See "Risk
Factors -- Competition and Technological Change" and "Risk Factors -- Risks
Attendant to Acquisition Strategy."
Competition for Acquisition of Rural DIRECTV Markets
We are aware that at least one other company, Pegasus Communications
Corporation ("Pegasus") is currently pursuing the same goal as our company of
consolidating Rural DIRECTV Markets. Pegasus is currently the largest
independent provider of DIRECTV services and has substantially greater financial
resources than we do. We cannot assure you that the marketing and sales efforts
or competing acquisition strategies of Pegasus or other competitors will not
have an 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 $35. 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, such as conversion to digital format, fiber
optic cabling, advanced compression technology and other technological
improvements, when fully completed, will permit cable companies to increase
channel capacity, thereby increasing programming alternatives, and to deliver a
better quality signal. However, although cable systems with adequate channel
capacity may offer digital service without major rebuilds, 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 such 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 digital DBS
providers and that some cable systems in those markets may never be upgraded,
subject to advances in digital compression technology currently under
development.
We expect to encounter a number of challenges in competing with cable
television providers. First, cable operators have an entrenched position in the
marketplace. We believe that our current strategy of targeting the acquisition
of Rural DIRECTV Markets which are not served by cable or are underserved by
cable partially offsets the cable industry's position in the consumer
marketplace. Second, the 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, current DBS systems, unlike cable, do not
provide local broadcast programming via satellite, although seamless switching
between satellite and broadcast programming from other sources is possible with
all 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. We believe that the significant
capital costs of upgrading cable systems to provide similar services, combined
with the marketing strength of DBS providers such as DIRECTV, presents DBS
providers with an opportunity to take substantial market share for pay
television services from cable in the Rural DIRECTV Markets.
OTHER DTH PROVIDERS
EchoStar, the only other DBS provider, commenced national broadcasting of
programming in March 1996 and currently broadcasts approximately 200 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. full continental United States ("CONUS") orbital
position and has 69 frequencies in other partial CONUS orbital locations.
EchoStar reported approximately 2.3 million subscribers as of March 31, 1999. On
November 30, 1998, EchoStar announced that it had entered into an agreement to
acquire certain satellite-television assets from The News Corporation Limited
and MCI Worldcom Inc. The satellite-television assets to be acquired by EchoStar
include a license for 28 DBS frequencies at 110 degrees W.L. (a full CONUS
orbital location), two satellites to be delivered in orbit, and a direct
broadcast operations facility. Consummation of these asset purchases by EchoStar
may enable it to significantly expand its DBS and other programming offerings,
thereby potentially strengthening its competitive strength relative to DIRECTV
and our company. We believe that we can successfully compete with EchoStar in
the DBS market because of DIRECTV's brand name and its
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significantly larger distribution networks and greater number of manufacturers
of the equipment used to receive DTH services.
Primestar, a medium-power DTH provider owned primarily by a consortium of
cable companies including TCI, launched the first digital DTH satellite
television service in 1994. As a result of the successful launch and operation
of a new satellite in early 1997, Primestar increased its programming services
to approximately 150 channels. As of February 28, 1999, Primestar had
approximately 2.3 million subscribers. On January 22, 1999, DIRECTV announced
that it had reached an agreement with Primestar to acquire all of Primestar's
subscribers and related high-power satellite assets from Primestar and one of
its affiliates in two transactions valued at approximately $1.8 billion. We are
not yet able to assess the effect of DIRECTV's acquisition of Primestar on our
future business, financial position, or results of operations.
Low power C-band operators reported approximately 1.9 million subscribers
as of February 28, 1999. The C-band/TVRO market has been built primarily on
subscribers who live in markets not served by cable television. C-band
equipment, including the six-to-eight-foot dish necessary to receive the low
power signal, currently costs approximately $2,000 and is distributed by local
TVRO satellite dealers. 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
Wireless cable systems (which are usually analog) typically offer only 20
to 40 channels of programming, which may include local programming. Wireless
cable requires a direct line of sight from the receiver to the transmitter,
which creates the potential for substantial interference from terrain, buildings
and foliage in the line of sight. However, while it is expected that most large
wireless operators (especially certain of those backed by local telephone
companies) will upgrade to digital technology over the next several years, such
upgrades will require the installation of new digital decoders in customers'
homes and modifications to transmission facilities, at a potentially significant
cost.
Certain regional telephone companies and other long distance companies
could become significant competitors in the future, as they have expressed an
interest in becoming subscription multichannel video programming distributors.
Furthermore, the Telecommunications Act of 1996 (the "1996 Act") removes
barriers to entry which previously inhibited local telephone companies from
competing, or made it more difficult for such telephone companies to compete, in
the provision of video programming and information services. Certain telephone
companies have received authorization to test market video and other services in
certain geographic areas using fiber optic cable and digital compression over
existing telephone lines. Estimates for the timing of wide-scale deployment of
such multi-channel video service vary, as several telephone companies have
pushed back or cancelled originally announced deployment schedules.
As more telephone companies begin to provide multichannel video programming
and other information and other communications services to their customers,
additional significant competition for subscribers will develop. Among other
things, telephone companies have an existing relationship with substantially
every household in their service area, substantial financial resources, and an
existing infrastructure and may be able to subsidize the delivery of programming
through their position as the sole source of local wireline telephone service to
the home.
Most areas of the United States are covered by traditional territorial
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 spectra for use by
VHF/UHF broadcasters.
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REGULATION
Unlike a cable operator, DBS operators such as DIRECTV are free to set
prices and serve customers according to their business judgment, without rate of
return or other regulation or the obligation not to discriminate among
customers. However, there are laws and regulations that affect DIRECTV and,
therefore, affect our company. As an operator of a privately owned United States
satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC,
primarily with respect to
- the licensing of individual satellites (i.e., the requirement that
DIRECTV meet minimum financial, legal and technical standards),
- avoidance of interference with radio stations, and
- compliance with rules that the FCC has established specifically for DBS
satellite licenses.
As a distributor of television programming, DIRECTV is also affected by
numerous other laws and regulations. The 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 it impairs the installation, maintenance or use of a DBS
receiving antenna that is one meter or less in diameter or diagonal measurement,
except where such restriction is necessary to accomplish a clearly defined
safety objective or to preserve a recognized historic district. Local
governments and associations may apply to the FCC for a waiver of this rule
based on local concerns of a highly specialized or unusual nature. 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 such as DTH operators fully scramble or block
channels providing indecent or sexually explicit adult programming. If a
multi-channel video programming distributor cannot fully scramble or block such
programming, it must restrict transmission to those hours of the day when
children are unlikely to view the programming (as determined by the FCC). On
December 30, 1998, a three-judge federal court in Delaware held that this
provision was unconstitutional. The government has filed a notice indicating its
intent to appeal this decision to the United States Supreme Court.
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Act was intended to establish and
support existing and new multi-channel video services, such as wireless cable
and DTH, to provide subscription television services. DIRECTV and our company
have benefitted from the programming access provisions of the Cable Act and
implementing rules in that DIRECTV has been able to gain access to previously
unavailable programming services and, in some circumstances, has obtained
certain programming services at reduced cost. Any amendment to, or
interpretation of, the Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as DIRECTV in making programming available (or to discriminate
in the terms and conditions of such programming) could adversely affect
DIRECTV's ability to acquire programming on a cost-effective basis, which would
have an adverse impact on our company. Certain of the restrictions on
cable-affiliated programmers will expire in 2002 unless the FCC or Congress
extends such restrictions.
The Cable Act also requires the FCC to conduct a rule-making proceeding
that will 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
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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.
While DTH operators like DIRECTV currently are not subject to the "must
carry" requirements of the Cable Act, the cable and broadcast television
industries have argued that DTH operators should be subject to these
requirements. In the event the "must carry" requirements of the Cable Act are
revised to include DTH operators, or to the extent that new legislation of a
similar nature is enacted, DIRECTV's future plans to provide local programming
will be adversely affected, and such must-carry requirements could cause the
displacement of possibly more attractive programming.
The 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. Legislation to extend the SHVA
has been introduced in Congress. This legislation also provides for a reduction
in the royalty rates payable under the SHVA and establishes new rules regarding
the retransmission of distant and local broadcast television stations by
satellite carriers.
With respect to the retransmission 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. Until recently, a number of satellite providers, including
DIRECTV (and its distributors, including NRTC members and affiliates like us)
received ABC, CBS, NBC and Fox network programming from PrimeTime 24 Joint
Venture. Certain television broadcast networks and their affiliates have
commenced litigation against PrimeTime 24 alleging that the network programming
offered by PrimeTime 24 has been retransmitted in violation of the "unserved
households" limitation of the SHVA.
The litigation commenced against PrimeTime 24 has resulted in the issuance
of permanent injunctions by courts in North Carolina and Florida prohibiting
PrimeTime 24 from providing the programming of certain broadcast networks to
subscribers in certain designated geographic areas. In North Carolina, the court
issued a permanent injunction 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. The Florida injunction applies
nationwide and requires PrimeTime 24 to disconnect those customers for CBS and
Fox programming that are able to receive "a signal of Grade B intensity" (based
on Longley-Rice signal strength propagation maps) unless the local network
consents to continued service or a signal-strength test proves that a certain
quality of off-air service is unavailable to the customer. The Florida court
established February 28, 1999 as the deadline for compliance with the injunction
with respect to customers who first began receiving PrimeTime 24's network
programming after March 11, 1997; for customers who first received service
before that date, the compliance deadline is April 30, 1999. Additional
litigation against PrimeTime 24 alleging violations of the 'unserved households'
limitation, brought in Texas by an NBC affiliate, is currently pending.
In February 1999, DIRECTV announced that it was discontinuing
retransmission of the four broadcast networks received from PrimeTime 24 and
would instead distribute a different package of network affiliates to its
existing subscribers. On February 24, 1999 CBS, NBC, ABC and Fox asked the same
Federal District Court in Florida that had issued an injunction against
PrimeTime 24 to grant a temporary restraining order, preliminary injunction, and
contempt finding against DIRECTV for violating the SHVA. On February 25, 1999,
the court granted the requested temporary restraining order requiring DIRECTV
(and its agents and those who act in active concert or participation with
DIRECTV) not to deliver CBS or Fox programming to subscribers who do not live in
"unserved households." (For purposes of determining whether a subscriber is
"unserved," the court referred to a modified version of the Longley-
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Rice signal propagation model; the modifications reflect an order adopted by the
FCC on February 2, 1999 (see below)). 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 with a local
network affiliate's "Grade A" signal strength contour as of June 30, 1999 and to
terminate retransmission of such 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.
A subscriber's eligibility to continue to receive network programming from
DIRECTV will be determined using the Individual Location Longley-Rice technology
approved by the FCC in a rulemaking order adopted on February 2, 1999. The FCC's
rulemaking order was adopted in a proceeding commenced in response to petitions
for rulemaking filed by the NRTC and other satellite providers. Although the FCC
declined to changed the definition of a signal of Grade B intensity, the agency
did adopt a standardized method for predicting signal strength at individual
locations that could be used in place of taking actual measurements. EchoStar
has filed a petition for reconsideration of the FCC's order.
In addition, in October 1998, EchoStar filed a lawsuit in the United States
District Court of Colorado seeking a declaratory ruling establishing a
predictive model for determining whether a household is "unserved" for purposes
of the SHVA based on a "Longley-Rice" predictive model that applies a criteria
of 95% of the locations receiving a Grade B signal 95% of the time with a 50%
degree of confidence. The lawsuit, which was transferred on March 24, 1999 to
the same Florida court which is hearing the Prime Time 24 and DIRECTV
litigations, also asks the court to clarify the particular means (e.g., antenna
height and orientation) for measuring signal strength.
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 materially adversely affect our financial results or its ability to
attract new subscribers, we cannot assure you that our inability to provide
network services to certain subscribers will not have such effects. In addition,
should we elect to continue to offer network services, we cannot assure you that
the costs of compliance with those interpretations will not be material. The
inability of DIRECTV and 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 October 1997, the United States Copyright Office recommended that the
compulsory copyright fees for the retransmission of television "superstations"
and broadcast network affiliates by satellite providers be increased. The new
rates took effect on January 1, 1998. Although an exact comparison between
copyright fees payable by cable operators and by satellite providers is not
possible, it has been estimated that the new rates would be approximately 300%
and 900% of the rates applicable to cable providers in their provision of the
superstation signals and network signals, respectively. The United States Court
of Appeals for the District of Columbia Circuit has affirmed the decision to
increase the rates. Under the terms of the NRTC Agreements, we may expect to
have this cost passed along to us, unless the NRTC elects to absorb all or a
portion of the increased rate into the margin that it earns on the provision of
DIRECTV programming.
YEAR 2000 COMPLIANCE
Many existing computer systems and software products use only two character
fields to identify dates. These programs were designed and developed without
consideration of the upcoming turn of the century. Significant uncertainty
exists in the software industry concerning the potential consequences of the
Year 2000 phenomenon. If not corrected, these computer applications could fail
or create erroneous information from the Year 2000 date change. This issue
affects virtually all organizations and can be very costly and time consuming to
correct. We have reviewed Year 2000 compliance of our internal systems and
believe that such systems are Year 2000 compliant. However, we cannot assure you
that all of the software
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<PAGE> 70
products 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.
Additionally, we are currently conducting surveys of all of our vendors and
other pertinent relationships to assess their readiness for Year 2000
processing. We are significantly reliant on contracted data processing services
from the NRTC and DIRECTV for customer service, billing and remittance
processing pursuant to our contractual relationship with the NRTC. The NRTC has
informed us that the computer systems that provide such services are not
currently Year 2000 compliant, but that the majority of such systems will be
compliant by September 1999. With respect to the NRTC's billing and
authorization systems, the NRTC has informed us that a small number of Year 2000
issues exist, and that appropriate changes have been requested and scheduled for
development action. We are reliant on DIRECTV for distribution of its DBS
programming services. The NRTC has informed us that DIRECTV expects to establish
Year 2000 compliance for its billing and authorization systems by the end of the
second calendar quarter of 1999. In addition to the NRTC and DIRECTV, we are
significantly reliant on other parties (such as its suppliers of DBS equipment)
for the successful conduct of our business. As previously described, we are in
the process of ascertaining the Year 2000 readiness of these third-parties. 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 impact on our operations. We
cannot assure you that the systems of the NRTC, DIRECTV and other companies with
which our systems interact or depend will be compliant by the end of 1999, or
that any such third party failure would not have an adverse effect on our
business or our operations. Any adverse impact on subscribers in our Rural
DIRECTV Markets could also have a material adverse effect on our business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Year 2000
Compliance."
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 is $568,800, and the lease will terminate in August 2002. We moved
our principal executive offices to this location in April 1999. We also have 71
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
We have assembled an experienced management team to execute our business
strategy. Certain members of our senior management team have significant
experience working together. Our executive team has extensive business
acquisition experience in the telecommunications industry, as well as experience
in the sales and delivery of a full array of communications services to
customers in rural America. As of March 31, 1999, we had approximately 840
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.
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<PAGE> 71
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of our company as of March 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Rodney A. Weary....................... 48 Chairman of the Board, Chief Executive
Officer and Director
John R. Hager......................... 37 Chief Financial Officer
William J. Gerski..................... 46 Vice President, Sales and Marketing
Scott R. Brown........................ 33 Vice President, Operations
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 the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
BACKGROUND OF EXECUTIVE OFFICERS
Rodney A. Weary. Mr. Weary founded our company in June 1996 and has been
its Chief Executive Officer since our inception. Until 1995, he was President of
Cable Video Enterprises Inc., which Mr. Weary 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. From 1986 to 1992, he was a principal shareholder in W.K. Cellular,
Inc., which owned and operated cellular license R.S.A. 5 in Indiana. Mr. Weary
was involved in the formation of the Missouri Cable Television Association in
the 1970s, and has served in many capacities for both it and the four-state Mid-
America Cable Television Association.
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 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 1996 to 1997, Mr. Gerski was Regional Director of
Marketing and Sales at American Telecasting Incorporated. In 1996, Mr. Gerski
was Vice President of Marketing and Sales of Bell Atlantic Video Services. From
1990 through 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> 72
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.
Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since
our 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 was a contract negotiator in the network real estate department of
Sprint Communications from 1990 to 1992. From 1988 to 1990, Ms. Linn was Vice
President and General Counsel of the cable brokerage firm Hardesty, Puckett &
Company (now HPC Puckett & Company). Ms. Linn is licensed to practice law in
Kansas and Texas.
BACKGROUND OF DIRECTORS
Robert F. Benbow. Mr. Benbow has been one of our Directors 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, and Preferred Networks, Inc.
William O. Charman. Mr. Charman has been one of our Directors 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. Mr. Charman was a Director in Bank of
Boston's Media & Communications Group in Boston from 1987 to 1993. Mr. Charman
is a Director of Cambridge Communications, MultiTechnology Services and Prime
Communications.
William P. Collatos. Mr. Collatos has been one of our Directors since March
1997. He is a Managing General Partner of Spectrum Equity Investors, which he
founded in 1993. Prior to the founding of Spectrum, he was an independent
consultant from 1991 to 1993. Mr. Collatos was an Associate and then General
Partner of funds managed by TA Associates from 1980 to 1990 and a founding
General Partner of Media/Communications Partners. Prior to joining TA
Associates, Mr. Collatos was in charge of the media lending group at Fleet
National Bank in Providence, Rhode Island. He is a Director of Galaxy Telecom
Systems, Inc., TSR Paging, Inc., Internet Network Services, Ltd. and ITXC, Inc.
William A. Johnston. Mr. Johnston has been one of our Directors 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. Prior to joining
Hancock Venture Partners, Inc., Mr. Johnston was an assistant vice president at
State Street Bank in Boston, Massachusetts. He is a Director of Adesemi
Communications International, Inc., Epoch Internet, Inc., Formus Communications,
Inc., The Marks Group, Inc. and V-I-A Internet, Inc.
Robert B. Liepold. Mr. Liepold has been one of our Directors 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. From 1978 through 1983, he was Executive Vice
President of Sprint/United Telecom. He is a Director of KCWE-TV, Com-21 and W.K.
Communications.
Erik M. Torgerson. Mr. Torgerson has been one of our Directors 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. Mr. Torgerson serves as a director of
Command Tooling Systems, LLC, Seasonal Specialties, LLC, TelcoPlus
Communications, Inc., InSTEP, LLC and Norwesco, Inc.
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<PAGE> 73
Each Director of our company has been elected pursuant to the terms of the
Stockholders' Agreement. See "Certain Relationships and Related
Transactions -- Stockholders' Agreement."
All of our directors are elected annually and hold office until the next
annual meeting of our stockholders and until their successors are duly elected
and qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, we do reimburse non-management directors for expenses incurred in
attending meetings of the Board of Directors.
During 1998, our Board of Directors held 8 meetings. The only standing
committees of the Board of Directors are the Audit Committee and the
Compensation Committee. The current members of the Audit Committee are Messrs.
Liepold, Johnston and Torgerson. The Audit Committee periodically consults with
our management and independent public accountants on financial matters,
including our internal financial controls and procedures. The Audit Committee
was formed in February 1997. The current members of the Compensation Committee
are Messrs. Benbow, Collatos and Johnston. The Compensation Committee approves
compensation arrangements for our executive officers and administers our Stock
Option Plan. The Compensation Committee was formed in February 1997.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal years ended December 31, 1997 and 1998 as to our Chief Executive Officer
and the two other highest paid executive officers of our company whose total
annual salary and bonus exceeded $100,000 for such year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION($)
- --------------------------- ----- --------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Rodney A. Weary.................. 1998 $227,462 $90,000 21,884 $ 7,945(1)
Chief Executive Officer, 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 1997 60,259 50,000 12,182 --
Marketing
Jo Ellen Linn.................... 1998 $ 93,061 $32,500 2,501 $ --
Secretary and General 1997 80,926 25,000 2,501 --
Counsel
</TABLE>
- ---------------
(1) Represents compensation attributable to Mr. Weary's use of a company-owned
car.
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<PAGE> 74
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options to the named executive officers during the fiscal year ended
December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL
PERCENT OF REALIZABLE VALUE
TOTAL AT ASSUMED ANNUAL
NUMBER OF OPTIONS/ RATES OF STOCK
SECURITIES SARS GRANTED PRICE APPRECIATION
UNDERLYING TO EMPLOYEES EXERCISE OF FOR OPTION TERM
OPTION/SARS 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 15.1 1.00 10/08/07 1,772 4,491
Jo Ellen Linn................ -- -- -- -- -- --
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE YEAR-END(#) AT FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
(#) $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary........... 9,726 -- 1,823 10,335 -- --
William J. Gerski......... 5,414 -- 2,502 7,084 -- --
Jo Ellen Linn............. 1,111 -- 208 1,192 -- --
</TABLE>
- ---------------
(1) Based on a value of $1.00 per share, which is the fair value of the Common
Stock as determined by the board of directors of Holdings for purposes of
option grants. On this basis, the unexercised options are not in the money.
EMPLOYMENT AGREEMENTS
In January 1997, we entered into substantially similar 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.
In February 1997, our company and Mr. Weary entered into an agreement
pursuant to which Mr. Weary agreed to serve as our President and Chief Executive
Officer through February 2000. Such agreement may be extended according to its
terms. Under the agreement, Mr. Weary is paid compensation in 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 our company in their present capacity through February and November
2000, respectively. Such 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. Mr. Gerski is paid compensation in an amount not less than
$100,000 per year. Each is also eligible to participate in our Stock Option
Plan.
In August 1998, we entered into an employment agreement with Mr. Hager.
Pursuant to the employment agreement, Mr. Hager agreed to serve our company in
his current capacity through August 2001. The employment agreement may be
extended in accordance with its terms. Mr. Hager is paid compensation under the
employment agreement in an amount not less than $120,000 per year and is
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<PAGE> 75
eligible to participate in our Stock Option Plan. Our company and Mr. Hager also
entered into a non-competition agreement and a confidentiality and proprietary
rights agreement in August 1998. The terms of the non-competition agreement
preclude Mr. Hager from competing with us during the term of his employment and
for one year thereafter in any market in the United States in which we operate
or intend to operate. The confidentiality and proprietary rights agreement
requires Mr. Hager to maintain the confidentiality of our proprietary
information during the period of his employment and thereafter.
STOCK OPTION PLAN
In July 1997, our Board of Directors adopted our Stock Option Plan pursuant
to which we may, at the direction of the Compensation Committee of our Board of
Directors, grant incentive stock options, non-qualified stock options or
restricted stock options to officers, directors and employees. Our Stock Option
Plan was approved by our stockholders on July 24, 1997. Our Stock Option Plan
was assumed by Holdings and approved by its stockholders effective September 9,
1997.
401(K) PLAN
We maintain a 401(k) Savings Plan for our full-time employees which permits
employee contributions up to 15% of annual compensation to the plan on a pre-tax
basis. In addition, we may make contributions on a discretionary basis as a
percentage of each participating employee's annual compensation. We may also
make additional discretionary contributions to this Plan in any plan year up to
the annual 401(k) plan contribution limits as defined in the Internal Revenue
Code. This Plan is administered by the Compensation Committee of our Board of
Directors.
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<PAGE> 76
PRINCIPAL STOCKHOLDERS
All of the issued and outstanding capital stock of Golden Sky DBS is owned
by Holdings. The following table sets forth certain information as of March 30,
1999, regarding the ownership of Holdings' Common Stock ("Common Stock"), Series
A Convertible Participating Preferred Stock, $.01 par value ("Series A Preferred
Stock"), Series B Convertible Participating Preferred Stock, $.01 par value
("Series B Preferred Stock"), and Series C Senior Convertible Preferred Stock,
$.01 par value ("Series C Preferred Stock"), by (i) certain stockholders or
groups of related stockholders who, individually or as a group, are the
beneficial owners of 5% or more of any class of Holdings' capital stock and (ii)
the executive officers and directors of Holdings. Beneficial ownership
percentages of the Common Stock presented below are significantly affected by
the securities convertible into or exercisable for Common Stock held by each
stockholder. Except as required by law, holders of the Common Stock do not vote
as a separate class on matters presented for stockholder approval.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
------------------ ------------------ ----------------- --------------------- DILUTED
% OF % OF % OF % OF VOTING
NAME(1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES(2) CLASS(3) POWER(%)
- ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Alta Subordinated Debt
Partners III, L.P.(4)....... 55,532.00 13.3 11,125.24 4.9 -- -- 2,116.00 7.8 9.2
Alta Communications VI,
L.P.(4)..................... 92,365.00 22.1 18,504.38 8.1 -- -- 3,522.00 12.4 15.4
Alta-Comm S By S, LLC(4)...... 2,103.00 * 421.84 * -- -- 81.00 * *
Spectrum Equity Investors
L.P.(5)..................... 50,000.00 12.0 -- -- -- -- 12.00 * 6.7
Spectrum Equity Investors II
L.P.(5)..................... 100,000.00 23.9 -- -- -- -- 25.00 * 13.4
BancBoston Ventures Inc.(6)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.8
Norwest Equity Partners VI,
LP(7)....................... -- -- 50,083.75 21.9 -- -- -- -- 6.7
Norwest Venture Partners VI,
LP(7)....................... -- -- 25,041.87 11.0 -- -- -- -- 3.4
HarbourVest Partners V-Direct
Fund L.P.(8)................ -- -- 75,125.62 32.9 -- -- -- -- 10.1
Lion Investments Limited(9)... -- -- 5,010.76 2.2 -- -- -- -- *
Westpool Investment Trust
plc(9)...................... -- -- 15,031.27 6.6 -- -- -- -- 2.0
General Electric Capital
Corporation(10)............. -- -- 15,000.00 6.6 -- -- -- -- 2.0
Harold Poulsen(11)............ 1,000.00 * -- -- 19,809.27 37.0 19,809.27 44.3 2.7
Jack S. Ramirez and Carol H.
Ramirez(12)................. -- -- -- -- 8,413.18 15.7 8,413.18 25.2 1.1
Joyce Travis, Trustee of the
Travis Living Trust Dated
the 5th day of March,
1998(13).................... -- -- -- -- 4,952.31 9.3 4,952.31 16.6 *
James and Constance R.
Hertz(14)................... -- -- -- -- 5,047.91 9.4 5,047.91 16.8 *
Maxon R. and Kristina
Davis(15)................... -- -- -- -- 3,400.20 6.4 3,400.20 12.0 *
Louise A. Davis(16)........... -- -- -- -- 3,322.66 6.2 3,322.66 11.8 *
Jay and Maria Downen(17)...... -- -- -- -- 2,865.00 5.4 2,865.00 10.3 *
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(18)............... -- -- -- -- 2,862.44 5.3 2,862.44 10.3 *
Chris J. Downen(19)........... -- -- -- -- 2,862.44 5.3 2,862.44 10.3 *
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
------------------ ------------------ ----------------- --------------------- DILUTED
% OF % OF % OF % OF VOTING
NAME(1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES(2) CLASS(3) POWER(%)
- ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Rodney A. Weary(20)(21)....... 16,030.00 3.8 -- -- -- -- 13,377.00 46.8 3.9
John R. Hager(21)(22)......... -- -- -- -- -- -- 2,500.00 9.1 *
William J. Gerski(21)(23)..... -- -- -- -- -- -- 9,166.00 32.0 1.2
Scott R. Brown(21)(24)........ -- -- -- -- -- -- 333 1.3 *
Jo Ellen Linn(21)(25)......... 430.00 * -- -- -- -- 1,528.00 6.0 *
Robert F. Benbow(26).......... 150,000.00 38.9 30,051.46 13.2 -- -- 5,719.00 20.5 24.8
William O. Charman(27)........ 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.7
William P. Collatos(28)....... 150,000.00 35.9 -- -- -- -- 37.00 * 20.1
William A. Johnston(29)....... -- -- 75,125.62 32.9 -- -- -- -- 10.1
Robert B. Liepold(21)(30)..... 1,000.00 * -- -- -- -- 2,113.00 8.2 *
Erik M. Torgerson(31)......... -- -- 50,083.75 21.9 -- -- -- -- 6.7
All Executive Officers and
Directors as a group (11
persons).................... 392,460.00 93.5 167,782.27 73.4 -- -- 34,792.00 100.0 79.5
</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.
(2) Includes shares issuable upon exercise of warrants and options exercisable
within 60 days of the date hereof, as well as shares of Common Stock
issuable upon conversion of beneficially-owned shares of Series C Preferred
Stock.
(3) The percent of class beneficially owned by each listed holder of Common
Stock appears unusually large, because there is a small number of shares of
Common Stock outstanding relative to the number of shares of Common Stock
owned and subject to options, warrants or conversion privileges held by
such person.
(4) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite
4050, San Francisco, California 94111, Attn: Robert Benbow. Alta
Subordinated Debt Partners III, L.P. ("Alta Sub Debt III") is managed by
Burr, Egan, Deleage & Co. Alta Communications VI, L.P. ("Alta VI") and Alta
Comm S by S, LLC ("S by S") are managed by Alta Communications, Inc. The
general partner of Alta Sub Debt III and the general partner of Alta VI
exercise sole voting and investment powers with respect to the securities
held by their respective fund. 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. Such general partners may be deemed to share voting and
investment powers for the shares held by Alta Sub Debt III. The general
partners of Alta Communications VI Management Partners, L.P., which is the
general partner of Alta VI, include Messrs. William P. Egan, Brian McNeill,
Robert Benbow, Timothy Dibble and David Retik and Ms. Eileen McCarthy. Such
general partners may be deemed to share voting and investment powers for
the shares held by Alta VI. These general partners disclaim beneficial
ownership of all such securities held by the funds except to the extent of
their proportionate pecuniary interests therein. Certain principals of
Burr, Egan, Deleage & Co. and Alta Communications, Inc. (including certain
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 powers for the shares held by S by S. These principals
disclaim beneficial ownership of all such shares except to the extent of
their proportionate pecuniary interest therein.
Common stock ownership includes warrants to purchase 2,103, 3,499 and 80
shares of Common Stock owned by Alta Sub Debt III, Alta VI and S by S,
respectively.
(5) 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
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<PAGE> 78
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. Such individuals disclaim such beneficial ownership except to the
extent of their respective pecuniary interests in such shares.
(6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110,
Attn: William O. Charman. The shares of Series A Preferred Stock and Series
B Preferred Stock beneficially owned by BancBoston Ventures Inc. are
controlled by its President, Frederick M. Fritz, and by its Managing
Director, Sanford Anstey, and by William O. Charman, who is a director of
the Company.
(7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attn:
Erik M. Torgerson. The shares of Series B Preferred Stock beneficially
owned by Norwest Equity Partners VI, LP are controlled by its general
partner, Itasca LBO Partners VI, LLP, which is controlled by John E.
Lindahl, Managing Partner, and by John P. Whaley, Managing Administrative
Partner. The shares of Series B Preferred Stock beneficially owned by
Norwest Venture Partners VI, LP are controlled by its general partner,
Itasca VC partners, LLP, which is controlled by its Managing Partner,
George J. Still, Jr., and by John P. Whaley, Managing Administrative
Partner.
(8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole
general partner of HarbourVest Partners V -- Direct Fund L.P. ("HarbourVest
V") is a limited liability company whose managing member is HarbourVest
Partners, LLC. The managing directors of HarbourVest Partners, LLC are
Messrs. George Anson, John M. Begg, Philip M. Bilden, Theodore A. Clark,
Kevin S. Delbridge, William A. Johnston, Edward W. Kane, Frederick C.
Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D. Brooks Zug, and Ms.
Martha D. Vorlicek. Such individuals may be deemed to share beneficial
ownership of the shares held by HarbourVest V, and disclaim such beneficial
ownership except to the extent of their respective pecuniary interest in
such shares.
(9) The address is c/o London Merchant Securities, Carlton House, 33 Robert
Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion
Investments Limited and Westpool Investment Trust plc is a wholly-owned
subsidiary of London Merchant Supplies plc, a publicly traded company in
the U.K.
(10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut 06927,
Attn: Peter Foley. General Electric Capital Corporation is a wholly-owned
subsidiary of General Electric Corporation.
(11) The address is P.O. Box 1376, Great Falls, Montana 59403.
(12) The address is 2061 Norwich Ct., Glenview, Illinois 60025.
(13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086.
(14) The address is 7444 Molt Road, Billings, Montana 59106.
(15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404.
(16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128.
(17) The address is 511 Fortress Circle, Leesburg, Virginia 21075.
(18) The address is 2105 Noble Avenue, Springfield, Illinois 62704.
(19) The address is 1617 Outer Park, Springfield, Illinois 62704.
(20) 16,030 shares of Series A Preferred Stock and 9,730 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 the
Stock Option Plan, Mr. Weary beneficially owns 3,647 shares of Common Stock
as to which options have vested or will have vested within 60 days, out of
a pool of 21,884 shares available to him.
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(21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112.
(22) Through the Stock Option Plan, Mr. Hager beneficially owns 2,500 shares of
Common Stock as to which options have vested or will have vested within 60
days, out of a pool of 10,000 available to him.
(23) Mr. Gerski beneficially owns 5,414 shares of Common Stock. In addition,
through the Stock Option Plan, Mr. Gerski beneficially owns 3,752 shares of
Common Stock as to which options have vested or will have vested within 60
days, out of a pool of 15,000 shares available to him.
(24) Through the Stock Option Plan, Mr. Brown beneficially owns 333 shares of
Common Stock as to which options have vested or will have vested within 60
days, out of a pool of 4,000 available to him.
(25) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and 1,111
shares of Common Stock. In addition, through the Stock Option Plan, Ms.
Linn beneficially owns 417 shares of Common Stock as to which options have
vested or will have vested within 60 days, out of a pool of 2,501 shares
available to her.
(26) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite
4050, San Francisco, California 94111. Shares held 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
powers with respect to the shares held by the funds. Mr. Benbow disclaims
beneficial ownership of the shares held by such funds except to the extent
of his proportionate pecuniary interest therein. Mr. Benbow also disclaims
beneficial ownership of all shares held by Alta Comm S by S, LLC, of which
he is not a member.
(27) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th
Floor, Boston, Massachusetts 02110. Shares held by BancBoston Ventures
Inc., which may be deemed to be beneficially owned by Mr. Charman.
(28) The address is c/o Spectrum Equity Investors, 125 High Street, Suite 2600,
Boston, Massachusetts 02110. Shares held by Spectrum Equity Investors L.P.
and Spectrum Equity Investors II L.P., which may be deemed to be
beneficially owned by Mr. Collatos.
(29) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111. Shares held by HarbourVest Partners
V-Direct Fund L.P., which may be deemed to be beneficially owned by Mr.
Johnston.
(30) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock and
1,425 shares of Common Stock. In addition, through the Stock Option Plan,
Mr. Liepold beneficially owns 688 shares of Common Stock as to which
options have vested or will have vested within 60 days, out of a pool of
3,758 shares available to him.
(31) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3388. Shares held by
Norwest Equity Partners VI, LP, which may be deemed to be beneficially
owned by Mr. Torgerson.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENTS
On February 12, 1997, pursuant to the Stock Purchase Agreement dated as of
such date by and among Systems, Rodney A. Weary, and the investors named
therein, Systems sold an aggregate 199,000 shares of Series A Preferred Stock
and 75 shares of Common Stock to such investors. At a subsequent closing on
February 28, 1997, Systems issued to certain of such investors an additional
207,000 shares of Series A Preferred Stock and 25 shares of Common Stock in the
aggregate. Such transactions resulted in proceeds to Systems of approximately
$40.6 million in the aggregate. Systems subsequently sold an aggregate 12,000
shares of Series A Preferred Stock to certain investors who had not previously
purchased either Series A Preferred Stock or Common Stock. Such transactions
resulted in proceeds to Systems of approximately $35.6 million, in addition to
the conversion of approximately $2.4 million in stock subscriptions and $3.8
million in short term borrowings.
Pursuant to an Agreement and Plan of Merger dated as of September 9, 1997
by and among Systems, GSS Mergersub Inc., a wholly-owned subsidiary of Holdings,
and Holdings, GSS Mergersub Inc. merged with and into Systems, with Systems
being the surviving corporation. Upon the consummation of such merger, each
share of Series A Preferred Stock of Systems was converted into a share of
Series A Preferred Stock of Holdings, each share of Common Stock of Systems was
converted into a share of Common Stock of Holdings, and each share of capital
stock of GSS Mergersub Inc. was converted into a share of Common Stock of
Systems, thereby causing Systems to be a wholly-owned subsidiary of Holdings.
Pursuant to a letter agreement dated as of September 9, 1997 by and between
Systems and Holdings, Systems assigned and Holdings assumed all of the rights
and obligations of Systems under the Series A Stock Purchase Agreement.
Pursuant to a Note Purchase Agreement dated as of November 6, 1997 by and
among Holdings, Systems and certain outside investors, Holdings issued and sold
to such investors an aggregate $10.0 million principal amount of convertible
promissory notes of Holdings ("Series B Convertible Notes"). Each Series B
Convertible Note (together with accrued interest thereon, if any) was
automatically convertible into a specified number of shares of Series B
Preferred Stock upon the consummation of a qualified Series B Preferred Stock
financing. On November 24, 1997, pursuant to the Stock Purchase Agreement dated
as of such date by and among Holdings, Systems, Rodney A. Weary and the
investors named therein, Holdings issued an aggregate 228,442 shares of Series B
Preferred Stock at a purchase price of $200 per share to certain of such
investors upon conversion of the Series B Convertible Notes. Such Stock Purchase
Agreement provides that certain actions by Holdings, including the incurrence of
indebtedness in excess of $1.0 million and the granting of liens securing
indebtedness in excess of $1.0 million, require the approval of a supermajority
of the members of Holdings' Board of Directors.
Subject to certain exceptions, Holdings and its subsidiaries (including
Systems) are prohibited under the terms of each of the Stock Purchase Agreements
from paying any dividends or making any distributions of cash, property or
securities of Holdings or any such subsidiary with respect to any shares of
capital stock of any such company, or directly or indirectly redeeming,
purchasing or otherwise acquiring for consideration any shares of capital stock
of any such company. Such prohibitions could have the effect of limiting the
cash available for Golden Sky DBS to service its indebtedness.
On October 2, 1998, pursuant to an Agreement and Plan of Merger, dated as
of September 1, 1998, among Holdings, Systems, Western Montana DBS, Inc. d/b/a
Rocky Mountain DBS ("Western Montana DBS") and the then stockholders of Western
Montana DBS, Holdings issued an aggregate 51,000 shares of Series C Senior
Convertible Preferred Stock to such stockholders.
On February 19, 1999, Holdings transferred all the outstanding capital
stock of Systems (together with $100 in cash) to Golden Sky DBS in exchange for
100 shares of common stock, par value $.01, of Golden Sky DBS.
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STOCKHOLDERS' AGREEMENT
Holdings and its stockholders have entered into a stockholders' agreement
dated as of November 24, 1997 (the "Stockholders' Agreement"). Under the
Stockholders' Agreement, Holdings and certain of its stockholders were granted a
right of first offer and a co-sale option with respect to shares of Holdings'
capital stock offered in transactions not otherwise expressly permitted under
the Stockholders' Agreement. In addition, certain of the holders of Series A and
Series B Preferred Stock were granted the right, upon the affirmative vote of
58% of the outstanding shares of each such class, to cause the other holders to
(i) dispose of all their shares of capital stock of Holdings in connection with
a sale of all outstanding shares of Holdings' capital stock or (ii) vote for the
merger or consolidation of Holdings with an unaffiliated acquiring entity or the
sale of all or substantially all the assets of Holdings. Such rights shall
terminate immediately upon an initial public offering of Holdings' Common Stock
meeting certain criteria or a sale of Holdings. The election of directors is
also established by the Stockholders' Agreement. Under the Stockholders'
Agreement, Holdings has agreed, subject to certain conditions, to effect up to
four demand registrations of the common stock held by its stockholders for a
sale to the public under applicable federal and state securities laws. In
addition, the stockholders have certain "piggy-back" registration rights and
rights to registration on Form S-3, subject to certain conditions. In
consideration for such registration rights, under the Stockholders' Agreement
the stockholders have agreed not to sell or otherwise dispose of shares of
Holdings' common stock for 180 days following any initial public offering by
Holdings upon the request of Holdings or the underwriter for such offering. The
obligations of Holdings to register shares of its common stock under the
Stockholders' Agreement will terminate as to any party thereto (other than
Holdings) seven years after an initial public offering of the Holdings'
securities, or, as to any party holding less than 2% of Holdings' outstanding
common stock, at such time after the first anniversary of an initial public
offering when all such shares can be legally transferred in a three-month period
under Rule 144 under the Securities Act (as defined herein), as reasonably
determined by Holdings.
FORMER CABLE-VIDEO MANAGEMENT, INC. ARRANGEMENT
On July 1, 1996, Systems entered into a management agreement with
Cable-Video Management, Inc. ("CVM"), which is owned by Rodney A. Weary,
Systems' Chief Executive Officer, to administer Systems' first Acquisition. The
management agreement was terminated effective September 30, 1996. During the
term of the agreement, total management fees of $280,000 were paid to CVM, and
Systems reimbursed CVM for salaries and other miscellaneous expenses totaling
approximately $343,000. Upon termination of the management agreement, Systems
purchased the assets of CVM for $44,000.
CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD
Systems has an oral consulting agreement with Robert B. Liepold, a vice
president and director of Systems, to provide expertise on an "as needed" basis
at the rate of $200 per hour in fiscal 1997 and at the rate of $7,000 per month
in 1998. Systems paid an aggregate $77,000 and $84,000 to Mr. Liepold in 1997
and 1998, respectively, in connection with such services. In addition, 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
Systems utilizes the air transportation services of a company owned by
Rodney A. Weary, Systems' Chief Executive Officer. Systems paid $506,000 in
1998, $109,000 in 1997 and $31,000 in 1996 in connection with such services. In
October 1997, Systems entered into an agreement to lease an aircraft from Mr.
Weary. The lease is cancelable with six months' notice and requires monthly
payments equal to the greater of $20,000 or a fixed hourly operating charge
based on prevailing market rates.
In 1997, Mr. Weary loaned $150,000 to Systems at an interest rate of 10%
per annum. In 1996, Mr. Weary made a short-term loan in the principal amount of
$381,000 to Systems at an annual interest rate of 10%. All such amounts were
repaid by Systems prior to December 31, 1997.
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Also in 1997, Systems paid $66,000 to a company affiliated with Mr. Weary,
which payment was reimbursement relating to consulting services rendered to
Systems.
In 1997, F.G. Weary, the father of Rodney A. Weary, loaned $215,000 to
Systems at an interest rate of 10% per annum. Such loan, together with accrued
interest, was repaid by Systems prior to December 31, 1997.
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DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
The Amended and Restated Credit Agreement, dated as of May 8, 1998, among
Holdings, 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 our Credit Facility was amended in connection with the
offering of the outstanding notes. As amended, our 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 our term loan availability. All the proceeds of borrowings pursuant to
the term loan facility ("Term Loans") were used to repay existing indebtedness
and for working capital purposes. The proceeds of borrowings pursuant to 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. Capitalized terms used in this section but not defined
herein have the meaning ascribed to such terms as the Credit Facility.
The term loan facility is to be repaid in 16 consecutive quarterly
installments commencing 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 shall 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 to us 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 certain conditions, which include not
exceeding a certain "borrowing base" based on 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 that we will be
required to make mandatory repayments of the Credit Facility from, subject to
certain exceptions, the net proceeds of certain sales or other dispositions by
us or any of our subsidiaries 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 Systems under the Credit Facility are unconditionally and
irrevocably guaranteed by Holdings, Golden Sky DBS and each of our direct and
indirect subsidiaries (excluding South Plains DBS Limited Partnership and DCE
Satellite Entertainment, LLC), and such borrowings are secured by (i) a pledge
by Holdings of all of the capital stock of Golden Sky DBS, (ii) a pledge by
Golden Sky DBS, of all of the capital stock of Systems, (iii) an equal and
ratable pledge of all of the capital stock of Systems' subsidiaries, (iv) a
first priority security interest in all of such subsidiaries' assets, and (v) a
collateral assignment of the 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 annum, less, in certain
circumstances, 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 annum, 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 annum, 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 annum, less a
discount based on leverage, if applicable. As used herein, the "Base Rate" means
the higher of (i) 0.50% in excess of the Federal Funds rate and (ii) the prime
lending rate. As used herein, the "Quoted Rate" means (a) the quotation offered
to the Administrative Agent in the New York
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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 determined
with maturities comparable to the interest period applicable to such loan as
determined by the Administrative Agent's Treasury Funding Management on the date
which is two business days prior to the commencement of such interest period,
divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (b) a
percentage equal to the remainder of 100% minus the then stated maximum rate of
all reserve requirements (including, without limitation, any marginal,
emergency, supplemental, special or other reserves) 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 (or any successor category of liabilities under such Regulation
D).
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 certain 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 our organizational
documents or transact with affiliates. In addition, the Credit Facility requires
the maintenance of certain specified financial and operating covenants,
including minimum interest coverage ratios and limits on general and
administrative expenses.
We will pay commitment fees on the unused amounts under the revolving loan
commitments. Such commitment fees, which shall be payable quarterly in arrears,
shall range from 0.5% per annum to 1.25% per annum based on our utilization of
such commitments.
Pursuant to a recent amendment to the NRTC Agreements, our company and all
other NRTC members whose monthly obligations to the NRTC have exceeded $500,000
in the past six months are required to keep and maintain in full force and
effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC 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, Systems, our wholly-owned subsidiary consummated an
offering of $195 million in aggregate principal amount of 12 3/8% Senior
Subordinated Notes due 2006. 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. Systems' 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.
Systems' 12 3/8% notes are unsecured senior subordinated obligations of
Systems and are subordinated in right of payment to all of its existing and
future senior indebtedness. Systems' 12 3/8% notes rank equally in right of
payment with all other existing and future senior subordinated indebtedness, if
any, of our company and senior in right of payment to all existing and future
subordinated indebtedness, if any, of our company.
The 12 3/8% notes are redeemable, in whole or in part, at our 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, we may, at our 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
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proceeds of a public equity offering of our company, Holdings or Systems
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 or Golden Sky DBS, all the net proceeds are therefore contributed to
Systems); provided, further, that immediately after any such 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 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 our subsidiaries to pay dividends or make
certain 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 12 3/8%
notes indenture, each holder of the 12 3/8% notes will have the right to require
us 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 13 1/2% NOTES
To the extent that holders of the outstanding notes choose not tender their
notes in the exchange offer, these non-tendered notes will remain outstanding
after the consummation of the exchange offer. The terms of these notes will be
identical in all material respects (including principal amount at maturity,
yield to maturity and maturity) to the terms of the new notes. However, the
outstanding notes will continue to be subject to the transfer restrictions
contained in the legend which appears on each respective note. After the
consummation of this exchange offer, the aggregate principal amount at maturity
of any non-tendered outstanding notes and the new notes will be $193,100,000.
See "Risk Factors -- Consequences of the Exchange Offer to Holders of the
Outstanding Notes" and "Description of the New Notes."
SELLER NOTES
In connection with the acquisition of our Rural DIRECTV Market in Clark
County, Nevada, we issued a promissory note in favor of TEG-DBS Services, Inc.
Pursuant to the TEG-DBS note, we are obligated to pay to TEG-DBS the principal
sum of $2.5 million, which amount is due and payable on June 12, 1999, together
with interest accrued on the unpaid principal amount at the rate of 10% per
annum, which interest is payable in quarterly installments. Our obligations
pursuant to the TEG-DBS Note are secured by assets of TEG-DBS acquired by us, as
described in the Security Agreement, dated June 12, 1997 between TEG-DBS and our
company. As of December 31, 1998, the entire principal amount of the TEG-DBS
note was outstanding. A failure by us to make a payment under the TEG-DBS note
would entitle TEG-DBS, at its sole option to (i) a late payment penalty equal to
2% of the payment amount or (ii) to accelerate the payment by us of all amounts
due pursuant to the TEG-DBS note.
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, dated December 22,
1997. The Western Montana note bears interest at an annual rate of 7%. Four
annual installments of principal and interest of $1,121,868 are payable
commencing January 5, 1999. The Western Montana note is secured by a letter of
credit.
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, dated May 8, 1998. 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 Systems at the end of
December 1998. The Halifax note is secured by a letter of credit.
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In connection with the acquisition of our Rural DIRECTV Market in
Summerdale, Alabama, we issued a note payable in favor of Baldwin County
Electric Membership Corporation in the principal amount of $5.16 million, dated
June 29, 1998. The Alabama note bears interest at an annual rate of 8%.
Principal and accrued interest was paid, in full, on January 15, 1999. The
Alabama note is secured by a letter of credit.
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DESCRIPTION OF THE NEW NOTES
The outstanding notes were, and the new notes (the "Notes") will be, issued
under the same indenture that governs the outstanding notes (the "Indenture").
The Indenture, which is dated as of February 19, 1999, is between Golden Sky
DBS, Inc. and United States Trust Company of New York, as trustee (the
"Trustee"). A copy of the form of the Indenture will be made available to
holders of the outstanding new notes upon request. Upon the effectiveness of the
shelf registration statement of which this prospectus is a part, the Indenture
will be subject to and governed by the Trust Indenture Act of 1939, as that act
may have been amended (the "Trust Indenture Act"). The summary of the material
provisions of the Indenture in this "Description of the New Notes," is not
complete and is qualified by reference to, the Trust Indenture Act, and to all
of the provisions of the Indenture, including the definitions of some of the
terms therein and those terms made a part of the Indenture by reference to the
Trust Indenture Act, as in effect on the date of the Indenture. As used in this
section, the "Issuer" refers to Golden Sky DBS, Inc. only. The definitions of
many of the capitalized terms used in this section are set forth below under
"-- Certain Definitions."
GENERAL
The Notes will be general senior unsecured obligations of the Issuer. The
Notes are limited to $193,100,000 aggregate principal amount at maturity and
will mature on March 1, 2007. The outstanding notes were issued at a substantial
discount from their principal amount at maturity and generated gross proceeds to
the Issuer of $100,048,972. Based on the issue price of the outstanding notes,
the yield to maturity of the Notes is 13 1/2% (computed on a semi-annual bond
equivalent basis), calculated from February 19, 1999. See "Certain Federal
Income Tax Considerations."
Cash interest will not accrue or be payable on the Notes prior to March 1,
2004. After that date, cash interest on the Notes will accrue at a rate of
13 1/2% per year and will be payable semi-annually in arrears on each March 1
and September 1, commencing on September 1, 2004, to the holders of record of
the Notes at the close of business on the February 15 and August 15, immediately
preceding such interest payment date. Cash interest will accrue from the most
recent interest payment date to which interest has been paid or duly provided
for or, if no interest has been paid or duly provided for, from March 1, 2004.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. The Principal of, premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Issuer in the City of New York maintained for such purposes. This
office will initially be the corporate trust office of the Trustee. No service
charge will be made for any registration of transfer, exchange or redemption of
the Notes, but the Issuer may require payment to cover any tax or other
governmental charge that may be imposed in connection therewith.
OPTIONAL REDEMPTION
Optional Redemption. The Issuer, at any time on or after March 1, 2004, may
redeem all or part of the Notes at the redemption prices (expressed as
percentages of principal amount at maturity) set forth below, plus accrued and
unpaid interest, if any, to the redemption date, if redeemed during the 12-month
period beginning on March 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2004........................................................ 106.750%
2005........................................................ 103.375%
2006 and thereafter......................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. In addition, at any time
prior to March 1, 2002, the Issuer may, at its option, redeem up to 35% of the
originally issued aggregate principal amount at
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maturity of the Notes, at a redemption price in cash 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 of the Issuer yielding gross proceeds of at
least $40 million and any subsequent Public Equity Offerings. At least 65% of
the originally issued aggregate principal amount of Notes must remain
outstanding after each such redemption. The Issuer must give notice of its
desire to make any such redemption within 60 days of the related Public Equity
Offering.
MANDATORY REDEMPTION
The Issuer will not be required to make any mandatory sinking fund payments
in respect of the Notes. However,
(1) upon a Change of Control, the Issuer will be required to make an
offer to purchase all outstanding Notes at a price equal to 101% of the
Accreted Value thereof, or if the Change of Control occurs on or after
March 1, 2004, the principal amount at maturity thereof (in each ease
determined at the date of purchase), plus accrued interest thereon, if any,
to the date of purchase and
(2) upon an Asset Sale, the Issuer may be obligated to make an offer
to purchase all or a portion of the Notes at a price equal to 100% of the
Accreted Value thereof, or if the Asset Sale occurs on or after March 1,
2004, the principal amount at maturity thereof (determined at the date of
purchase), plus accrued and unpaid interest, if any, to the date of
purchase. See "-- Certain Covenants -- Disposition of Proceeds of Asset
Sales."
Selection; Effect of Redemption Notice. In the case of a partial
redemption, the Trustee will select the notes for redemption on a pro rata, by
lot or such other method. Any redemption relating to a Public Equity Offering
must be made on a pro rata basis or on as nearly a basis as practicable (subject
to DTC procedures). No Notes of a principal amount at maturity of $1,000 or less
can be redeemed in part. The Issuer must be mail notice of redemption to the
registered address of each holder of Notes by first-class mail at least 30 but
not more than 60 days before the redemption date. If any Note is to be redeemed
in part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount at maturity thereof to be redeemed. A new note
in a principal amount at maturity equal to the unredeemed portion of the
partially redeemed Note, will be issued in the name of the holder thereof upon
cancellation of the original Note. Upon giving of a redemption notice, interest
on any Notes called for redemption will cease to accrue from and after the date
fixed for redemption (unless the Issuer defaults in providing the funds for such
redemption) and those Notes will cease to be outstanding.
CHANGE OF CONTROL
The Indenture provides that, following a Change of Control (the date of
such Change of Control being the "Change of Control Date"), the Issuer will be
obligated, within 30 days after the Change of Control Date, to make an offer to
purchase (a "Change of Control Offer") on a business day not later than the 60th
day following the Change of Control Date (the "Change of Control Payment Date")
all of the then existing Notes at a purchase price (the "Change of Control
Purchase Price") in cash equal to 101% of the Accreted Value of the Notes on the
Change of Control Payment Date. If the Change of Control Payment Date is on or
after March 1, 2004, the Change of Control Purchase price must be equal to 101%
of the principal amount at maturity of the Notes, plus accrued and unpaid
interest thereon, if any, to the Change of Control Payment Date. The Issuer will
be required to purchase all Notes properly tendered and not withdrawn pursuant
to the Change of Control Offer.
Within 30 days following any Change of Control and prior to mailing the
notice referred to below, the Indenture provides that the Issuer covenants to
either
(1) repay in full and terminate all commitments under all Indebtedness
under the Credit Facility or offer to repay in full and terminate all
commitments under all Indebtedness under the Credit Facility and to repay
the Indebtedness owed to each lender which has accepted such offer or
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(2) obtain the requisite consents under the Credit Facility to permit
the repurchase of the Notes as provided below.
The Company shall first comply with the covenant in (2) above before it shall be
required to repurchase Notes as contemplated by the provisions described herein.
The Company's failure to comply with (1) and (2) above constitute an Event of
Default described in (4), but not (2) of "-- Events of Default" below.
In order to effect such Change of Control Offer, the Issuer will, not later
than the 30th day after the Change of Control Date, be obligated to mail to each
holder of Notes notice of the Change of Control Offer, which notice will
(1) govern the terms of the Change of Control Offer and
(2) will state, among other things, the procedures that holders must
follow to accept the Change of Control Offer.
The Change of Control Offer must remain open for at least 20 business days.
The occurrence of some of the events that would constitute a Change of
Control would also constitute a "Change in Control" or other event of default
under the Credit Facility and/or a "Change of Control" under the 12 3/8% Notes
Indenture. The Credit Facility contains an event of default upon a "Change of
Control" as defined therein and the 12 3/8% Notes Indenture obligates Systems to
make an offer to repurchase the 12 3/8% Notes upon a "Change of Control" as
defined therein.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the purchase price for all of
the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Issuer fails to purchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "-- Events of Default" below.
The Issuer must comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act, and any other securities laws or regulations
and any applicable requirements of any securities exchange on which the Notes
are listed, in connection with the repurchase of Notes pursuant to a Change of
Control Offer. Any violation of the provisions of the Indenture relating to such
Change of Control Offer occurring as a result of such compliance will not be
deemed a Default or an Event of Default under the Indenture.
CERTAIN COVENANTS
Set forth below are the material covenants that are contained in the
Indenture.
Limitation on Indebtedness of the Issuer. The Indenture provides that the
Issuer will not directly or indirectly Incur, contingently or otherwise, any
Indebtedness (including any Acquired Indebtedness), except that the Issuer may
Incur
(1) Indebtedness of the Issuer evidenced by the Notes and the
Indenture,
(2) Indebtedness represented by a guarantee of
(a) the Issuer's obligations of amounts outstanding under the
Credit Facility and
(b) Indebtedness of a Restricted Subsidiary Incurred under clauses
(b)(2), (e), (h) and (i) of the definition of "Permitted Indebtedness,"
and any refinancing thereof under clause (g) of such definition,
pursuant to the covenant "Limitation on Additional Indebtedness of
Subsidiaries of the Issuer," and
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(3) Indebtedness of the Issuer the proceeds of which are used solely
to refinance Indebtedness Incurred under clause (1) above; provided that
(a) the principal amount of Indebtedness incurred pursuant to this
clause (3) (or, if such Indebtedness provides for an amount less than
the principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the original issue price of such
Indebtedness) shall not exceed the sum of
(i) if prior to March 1, 2004, the total Accreted Value or, if
on or after March 1, 2004, the aggregate principal amount at maturity
of the Notes refinanced, plus
(ii) the amount of any premium reasonably determined by the
Issuer as necessary to accomplish such refinancing by means of a
tender offer or privately negotiated purchase, plus
(iii) the amount of expenses in connection therewith,
(b) the new Indebtedness refinancing such Indebtedness shall have
an Weighted Average Life to Stated Maturity that is equal to or greater
than the remaining Weighted Average Life Stated Maturity of such
Indebtedness and shall have no scheduled principal payment prior to the
91st day after the Stated Maturity for the final scheduled principal
payment of such Indebtedness, and
(c) in the case of any partial refinancing of the Notes, such new
Indebtedness shall be unsecured.
Limitation on Additional Indebtedness of Subsidiaries of the Issuer. The
Indenture provides that the Issuer will not permit any Restricted Subsidiary to,
directly or indirectly, Incur, contingently or otherwise, any Indebtedness
(including any Acquired Indebtedness), other than Permitted Indebtedness.
However, the Restricted Subsidiaries will be permitted to Incur Indebtedness
(including Acquired Indebtedness), if, at the time of and immediately after
giving pro forma effect to such Incurrence (including the application of the net
proceeds therefrom), the Debt to Operating Cash Flow Ratio of the Issuer would
be less than or equal to 6.5 to 1.0.
Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless
(1) no Default shall have occurred and be continuing at the time of or
after giving effect to such Restricted Payment,
(2) immediately after giving effect to such Restricted Payment, a
Restricted Subsidiary would be able to Incur $1.00 of Indebtedness under
the Debt to Operating Cash Flow Ratio set forth in the covenant "Limitation
on Additional Indebtedness of Subsidiaries of the Issuer," and
(3) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments and Designation Amounts
declared or made on or after the Issue Date does not exceed an amount equal
to the sum of, without duplication,
(a) the difference between
(i) the Cumulative Operating Cash Flow determined for the period
commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of such
Restricted Payment and
(ii) 150% of Cumulative Consolidated Interest Expense determined
for the period commencing on the Issue Date and ending on the last
day of the most recent fiscal quarter immediately preceding the date
of such Restricted Payment, plus
(b) the aggregate net cash proceeds received by the Issuer either
(i) as capital contributions to the Issuer after the Issue Date
or
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(ii) from the issue and sale (other than to a Subsidiary of the
Issuer) of its Qualified Equity Interests after the Issue Date, plus
(c) the aggregate net cash proceeds received by the Issuer or any
Restricted Subsidiary after the Issue Date upon the conversion of, or
exchange for, Indebtedness of the Issuer or a Restricted Subsidiary that
has been converted into or exchanged for Qualified Equity Interests of
the Issuer, plus
(d) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment (other than an Investment made
pursuant to (4) of the following paragraph) made after the Issue Date,
an amount (to the extent not included in the computation of Cumulative
Operating Cash Flow) equal to the lesser of
(i) the return of capital with respect to such Investment and
(ii) the amount of such Investment that was treated as a
Restricted Payment, plus
(e) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after
the Issue Date in accordance with "-- Designation of Unrestricted
Subsidiaries" below, the Issuer's proportionate interest equal to the
Fair Market Value of any Unrestricted Subsidiary that has been
redesignated as a Restricted Subsidiary after the Issue Date in
accordance with "-- Designation of Unrestricted Subsidiaries" below not
to exceed in any case the Designation Amount with respect to such
Restricted Subsidiary upon its Designation, minus
(f) the greater of
(i) $0 and
(ii) the Designation Amount (measured as of the date of
Designation) with respect to any Subsidiary of the Issuer that has
been Designated as an Unrestricted Subsidiary after the Issue Date in
accordance with "-- Designation of Unrestricted Subsidiaries" below
and minus
(g) 50% of the aggregate principal amount of outstanding
Indebtedness included in the calculation of clause (c) of the definition
of Permitted Indebtedness at the time of such Restricted Payment to the
extent funded with the net cash proceeds received by the Issuer either
(i) as capital contributions to the Issuer after the Issue Date
or
(ii) from the issue and sale (other than to a Subsidiary of the
Issuer) of its Qualified Equity Interests after the Issue Date.
For purposes of the (b) and (c) above and without duplication and for purposes
of the definition of Total Incremental Invested Equity, the value of the
aggregate net cash proceeds received by the Issuer upon the issuance of
Qualified Equity Interests either upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of
options, warrants or rights will be the net cash proceeds received upon the
issuance of such Indebtedness, options, warrants or rights plus the incremental
cash received by the Issuer upon the conversion, exchange or exercise thereof.
The provisions of this covenant shall not prohibit
(1) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof, if at such date of declaration such
payment would comply with the provisions of the Indenture,
(2) so long as no Default shall have occurred and be continuing, the
purchase, redemption, retirement or other acquisition of any Equity
Interests of the Issuer
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(a) in exchange for or conversion into or
(b) out of the net cash proceeds of the substantially concurrent
issue and sale (other than to a Subsidiary of the Issuer) of Equity
Interests of the Issuer (other than Disqualified Equity Interests);
provided that any such net cash proceeds pursuant to the immediately
preceding subclause (b) are excluded from clause (3)(b) of the preceding
paragraph,
(3) so long as no Default shall have occurred and be continuing, the
purchase, redemption, defeasance or other acquisition or retirement for
value of Subordinated Indebtedness made by exchange for (including any such
exchange pursuant to the exercise of a conversion right or privilege in
which cash is paid in lieu of fractional shares or scrip), or out of the
net cash proceeds of a substantially concurrent issue or sale (other than
to a Subsidiary of the Issuer) of,
(a) Equity Interests (other than Disqualified Equity Interests) of
the Issuer; provided that any such net cash proceeds, to the extent so
used, are excluded from clause (3) of the preceding paragraph, and/or
(b) other Subordinated Indebtedness, having a Weighted Average Life
to Maturity that is equal to or greater than the Weighted Average Life
to Maturity of the Subordinated Indebtedness being purchased, redeemed,
defeased or otherwise acquired or retired,
(4) Investments constituting Restricted Payments in Persons engaged
primarily in a Permitted Business in an amount not to exceed $10.0 million
outstanding at any time,
(5) the making of any Investment in or payment of any dividend or
distribution by the Issuer to Holdings for bona fide costs and operating
expenses of Holdings directly related to the operations of Holdings and its
Subsidiaries, and
(6) the payment of any dividend or distribution by the Issuer to
Holdings to enable it to purchase, redeem, or otherwise acquire or retire
for value Equity Interests of Holdings held by employees or former
employees of the Issuer, or any Subsidiary of the Issuer (or their estates
or beneficiaries under their estates) upon death, disability, retirement or
termination of employment, not to exceed $1.0 million in any year or $3.0
million in the aggregate since the Issue Date plus, in each case, the
amount of the net proceeds received by the Issuer or any such Subsidiary
from life insurance policies on the life of the employee whose Equity
Interests are being purchased, redeemed or otherwise acquired or retired
for value.
In no event shall a Restricted Payment made on the basis of consolidated
financial statements prepared in good faith in accordance with GAAP be subject
to rescission or constitute a Default by reason of any requisite subsequent
restatement of such financial statements which would have made such Restricted
Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (4) and (6) of the second
preceding paragraph shall be included as Restricted Payments and amounts
expended pursuant to clauses (2), (3) and (5) shall be excluded. The amount of
any non-cash Restricted Payment shall be deemed to be equal to the Fair Market
Value thereof at the date of the making of such Restricted Payment.
Ownership of Systems. The Indenture provides that the Issuer will at all
times be the legal and beneficial owner (as defined in the Indenture) of 100% of
the Capital Stock of Systems.
Limitation on Liens. The Indenture provides that the Issuer will not,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind upon any of its property or assets, whether now owned or acquired after the
Issue Date, or any proceeds therefrom, or assign or convey any right to receive
income therefrom to secure either
(1) Subordinated Indebtedness, unless the Notes are secured by a Lien
on such property, assets or proceeds that is senior in priority to the
Liens securing such Subordinated Indebtedness, or
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(2) any Indebtedness of the Issuer that is not Subordinated
Indebtedness, unless the Notes are equally and ratably secured with the
Liens securing such other Indebtedness, except, in either case for Liens to
secure Indebtedness on cash representing the proceeds of such Indebtedness
or Government Securities acquired with such cash and pledged for the
purpose of providing for the payment of interest on such Indebtedness and
except for Liens to secure the Issuer's guarantee of the Credit Facility
and Interest Rate Protection Obligations of a Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to
(1) pay dividends or make any other distributions to the Issuer or any
other Restricted Subsidiary on its Equity Interests or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Issuer or any other Restricted Subsidiary,
(2) make loans or advances to, or guarantee any Indebtedness or other
obligations of, the Issuer or any other Restricted Subsidiary, or
(3) transfer any of its properties or assets to the Issuer or any
other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of
(a) restrictions under the 12 3/8% Notes Indenture, as the same may
from time to time be modified or amended and restrictions under
agreements governing Indebtedness Incurred to refinance the 12 3/8%
Notes (or refinancings thereof), in each case, so long as the
restrictions as modified or amended or contained in such agreements
governing such refinancing Indebtedness, as the case may be, are no less
favorable to the holders of the Notes in any material respect than the
restrictions under the 12 3/8% Notes Indenture on the Issue Date,
(b) restrictions under the Credit Facility so long as such
restrictions are no less favorable to the holders of the Notes in any
material respect than the restrictions under the Credit Facility in
effect on the Issue Date,
(c) restrictions under other agreements governing Indebtedness
Incurred in compliance with the Indenture, provided that any such
restrictions permit the payment of dividends to the Issuer in amounts
and at the times necessary to permit the payment of cash interest due on
the Notes on and after September 1, 2004, but no such permission need
apply when a default or event of default in respect of such Indebtedness
has occurred and is continuing,
(d) applicable law,
(e) any instrument governing Indebtedness or Equity Interests of an
Acquired Person acquired by the Issuer or any Restricted Subsidiary as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred by such Acquired Person in connection with, as
a result of or in contemplation of such acquisition); provided, however,
that such encumbrances and restrictions are not applicable to the Issuer
or any Restricted Subsidiary, or the properties or assets of the Issuer
or any Restricted Subsidiary, other than the Acquired Person,
(f) customary non-assignment provisions in leases and other
contracts entered into in the ordinary course of business and consistent
with past practices (including, without limitation, non-assignment
provisions in agreements between the Issuer, Systems or any Restricted
Subsidiary and the NRTC with respect to DBS services),
(g) Purchase Money Indebtedness for property acquired in the
ordinary course of business that only imposes encumbrances and
restrictions on the property so acquired, and
(h) any agreement for the sale or disposition of the Equity
Interests or assets of any Restricted Subsidiary; provided, however,
that such encumbrances and restrictions described in
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this clause (h) are only applicable to such Restricted Subsidiary or
assets, as applicable, and any such sale or disposition is made in
compliance with "-- Disposition of Proceeds of Asset Sales" below to the
extent applicable thereto.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless
(1) the Issuer or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of and
(2) at least 85% of such consideration consists of
(a) cash or Cash Equivalents,
(b) properties and capital assets to be used in a Permitted
Business and/or
(c) Equity Interests in one or more Persons that are primarily
engaged in a Permitted Business so long as upon the consummation of any
sale in accordance with this clause (c), such Person becomes a Wholly
Owned Restricted Subsidiary.
In the case of sales pursuant to clauses (b) and (c) above not involving solely
an exchange of a Permitted Business and cash (if any), if the Fair Market Value
of the assets sold or otherwise disposed of in a single transaction or series of
transactions exceeds $5.0 million, the Issuer must obtain the written opinion
from an Independent Financial Advisor (and file such opinion with the Trustee)
stating that the terms of such Asset Sale are fair, from a financial point of
view, to the Issuer or the Restricted Subsidiary involved in such Asset Sale.
The amount of any
(1) Indebtedness (other than any Subordinated Indebtedness) of the
Issuer or any Restricted Subsidiary that is actually assumed by the
transferee in such Asset Sale and from which the Issuer and the Restricted
Subsidiaries are fully released shall be deemed to be cash for purposes of
determining the percentage of cash consideration received by the Issuer or
the Restricted Subsidiaries and
(2) notes or other similar obligations received by the Issuer or the
Restricted Subsidiaries from such transferee that are immediately
converted, sold or exchanged (or are converted, sold or exchanged within
thirty days of the related Asset Sale) by the Issuer or the Restricted
Subsidiaries into cash shall be deemed to be cash, in an amount equal to
the net cash proceeds realized upon such conversion, sale or exchange for
purposes of determining the percentage of cash consideration received by
the Issuer or the Restricted Subsidiaries.
Notwithstanding the foregoing, during the term of the Notes, the Issuer and the
Restricted Subsidiaries may engage in Asset Sales involving up to $10.0 million
without complying with clause (2)(b) of the first sentence of this paragraph.
Notwithstanding the foregoing, the Issuer or such Restricted Subsidiary, as
the case may be, may
(1) apply the Net Cash Proceeds of any Asset Sale within 365 days of
receipt thereof to repay or purchase or retire Indebtedness of Systems and
permanently reduce any related commitment,
(2) apply such Net Cash Proceeds to acquire, construct or improve
properties and capital assets to be used on a Permitted Business within 365
days after the receipt thereof, or
(3) any combination of the foregoing.
To the extent that all or part of the Net Cash Proceeds of any Asset Sale
are not applied (or, in the case of clause (1) above, an offer to purchase or
retire such Indebtedness of Systems has not been made) within 365 days of such
Asset Sale as described in clause (1) or (2) of the immediately preceding
paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the
Issuer shall, within
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20 days after such 365th day, make an offer to purchase ("Offer to Purchase")
all outstanding Notes, at a purchase price in cash equal to 100% of the Accreted
Value of the Notes on the Purchase Date, unless the Purchase Date is on or after
March 1, 2004, in which case such purchase price shall be an amount in cash
equal to 100% of the principal amount at maturity thereof, plus accrued and
unpaid interest (including Additional Interest, if any) thereon, if any, to the
Purchase Date; provided, however, that the Offer to Purchase may be deferred
until there are aggregate Unutilized Net Cash Proceeds equal to or in excess of
$10.0 million, at which time the entire amount of such Unutilized Net Cash
Proceeds, and not just the amount in excess of $10.0 million, shall be applied
as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to this covenant,
to the extent that the principal amount at maturity of the Notes tendered
pursuant to such Offer to Purchase exceeds the Net Cash Proceeds to be applied
to the purchase thereof, such Notes shall be purchased pro rata based on the
principal amount at maturity of such Notes tendered by each holder.
In the event that the Issuer makes an Offer to Purchase the Notes, the
Issuer shall comply with any applicable securities laws and regulations,
including any requirements of Section 14(e) of, and Rule 14e-1 under, the
Exchange Act, and any violation of the provisions of the Indenture relating to
such Offer to Purchase occurring as a result of such compliance shall not be
deemed an Event of Default or an event that with the passing of time or giving
of notice, or both, would constitute an Event of Default.
Each holder of Notes shall be entitled to tender all or any portion of the
Notes owned by such holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount at maturity and subject to any proration
among tendering holders as described above.
Limitation on Issuances and Sales of Preferred Equity Interests by
Restricted Subsidiaries. The Indenture provides that the Issuer
(1) will not permit any Restricted Subsidiary to issue any Preferred
Equity Interests (other than to the Issuer or a Restricted Subsidiary) and
(2) will not permit any Person (other than the Issuer or a Restricted
Subsidiary) to own any Preferred Equity Interests of any Restricted
Subsidiary.
Limitations on Conduct of Business of the Issuer and the Restricted
Subsidiaries. The Indenture provides that the Issuer will not conduct any trade
or business, other than through a Subsidiary and the ownership of Common Stock
of Systems, and the Issuer will not permit any of the Restricted Subsidiaries to
be primarily engaged in any business, except for a Permitted Business.
Limitation on Transactions with Affiliates. The Indenture provides that the
Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary
to, conduct any business or enter into any transaction (or series of related
transactions that are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Common Stock of the Issuer or any officer or director of the Issuer (each,
an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are
set forth in writing, and are fair and reasonable to the Issuer or such
Restricted Subsidiary, as the case may be. Each Affiliate Transaction involving
aggregate payments or other Fair Market Value in excess of $5.0 million shall be
approved by a majority of the Board of Directors, such approval to be evidenced
by a board resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions. In addition to
the foregoing, each Affiliate Transaction involving aggregate consideration of
$10.0 million or more shall be approved by a majority of the Disinterested
Directors. However, in lieu of such approval by the Disinterested Directors, the
Issuer may obtain a written opinion from an Independent Financial Advisor
stating that the terms of such Affiliate Transaction to the Issuer or the
Restricted Subsidiary, as the case may be, are fair from a financial point of
view.
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Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to
(1) transactions with or among the Issuer and any Restricted
Subsidiary or between or among Restricted Subsidiaries,
(2) customary directors' fees, indemnification and similar
arrangements, consulting fees, employee salaries, bonuses or employment
agreements, compensation or employee benefit arrangements and incentive
arrangements with any officer, director or employee of the Issuer entered
into in the ordinary course of business (including customary benefits
thereunder) and payments under any indemnification arrangements permitted
by applicable law,
(3) any transactions undertaken pursuant to any other contractual
obligations in existence on the Issue Date (as in effect on the Issue
Date),
(4) any Restricted Payments made in compliance with "-- Limitation on
Restricted Payments" above,
(5) loans, advances and reimbursements to officers, directors and
employees of the Issuer and the Restricted Subsidiaries for travel,
entertainment, moving and other relocation expenses, in each case made in
the ordinary course of business and consistent with past business
practices,
(6) the pledge of Equity Interests of Unrestricted Subsidiaries to
support the Indebtedness thereof,
(7) the sale of products or property by any Person to the Issuer or a
Restricted Subsidiary, or by the Issuer or any Restricted Subsidiary to any
Person, in the ordinary course of business and consistent with past
practice and
(8) the issuance and sale by Systems of Qualified Equity Interests.
Reports. The Indenture provides that, whether or not the Issuer has a class
of securities registered under the Exchange Act, the Issuer shall furnish
without cost to each holder of Notes and file with the Trustee and, following
the effectiveness of any Exchange Offer Registration Statement or a Shelf
Registration Statement, file with the SEC
(1) within the applicable time period required under the Exchange Act,
after the end of each fiscal year of the Issuer, the information required
by Form 10-K (or any successor form thereto) under the Exchange Act with
respect to such period,
(2) within the applicable time period required under the Exchange Act
after the end of each of the first three fiscal quarters of each fiscal
year of the Issuer, the information required by Form 10-Q (or any successor
form thereto) under the Exchange Act with respect to such period and
(3) any current reports on Form 8-K (or any successor forms) required
to be filed under the Exchange Act.
Designation of Unrestricted Subsidiaries.
(1) The Issuer may designate after the Issue Date any Subsidiary of
the Issuer (other than Systems) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") only if
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation,
(b) at the time of and after giving effect to such Designation,
Systems could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the proviso in "-- Limitation on
Additional Indebtedness of Subsidiaries of the Issuer" above, and
(c) the Issuer would be permitted to make an Investment (other than
a Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) as
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contemplated by the first paragraph or subclause (4) of the second
paragraph of "-- Limitation on Restricted Payments" above in an amount
(the "Designation Amount") equal to the Fair Market Value of the
Issuer's proportionate interest of the Issuer and the Restricted
Subsidiaries in such Subsidiary on such date.
Notwithstanding the above, no Subsidiary of the Issuer shall be designated
an Unrestricted Subsidiary if such Subsidiary distributes, directly or
indirectly, DIRECTV Services under an agreement with the NRTC or has any right,
title or interest in the revenue or profits in, or holds any Lien in respect of,
any such agreement.
Neither the Issuer nor any Restricted Subsidiary shall at any time
(i) provide credit support for, subject any of its property or assets
(other than the Equity Interests of any Unrestricted Subsidiary) to the
satisfaction of, or guarantee, any Indebtedness of any Unrestricted
Subsidiary (including any undertaking, agreement or instrument evidencing
such Indebtedness),
(ii) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary, or
(iii) be directly or indirectly liable for any Indebtedness that
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a
default with respect to any Indebtedness of any Unrestricted Subsidiary,
except, in the case of subclause (i) or (ii), to the extent otherwise
permitted under the terms of the Indenture, including, without limitation,
pursuant to "-- Limitation on Restricted Payments" above and
"-- Disposition of Proceeds of Asset Sales" above.
(2) The Issuer may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") if:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation;
and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Issuer, delivered to the Trustee certifying compliance
with the foregoing provisions.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Issuer shall not consolidate with or merge with or into (whether or not
the Issuer is the Surviving Person) any other entity and the Issuer shall not,
and shall not cause or permit any Restricted Subsidiary to, sell, convey,
assign, transfer, lease or otherwise dispose of all or substantially all of the
Issuer's properties and assets (determined on a consolidated basis for the
Issuer and the Restricted Subsidiaries) to any entity in a single transaction or
series of related transactions, unless
(1) either
(a) the Issuer shall be the Surviving Person or
(b) the Surviving Person (if other than the Issuer) shall be a
corporation, partnership or limited liability company organized and
validly existing under the laws of the United States of America or any
State thereof or the District of Columbia, and shall expressly assume by
a supplemental indenture the due and punctual payment of the principal
of, premium, if any, and interest on all the Notes and the performance
and observance of every covenant of the Indenture and the Registration
Rights Agreement to be performed or observed on the part of the Issuer,
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(2) immediately thereafter, no Default shall have occurred and be
continuing,
(3) immediately after giving effect to any such transaction involving
the Incurrence by the Issuer or any Restricted Subsidiary, directly or
indirectly, of additional Indebtedness (and treating any Indebtedness not
previously an obligation of the Issuer or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred
at the time of such transaction), the Issuer or the Surviving Person, as
applicable, could Incur, on a pro forma basis after giving effect to such
transaction as if it had occurred at the beginning of the latest fiscal
quarter for which consolidated financial statements of the Issuer are
available, at least $1.00 of additional Indebtedness under the proviso in
"-- Limitation on Additional Indebtedness of Subsidiaries of the Issuer"
above, and
(4) the Issuer has delivered to the Trustee an opinion of counsel to
the effect that the holders of the Notes will not recognize gain or loss
for federal income tax purposes as a result of such transaction; provided,
however, that the Issuer may consolidate with or merge with or into
Holdings without complying with clause (3) above.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interests of which constitute all or substantially all
the properties and assets of the Issuer shall be deemed to be the transfer of
all or substantially all the properties and assets of the Issuer.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed above in which the Issuer is not the
Surviving Person and the Surviving Person is to assume all of the Obligations of
the Issuer under the Notes, the Indenture and the Registration Rights Agreement
under a supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer and the
Issuer shall be discharged from its Obligations under the Indenture and the
Notes.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Issuer, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The "Events of Default" under the Indenture include
(1) default in the payment of interest on the Notes issued thereunder
when it becomes due and payable and continuance of such default for a
period of 30 days or more,
(2) default in the payment of (a) if prior to March 1, 2004, the
Accreted Value of, and (b) if on or after March 1, 2004, the principal
amount at maturity of and premium, if any, on the Notes when due (including
the failure to make a payment to purchase Notes pursuant to a Change of
Control Offer),
(3) default in the performance, or breach, of any covenant described
under "-- Certain Covenants -- Disposition of Proceeds of Asset Sales" or
"-- Consolidation, Merger, Sale of Assets, Etc.,"
(4) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (1), (2) or (3) above),
and continuance of such default or breach for a period of 30 days or more
after written notice to the Issuer by the Trustee or to the Issuer and the
Trustee by
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the holders of at least 25% in aggregate principal amount at maturity of
the outstanding Notes (in each case, when such notice is deemed received in
accordance with the Indenture),
(5) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $15.0 million or more under which the Issuer or a Restricted
Subsidiary is obligated, and either
(a) such Indebtedness is already due and payable in full and has
not been paid in full (and such failure continues for a period of 30
days or more) or
(b) such failure results in the acceleration of the final maturity
of such Indebtedness (which acceleration has not been rescinded prior to
any declaration of acceleration of the Notes),
(6) one or more judgments, orders or decrees, not subject to appeal,
for the payment of money of $15.0 million or more, either individually or
in the aggregate (in all cases net of amounts covered by insurance for
which coverage is not being challenged or denied), shall be entered against
the Issuer or any of the Issuer's Significant Restricted Subsidiaries or
any of their respective properties and shall not be discharged, paid or
stayed within 60 days after the right of appeal has expired, or
(7) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Issuer or any of
the Issuer's Significant Restricted Subsidiaries shall have occurred.
If an Event of Default with respect to the Notes (other than an Event of
Default with respect to the Issuer described in clause (7) of the preceding
paragraph) occurs and is continuing, the Trustee or the holders of at least 25%
in aggregate principal amount at maturity of the outstanding Notes by notice in
writing to the Issuer may declare the Default Amount of all the outstanding
Notes to be due and payable immediately and, upon any such declaration, such
Default Amount will become immediately due and payable. If an Event of Default
specified in clause (6) of the preceding paragraph with respect to the Issuer
occurs under the Indenture, the outstanding Notes will, ipso facto, become
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of the Notes.
Notwithstanding the foregoing, in the event of a declaration of
acceleration in respect of the Notes because an Event of Default specified in
clause (5) above shall have occurred and be continuing, such declaration of
acceleration shall be automatically annulled if the Indebtedness that is the
subject of such Event of Default has been discharged or paid or such Event of
Default shall have been cured or waived by the holders of such Indebtedness and
written notice of such discharge, cure or waiver, as the case may be, shall have
been given to the Trustee by the Issuer or by the requisite holders of such
Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days
after such declaration of acceleration in respect of the Notes and no other
Event of Default shall have occurred which has not been cured or waived during
such 30-day period.
Any such declaration with respect to the Notes may be annulled as to past
Events of Default and Defaults (except, unless theretofore cured, an Event of
Default or a Default in payment of principal of (and premium, if any) or
interest on the Notes) upon the conditions provided in the Indenture. For
information as to waiver of defaults, see "-- Amendment and Waivers" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the outstanding
Notes, give the holders of the Notes notice of all uncured Defaults or Events of
Default known to it. However, except in the case of an Event of Default in
payment with respect to such Notes or a Default or Event of Default in complying
with "-- Consolidation, Merger, Sale of Assets, Etc." above, the Trustee shall
be protected in withholding such notice if and so long as a committee of its
trust officers in good faith determines that the withholding of such notice is
in the interest of the holders of the Notes.
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No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless
(1) such holder shall have previously given to the Trustee written
notice of a continuing Event of Default thereunder,
(2) the holders of at least 25% of the aggregate principal amount at
maturity of the outstanding Notes under the Indenture shall have made
written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, and
(3) the Trustee shall have not received from the holders of a majority
in aggregate principal amount at maturity of outstanding Notes a direction
inconsistent with such request and shall have failed to institute such
proceeding within 45 days.
However, such limitations do not apply to a suit instituted by a holder of a
Note for enforcement of payment of the Default Amount and premium, if any, on
such Note on or after the respective due dates expressed in such Note.
The Issuer will be required to furnish to the Trustee annually a statement
as to the performance by it of certain of its obligations under the Indenture
and as to any default in such performance.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Issuer may at any time terminate its obligations under some of the
covenants set forth in the Indenture, some of which are described under
"-- Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default with respect to the Notes ("covenant
defeasance"). To exercise either defeasance or covenant defeasance, the Issuer
must irrevocably deposit in trust, for the benefit of the holders of the Notes,
with the Trustee money (in United States dollars) or U.S. government obligations
(denominated in United States dollars), or a combination thereof, in such
amounts as will be sufficient to pay the principal at maturity of, and premium,
if any, and interest on the Notes to redemption or maturity and comply with
certain other conditions, including the delivery of a legal opinion as to
certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either
(1) all such Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes that have been replaced or paid and Notes
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from such trust) have been delivered to the Trustee
for cancellation, or
(2) (a) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in
trust for the purpose an amount of money sufficient to pay and discharge
the entire indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation, for principal amount at maturity of, premium, if
any, and accrued interest to the date of such deposit,
(b) the Issuer has paid all sums payable by it under the Indenture,
and
(c) the Issuer has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of the Notes at
maturity or on the redemption date, as the case may be.
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In addition, the Issuer must deliver an officers' certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENT AND WAIVERS
From time to time, the Issuer, when authorized by resolutions of the
Issuer's Board of Directors, and the Trustee, without the consent of the holders
of the Notes, may amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, maintaining the qualification of the Indenture under
the Trust Indenture Act or making any change that does not adversely affect the
rights of any holder. Other amendments and modifications of the Indenture and
the Notes may be made by the Issuer and the Trustee by supplemental indenture
with the consent of the holders of not less than a majority of the aggregate
principal amount at maturity of the outstanding Notes. However, no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby,
(1) reduce the principal amount at maturity of, change the fixed
maturity of, or alter the redemption provisions of, the Notes,
(2) change the currency in which any Notes or amounts owing thereon
are payable,
(3) reduce the percentage of the aggregate principal amount at
maturity outstanding of Notes which must consent to an amendment,
supplement or waiver or consent to take any action under the Indenture or
the Notes,
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes,
(5) waive a default in payment with respect to the Notes,
(6) following the occurrence of a Change of Control or an Asset Sale,
alter the Issuer's obligation to purchase the Notes in accordance with the
Indenture or waive any default in the performance thereof,
(7) reduce or change the rate or time for payment of interest on the
Notes or amend or modify the definition of Accreted Value or
(8) affect the ranking of the Notes in a manner adverse to the holder
of the Notes.
REGARDING THE TRUSTEE
United States Trust Company of New York will serve as Trustee under the
Indenture.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes will be governed by
and construed in accordance with laws of the State of New York without giving
effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of many of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
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"Accreted Value" as of any date (the "Specified Date") means, with respect
to each $1,000 principal amount at maturity of Notes:
(1) if the Specified Date is one of the following dates (each a
"Semi-Annual Accreted Date"), the amount set forth opposite such date
below:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRETED DATE VALUE
- ------------- ---------
<S> <C>
02/19/99.................................................... $ 518.12
09/01/99.................................................... $ 555.51
03/01/00.................................................... $ 593.00
09/01/00.................................................... $ 633.03
03/01/01.................................................... $ 675.76
09/01/01.................................................... $ 721.37
03/01/02.................................................... $ 770.07
09/01/02.................................................... $ 822.05
03/01/03.................................................... $ 877.53
09/01/03.................................................... $ 936.77
03/01/04.................................................... $1,000.00
</TABLE>
(2) if the Specified Date occurs between two Semi-Annual Accreted
Dates, the sum of
(a) the Accreted Value for the Semi-Annual Accreted Date
immediately preceding the Specified Date and
(b) an amount equal to the product of
(i) the Accreted Value for the immediately following Semi-Annual
Accreted Date less the Accreted Value for the immediately preceding
Semi-Annual Accreted Date and
(ii) a fraction, the numerator of which is the number of days
from the immediately preceding Semi-Annual Accreted Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180.
"Acquired Indebtedness" means Indebtedness of a Person
(1) assumed in connection with an Acquisition from such Person or
(2) existing at the time such Person becomes a Restricted Subsidiary
or is merged or consolidated with or into the Issuer or any Restricted
Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person that merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means
(1) any capital contribution (by means of transfers of cash or other
property to others or payments for property or services for the account or
use of others, or otherwise) by the Issuer or any Restricted Subsidiary to
any other Person, or any acquisition or purchase of Equity Interests of any
other Person by the Issuer or any Restricted Subsidiary, in either case
pursuant to which such Person shall become a Restricted Subsidiary or shall
be consolidated or merged with or into the Issuer or any Restricted
Subsidiary or
(2) any acquisition by the Issuer or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of
the ordinary course of business.
"Additional Interest" has the meaning provided in the Registration Rights
Agreement.
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"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, however, that
(1) beneficial ownership of 10.0% or more of the voting power of the
then outstanding voting securities of a Person shall be deemed to be
control; and
(2) no individual, other than a director of the Issuer or an officer
of the Issuer with a policy making function, shall be deemed an Affiliate
of the Issuer or any of the Issuer's Subsidiaries solely by reason of such
individual's employment, position or responsibilities by or with respect to
the Issuer or any of the Issuer's Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Issuer or a Restricted Subsidiary, in one transaction or a
series of related transactions, of
(1) any Equity Interest of any Restricted Subsidiary,
(2) any material license, franchise or other authorization of the
Issuer or any Restricted Subsidiary,
(3) any assets of the Issuer or any Restricted Subsidiary that
constitute substantially all of an operating unit or line of business of
the Issuer or any Restricted Subsidiary, or
(4) any other property or asset of the Issuer or any Restricted
Subsidiary outside of the ordinary course of business (including the
receipt of proceeds paid on account of the loss of or damage to any
property or asset, except to the extent used to repurchase or repair such
property or asset, and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings).
The term "Asset Sale" shall not include
(1) any transaction consummated in compliance with "-- Consolidation,
Merger, Sale of Assets, Etc." above and the creation of any Lien not
prohibited by "-- Certain Covenants -- Limitation on Liens" above;
provided, however, that any transaction consummated in compliance with
"-- Consolidation, Merger, Sale of Assets, Etc." above involving a sale,
conveyance, assignment, transfer, lease or other disposal of less than all
of the properties or assets of the Issuer and the Restricted Subsidiaries
shall be deemed to be an Asset Sale with respect to the properties or
assets of the Issuer and Restricted Subsidiaries that are not so sold,
conveyed, assigned, transferred, leased or otherwise disposed of in such
transaction,
(2) sales of property or equipment that has become worn out, obsolete
or damaged or otherwise unsuitable for use in connection with the business
of the Issuer or any Restricted Subsidiary, as the case may be, and
(3) any transaction consummated in compliance with "-- Certain
Covenants -- Limitation on Restricted Payments" above.
"Board of Directors" means
(1) in the case of a Person that is a corporation, the board of
directors of such Person and
(2) in the case of any other Person, the board of directors, board of
managers, management committee or similar governing body of such Person (or
in the case of a limited partnership, of such
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Person's general partner, or in the case of a limited liability company, of
such Person's manager), or any authorized committee thereof responsible for
the management of the business and affairs of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means
(1) any evidence of Indebtedness (with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or
less) issued or directly and fully guaranteed or insured by the United
States or any agency or instrumentality thereof that (provided that the
full faith and credit of the United States is pledged in support thereof or
such Indebtedness constitutes a general obligation of such country) have
maturities of not more than six months from the date of acquisition,
(2) time deposits, certificates of deposit or acceptances (with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less) of any financial institution that is a member
of the Federal Reserve System, in each case having combined capital and
surplus and undivided profits (or any similar capital concept) of not less
than $200.0 million and whose senior unsecured debt is rated at least "A-1"
by S&P or "P-1" by Moody's,
(3) commercial paper with a maturity of 365 days or less issued by a
corporation (other than an Affiliate of the Issuer) organized under the
laws of the United States or any State thereof and rated at least "A-1" by
S&P or "P-1" by Moody's and in each case maturing not more than six months
after the date of acquisition,
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above and
entered into with any bank meeting the qualifications specified in clause
(2) above, and
(5) money market funds that invest substantially all of their assets
in securities described in the preceding clauses (1) through (4).
"Change of Control" is defined to mean the occurrence of
(1) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total Voting Equity
Interests of the Issuer,
(2) the Issuer consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes
of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Issuer, in any such event
pursuant to a transaction in which the outstanding Voting Equity Interests
of the Issuer are converted into or exchanged for cash, securities or other
property, other than any such transaction where
(a) the outstanding Voting Equity Interests of the Issuer are
converted into or exchanged for
(i) Voting Equity Interests (other than Disqualified Equity
Interests) of the surviving or transferee corporation or its parent
corporation and/or
(ii) cash, securities and other property in an amount that could
be paid by the Issuer as a Restricted Payment under the Indenture and
(ii) immediately after such transaction no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange
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Act), excluding the Permitted Holders, is the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Equity
Interests of the surviving or transferee corporation or its parent
corporation, as applicable,
(3) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by the Board of Directors or whose
nomination for election by the stockholders of the Issuer was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason (other than
by action of the Permitted Holders) to constitute a majority of the Board
of Directors then in office, or
(4) the approval by stockholders of the Issuer of any liquidation or
dissolution of the Issuer.
"Change of Control Date" has the meaning set forth under "-- Change of
Control" above.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such Person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to the Issuer for any
period, the provision for federal, state, local and foreign income taxes payable
by the Issuer and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Issuer for any
period, without duplication, the sum of
(1) the interest expense of the Issuer and the Restricted Subsidiaries
for such period as determined on a consolidated basis in accordance with
GAAP, including, without limitation,
(a) any amortization of debt discount,
(b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts),
(c) the interest portion of any deferred payment obligation,
(d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, and
(e) all capitalized interest and all accrued interest,
(2) the interest component of Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Issuer and the Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP, and
(3) dividends and distributions in respect of Disqualified Equity
Interests actually paid in cash by the Issuer during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Issuer and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication,
(1) all extraordinary gains or losses and all gains and losses from
the sales or other dispositions of assets out of the ordinary course of
business (net of taxes, fees and expenses relating to the transaction
giving rise thereto) for such period,
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(2) that portion of such net income derived from or in respect of
investments in Persons other than Restricted Subsidiaries, except to the
extent actually received in cash by the Issuer or any Restricted Subsidiary
(subject, in the case of any Restricted Subsidiary, to the provisions of
clause (5) of this definition),
(3) the portion of such net income (or loss) allocable to minority
interests in any Person (other than a Restricted Subsidiary) for such
period, except to the extent actually received in cash by the Issuer or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary,
to the provisions of clause (5) of this definition),
(4) net income (or loss) of any other Person combined with the Issuer
or any Restricted Subsidiary on a "pooling of interests" basis attributable
to any period prior to the date of combination, and
(5) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Equity Interest holders, except, solely for the purposes of the "Limitation
on Additional Indebtedness of Subsidiaries of the Issuer" covenant and for
determining the amount available under clause (3) of the "Limitation on
Restricted Payments" covenant for a proposed Restricted Payment
constituting an Investment, for any restriction in any agreement or
instrument governing Indebtedness outstanding on the Issue Date or Incurred
in compliance with the Indenture.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication) by the
sum of
(1) Consolidated Income Tax Expense for such period to the extent
deducted in determining Consolidated Net Income for such period,
(2) Consolidated Interest Expense for such period to the extent
deducted in determining Consolidated Net Income for such period,
(3) all dividends on Preferred Equity Interests to the extent not
taken into account for computing Consolidated Net Income for that period,
and
(4) depreciation, amortization and any other non-cash items for such
period to the extent deducted in determining Consolidated Net Income for
such period (other than any non-cash item that requires the accrual of, or
a reserve for, cash charges for any future period) of the Issuer and the
Restricted Subsidiaries, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing
determined on a consolidated basis in accordance with GAAP minus non-cash
items to the extent they increase Consolidated Net Income (including the
partial or entire reversal of reserves taken in prior periods, except to
the extent any such reserves were not permitted to be added back in the
calculation of Consolidated Operating Cash Flow for a prior period pursuant
to clause (4) above) for such period.
"Credit Facility" means the Amended and Restated Credit Agreement dated as
of July 7, 1997, amended and restated as of May 8, 1998, among Holdings,
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,
including any deferrals, renewals, extensions, replacements, refinancings or
refundings thereof, or amendments, modifications or supplements thereto
(including, without limitation, any such deferrals, renewals, extensions,
replacements, refinancings, refundings, amendments, modifications or supplements
that increase the aggregate amount of commitments or borrowings thereunder or
add Subsidiaries of the Issuer as additional borrower or guarantor thereunder),
and any agreements providing therefor, whether by or with
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the same or any other lender, creditor or group of lenders or creditors, and
including related notes, guarantees, security agreements, pledge agreements,
mortgages, note agreements, other collateral documents and note agreements and
other instruments and agreements executed in connection therewith.
"Cumulative Operating Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Issuer is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"DBS" means direct broadcast satellite.
"Debt to Operating Cash Flow Ratio" means the ratio of
(1) an amount equal to the Total Consolidated Indebtedness as of the
date of calculation (the "Determination Date") to
(2) four times the Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For purposes
of calculating Consolidated Operating Cash Flow for the Measurement Period
immediately prior to the relevant Determination Date,
(a) any Person that is a Restricted Subsidiary on the Determination
Date (or would become a Restricted Subsidiary on such Determination Date
in connection with the transaction that requires the determination of
such Consolidated Operating Cash Flow) will be deemed to have been a
Restricted Subsidiary at all times during such Measurement Period,
(b) any Person that is not a Restricted Subsidiary on such
Determination Date (or would cease to be a Restricted Subsidiary on such
Determination Date in connection with the transaction that requires the
determination of such Consolidated Operating Cash Flow) will be deemed
not to have been a Restricted Subsidiary at any time during such
Measurement Period, and
(c) if the Issuer or any Restricted Subsidiary shall have in any
manner
(i) acquired (including through an Acquisition or the
commencement of activities constituting such operating business) or
(ii) disposed of (including by way of an Asset Sale or the
termination or discontinuance of activities constituting such
operating business) any operating business during such Measurement
Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if, in the case of an Acquisition or
the commencement of activities constituting such operating business,
all such transactions had been consummated on the first day of such
Measurement Period and, in the case of an Asset Sale or termination
or discontinuance of activities constituting such operating business,
all such transactions had been consummated prior to the first day of
such Measurement Period; provided, however, that such pro forma
adjustment shall not give effect to the Operating Cash Flow of any
Acquired Person to the extent that such Person's net income would be
excluded pursuant to clause (5) of the definition of Consolidated Net
Income.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Default Amount" means,
(1) prior to March 1, 2004, the Accreted Value of the Notes as of the
payment date, and
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(2) after March 1, 2004, the principal amount at maturity thereof,
plus, in the case of clause accrued and unpaid interest thereon, if any, to
the payment date.
"Designation" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"DIRECTV Services" means DBS television services and all other video,
audio, data packages, "a la carte" programming services and other services
offered by DIRECTV, Inc., the predecessor-in-interest of Hughes Communications
Galaxy, Inc., or its successors or assigns.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Issuer's Board of Directors other than
a director who
(1) has any material direct or indirect financial interest in or with
respect to such transaction or series of related transactions or
(2) is an employee or officer of the Issuer or an Affiliate that is
itself a party to such transaction or series of transactions or an
Affiliate of a party to such transactions or series of related
transactions.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event (other than a Change of Control), matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable,
at the option of the holder thereof, in whole or in part, or exchangeable into
Indebtedness on or prior to the earlier of the maturity date of the Notes or the
date on which no Notes remain outstanding.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, or
member interests in such Person, including any Preferred Equity Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Issuer and the
Restricted Subsidiaries in existence on the Issue Date until such amounts are
repaid.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) that could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction. However, the Fair Market Value of any
such asset or assets shall be determined conclusively by the Board of Directors
of the Issuer acting in good faith, and shall be evidenced by resolutions of the
Board of Directors of the Issuer delivered to the Trustee.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States that are applicable at the date of
determination and that are consistently applied for all applicable periods.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States are pledged.
"guarantee" means, as applied to any obligation,
(1) a guarantee (other than by endorsement of negotiable instruments
for collection in the ordinary course of business), direct or indirect, in
any manner, of any part or all of such obligation and
(2) an agreement, direct or indirect, contingent or otherwise, the
practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all
or any part of such obligation, including, without limiting the foregoing,
the payment of amounts drawn down by letters of credit.
A guarantee shall include, without limitation, any agreement to maintain or
preserve any other Person's financial condition or to cause any other Person to
achieve certain levels of operating results.
"High Power Satellite Transmission Business" means the business of the
acquisition, transmission or sale of programming in the high power DBS business
utilizing broadcast satellite service (including any provision of such services
to cable operators or other media providers), which may utilize all or part of
satellites owned by DIRECTV, Inc. and all other activities relating thereto or
arising therefrom.
"Holdings" means Golden Sky Holdings, Inc. or any successor or assign
thereof that owns 100% of the Equity Interests of the Issuer.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing).
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent,
(1) every obligation of such Person for money borrowed,
(2) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses,
(3) every reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of such Person,
(4) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts
payable incurred in the ordinary course of business and payable in
accordance with industry practices, or other accrued liabilities arising in
the ordinary course of business that are not overdue or that are being
contested in good faith),
(5) every Capital Lease Obligation of such Person,
(6) every net obligation under interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and other
agreements or arrangements designed to protect such Person against
fluctuations in interest rates,
(7) every obligation of the type referred to in clauses (1) through
(6) of another Person and all dividends of another Person the payment of
which, in either case, such Person has guaranteed or is responsible or
liable for, directly or indirectly, as obligor, guarantor or otherwise, and
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(8) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (1) through (7) above.
The term "Indebtedness'
(1) shall never be calculated taking into account any cash and Cash
Equivalents held by such Person,
(2) shall not include obligations of any Person
(a) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business, provided
that such obligations are extinguished within two Business Days of their
incurrence unless covered by an overdraft line,
(b) resulting from the endorsement of negotiable instruments for
collection in the ordinary course of business and consistent with past
business practices and
(c) under standby letters of credit to the extent collateralized by
cash or Cash Equivalents,
(3) to the extent that it provides that an amount less than the
principal amount thereof shall be due upon any declaration of acceleration
thereof shall be deemed to be incurred or outstanding in an amount equal to
the accreted value thereof at the date of determination,
(4) shall include the liquidation preference and any mandatory
redemption payment obligations in respect of any Disqualified Equity
Interests of the Issuer or any Restricted Subsidiary, and
(5) shall not include obligations under performance bonds, performance
guarantees, surety bonds and appeal bonds, letters of credit or similar
obligations, Incurred in the ordinary course of business (including standby
letters of credit securing obligations to the NRTC Incurred in the ordinary
course of business that are not overdue or that are being contested in good
faith by appropriate proceedings) (other than obligations under or in
respect of any direct or indirect credit support for obligations of any
Unrestricted Subsidiary).
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal or investment banking firm or consultant with experience advising DBS
businesses that is, in the judgment of the Issuer's Board of Directors,
qualified to perform the task for which it has been engaged
(1) that does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the
Issuer and
(2) that, in the judgment of the Board of Directors of the Issuer, is
otherwise independent and qualified to perform the task for which it is to
be engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements, and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guarantee or other extension of credit or capital contribution to
(by means of transfers of cash or other property or
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assets to others or payments for property or services for the account or use of
others, or otherwise), or purchase or acquisition of capital stock, bonds,
notes, debentures or other securities or evidences of Indebtedness issued by,
any other Person. In no event will the issuance by the Issuer of Qualified
Equity Interests of the Issuer in exchange for any such capital stock, bonds,
notes, debentures or other securities or evidences of Indebtedness constitute an
Investment. The amount of any Investment shall be
(1) the original cost of such Investment, plus
(2) the cost of all additions thereto, and minus
(3) the amount of any portion of such Investment repaid to such Person
in cash or other property or assets that would not otherwise constitute an
Investment as a repayment of principal or a return of capital, as the case
may be, but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such
Investment.
In determining the amount of any Investment or any repayment in respect of an
Investment involving a transfer of any property or asset other than cash, such
property shall be valued at its Fair Market Value at the time of such transfer,
as determined in good faith by the Board of Directors (or comparable body) of
the Person making such transfer or receiving such repayment.
"Investment Grade" means, with respect to a security, that such security is
rated by at least two nationally recognized statistical rating organizations in
one of each such organization's four highest generic rating categories.
"Issue Date" means the original issue date of the outstanding notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Marketable Securities" means
(1) Government Securities,
(2) any certificate of deposit maturing not more than 365 days after
the date of acquisition issued by, or time deposit of, an Eligible
Institution,
(3) commercial paper maturing not more than 365 days after the date of
acquisition issued by a corporation (other than an Affiliate of the Issuer)
with an Investment Grade rating, at the time as of which any investment
therein is made, issued or offered by an Eligible Institution,
(4) any bankers' acceptances or money market deposit accounts issued
or offered by an Eligible Institution, and
(5) any fund investing substantially in investments of the types
described in clauses (1) through (4) above.
"Maturity Date" means the date, which is set forth on the face of the
Notes, on which the Notes will mature.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Issuer or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of
(1) the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees and sales
commissions) and any relocation expenses incurred as a result thereof,
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(2) taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements),
(3) amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such
Asset Sale,
(4) amounts deemed, in good faith, appropriate by the Board of
Directors of the Issuer to be provided as a reserve, in accordance with
GAAP, against any liabilities associated with such assets that are the
subject of such Asset Sale (provided that the amount of any such reserves
shall be deemed to constitute Net Cash Proceeds at the time such reserves
shall have been released or are not otherwise required to be retained as a
reserve), and
(5) with respect to Asset Sales by Restricted Subsidiaries, the
portion of such cash payments attributable to Persons holding a minority
interest in such Restricted Subsidiary.
"NRTC" means the National Rural Telecommunications Cooperative and any
successor entity to it.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), premium, penalties, fees, indemnifications,
reimbursement obligations, damages and other liabilities payable under the
documentation governing any Indebtedness, including the Notes.
"Offer" has the meaning set forth under "-- Certain
Covenants -- Disposition of Proceeds of Asset Sales."
"Permitted Acquisition Deposits" means any advance or payment of funds,
whether as consideration for an option to purchase or as a deposit, binder or
earnest money, whether or not refundable, and whether or not made into escrow,
made pursuant to any written agreement, term sheet, letter of intent or other
instrument providing for the Acquisition of any High Power Satellite
Transmission Business.
"Permitted Business" means those businesses in which the Issuer and the
Restricted Subsidiaries are engaged on the Issue Date or business reasonably
related thereto (including, without limitation, the High Power Satellite
Transmission Business and the business of satellite data transmission).
"Permitted Holders" any of
(1) means Burr, Egan, Deleage & Co., Spectrum Equity Investors, L.P.,
BancBoston Ventures Inc., Norwest Equity Partners and HarbourVest Partners
LLC and
(2) their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(1) Indebtedness of any Restricted Subsidiary outstanding on the Issue
Date;
(2) (a) Indebtedness under the Credit Facility of any Restricted
Subsidiary, and, without duplication, any guarantee thereof by any other
Restricted Subsidiary, Incurred in an aggregate principal amount at any one
time outstanding not to exceed $150.0 million, which amount shall be
reduced by
(i) any permanent reduction of commitments thereunder and
(ii) any other repayment accompanied by a permanent reduction of
commitments thereunder (other than in connection with any refinancing
thereof where the aggregate principal amount outstanding and
commitments thereunder immediately prior thereto are not greater than
such amounts immediately thereafter), and
(b) Indebtedness of any Restricted Subsidiary, and, without
duplication, any guarantee thereof by any other Restricted Subsidiary,
Incurred to fund Acquisitions of Permitted Businesses, Capital Lease
Obligations, Investments permitted under the Indenture and working
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capital to support a Permitted Business in an aggregate principal amount
at any one time outstanding not to exceed $65.0 million, which amount
shall be reduced by any permanent reduction of commitments thereunder,
(3) Indebtedness of Systems such that, at the time of and after giving
effect to the Incurrence thereof, the total aggregate principal amount of
Indebtedness Incurred under this clause (3) and any refinancing thereof
(whether initial or successive) Incurred pursuant to and otherwise Incurred
in compliance with the Indenture would not exceed 200% of Total Incremental
Invested Equity (which includes the contributed proceeds from the issuance
of the Notes);
(4) Indebtedness of any Restricted Subsidiary owed to and held by the
Issuer or any Restricted Subsidiary; provided, however, that an Incurrence
of Indebtedness that is not permitted by this clause (4) shall be deemed to
have occurred upon
(a) any sale or other disposition of any Indebtedness of any
Restricted Subsidiary referred to in this clause (4) to a Person (other
than the Issuer or any other Restricted Subsidiary) or
(b) the Designation of a Restricted Subsidiary that holds
Indebtedness of any other Restricted Subsidiary as an Unrestricted
Subsidiary,
(5) Interest Rate Protection Obligations of any Restricted Subsidiary
relating to Indebtedness of a Restricted Subsidiary (which Indebtedness (a)
bears interest at fluctuating interest rates and (b) is otherwise permitted
to be Incurred under this covenant) and guarantees by any Restricted
Subsidiary thereof; provided, however, that the notional principal amount
of such Interest Rate Protection Obligations does not exceed the principal
amount of the Indebtedness to which such Interest Rate Protection
Obligations relate,
(6) indemnification obligations of any Restricted Subsidiary and
guarantees thereof under agreements providing for the disposition of assets
or one or more businesses or Restricted Subsidiaries; provided, however,
that such obligations do not exceed at any time the Fair Market Value of
the gross proceeds received by the Restricted Subsidiaries for such
disposition,
(7) Indebtedness to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness Incurred in compliance with the Debt to Operating Cash Flow
Ratio of the covenant "Limitation on Additional Indebtedness of
Subsidiaries of the Issuer" or clause (1), (2)(b), (8) or (9) of this
definition, provided, however, that
(a) any such refinancing shall not exceed the sum of the principal
amount (or, if such Indebtedness provides for a lesser amount to be due
and payable upon a declaration of acceleration thereof at the time of
such refinancing, an amount no greater than such lesser amount) of the
Indebtedness being refinanced, plus the amount of accrued interest or
dividends thereon, plus the amount of an reasonably determined
prepayment premium necessary to accomplish such refinancing and such
reasonable fees and expenses incurred in connection therewith,
(b) Indebtedness representing a refinancing of Indebtedness shall
have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being refinanced,
and
(c) with respect to any refinancing of Indebtedness Incurred
pursuant to subparagraph (8) or (9) of this definition, such refinancing
pursuant to this clause (7) shall also be deemed to be Incurred pursuant
to clause (8) or (9), as the case may be, of this paragraph (for the
avoidance of doubt, the result of which is that a refinancing does not
create new debt incurrence capacity under such clauses),
(8) Indebtedness of any Restricted Subsidiary Incurred to finance the
acquisition of the exclusive right to distribute DIRECTV Services within
designated Rural DIRECTV Markets; provided, however, that such Indebtedness
shall be Permitted Indebtedness under this subpara-
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graph (8)in an amount not greater than the face amount of any letter of
credit issued under the Credit Facility to support such Indebtedness, it
being understood that the issuance of such letter of credit (but only for
so long as such letter of credit remains outstanding) constitutes a
reduction in the amount of Permitted Indebtedness available to be Incurred
under clause (2) of this definition, and
(9) in addition to the items referred to in subparagraphs (1) through
(8) above, Indebtedness of any of the Restricted Subsidiaries (including
any Indebtedness under the Credit Facility that utilizes this clause (9))
having an aggregate principal amount for the Restricted Subsidiaries not to
exceed $25.0 million at any time outstanding.
Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Issuer or any Restricted Subsidiary), whether or not such Indebtedness
was Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Issuer or
any Restricted Subsidiary), shall be deemed Incurred at the time any such Person
becomes a Restricted Subsidiary or merges into or consolidates with the Issuer
or any Restricted Subsidiary.
"Permitted Investments" means
(1) Cash Equivalents,
(2) Investments by the Issuer or any Restricted Subsidiary in any
Person that is or will become immediately after such Investment a
Restricted Subsidiary or that will merge or consolidate into the Issuer or
a Restricted Subsidiary,
(3) Investments in the Issuer by any Restricted Subsidiary,
(4) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits,
(5) loans and advances to employees made in the ordinary course of
business not to exceed $1.0 million in the aggregate at any one time
outstanding,
(6) Interest Rate Protection Obligations,
(7) bonds, notes, debentures or other securities received as a result
of Asset Sales permitted under "-- Certain Covenants -- Disposition of
Proceeds of Asset Sales" above not to exceed 25% of the total consideration
for such Asset Sales (determined and computed as set forth under
"-- Certain Covenants -- Disposition of Proceeds of Asset Sales"),
(8) transactions with officers, directors and employees of the Issuer
or any Restricted Subsidiary entered into in the ordinary course of
business (including compensation or employee benefit arrangements with any
such director or employee) and consistent with past business practices,
(9) Investments existing as of the Issue Date and any amendment,
extension, renewal or modification thereof to the extent that any such
amendment, extension, renewal or modification does not require the Issuer
or any Restricted Subsidiary to make any additional cash or non-cash
payments or provide additional services in connection therewith, and
(10) Permitted Acquisition Deposits.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) that is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
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"principal amount at maturity" means $1,000 per $1,000 face amount of the
Notes.
"Public Equity Offering" means an underwritten public offering of Equity
Interests (other than Disqualified Equity Interests) of the Issuer made on a
primary basis by the Issuer pursuant to a registration statement filed with and
declared effective by the SEC in accordance with the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of any Restricted
Subsidiary Incurred for the purpose of financing all or any part of the purchase
price or the cost of construction or improvement of any property. However, the
aggregate principal amount of such Indebtedness must not exceed the lesser of
the Fair Market Value of such property or such purchase price or cost, including
any refinancing of such Indebtedness that does not increase the aggregate
principal amount (or accreted amount, if less) thereof as of the date of
refinancing.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Restricted Payment" means any of the following
(1) the declaration or payment of any dividend or any other
distribution on Equity Interests of the Issuer or any payment made to the
direct or indirect holders (in their capacities as such) of Equity
Interests of the Issuer (other than dividends or distributions payable
solely in Equity Interests (other than Disqualified Equity Interests) of
the Issuer) or in options, warrants or other rights to purchase Equity
Interests (other than Disqualified Equity Interests) of the Issuer,
(2) the purchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Issuer (other than any such Equity
Interests owned by the Issuer or a Wholly Owned Restricted Subsidiary),
(3) the purchase, redemption, defeasance or other acquisition or
retirement for value prior to any scheduled repayment, sinking fund or
maturity of any Subordinated Indebtedness (other than any Subordinated
Indebtedness held by a Wholly Owned Restricted Subsidiary), or
(4) the making by the Issuer or any Restricted Subsidiary of any
Investment (other than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board of Directors of the Issuer, by a resolution of the
Board of Directors of the Issuer delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "-- Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Issuer delivered to the Trustee, subject to the
provisions of such covenant.
"SEC" means the Securities and Exchange Commission.
"Seller Notes" means any promissory notes issued by a Restricted Subsidiary
to any Person selling any assets or properties to the Issuer or any Restricted
Subsidiary in an Acquisition, including those outstanding on the Issue Date.
"Significant Restricted Subsidiary" means, at any date of determination,
(1) any Restricted Subsidiary that, together with its Subsidiaries
that constitute Restricted Subsidiaries,
(a) for the most recent fiscal year of the Issuer accounted for
more than 5.0% of the consolidated revenues of the Issuer and the
Restricted Subsidiaries or
(b) as of the end of such fiscal year owned more than 5.0% of the
consolidated assets of the Issuer and the Restricted Subsidiaries, all
as set forth on the consolidated financial statements of the Issuer and
the Restricted Subsidiaries for such year prepared in conformity with
GAAP, and
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(2) any Restricted Subsidiary that, when aggregated with all other
Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (5), (7) or (8)
of "-- Events of Default" above has occurred, would constitute a
Significant Restricted Subsidiary under clause (1) of this definition.
"Stated Maturity," when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subordinated Indebtedness" means, with respect to the Issuer, Indebtedness
of the Issuer that is expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person,
(1) any corporation of which the outstanding Voting Equity Interests
having at least a majority of the votes entitled to be cast in the election
of directors shall at the time be owned, directly or indirectly, by such
Person, or
(2) any other Person of which at least a majority of Voting Equity
Interests are at the time, directly or indirectly, owned by such first
named Person.
"Systems" means Golden Sky Systems, Inc., a Wholly Owned Restricted
Subsidiary.
"Total Consolidated Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all Indebtedness and Disqualified
Equity Interests of the Issuer and the Restricted Subsidiaries outstanding as of
such date of determination.
"Total Incremental Invested Equity" means, at any date of determination,
the sum of, without duplication,
(1) the aggregate net cash proceeds received by Systems either
(a) as capital contributions to Systems on or after the Issue Date,
including any capital contributions made out of the proceeds from the
issuance of the Notes, or
(b) from the issue and sale (other than to a Subsidiary of Systems
by Systems) of its Qualified Equity Interests after the Issue Date, plus
(2) the aggregate net proceeds received by Systems or any other
Restricted Subsidiary after the Issue Date from the issuance (other than to
a Subsidiary of Systems) of Qualified Equity Interests upon the conversion
of, or in exchange for, Indebtedness of Systems or another Restricted
Subsidiary that has been converted into or exchanged for Qualified Equity
Interests of Systems, minus
(3) the aggregate amount of all Restricted Payments made on or after
the Issue Date and all Designation Amounts arising after the Issue Date,
but only to the extent the amount set forth in this clause (3) would exceed
the amount determined under subclause (a) of clause (3) of the first
paragraph under the "Limitation on Restricted Payments" covenant, plus
(4) in the case of the disposition or repayment of any Investment
which has been deducted pursuant to clause (3) of this definition, an
amount equal to the lesser of the return of capital with respect to such
Investment and the amount of such Investment which has been deducted
pursuant to such clause (3), plus
(5) in the case of any Revocation with respect to any Subsidiary that
was made the subject of Designation after the Issue Date and as to which a
Designation Amount has been deducted pursuant to clause (3) of this
definition, an amount equal to the lesser of such Designation Amount or the
Fair Market Value of the Investment of Systems and the other Restricted
Subsidiaries in such Subsidiary at the time of Revocation.
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"12 3/8% Notes" means the $195,000,000 aggregate principal amount of
12 3/8% Senior Subordinated Notes due 2006 of Systems.
"12 3/8% Notes Indenture" means the indenture dated July 31, 1998 governing
the 12 3/8% Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to "-- Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Issuer delivered to the Trustee, subject to the
provisions of "-- Certain Covenants -- Designation of Unrestricted Subsidiaries"
above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required scheduled payment of principal,
including payment of final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by
(2) the then outstanding aggregate principal amount of such
Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Issuer.
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BOOK ENTRY; DELIVERY AND FORM
The outstanding notes were initially issued in the form of
(1) in the case of outstanding notes initially purchased by "qualified
institutional buyers" (as this term is defined in Rule 144A under the
Securities Act) two permanent global certificates in definitive, fully
registered form, and
(2) in the case of outstanding notes initially purchased by non-U.S.
persons in reliance on Regulation S under the Securities Act, by a single
permanent global certificate in definitive, fully registered form.
On the closing date of the outstanding notes offering, we deposited these global
certificates representing the outstanding notes with The Depository Trust
Corporation (DTC). These global certificates were registered in the name of Cede
& Co., as nominee of DTC. The new notes exchanged for the outstanding notes will
be represented by two, permanent global certificates in definitive, fully
registered form (collectively, the "Global Note"). Upon the completion of this
exchange offer, the Global Note will be deposited with, or on behalf of, The
Depository Trust Corporation (DTC) and registered in the name of Cede &Co., as
nominee of DTC.
The Global Note. Pursuant to procedures established by DTC,
(1) upon the issuance of the Global Note, DTC or its custodian will
credit, for the respective accounts of each holder of new notes who has an
account with DTC ("DTC participants"), on its internal records, the
principal amount at maturity of new notes beneficially owned by the DTC
participant and represented by the Global Note, and
(2) ownership of beneficial interests in the Global Note will be shown
on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to the interests of
DTC participants) and the records of DTC participants (with respect to
interests of persons other than DTC participants who hold those interests
through DTC participants).
Initially, ownership of beneficial interests in the Global Note will be limited
to persons who are DTC participants or persons who hold interests through DTC
participants.
So long as DTC, or its nominee, is the registered owner or holder of the
new notes, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the new notes represented by the Global Note for all purposes
under the indenture. No beneficial owner of an interest in the Global Note will
be able to transfer that interest except in accordance with DTC's procedures and
the procedures provided for under the indenture.
Payments of the principal of, premium (if any) and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the trustee, any paying agent under the indenture or our
company has any responsibility or liability for any aspect of:
- the records relating to beneficial ownership interests in the Global Note
- payments made on account of beneficial ownership interests in the Global
Note, or
- maintaining, supervising or reviewing any records relating to that
beneficial ownership interest.
DTC or its nominee, upon receipt of any payment of principal, premium, if
any, or interest in respect of the Global Note, will credit DTC participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount at maturity of the Global Note as shown on the
records of DTC or its nominee. Payments by DTC participants to owners of
beneficial interests in the Global Note held through DTC participants are
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for customers. These payments are the responsibility of the DTC
participants.
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Transfers between DTC participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a certificated note for any reason,
including to sell notes to persons in states which require physical delivery of
the notes, or to pledge these securities, the holder will need to transfer its
interest in the Global Note, in accordance with the normal procedures of DTC and
with the procedures described in the indenture.
DTC has advised us that it will take action permitted to be taken by a
holder of notes (including the presentation of notes for exchange as described
below) only at the direction of one or more DTC participants to whose account
the DTC interests in the Global Note are credited and only in respect of that
portion of the aggregate principal amount at maturity of notes as to which the
DTC participant or DTC participants has or have given that direction. However,
if there is an event of default under the indenture, DTC will exchange the
Global Note for certificated securities, which it will distribute to its
participants.
DTC has advised us that it:
(1) is a limited purpose trust company organized under the laws of the
State of New York,
(2) is a member of the Federal Reserve System,
(3) is a "clearing corporation" within the meaning of the Uniform
Commercial Code,
(4) is a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act, and
(5) was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between DTC
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates.
DTC participants include securities brokers and dealers, banks, trust companies
and clearing corporations and certain other organizations. Indirect access to
the DTC system is available to others including banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the Global Note among DTC participants, it is under no
obligation to perform these procedures, and these procedures may be discontinued
at any time. Neither we nor the trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by us within 90 days, certificated securities will be issued in
exchange for the Global Note.
SAME-DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the outstanding notes
(including principal, premium, if any, and interest) be made in immediately
available funds. Secondary trading in long-term notes and debentures of
corporate issuers is generally settled in clearing-house or next-day funds. In
contrast, the new notes are expected to be eligible to trade in the PORTAL
Market and to trade in the Depositary's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in the new notes will therefore
be required by the Depositary to be settled in immediately available funds. No
assurance can be given as to the effect, if any, of settlement arrangements on
trading activity in the new notes.
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TRANSFER AND EXCHANGE
A holder of new notes will be permitted to transfer or exchange its new
notes in accordance with the indenture. The registrar under the indenture may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents, and to pay any taxes and fees required by law or permitted
by the indenture. The registrar is not required to transfer or exchange any new
note selected for redemption. Also, the registrar is not required to transfer or
exchange any new note for a period of 15 days before a selection of the new
notes to be redeemed.
The registered holder of a new note will be treated as the owner of it for
all purposes.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes, subject to the limitations set forth
below, the material U.S. federal income tax consequences associated with this
exchange offer and the acquisition, ownership and disposition of the new notes.
The discussion is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), its legislative history, judicial authority, current
administrative rulings and practice, and existing and proposed Treasury
Regulations, including regulations concerning the treatment of debt instruments
issued with original issue discount (the "OID Regulations"), all as in effect
and existing on the date hereof. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the validity of
the statements and conclusions set forth below. Any such changes or
interpretations may be retroactive and could adversely affect a holder of the
outstanding notes or the new notes. This discussion assumes that the outstanding
notes and the new notes are or will be held as capital assets (as defined in
Section 1221 of the Code) by the holders thereof. Except as otherwise described
herein, this discussion applies only to a holder who purchased notes for cash at
the "issue price" (as defined below) and who is:
(1) a citizen or resident of the United States for United States
federal income tax purposes,
(2) a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof,
(3) an estate the income of which is subject to United States federal
income taxation regardless of its source, or
(4) a trust that is subject to the primary supervision of a court
within the United States and the control of one or more United States
persons as described in Section 7701(a)(30) of the Code (a "U.S. Holder").
The following discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to particular holders in light of
their personal investment circumstances or status (including non-U.S. holders
who realize income or gain in respect of the new notes which is effectively
connected with their conduct of a U.S. trade or business), nor does it discuss
the U.S. federal income tax consequences to certain types of holders subject to
special treatment under the U.S. federal income tax laws, such as certain
financial institutions, insurance companies, dealers in securities, persons who
hold the new notes through partnerships or other pass-through entities,
tax-exempt organizations, or persons that hold new notes as part of a straddle
or a hedging or conversion transaction. Moreover, the effect of any applicable
state, local or foreign tax laws is not discussed.
THE FOLLOWING DISCUSSION IS FOR YOUR GENERAL INFORMATION ONLY. YOU ARE
STRONGLY URGED TO CONSULT WITH YOUR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF
YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THIS EXCHANGE
OFFER AND THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
EXCHANGE OF NOTES
The exchange of outstanding notes for new notes pursuant to this exchange
offer should not be treated as an "exchange" for federal income tax purposes,
because the new notes should not be considered to differ materially in kind or
extent from the outstanding notes. Rather, the new notes received by a holder of
outstanding notes should be treated as a continuation of the outstanding notes
in the hands of such holder. As a result, there will be no federal income tax
consequences to a holder exchanging outstanding notes for new notes pursuant to
this exchange offer. A holder shall have the same adjusted issue price, adjusted
basis and holding period in the new notes as it had in the outstanding notes
immediately before the exchange.
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ORIGINAL ISSUE DISCOUNT
General
The new notes will be treated as issued with original issue discount
("OID"), and each U.S. Holder is required to include in income, in each year
(regardless of whether such U.S. Holder is a cash or accrual basis taxpayer), in
advance of the receipt of cash payments on such notes, that portion of the OID,
computed on a constant yield-to-maturity basis, attributable to each day during
such year on which the U.S. Holder held the notes.
The Amount of Original Issue Discount
The amount of OID with respect to each new note is equal to the excess of
(1) its "stated redemption price at maturity" over (2) the "issue price" of the
outstanding note exchanged therefor. Under the OID Regulations, the "issue
price" is the initial offering price to the public (not including any bond
house, broker or similar person or organization acting in the capacity of an
underwriter, placement agent or wholesaler) at which a substantial amount of the
outstanding notes were sold, and the "stated redemption price at maturity" of
each new note is the sum of all cash payments (whether denominated as principal
or interest) provided by the note.
Taxation of Original Issue Discount
Except as described below in the section entitled "High Yield Discount
Obligations," a U.S. Holder of a debt instrument issued with OID is required to
include in gross income (generally as ordinary interest income) for U.S. federal
income tax purposes an amount equal to the sum of the "daily portions" of such
OID for all days during the taxable year on which the holder holds the debt
instrument. The daily portions of OID required to be included in a holder's
gross income in a taxable year is determined upon a constant yield-to-maturity
basis by allocating to each day during the taxable year on which the holder
holds the debt instrument a pro rata portion of the OID on such debt instrument
which is attributable to the "accrual period" (generally the period between
interest payment or compounding dates) in which such day is included. The amount
of the OID attributable to each "accrual period" is the product of (1) the
"adjusted issue price" at the beginning of such accrual period and (2) the
"yield to maturity" of the debt instrument (stated in a manner appropriately
taking into account the length of the accrual period). The "adjusted issue
price" of each new note at the beginning of an accrual period generally will be
equal to the issue price of the outstanding note exchanged therefor plus the
aggregate amount of OID that accrued in all prior accrual periods, less any cash
payments that have been made on the outstanding note or the new note. Payments
on the new notes are not separately included in a U.S. Holder's income as
interest, but rather are treated first as payments of previously accrued and
unpaid OID and then as payments of principal.
Effect of Mandatory and Optional Redemptions on OID
We do not intend to treat the possibility of an optional or mandatory
redemption or repurchase of the new notes as giving rise to any additional
accrual of OID or recognition of ordinary income upon redemption, sale or
exchange of a new note. U.S. Holders may wish to consider the portion of the OID
Regulations regarding the treatment of certain contingencies and may wish to
consult their tax advisors in this regard.
SALE, EXCHANGE OR REDEMPTION
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by us) or other disposition of a new note is a
taxable event for U.S. federal income tax purposes. In such event, a U.S. Holder
will recognize gain or loss equal to the difference between (1) the amount of
cash plus the fair market value of any property received upon such sale,
exchange, redemption or other taxable disposition and (2) the U.S. Holder's
adjusted tax basis therein. A U.S. Holder's adjusted tax basis in a new note
generally will equal the cost to the U.S. Holder of the outstanding note
exchanged
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therefor, increased by the amount of OID previously included in such U.S.
Holder's income with respect to such new note and decreased by the amount of any
principal or interest payments previously received by the U.S. Holder on such
note. Gain or loss realized on a sale, exchange, redemption or other taxable
disposition of the new note should be capital gain or loss and will be long-term
capital gain or loss if the note has been held by the U.S. Holder for more than
one year at the time of such sale, exchange, redemption or other taxable
disposition. The maximum rate of tax on long-term capital gains on capital
assets held by an individual for more than one year generally is 20%. The
deductibility of capital losses is subject to limitations.
HIGH-YIELD DISCOUNT OBLIGATIONS
The new notes will constitute "applicable high yield discount obligations"
("AHYDOs") since the yield to maturity of such notes equals or exceeds the sum
of the "applicable federal rate" in effect at the time of the issuance of the
notes (the "AFR") plus five percentage points and the new notes are issued with
"significant original issue discount." Accordingly, we generally may not deduct
any portion of OID on the obligations until such portion is actually paid. In
addition, since the yield-to-maturity of the new notes exceeds the sum of the
AFR plus six percentage points, a portion of the OID on the notes, generally
equal to the product of the total OID on the notes times the ratio of (1) the
excess of the yield to maturity over the sum of the AFR plus six percentage
points to (2) the yield to maturity, will not be deductible by us at any time
(the "non-deductible portion"). To the extent that the non-deductible portion of
OID would have been treated as a dividend if it had been distributed with
respect to our stock, such portion will be treated as a dividend to holders of
the new notes for purposes of the rules relating to the dividends received
deduction for corporate holders.
NON-U.S. HOLDERS
Payments of principal, if any, and interest (including OID) by us or our
agent (in its capacity as such) to any holder who is a beneficial owner of a new
note and who holds the new note as a capital asset but who is not a U.S. Holder
are not subject to U.S. federal income or withholding tax provided, in the case
of interest (including OID) that:
(1) such holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of our stock entitled to
vote and, is not a controlled foreign corporation for U.S. federal income
tax purposes that is related to us through stock ownership, and
(2) such holder either (A) certifies to us or our agent, under
penalties of perjury, that it is not a U.S. Holder and provides its name
and address, or (B) is a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and certifies
to us or our agent, under penalties of perjury, that the certification
described in clause (A) hereof has been received from the beneficial owner
by it or by another financial institution acting for the beneficial owner
and furnishes us with a copy thereof.
A holder of a new note who is not a U.S. Holder, and who does not meet the
requirements of (1) or (2) above, would generally be subject to U.S. federal
withholding tax at a flat rate of 30% (or a lower applicable treaty rate) on
payments of interest (including OID) on the notes.
Treasury Regulations recently issued by the IRS, which will be effective
January 1, 2000, make modifications to the certification procedures applicable
to non-U.S. Holders. In general, these regulations unify certification
procedures and forms and clarify and modify reliance standards. A non-U.S.
Holder should consult its own advisor regarding the effect of the new Treasury
Regulations.
Any capital gain realized upon the sale, exchange, redemption or other
disposition of a new note by a holder who is not a U.S. Holder and who holds the
note as a capital asset is not subject to U.S. federal income or withholding
taxes unless, in the case of an individual, such holder is present in the United
States for 183 days or more in the taxable year of the sale, exchange,
redemption or other disposition and certain other conditions are met.
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BACKUP WITHHOLDING AND INFORMATION REPORTING FOR U.S. AND NON-U.S. HOLDERS
Certain noncorporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments of principal and interest (including OID) on, and the
proceeds of a disposition of, a new note. Backup withholding will apply only if
the U.S. Holder (1) fails to furnish its Taxpayer Identification Number ("TIN")
which, in the case of an individual, would be his or her Social Security number,
(2) furnishes an incorrect TIN, (3) is notified by the IRS that it has failed to
properly report payments of interest and dividends or (4) under certain
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding. U.S. Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption if applicable.
Treasury Regulations provide that backup withholding will not apply to
payments on the new notes by us to a non-U.S. Holder if the holder certifies as
to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption provided that neither we nor our paying agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exception
are not, in fact, satisfied.
The payment of the proceeds from the disposition of new notes to or through
the U.S. office of any broker, U.S. or foreign, will be subject to possible
backup withholding unless the owner certifies as to its non-U.S. Holder status
under penalty of perjury or otherwise establishes an exemption, provided that
the broker does not have actual knowledge that the holder is a U.S. person or
that the conditions of any other exemption are not, in fact, satisfied. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person (absent actual knowledge that
the payee is U.S. person). For purposes of this paragraph, a "U.S. related
person" is (1) a "controlled foreign corporation" for U.S. federal income tax
purposes, (2) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with the
conduct of a U.S. trade or business, or (3) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more (by income or capital interest) owned by U.S. persons or is
engaged in the conduct of a U.S. trade or business. Treasury Regulations provide
certain presumptions under which a non-U.S. Holder will be subject to backup
withholding unless the non-U.S. Holder provides a certification as to its
non-U.S. Holder status.
The amount of any backup withholding from a payment to a U.S. Holder or a
non-U.S. Holder will be allowed as a credit against such holder's United States
federal income tax liability and may entitle such holder to a refund, provided
that the required information is furnished to the IRS.
We will furnish annually to the IRS and to record holders of the new notes
(other than with respect to certain exempt holders) information relating to the
stated interest and the OID accruing during the calendar year. Such information
will be based on the amount of OID that would have accrued to a holder who
acquired the note on original issue.
122
<PAGE> 125
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of those new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for outstanding notes
if the outstanding notes were acquired by the broker-dealer as a result of
market-making or other trading activities. We have agreed that, for a period of
90 days after the date of the expiration of this exchange offer, we will make
this prospectus available to any broker-dealer for use in connection with any
such resale. In addition, for a period of 90 days after the expiration date, all
dealers effecting transactions in the new notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to this exchange offer may be sold from time to time:
- in one or more transactions in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes, or
- through a combination of these methods of resale.
Resales of new notes may be at market prices prevailing at the time of resale,
at prices related to the prevailing market prices or at negotiated prices. Any
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
broker-dealer and/or the purchasers of any these new notes. Any broker-dealer
that resells new notes that were received by it for its own account pursuant to
this exchange offer and any broker or dealer that participates in a distribution
of new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act. If a broker or dealer is deemed to be an underwriter, any profit
on any resale of new notes and any commissions or concessions received by that
person may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal requires any broker-dealers who exchanges outstanding
notes for new notes to acknowledge that it will deliver a prospectus. A
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act solely by virtue of making that acknowledgment. We
have no arrangement or understanding with any broker or dealer to distribute the
new notes issued in the exchange offer.
For a period of 90 days after the expiration date of the exchange offer we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those documents
in its letter of transmittal.
LEGAL MATTERS
The validity of the new notes will be passed upon for us by Reboul,
MacMurray, Hewitt, Maynard & Kristol, 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 the reports of such firm:
(1) Golden Sky DBS's balance sheet as of February 2, 1999 (date of
inception),
(2) our consolidated financial statements for the period from
inception (June 25, 1996) to December 31, 1996, and for the years ended
December 31, 1997 and 1998,
123
<PAGE> 126
(3) financial statements of Thunderbolt Systems, Inc. for the years
ended December 31, 1996, 1995, and 1994,
(4) financial statements of TEG DBS Systems, Inc. for the years ended
December 31, 1996 and 1995,
(5) financial statements of Direct Vision for the years ended December
31, 1996, 1995 and 1994,
(6) financial statements of Satellite Entertainment, Inc. for the
years ended December 31, 1996, 1995, and 1994,
(7) financial statements of GVEC Rural TV, Inc. for the years ended
December 31, 1996, 1995 and 1994,
(8) financial statements of JECTV for the years ended December 31,
1996, 1995 and 1994,
(9) financial statements of Argos Support Services Company for the
years ended December 31, 1996 and 1995,
(10) financial statements of Direct Broadcast Satellite (a segment of
CTS Communication Corporation) for the years ended December 31, 1996, 1995
and 1994,
(11) financial statements of DBS LC for the period from January 1,
1997 to November 17, 1997,
(12) financial statements of Cal-Ore Digital TV, Inc. for the period
from January 1, 1997 to December 8, 1997 and for the year ended December
31, 1996,
(13) financial statements of NRTC System No. 0093, a segment of Cable
and Communications Corporation, for each of the years in the three year
period ended December 31, 1996, and
(14) financial statements of Lakeland DBS, Inc. for the period from
January 1, 1997 to December 24, 1997 and for the year ended December 31,
1996.
The financial statements of Western Montana DBS, Inc. dba Rocky Mountain
DBS for each of the years in the three-year period ended December 31, 1996 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 the report of such firm.
The financial statements of Gardonville Systems, Inc. (a wholly-owned
subsidiary of Gardonville Cooperative Telephone Association) for the year ended
December 31, 1997 have been audited by Olsen Thielen & Co., Ltd., independent
auditors, as stated in their report, and are included herein in reliance upon
the report if such firm.
The financial statements of Western Montana Entertainment Television, Inc.
for the year ended December 31, 1996 and for period ended December 22, 1997 have
been audited by Summers, McNea and Company, P.C., independent auditors, as
stated in their report, and are included herein in reliance upon the report of
such firm.
The financial statements of South Plains DBS Limited Partnership for each
of the years in the two-year period ended December 31, 1996 and for the period
ended December 22, 1997 have been audited by Bolinger, Segars, Gilbert & Moss,
L.L.P., independent auditors, as stated in their report, and are included herein
in reliance upon the report of such firm.
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 the report of such firm.
124
<PAGE> 127
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 the report of such firm.
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 the report of such firm.
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 the reports of such firm.
125
<PAGE> 128
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GOLDEN SKY DBS, INC.
Independent Auditors' Report.............................. F-2
Balance Sheet as of February 3, 1999...................... F-3
GOLDEN SKY SYSTEMS, INC.
Independent Auditors' Report.............................. F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-5
Consolidated Statements of Operations for the period from
inception (June 25, 1996) through December 31, 1996,
and for the years ended December 31, 1997 and 1998..... F-6
Consolidated Statements of Stockholder's Equity (Deficit)
for the period from inception (June 25, 1996) through
December 31, 1996, and for the years ended December 31,
1997 and 1998.......................................... F-7
Consolidated Statements of Cash Flows for the period from
inception (June 25, 1996) through December 31, 1996,
and for the years ended December 31, 1997 and 1998..... F-8
Notes to Consolidated Financial Statements................ F-9
FINANCIAL STATEMENTS OF COMPLETED ACQUISITIONS
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-29
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-37
TEG DBS Systems, Inc. .................................... F-44
TEG DBS Systems, Inc. (unaudited)......................... F-49
Direct Vision (a segment of Mankato Citizens Telephone
Company)............................................... F-52
Direct Vision (a segment of Mankato Citizens Telephone
Company) (unaudited)................................... F-60
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association).......................... F-64
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association) (unaudited).............. F-73
GVEC Rural TV, Inc. ...................................... F-77
GVEC Rural TV, Inc. (unaudited)........................... F-87
JECTV (a segment of Jackson Electric Cooperative)......... F-91
JECTV (a segment of Jackson Electric Cooperative)
(unaudited)............................................ F-100
Argos Support Services Company............................ F-105
Argos Support Services Company (unaudited)................ F-114
Gardonville Systems, Inc. ................................ F-118
Direct Broadcast Satellite (a segment of CTS
Communications Corporation)............................ F-125
Direct Broadcast Satellite (a segment of CTS
Communications Corporation) (unaudited)................ F-133
Souris River Television, Inc. ............................ F-137
Souris River Television, Inc. (unaudited)................. F-146
DBS LC.................................................... F-151
Western Montana Entertainment Television, Inc. ........... F-156
South Plains DBS Limited Partnership...................... F-164
Cal-Ore Digital TV, Inc. ................................. F-184
NRTC System No. 0093 (a segment of Cable and
Communications Corporation)............................ F-199
NRTC System No. 0093 (a segment of Cable and
Communications Corporation) (unaudited)................ F-208
Lakeland DBS.............................................. F-212
Triangle Communications System, Inc. ..................... F-218
Direct Broadcast Satellite (a segment of Nemont
Communications, Inc.).................................. F-228
DBS Segment of Cumby Cellular, Inc. ...................... F-237
DBS Segment of Cumby Cellular, Inc. (unaudited)........... F-245
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.).................................................. F-251
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.) (unaudited)...................................... F-260
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-267
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-276
</TABLE>
F-1
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
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> 130
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
will transfer 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 will be reported at predecessor cost, which at December 31, 1998
was $15.9 million (unaudited).
F-3
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
Systems, Inc. as of December 31, 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
Systems, 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> 132
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,632 $ 4,460
Restricted cash, current portion.......................... -- 28,083
Subscriber receivables (net of allowance for uncollectible
accounts of $138 and $293, respectively)............... 3,843 8,632
Other receivables......................................... 335 2,465
Inventory................................................. 2,174 10,146
Prepaid expenses and other................................ 127 1,859
-------- --------
Total current assets........................................ 20,111 55,645
Restricted cash, net of current portion..................... -- 23,534
Property and equipment (net of accumulated depreciation of
$1,061 and $3,214, respectively).......................... 2,936 4,994
Intangible assets, net...................................... 129,896 233,139
Deferred financing costs.................................... 3,106 10,541
Other assets................................................ 187 218
-------- --------
Total assets...................................... $156,236 $328,071
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable.................................... $ 8,471 $ 13,539
Interest payable.......................................... 786 11,009
Current maturities of long-term obligations............... 2,538 8,916
Unearned revenue.......................................... 2,630 5,574
Accrued payroll and other................................. 1,859 1,403
-------- --------
Total current liabilities................................... 16,284 40,441
Long-term obligations, net of current maturities:
12 3/8% Notes............................................. -- 195,000
Bank debt................................................. 60,000 67,000
Seller notes payable...................................... 6,200 6,912
Other notes payable and obligations under capital
leases................................................. 375 376
Minority interest......................................... 2,928 2,420
-------- --------
Total long-term obligations, net of current maturities...... 69,503 271,708
-------- --------
Total liabilities........................................... 85,787 312,149
Commitments and contingencies............................... -- --
Stockholder's Equity:
Common Stock, par value $.01; 1,000 shares authorized,
issued and outstanding................................. -- --
Additional paid-in capital................................ 87,400 97,600
Accumulated deficit....................................... (16,951) (81,678)
-------- --------
Total stockholder's equity.................................. 70,449 15,922
-------- --------
Total liabilities and stockholder's equity........ $156,236 $328,071
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 133
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1996 1997 1998
------------ ---------- ----------
<S> <C> <C> <C>
Revenue:
DBS services........................................... $ 219 $ 16,452 $ 74,910
Lease and other........................................ 36 944 1,014
------- -------- --------
Total revenue............................................ 255 17,396 75,924
Costs and Expenses:
Costs of DBS services.................................. 130 9,304 45,291
System operations...................................... 26 3,796 11,021
Sales and marketing.................................... 73 7,316 32,201
General and administrative............................. 1,035 2,331 7,431
Depreciation and amortization.......................... 97 7,300 23,166
------- -------- --------
Total costs and expenses................................. 1,361 30,047 119,110
------- -------- --------
Operating loss........................................... (1,106) (12,651) (43,186)
Non-operating items:
Interest and investment income......................... 1 40 1,573
Interest expense....................................... (62) (3,173) (20,537)
------- -------- --------
Total non-operating items................................ (61) (3,133) (18,964)
------- -------- --------
Loss before income taxes................................. (1,167) (15,784) (62,150)
Income taxes............................................. -- -- --
------- -------- --------
Loss before extraordinary charge......................... (1,167) (15,784) (62,150)
Extraordinary charge on early retirement of debt......... -- -- (2,577)
------- -------- --------
Net loss....................................... $(1,167) $(15,784) $(64,727)
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 134
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(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 Common Stock.......... -- 1 -- 1
Net loss.......................................... -- -- (1,167) (1,167)
---- ------- -------- -------
Balance at December 31, 1996........................ -- 1 (1,167) (1,166)
Cancellation of originally issued Common Stock.... -- (1) -- (1)
Issuance of 1,000 shares of new 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
==== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 135
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,167) $ (15,784) $ (64,727)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 97 7,300 23,166
Amortization of deferred financing costs.................. -- 215 977
Extraordinary charge on early retirement of debt.......... -- -- 2,577
Change in operating assets and liabilities, net of
acquisitions:
Subscriber receivables, net of unearned revenue......... (13) (2,501) (1,757)
Other receivables....................................... (123) (161) (2,130)
Inventory............................................... (31) (1,604) (8,049)
Prepaid expenses and other.............................. (17) (203) (1,228)
Trade accounts payable.................................. 372 7,515 5,068
Interest payable........................................ 53 733 10,223
Accrued payroll and other............................... 39 1,391 (708)
------- --------- ---------
Net cash used in operating activities....................... (790) (3,099) (36,588)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets....................... (2,806) (120,051) (104,487)
Offering proceeds and investment earnings placed in
escrow.................................................... -- -- (51,617)
Purchases of property and equipment......................... (105) (998) (3,317)
Other....................................................... (320) 320 (500)
------- --------- ---------
Net cash used in investing activities....................... (3,231) (120,729) (159,921)
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
Borrowings under the Credit Agreement....................... -- 75,000 28,000
Borrowings under the Credit Facility........................ -- -- 62,000
Principal payments on the Credit Agreement.................. -- (15,000) --
Principal payments on the Credit Facility................... -- -- (83,000)
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)
Proceeds from issuance of Common Stock...................... 1 -- --
Contribution from Golden Sky Holdings, Inc.................. -- 46,800 --
Increase in deferred financing costs........................ -- (3,321) (5,138)
------- --------- ---------
Net cash provided by financing activities................... 4,500 136,981 187,337
------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 479 13,153 (9,172)
Cash and cash equivalents, beginning of period.............. -- 479 13,632
------- --------- ---------
Cash and cash equivalents, end of period.................... $ 479 $ 13,632 $ 4,460
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 9 $ 2,225 $ 9,337
Property and equipment acquired under capitalized lease
obligations............................................... -- 554 609
Retirement of Credit Agreement from borrowings under the
Credit Facility........................................... -- -- 88,000
Issuance of seller notes payable in acquisitions............ 2,450 8,600 10,157
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> 136
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Principal Business
Golden Sky Systems, Inc. ("Systems" or "the Company") is the second largest
independent provider of DIRECTV subscription television services. DIRECTV is the
leading direct broadcast satellite ("DBS") company serving the continental
United States. Systems, a Delaware corporation formed on June 25, 1996
("Inception"), is a non-voting affiliate of the National Rural
Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with Hughes
Communications Galaxy, Inc. ("Hughes") for the exclusive right to distribute
DIRECTV programming to homes in certain rural territories of the United States
("Rural DIRECTV Markets"). As of December 31, 1998, Systems had acquired 48
Rural DIRECTV Markets in 22 states with approximately 1.7 million households. As
of that same date, Systems served approximately 230,500 subscribers.
Organization and Legal Structure
Until February 1999, Systems was a wholly-owned subsidiary of Golden Sky
Holdings, Inc. ("Holdings"). Holdings is a Delaware corporation formed on
September 9, 1997 for the purpose of holding all the capital stock of Systems.
Upon the formation of Holdings, Systems issued 1,000 shares of its common stock
to Holdings and all the shareholders of the then outstanding preferred stock of
Systems were issued equivalent shares of Holdings stock with identical features
to Systems' preferred stock (the "Exchange"). The Exchange was accounted for as
a reorganization of entities under common control and the historical cost basis
of consolidated assets and liabilities was not affected by the transaction.
Holdings has no significant assets or liabilities other than its investment in
Systems.
On February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for
the purpose of effecting an offering of senior discount notes. Upon formation,
Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for
$100 and the subsequent transfer of all of the capital stock of Systems to
Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became a
wholly-owned subsidiary of Golden Sky DBS.
Significant Risks and Uncertainties
Substantial Leverage. Systems is highly leveraged, making it vulnerable to
changes in general economic conditions and interest rates. As of December 31,
1998, Systems had outstanding long-term debt (including current portion)
totaling approximately $278.2 million. Substantially all of Systems' and its
subsidiaries' assets are pledged as collateral on its long-term debt. Further,
the terms associated with Systems' long-term debt obligations significantly
restrict its ability to incur additional indebtedness. Thus, it may be difficult
for Systems and its subsidiaries to obtain additional debt financing if desired
or required in order to further implement Systems' business strategy.
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, Systems has sustained significant
losses since Inception. Systems' operating losses were $1.1 million, $12.7
million and $43.2 million for the periods ended December 31, 1996, 1997 and
1998, respectively. Systems' net losses during those same periods aggregated
$1.2 million, $15.8 million and $64.7 million, respectively. Improvement in
Systems' 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. No assurance can be given that Systems will be effective
with regard to these matters. Systems incurs significant costs to acquire
DIRECTV subscribers. The high cost of obtaining new subscribers magnifies the
negative effects of subscriber churn. Systems anticipates that it will continue
to experience operating losses through at least 1999. There can
F-9
<PAGE> 137
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
be no assurance that such operating losses will not continue beyond 1999 or that
Systems' 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. Systems obtains substantially all of its revenue
from the distribution of DIRECTV programming services. As a result, Systems
would be materially adversely affected by any material change in the assets,
financial condition, programming, technological capabilities or services of
DIRECTV or Hughes. Further, Systems 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 Systems from continuing to provide DBS services and could
have a material adverse effect on Systems' financial condition and results of
operations. Additionally, Systems' 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 Systems' interests. Systems 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 Systems' business.
Competition. The subscription television industry is highly competitive.
Systems faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than Systems. Systems
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
Systems 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.
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, cash and cash equivalents include cash on hand, demand deposits and
money market accounts.
F-10
<PAGE> 138
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with the Company's
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, 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.
Long-lived Assets
Systems 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. Systems 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.
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.
F-11
<PAGE> 139
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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 formation,
Holdings elected to be taxed as a C Corporation for federal income tax purposes.
Pro forma income taxes have not been presented because the Company has incurred
operating losses in all periods.
Effects of Recently Issued Accounting Pronouncements
Systems 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. Systems 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"). FAS No. 133 is effective for fiscal years beginning after June
15, 1999. FAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Currently, Systems has no
derivative instruments or hedging
F-12
<PAGE> 140
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a
material effect on Systems' 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 Systems previously has
expensed all such costs, the adoption of SOP 98-5 is not expected to effect
Systems' 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.
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 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 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ -------- --------
<S> <C> <C> <C>
DIRECTV distribution rights............................ $4,664 $116,394 $114,747
Customer lists......................................... 453 9,450 7,114
Non-compete agreements................................. 35 4,879 2,587
Property and equipment................................. 135 1,953 204
Minority interest...................................... -- (2,931) --
Working capital, net................................... (31) (20) 192
------ -------- --------
$5,256 $129,725 $124,844
====== ======== ========
</TABLE>
F-13
<PAGE> 141
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following summarizes the Company's acquisitions of Rural DIRECTV
Markets consummated during 1996, 1997 and 1998 (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> 142
GOLDEN SKY SYSTEMS, 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
========
</TABLE>
The unaudited pro forma information presented below, excluding five
acquisitions that are 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. 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>
Subsequent to December 31, 1998, the Company acquired the exclusive rights
to provide DIRECTV programming in four additional Rural DIRECTV Markets. These
Rural DIRECTV Markets served approximately 10,600 subscribers as of the
respective acquisition dates. The aggregate purchase price of these
acquisitions, which represent approximately 54,000 television households,
totaled $19.9 million.
During 1997, Systems acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). Systems has an option to purchase, for approximately
$3.9 million, the remaining ownership interest in DCE that it does not own.
Systems may exercise this option by delivering no earlier than April 8, 1999,
and no later than April 23, 1999, written notice to DCE of its intention to
exercise such option. Pursuant to the related operating agreement between
Systems and DCE, closing shall occur no later than 30 days after the delivery of
such notice.
F-15
<PAGE> 143
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INTANGIBLE ASSETS
Intangible assets, which are amortized using the straight-line method over
the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- ESTIMATED
1997 1998 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
DIRECTV distribution rights........................ $121,969 $236,531 10-12 years
Customer lists..................................... 9,903 17,018 5 years
Non-compete agreements............................. 4,914 7,501 3 years
-------- --------
136,786 261,050
Less accumulated amortization...................... (6,890) (27,911)
-------- --------
Intangible assets, net........................... $129,896 $233,139
======== ========
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- --------
<S> <C> <C>
12 3/8% Notes............................................... $ -- $195,000
Bank debt................................................... 60,000 67,000
Seller notes payable........................................ 8,600 15,407
Other notes payable and obligations under capital leases.... 513 797
Minority interest........................................... 2,928 2,420
------- --------
Total long-term obligations................................. 72,041 280,624
Less current maturities..................................... (2,538) (8,916)
------- --------
Long-term obligations, net of current maturities.......... $69,503 $271,708
======= ========
</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.
Additionally, $5.3 million was reserved to fund a portion of a contingent
reduction of the Company's availability under its Credit Facility. Such
contingent reduction will not occur as a result of the February 1999 amendment
to the Credit Facility (see Note 15).
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of payment to all existing and future subordinated indebtedness,
if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional,
joint and several basis by Argos Support Services Company ("Argos") and
PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned
subsidiaries of the Company.
F-16
<PAGE> 144
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
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, the Credit Facility was amended to permit, among other
things, the offering of senior discount notes by Golden Sky DBS (see Note 15).
As amended, the term loan commitment amortizes in
F-17
<PAGE> 145
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
specified quarterly installments from March 31, 2002 through maturity on
December 31, 2005. Availability of revolving loan borrowings reduces by
specified amounts over the period from March 31, 2001 through maturity on
September 30, 2005. Borrowings under the Credit Facility are unconditionally and
irrevocably guaranteed by Holdings, Golden Sky DBS, and two subsidiaries of
Systems, Argos and PrimeWatch. Further, such borrowings are secured by (i) a
pledge by Holdings of all of the capital stock of Golden Sky DBS, (ii) a pledge
by Golden Sky DBS of all of the capital stock of Systems, (iii) an equal and
ratable pledge of all of the capital stock of Systems' subsidiaries, (iv) a
first priority security interest in all of such subsidiaries' assets, and (v) a
collateral assignment of Systems' NRTC agreements.
The 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 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, no amounts were
available for distribution to Holdings.
The 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. As of December 31, 1998, the Company was in compliance with all of
the covenants under the Credit Facility.
Commitment fees are payable on unused amounts available under the Credit
Facility. Such commitment fees, which are payable quarterly in arrears, range
from 0.50% per annum to 1.25% per annum based on Systems' utilization of such
commitments.
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, approximately $13.9 million 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-18
<PAGE> 146
GOLDEN SKY SYSTEMS, 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-19
<PAGE> 147
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of incentive stock option activity during 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year........ -- $ -- 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 year.............. 62,525 $1.00 48,745 $1.00
====== ===== ======= =====
Options exercisable, end of year.............. 8,684 $1.00 5,595 $1.00
====== ===== ======= =====
</TABLE>
Accounting for Stock-Based Compensation
Systems 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. Systems 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 Systems' net loss.
8. 401(K) RETIREMENT PLAN
Systems sponsors a 401(k) Retirement Plan (the "401(k) Plan") for eligible
employees. Employer matching contributions to the 401(k) Plan, which became
effective as of January 1, 1997, are discretionary. During the years ended
December 31, 1997 and 1998, Systems made no discretionary employer matching
contributions to the 401(k) Plan. Administrative expenses associated with the
401(k) Plan during those same periods were not material.
F-20
<PAGE> 148
GOLDEN SKY SYSTEMS, 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-21
<PAGE> 149
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 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-22
<PAGE> 150
GOLDEN SKY SYSTEMS, 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 and
1998, Systems paid $5,000, $77,000 and $159,000 (including $75,000 paid in
connection with a 1998 acquisition), 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 and
$506,000 during 1996, 1997 and 1998, respectively.
F-23
<PAGE> 151
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. VALUATION AND QUALIFYING ACCOUNTS
Systems' valuation and qualifying accounts as of December 31, 1996, 1997
and 1998 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 the Company, the Company's
guarantor subsidiaries and the Company's non-guarantor subsidiaries is as
follows (dollars in thousands):
Consolidated Balance Sheet -- December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
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-24
<PAGE> 152
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
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
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 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-25
<PAGE> 153
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
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-26
<PAGE> 154
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
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
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-27
<PAGE> 155
GOLDEN SKY SYSTEMS, 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)
</TABLE>
15. SUBSEQUENT EVENTS
On February 19, 1999, Golden Sky DBS consummated an 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 resulted in net proceeds to Golden Sky DBS
of approximately $96.8 million (after initial purchasers' discount but before
other offering expenses). Golden Sky DBS intends to contribute the net proceeds
of the 13 1/2% Notes Offering to Systems. Systems will use the contributed
proceeds to repay existing revolving credit indebtedness outstanding under its
Credit Facility, to finance the acquisition of Rural DIRECTV Markets and related
costs and expenses, and for general corporate purposes. Interest on the 13 1/2%
Notes will not accrue prior to March 1, 2004. Thereafter, cash interest on the
13 1/2% Notes 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 will mature on March 1, 2007. The Company is not obligated for
repayment of the 13 1/2% Notes and, as described in Note 5, is restricted as to
its ability to make payments to Golden Sky DBS. However, Golden Sky DBS is
dependent on the Company for dividends or other cash distributions in amounts
sufficient to make the required payments.
As previously described, in connection with the 13 1/2% Notes Offering,
Systems' Credit Facility was amended. The amendment became effective on February
19, 1999. On that same date, Systems repaid balances outstanding under the
revolving credit commitment of the Credit Facility (total of $53.0 million,
which may be reborrowed for permitted purposes including to finance the
acquisition of Rural DIRECTV Markets) with the proceeds of cash contributed to
Systems by Golden Sky DBS. Systems expects that it will report an extraordinary
charge on the early retirement of debt of approximately $2.7 million during the
first quarter of 1999 as a result of the amendment.
F-28
<PAGE> 156
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-29
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Montana DBS, Inc.
dba Rocky Mountain DBS:
We have audited the accompanying balance sheets of Western Montana DBS,
Inc. dba Rocky Mountain DBS as of December 31, 1996 and 1995 and the related
statements of earnings, accumulated deficit and cash flows for the years ended
December 31, 1996 and 1995 and 1994. 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 Western Montana DBS, Inc.
dba Rocky Mountain DBS at December 31, 1996 and 1995 and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994, in conformity with generally accepted accounting principles.
LOUCKS & GLASSLEY, PLLP
September 12, 1997
Great Falls, Montana
F-30
<PAGE> 158
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets
Cash and Equivalents (Note 4)............................. $ 251,602 $ 107,722
Trade Receivables, net of allowance for doubtful accounts
of $6,000 (Note 2)..................................... 277,829 107,336
Inventories............................................... 12,416 5,496
---------- ----------
Total Current Assets.............................. 541,847 220,554
---------- ----------
Furniture and equipment, less accumulated depreciation...... 15,610 18,379
---------- ----------
Intangible assets
Franchise Costs........................................... 1,253,803 1,253,803
Accumulated Amortization.................................. (334,358) (208,977)
---------- ----------
919,445 1,044,826
---------- ----------
Other assets
Prepaid Expenses.......................................... 1,420 1,420
NRTC Patronage Capital (Note 5)........................... 91,730 47,420
---------- ----------
93,150 48,840
---------- ----------
Total Assets...................................... $1,570,052 $1,332,599
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade Payables............................................ $ 355,831 $ 190,717
Unearned Revenues......................................... 548,343 100,827
Accrued Salaries and Other................................ 25,273 4,078
---------- ----------
Total Current Liabilities......................... 929,447 295,622
---------- ----------
Stockholders' equity
Common Stock, No Par Value, Authorized 50,000 shares,
10,463 shares Issued and Outstanding................... 1,124,739 1,124,739
Accumulated Deficit....................................... (484,134) (87,762)
---------- ----------
Total Stockholders' Equity........................ 640,605 1,036,977
---------- ----------
Total Liabilities and Stockholders' Equity........ $1,570,052 $1,332,599
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 159
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
REVENUES
DSS Programming Revenues............................... $2,588,681 $1,191,353 $ 62,544
DSS Equipment Sales.................................... 93,472 225,583 429,015
Other DSS Sales........................................ 31,362 33,120 --
---------- ---------- ---------
2,713,515 1,450,056 491,559
COST OF REVENUES
Programming Costs...................................... 1,763,043 771,093 40,479
Equipment Costs........................................ 66,930 205,200 391,056
Other DSS Cost of Revenues............................. 40,259 9,163 --
Rebates................................................ 274,529 23,546 --
---------- ---------- ---------
2,144,761 1,009,002 431,535
---------- ---------- ---------
Gross Profit................................... 568,754 441,054 60,024
---------- ---------- ---------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Salaries, Wages and Commissions........................ 206,113 118,064 40,038
Amortization and Depreciation.......................... 131,654 133,411 88,147
Bad Debt Expense....................................... 16,202 12,512 --
Advertising............................................ 90,395 53,076 5,431
Other Selling, General and Administrative.............. 132,304 117,990 32,656
---------- ---------- ---------
576,668 435,053 166,272
---------- ---------- ---------
Net Operating Income (Loss).................... (7,914) 6,001 (106,248)
---------- ---------- ---------
OTHER INCOME (EXPENSES)
Patronage Income (Note 5).............................. 44,310 30,609 16,921
Interest Expense....................................... (1,268) (19,485) (15,589)
Interest Income........................................ 2,212 29 --
---------- ---------- ---------
45,254 11,153 1,332
---------- ---------- ---------
Net Income (Loss).............................. $ 37,340 $ 17,154 $(104,916)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 160
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF ACCUMULATED DEFICIT
AS OF DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance, Beginning of Year................................ $ (87,762) $(104,916) $ --
Net Income (Loss)....................................... 37,340 17,154 (104,916)
Dividends and Distributions............................. (433,712) -- --
--------- --------- ---------
Balance, End of Year...................................... $(484,134) $ (87,762) $(104,916)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 161
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................... $ 37,340 $ 17,154 $ (104,916)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and Amortization....................... 131,654 133,411 88,147
(Increase) decrease in:
Trade Accounts Receivable......................... (170,493) (37,643) (69,693)
Inventories....................................... (6,920) 69,871 (75,367)
Prepaids.......................................... -- (701) (719)
NRTC Patronage Capital............................ (44,310) (30,499) (16,921)
Increase (decrease) in:
Trade Accounts Payable............................ 165,114 26,357 164,360
Accrued Expenses.................................. 21,195 2,394 1,684
Unearned Revenues................................. 447,516 74,091 26,736
Net Cash Provided by Operating Activities...... 581,096 254,435 13,311
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment.............. (3,504) (3,131) (27,829)
Investment in NRTC Marketing Rights.................... -- -- (1,253,803)
--------- --------- -----------
Net Cash Used by Investing Activities.......... (3,504) (3,131) (1,281,632)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Line of Credit Borrowings.............................. -- -- 487,534
Line of Credit Repayments.............................. -- (236,458) (251,076)
Borrowings from Stockholder............................ -- -- 33,499
Repayment on Stockholder Loan.......................... -- (33,499) --
Distributions to Stockholders.......................... (433,712) -- --
Issuance of Common Stock............................... -- -- 1,124,739
--------- --------- -----------
Net Cash Provided (Used) by Financing
Activities................................... (433,712) (269,957) 1,394,696
--------- --------- -----------
Net Increase (Decrease) in Cash.......................... 143,880 (18,653) 126,375
Cash, Beginning of Year.................................. 107,722 126,375 --
--------- --------- -----------
Cash, End of Year........................................ $ 251,602 $ 107,722 $ 126,375
--------- --------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest................. $ 1,268 $ 19,485 $ 15,589
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 162
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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, 1996, 1995 and 1994, the Company had the operating rights for five counties
in Montana, three counties in Idaho, and three counties in Colorado. The
Colorado operating rights 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.
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.
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
F-35
<PAGE> 163
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded. For the five months ended December 31, 1994, the company incurred a
loss and no income taxes were due.
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, 1995 or 1996.
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 and
a vehicle. The assets are being depreciated over five to seven years using
accelerated depreciation methods.
Advertising --
Advertising costs are charged to expense as incurred.
NOTE 2 -- ACCOUNTS RECEIVABLE
Trade receivables consist of amounts due from subscribers for monthly
programming fees.
NOTE 3 -- RELATED PARTY TRANSACTIONS
During 1994, a shareholder advanced $33,499 to the Company. This advance
had no specific repayment terms and was repaid in 1995.
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 $73,370 at December 31, 1996.
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 $3,224 in 1994, $12,090 in 1995, and $18,000 in
1996.
NOTE 7 -- SUBSEQUENT EVENT
In May of 1997, the Company contracted to sell its Colorado subscribers to
Golden Sky Systems, Inc. The Company estimates these customers comprise some 21%
of the customer base and account for some 31% of revenues.
F-36
<PAGE> 164
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
F-37
<PAGE> 165
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current assets
Cash and Equivalents...................................... $ 487,473 $ 180,274
Trade Receivables, net of allowance for doubtful accounts
of $6,000 in 1996 and 1997............................. 215,468 109,312
Inventories............................................... 8,440 17,536
---------- ----------
Total Current Assets.............................. 711,381 307,122
---------- ----------
Furniture and Equipment
Furniture and Equipment................................... 35,581 33,746
Accumulated Depreciation.................................. (20,686) (14,412)
---------- ----------
Net Furniture and Equipment............................ 14,895 19,334
---------- ----------
Intangible Assets
Franchise Costs........................................... 1,253,803 1,253,803
Accumulated Amortization.................................. (365,703) (240,322)
---------- ----------
888,100 1,013,481
---------- ----------
Other Assets
Prepaid Expenses.......................................... 320 1,420
NRTC Patronage Capital.................................... 91,730 47,420
---------- ----------
92,050 48,840
---------- ----------
$1,706,426 $1,388,777
========== ==========
Current Liabilities
Trade Payables............................................ 389,978 226,939
Unearned Revenues......................................... 608,590 112,491
Accrued Salaries and Other................................ 13,723 25,896
---------- ----------
Total Current Liabilities......................... 1,012,291 365,326
---------- ----------
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)............................... (430,604) (101,288)
---------- ----------
Total Stockholders' Equity........................ 694,135 1,023,451
---------- ----------
$1,706,426 $1,388,777
========== ==========
</TABLE>
See Selected Information
F-38
<PAGE> 166
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
REVENUES
DSS Programming Revenues.................................. $1,124,385 $526,368
DSS Equipment Sales....................................... 22,592 25,467
Other DSS Sales........................................... 7,909 5,859
---------- --------
1,154,886 557,694
COST OF REVENUES
Programming Costs......................................... 580,354 296,016
DSS Equipment Costs....................................... 22,592 22,817
Other DSS Cost of Revenues................................ 2,679 2,888
Rebates................................................... 170,943 12,570
---------- --------
776,568 334,291
---------- --------
Gross Profit...................................... 378,318 223,403
---------- --------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Salaries, Wages and Commissions........................... 64,628 35,881
Amortization and Depreciation............................. 32,755 32,755
Bad Debt Expense.......................................... 14,907 1,983
Marketing and Advertising................................. 24,487 20,192
Other General and Administrative.......................... 39,604 39,127
---------- --------
176,381 129,938
---------- --------
Operating Income.................................. 201,937 93,465
---------- --------
OTHER INCOME (EXPENSE)
Interest and Dividend Income.............................. 1,728 671
Interest Expense.......................................... (135) (1,246)
---------- --------
1,593 (575)
---------- --------
Net Income........................................ $ 203,530 $ 92,890
========== ========
</TABLE>
See Selected Information
F-39
<PAGE> 167
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance, Beginning of Period................................ $(484,134) $ (87,762)
Net Income................................................ 203,530 92,890
Dividends and Distributions............................... (150,000) (106,416)
--------- ---------
Balance, End of Period...................................... $(430,604) $(101,288)
========= =========
</TABLE>
See Selected Information
F-40
<PAGE> 168
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 203,530 $ 92,890
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 32,755 32,755
(Increase) Decrease in:
Trade Accounts Receivable............................ 62,361 (1,976)
Inventories.......................................... 3,976 (12,040)
Prepaids............................................. 1,100 --
Increase (Decrease) in:
Trade Accounts Payable............................... 34,147 36,222
Accrued Expenses..................................... (11,550) 21,818
Unearned Revenues.................................... 60,247 11,664
--------- ---------
Net Cash Provided by Operating Activities......... 386,566 181,333
--------- ---------
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment................. (695) (2,365)
--------- ---------
Net Cash Used by Investing Activities............. (695) (2,365)
--------- ---------
Cash Flows from Financing Activities
Distributions to Stockholders............................. (150,000) (106,416)
--------- ---------
Net Cash Used by Financing Activities............. (150,000) (106,416)
--------- ---------
Net Increase in Cash........................................ 235,871 72,552
Cash, Beginning of Period................................... 251,602 107,722
--------- ---------
Cash, End of Period......................................... 487,473 180,274
--------- ---------
Supplemental Disclosures:
Cash paid during the period for interest.................. $ 135 $ 1,246
========= =========
</TABLE>
See Selected Information
F-41
<PAGE> 169
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
SELECTED INFORMATION -- SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED
MARCH 31, 1997 AND 1996
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.
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-42
<PAGE> 170
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
SELECTED INFORMATION -- (CONTINUED)
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.
SUBSEQUENT EVENTS
In May of 1997, the Company sold its Colorado subscribers to Golden Sky
Systems, Inc. On October 2, 1998, the company was acquired by Golden Sky
Systems, Inc. Company shareholders received both cash and shares in Golden Sky
Holdings, Inc. in this latter transaction.
F-43
<PAGE> 171
TEG DBS SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-44
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
The Board of Directors
TEG DBS Systems, Inc.
We have audited the accompanying statements of operations and cash flows of
TEG DBS Systems, Inc. (the Company) for the years ended December 31, 1996 and
1995. 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 results of operations and cash flows of TEG DBS
Systems, Inc. for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
KPMG LLP
January 11, 1999
Kansas City, Missouri
F-45
<PAGE> 173
TEG DBS SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenue:
Program revenue........................................... $ 380,942 $ 125,934
Equipment sales........................................... -- 69,538
--------- ---------
Total revenue..................................... 380,942 195,472
--------- ---------
Costs and expenses:
Programming costs......................................... 312,874 101,157
Equipment costs........................................... -- 187,321
General and administrative................................ 148,236 193,774
Marketing................................................. 14,436 15,551
Depreciation and amortization............................. 87,544 85,265
--------- ---------
Total costs and expenses.......................... 563,090 583,068
--------- ---------
Net loss.......................................... (182,148) (387,596)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 174
TEG DBS SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................. $(182,148) $(387,596)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 87,544 85,265
Changes in:
Accounts receivable.................................... (50,406) (15,954)
Inventory.............................................. -- 81,543
Unearned revenue....................................... 104,860 11,909
Accounts payable....................................... 61,646 40,154
Other assets........................................... 146,880 (118,188)
Other liabilities...................................... (12,897) 16,180
--------- ---------
Net cash provided by (used in) operating
activities...................................... 155,479 (286,687)
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment... 13,404 --
Purchase of property, plant and equipment................. -- (22,648)
--------- ---------
Net cash provided by (used in) investing
activities...................................... 13,404 (22,648)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in payable to related party........... (135,039) 110,914
--------- ---------
Net cash provided by (used in) financing
activities...................................... (135,039) 110,914
--------- ---------
Net change in cash................................ 33,844 (198,421)
Beginning of year cash and cash equivalents................. 20,318 218,739
--------- ---------
End of year cash and cash equivalents....................... $ 54,162 $ 20,318
========= =========
Supplemental cash flow disclosure:
Cash paid for interest.................................... $ 7,270 $ 8,771
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 175
TEG DBS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
TEG DBS Systems, Inc. (the Company) is a limited liability company
organized in California in 1994 for the purpose of supplying direct broadcast
satellite services (DBS) to customers within its franchise areas, which include
certain zip codes in Nevada. 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. Hughes
controls the satellites that provide programming for DirecTV.
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. The Company discontinued selling equipment to customers in
1995.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities as well as the
reported amounts of revenues and expenses during the period to prepare these
financial statements in conformity with generally accepted accounting
principles. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
The Company is not a taxable entity for federal and state income tax
purposes. Accordingly, no provision for income taxes is included in the
accompanying financial statements.
(2) SUBSEQUENT EVENTS
On June 12, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-48
<PAGE> 176
TEG DBS SYSTEMS, INC.
(UNAUDITED)
SPECIAL PURPOSE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
F-49
<PAGE> 177
TEG DBS SERVICES, INC.
SPECIAL PURPOSE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Revenues:
DBS Programming Revenue................................... $164,028 $64,121
DBS costs and expenses:
DBS programming costs..................................... 107,516 45,561
Bad debt expense.......................................... 2,606 977
Rebate expense............................................ 43,448 1,272
-------- -------
Total costs and expenses.......................... 153,570 47,810
-------- -------
DBS operations.................................... $ 10,458 $16,311
======== =======
</TABLE>
F-50
<PAGE> 178
TEG DBS SYSTEMS, INC.
NOTES TO SPECIAL PURPOSE STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
TEG DBS Systems, Inc. (the Company) is a limited liability company
organized in California in 1994 for the purpose of supplying direct broadcast
satellite services (DBS) to customers within its franchise areas, which include
certain zip codes in Nevada. 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. Hughes
controls the satellites that provide programming for DirecTV.
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.
BASIS OF PRESENTATION
The accompanying special purpose statements of operations present the
revenue and expense directly attributable to the Company's DBS operations. These
statements do not include other costs and expenses such as general and
administrative, marketing and depreciation and amortization. Accordingly, had
these costs and expenses been included in these special purpose statements, the
results of operations would have been reduced.
(2) SUBSEQUENT EVENTS
On June 12, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-51
<PAGE> 179
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-52
<PAGE> 180
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mankato Citizens Telephone Company:
We have audited the accompanying balance sheets of Direct Vision (the
Segment), a segment of Mankato Citizens Telephone Company, as of December 31,
1996 and 1995 and the related statements of operations, segment equity and cash
flows for the years ended December 31, 1996 and 1995 and the five-month period
ended December 31, 1994. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Vision at December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 and the five-month period ended December
31, 1994, in conformity with generally accepted accounting principles.
KPMG LLP
May 30, 1997, except as to note 4,
which is as of July 15, 1997
Kansas City, Missouri
F-53
<PAGE> 181
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Inventory................................................. $ 59,336 $ 138,396
Accounts receivable -- subscribers (note 3)............... 122,860 33,964
---------- ----------
Total current assets.............................. 182,196 172,360
Intangible assets (net of accumulated amortization of
$278,419 and $163,211) (note 1)........................... 887,855 1,003,063
Other assets................................................ 11,870 11,563
---------- ----------
Total assets...................................... $1,081,921 $1,186,986
========== ==========
LIABILITIES AND SEGMENT EQUITY
Liabilities:
Accounts payable:
Intercompany (note 2).................................. $ 319,609 328,486
Vendors................................................ 51,503 22,876
Unearned revenue.......................................... 200,408 24,045
---------- ----------
Total liabilities................................. 571,520 375,407
Segment equity.............................................. 510,401 811,579
---------- ----------
Total liabilities and segment equity.............. $1,081,921 $1,186,986
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 182
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Programming revenues.................................... $ 735,576 $ 273,712 $ 20,825
Equipment sales......................................... 157,031 148,931 63,980
Other revenues.......................................... 10,773 6,977 1,341
--------- --------- ---------
Total revenues.................................. 903,380 429,620 86,146
--------- --------- ---------
Cost of revenues:
Programming costs....................................... 446,900 170,592 12,894
Equipment costs......................................... 202,514 166,764 34,969
Rebate expense.......................................... 106,667 -- --
--------- --------- ---------
Total cost of revenues.......................... 756,081 337,356 47,863
--------- --------- ---------
Gross profit.................................... 147,299 92,264 38,283
--------- --------- ---------
Expenses:
Salaries and commissions................................ 197,840 165,493 50,894
Amortization............................................ 120,941 115,208 48,003
Marketing............................................... 100,508 49,591 40,734
Billing and other expenses.............................. 29,188 12,522 2,797
--------- --------- ---------
448,477 342,814 142,428
--------- --------- ---------
Net loss........................................ $(301,178) $(250,550) $(104,145)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 183
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
STATEMENTS OF SEGMENT EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
SEGMENT
EQUITY
----------
<S> <C>
Balance at August 1, 1994................................... $ --
Company contribution to segment........................... 1,166,274
1994 net loss............................................. (104,145)
----------
Balance at December 31, 1994................................ 1,062,129
1995 net loss............................................. (250,550)
----------
Balance at December 31, 1995................................ 811,579
1996 net loss............................................. (301,178)
----------
Balance at December 31, 1996................................ $ 510,401
==========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 184
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss............................................... $(301,178) $(250,550) $ (104,145)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities -- amortization... 115,208 115,208 48,003
Change in:
Inventory........................................... 79,060 (74,660) (63,736)
Accounts receivable -- subscribers.................. (88,896) (22,008) (11,956)
Other assets........................................ (307) (7,230) (4,333)
Accounts payable -- vendor.......................... 28,627 17,077 5,799
Unearned revenue.................................... 176,363 13,924 10,121
--------- --------- -----------
Net cash provided by (used in) operating
activities................................... 8,877 (208,239) (120,247)
--------- --------- -----------
Investing activities -- purchase of DBS regions.......... -- -- (1,166,274)
--------- --------- -----------
Financing activities:
Capital contribution by parent......................... -- -- 1,166,274
Increase (decrease) in payable to parent............... (8,877) 208,239 120,247
--------- --------- -----------
Net cash provided by (used in) financing
activities................................... (8,877) 208,239 1,286,521
--------- --------- -----------
Net change in cash............................. -- -- --
Cash at beginning of period.............................. -- -- --
--------- --------- -----------
Cash at end of period.................................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 185
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Direct Vision (the Segment) is a segment of Mankato Citizens Telephone
Company (the Company). The Company is a wholly-owned subsidiary of Hickory Tech
Corporation (the Parent). The Segment was formed in August 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
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, 1996, 1995 and 1994, the
Company had the operating rights for seven counties in southern Minnesota.
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
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
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 Company 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.
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
F-58
<PAGE> 186
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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 or fair value less costs to sell.
Income Taxes
The Segment is not directly subjected to income taxes as it's net losses
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.
(2) RELATED PARTY TRANSACTIONS
As described in note 1, the operations of the Segment are closely related
to those of the Company. As a result, substantially all cash transactions
relating to the Segment's operations are processed at the Company level.
Therefore, the Company is funding the cash operating losses and inventory
purchases of the Segment. The Company also absorbs certain immaterial overhead
costs such as rent and utilities.
Intercompany payables as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Intercompany payables for:
Cash operating losses..................................... $269,702 $190,847
Inventory purchases....................................... 59,336 138,396
Other..................................................... (9,429) (757)
-------- --------
$319,609 $328,486
======== ========
</TABLE>
(3) ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from subscribers for monthly
programming fees and equipment purchases financed by the Segment. Accounts
receivable as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Accounts receivable -- programming.......................... $115,113 $27,881
Accounts receivable -- financed equipment sales............. 7,747 6,083
-------- -------
$122,860 $33,964
======== =======
</TABLE>
(4) SUBSEQUENT EVENTS
On April 29, 1997, the Parent contracted to sell substantially all of the
Segment's assets and liabilities to Golden Sky Systems, Inc. The acquisition
closed on July 15, 1997.
F-59
<PAGE> 187
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-60
<PAGE> 188
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Revenue:
Program revenue........................................... $592,556 $ 286,647
Equipment sales........................................... 10,269 95,048
Other revenue............................................. 6,198 4,789
-------- ---------
Total revenue..................................... 609,023 386,484
-------- ---------
Costs and expenses:
Programming costs......................................... 351,222 174,706
Equipment costs........................................... 14,077 101,667
General and administrative................................ 149,501 84,909
Marketing................................................. 80,272 72,326
Amortization.............................................. 57,604 57,604
Other expense............................................. 16,164 8,647
-------- ---------
Total costs and expenses.......................... 668,840 499,859
-------- ---------
-------- ---------
Net loss.......................................... (59,817) (113,375)
======== =========
</TABLE>
See accompanying notes.
F-61
<PAGE> 189
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................. $(59,817) $(113,375)
Adjustments to reconcile net income to net cash used in
operating activities:
Amortization........................................... 57,604 57,604
Changes in:
Accounts receivable.................................... 7,290 (7,361)
Inventory.............................................. (2,964) 85,116
Other assets........................................... (13,541) (2,131)
Accounts payable....................................... (16,672) (120,718)
Unearned revenues...................................... 28,100 100,865
-------- ---------
Net cash provided by operating activities......... -- --
-------- ---------
Net change in cash................................ -- --
Beginning of period cash and cash equivalents...............
-------- ---------
End of period cash and cash equivalents..................... $ -- $ --
======== =========
</TABLE>
See accompanying notes.
F-62
<PAGE> 190
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Direct Vision (the Segment) is a segment of Mankato Citizens Telephone
Company (the Company). The Company is a wholly-owned subsidiary of Hickory Tech
Corporation (the Parent). The Segment was formed in August 1994 for the purpose
of acquiring, owning and operating direct broadcast satellite services (DBS) to
customers within its franchise areas, which include seven counties in Minnesota.
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. Hughes controls the satellites that provide
programming for DirecTV.
The financial statement presented represent the operations of the Segment,
which operates as part of the Company. As a result, substantially all cash
transactions relating to the Segment's operations are processed at the Company
level. Therefore, the Company is funding the cash operating losses and inventory
purchases of the Segment. The Company also absorbs certain immaterial overhead
costs such as rent and utilities.
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. The company ceased selling equipment during 1997.
Use of Estimates
Management of the Segment has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities as well as the
reported amounts of revenues and expenses during the period to prepare these
financial statements in conformity with generally accepted accounting
principles. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
The Segment is not directly subjected to income taxes as it's net losses
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.
(2) SUBSEQUENT EVENTS
On July 15, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-63
<PAGE> 191
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-64
<PAGE> 192
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ace Telephone Association:
We have audited the accompanying balance sheets of Satellite Entertainment,
Inc., a wholly-owned subsidiary of Ace Telephone Association, as of December 31,
1996 and 1995 and the related statements of operations, shareholder's equity and
cash flows for the years ended December 31, 1996 and 1995 and the five-month
period ended December 31, 1994. 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 Satellite Entertainment,
Inc. at December 31, 1996 and 1995 and the results of its operations and its
cash flows for the years ended December 31, 1996 and 1995 and the five-month
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
KPMG LLP
July 3, 1997, except as to note 6,
which is as of July 14, 1997
Kansas City, Missouri
F-65
<PAGE> 193
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 156,502 $ 120,187
Accounts receivable, net of allowance of $33,598 in 1996
(note 2)............................................... 257,995 263,198
Inventory................................................. 79,008 131,142
---------- ----------
Total current assets.............................. 493,505 514,527
Furniture, fixtures and equipment, net of accumulated
depreciation of $106,968 and $35,791 (note 5)............. 326,377 358,245
Intangible assets (net of accumulated amortization of
$278,851 and $163,464) (note 1)........................... 875,006 990,393
Other assets................................................ 39,404 22,189
---------- ----------
Total assets...................................... $1,734,292 $1,885,354
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable (note 4)................................. $ 105,288 $ 65,539
Unearned revenue.......................................... 158,493 35,581
Other liabilities......................................... 49,197 37,326
---------- ----------
Total current liabilities......................... 312,978 138,446
Long-term liabilities:
Notes payable (note 4).................................... 350,000 600,000
---------- ----------
Total liabilities................................. 662,978 738,446
========== ==========
Shareholder's equity:
Common stock ($1 par -- 50,000 shares issued and
outstanding)........................................... 50,000 50,000
Additional paid-in capital................................ 1,250,000 1,250,000
Accumulated deficit....................................... (228,686) (153,092)
---------- ----------
Total shareholder's equity........................ 1,071,314 1,146,908
---------- ----------
Total liabilities and shareholder's equity........ $1,734,292 $1,885,354
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE> 194
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Program revenues........................................ $1,216,893 $ 542,511 $ 47,779
Equipment sales......................................... 231,025 378,892 317,902
Lease revenue (note 5).................................. 96,999 42,392 4,681
Other revenues.......................................... 138,594 82,838 58,004
---------- ---------- --------
Total revenues.................................. 1,683,511 1,046,633 428,366
---------- ---------- --------
Cost of revenues:
Programming costs....................................... 794,779 340,460 19,868
Equipment costs......................................... 213,005 322,617 258,964
Rebate expense.......................................... 85,675 14,909 724
Other costs of revenue.................................. 99,603 128,874 59,859
---------- ---------- --------
Total cost of revenues.......................... 1,193,062 806,860 339,415
---------- ---------- --------
Gross profit.................................... 490,449 239,773 88,951
---------- ---------- --------
Expenses:
Salaries and commissions................................ 139,261 76,904 3,855
Depreciation and amortization........................... 186,563 147,794 51,462
Bad debt expense........................................ 56,587 4,274 --
Marketing............................................... 97,044 111,068 38,060
Other................................................... 84,791 64,656 13,110
---------- ---------- --------
564,246 404,696 106,487
---------- ---------- --------
Operating loss.................................. (73,797) (164,923) (17,536)
Other income............................................ 4,129 5,431 --
Interest income......................................... 17,002 12,707 4,170
Interest expense........................................ (52,394) (64,989) (7,440)
---------- ---------- --------
Loss before tax benefit......................... (105,060) (211,774) (20,806)
Income tax benefit (note 3)............................... 29,466 70,964 8,524
---------- ---------- --------
Net loss........................................ $ (75,594) $ (140,810) $(12,282)
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 195
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at August 1, 1994....................... $ -- $ -- $ -- $ --
Sale of common stock.......................... 50,000 1,250,000 -- 1,300,000
Net loss...................................... -- -- (12,282) (12,282)
------- ---------- --------- ----------
Balance at December 31, 1994.................... 50,000 1,250,000 (12,282) 1,287,718
Net loss...................................... -- -- (140,810) (140,810)
------- ---------- --------- ----------
Balance at December 31, 1995.................... 50,000 1,250,000 (153,092) 1,146,908
Net loss...................................... -- -- (75,594) (75,594)
------- ---------- --------- ----------
Balance at December 31, 1996.................... $50,000 $1,250,000 $(228,686) $1,071,314
======= ========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 196
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss............................................... $ (75,594) $(140,810) $ (12,282)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization....................... 186,563 147,794 51,462
Bad debt expense.................................... 56,587 4,274 --
Change in:
Accounts receivable................................. (51,384) (128,073) (139,399)
Inventory........................................... 52,134 298,286 (429,428)
Other assets........................................ (17,215) (22,189) --
Accounts payable.................................... 39,749 (121,284) 186,823
Unearned revenue.................................... 122,912 26,401 9,180
Other liabilities................................... 11,871 32,283 5,043
--------- --------- -----------
Net cash provided by (used in) operating
activities................................... 325,623 96,682 (328,601)
--------- --------- -----------
Investing activities:
Purchase of furniture, fixtures and equipment.......... (39,308) (255,942) (138,095)
Purchase of DBS regions................................ -- -- (1,153,857)
--------- --------- -----------
Net cash used in investing activities.......... (39,308) (255,942) (1,291,952)
--------- --------- -----------
Financing activities:
Sale of common stock................................... -- -- 1,300,000
Proceeds from issuance of notes payable................ -- -- 600,000
Payments on notes payable.............................. (250,000) -- --
--------- --------- -----------
Net cash provided by (used in) financing
activities................................... (250,000) -- 1,900,000
--------- --------- -----------
Net change in cash............................. 36,315 (159,260) 279,447
Cash at beginning of period.............................. 120,187 279,447 --
--------- --------- -----------
Cash at end of period.................................... $ 156,502 $ 120,187 $ 279,447
========= ========= ===========
Cash paid for interest................................... $ 62,528 $ 56,299 $ --
========= ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 197
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Satellite Entertainment, Inc. (the Company) is a wholly-owned subsidiary of
Ace Telephone Association (the Parent). The Company was formed in August 1994
for the purpose of owning and operating direct broadcast satellite (DBS)
television systems previously purchased by the Parent. 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 satellite that provides programming for DirecTV. At
December 31, 1996, 1995 and 1994, the Company had the operating rights for three
counties in Minnesota and five counties in Michigan.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenue represents subscriber advance billings for one
or more months and is deferred until the service is provided. Revenues for
equipment sales 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
DBS receivers, satellite dishes and accessories as well as retail inventory at a
Radio Shack franchise owned and operated by the Company. Radio Shack inventory
had a carrying value at December 31, 1996 and 1995 of $30,079 and $31,139,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make a
number of estimates and assumptions which 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 these estimates.
Fair Value of Financial Instruments
Financial instruments consisting of receivables, accounts payable and notes
payable are carried at cost, which approximates fair value, as a result of the
short-term nature of the instruments.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are carried at cost and depreciated on a
straight-line basis over their estimated useful lives, which range from five to
thirty years.
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 a period of ten years, which is the expected useful life of the
revenue stream of those services.
F-70
<PAGE> 198
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 or fair value less costs to sell.
Income Taxes
The Company is not directly subjected to income taxes as its net losses are
consolidated with the Parent's operations for tax filing purposes.
(2) ACCOUNTS RECEIVABLE
Trade receivables consist primarily of amounts due from subscribers for
monthly programming fees and equipment purchases financed by the Company. Trade
receivables as of December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accounts receivable:
Programming............................................... $121,727 $ 65,884
Financed equipment sales.................................. 133,913 195,454
Other..................................................... 2,355 1,860
-------- --------
$257,995 $263,198
======== ========
</TABLE>
(3) INCOME TAXES
The Company is not directly subjected to income taxes as it's net losses
are consolidated with the Parent's operations for tax filing purposes. The
Company records a receivable from the Parent for the tax benefits arising from
the net losses of the Company. All tax benefits arise from losses from
continuing operations. There are no significant differences between tax and book
basis resulting in deferred tax assets or liabilities.
Total income tax benefit differs from expected income tax benefit as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Expected income tax benefit at 34%....................... $35,720 $72,003 $7,074
Difference due to income tax benefit allocation made by
Parent................................................. (6,254) (1,039) 1,450
------- ------- ------
Total income tax benefit....................... $29,466 $70,964 $8,524
======= ======= ======
</TABLE>
If the Company had filed income taxes on a separate return basis, any tax
benefit and net operating loss carry-forward would not be recognizable due to
the Company's recurring historical losses Pro forma net income would therefore
be as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------- -------- -------
<S> <C> <C>
$88,545 $190,050 $20,806
======= ======== =======
</TABLE>
F-71
<PAGE> 199
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) RELATED PARTY TRANSACTIONS
The Company has a revolving line of credit with the Parent whereby the
Parent will loan the Company cash for operating purposes up to $1,000,000. These
borrowings carry interest at prime plus two percent and require quarterly
interest-only payments, with the unpaid principal balance due on April 27, 1999.
The unpaid balance of these borrowings totaled $350,000 and $600,000 at December
31, 1996 and 1995, respectively.
The Company is also party to various intercompany transactions with the
Parent and a subsidiary of the Parent, including interest accruals on the line
of credit noted above, intercompany cash receipts and tax benefits arising from
the Company's net losses. Net receivable balances due from the Parent offset
against accounts payable at December 31, 1996 and 1995 were $43,323 and $34,486,
respectively.
(5) LEASES
In addition to selling satellite television equipment, the Company also
leases the equipment to customers for a minimum one-year period at a fixed
monthly rental charge. After one year, the customer may continue to lease the
equipment on a month-to-month basis. All minimum rents due under such leases at
December 31, 1996, 1995 and 1994 are, therefore, due within the next calendar
year.
The above leases qualify for operating lease treatment and, accordingly,
the leased units are transferred from inventory to furniture, fixtures and
equipment at average cost when leased and 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 furniture, fixtures and
equipment at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cost........................................................ $299,744 $286,104
Accumulated depreciation.................................... (92,261) (28,935)
-------- --------
Net carrying cost......................................... $207,483 $257,169
======== ========
</TABLE>
(6) NRTC PATRONAGE CAPITAL
The NRTC declares and the Company 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 Company has recorded an asset and an offsetting-deferred income liability
for the noncash portion of the patronage dividend. The deferred income will be
recognized as revenue when cash distributions are declared by the NRTC. Deferred
revenue included in other liabilities was $38,239 and $21,724 at December 31,
1996 and 1995, respectively.
(7) SUBSEQUENT EVENTS
On March 21, 1997, the Company contracted to sell substantially all of its
assets to Golden Sky Systems, Inc. The sale closed on July 14, 1997.
F-72
<PAGE> 200
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-73
<PAGE> 201
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Revenue:
Program revenue........................................... $ 819,501 $553,637
Equipment sales........................................... 108,623 120,499
Lease revenue............................................. 39,002 47,144
Other revenue............................................. 57,331 45,835
---------- --------
Total revenues.................................... 1,024,457 767,115
---------- --------
Costs and expenses:
Programming costs......................................... 466,863 277,740
Equipment costs........................................... 92,666 70,121
Rebate expense............................................ 62,106 41,978
Selling, general and Administrative....................... 236,689 202,054
Depreciation and amortization............................. 94,786 92,043
Bad debt expense.......................................... 31,019 26,963
Other..................................................... 70,020 42,727
---------- --------
Total costs and expenses.......................... 1,054,149 753,626
---------- --------
Operating income (loss)........................... (29,692) 13,489
Interest income............................................. 13,413 13,366
Interest expense............................................ (11,883) (30,654)
---------- --------
Loss before tax benefit........................... (28,162) (3,799)
Income tax benefit.......................................... 9,400 1,296
---------- --------
Net loss.......................................... $ (18,762) $ (2,503)
========== ========
</TABLE>
See accompanying notes.
F-74
<PAGE> 202
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Operating Activities
Net loss.................................................. $ (18,762) $ (2,503)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 94,786 92,043
Bad debt expense....................................... 31,019 26,963
Changes in:
Accounts receivable.................................... 52,328 (10,695)
Inventory.............................................. 39,141 57,816
Other assets........................................... 5,930 (16,050)
Accounts payable....................................... 48,133 49,026
Unearned revenue....................................... -- 24,048
Other liabilities...................................... (48,174) (30,090)
--------- --------
Net cash provided by operating activities................... 204,401 190,558
--------- --------
Investing activities:
Sale (purchase) of furniture, fixtures, and equipment..... 26,799 (68,304)
--------- --------
Net cash provided by (used in) investing activities......... 26,799 (68,304)
--------- --------
Financing activities:
Payments on notes payable................................. (200,000) (50,000)
--------- --------
Net cash used in financing activities....................... (200,000) (50,000)
--------- --------
Net increase in cash........................................ 31,200 72,254
Cash at beginning of period................................. 156,502 120,187
--------- --------
Cash at end of period....................................... $ 187,702 $192,441
========= ========
</TABLE>
See accompanying notes.
F-75
<PAGE> 203
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Satellite Entertainment, Inc. (the Company) is a wholly-owned subsidiary of
Ace Telephone Association (the Parent). The Company was formed in August 1994
for the purpose of owning and operating direct broadcast satellite (DBS)
television systems previously purchased by the Parent. 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 rural territories of 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 June 30, 1997 and 1996, the Company had the
operating rights for three counties in Minnesota and five counties in Michigan.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenue represents subscriber advance billings for one
or more months and is deferred until the service is provided. Equipment sales
are recognized as revenue when the equipment is delivered to the customer.
Use of Estimates
The preparation of 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 revenues and expenses during the period. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
The Company is not directly subjected to income taxes as it's net losses
are consolidated with the Parent's operations for tax filing purposes. The
Company records a receivable from the Parent for the tax benefits arising from
the net losses of the Company. All tax benefits arise from losses from
continuing operations. There are no significant differences between tax and book
basis resulting in deferred tax assets or liabilities.
(2) SUBSEQUENT EVENTS
On July 14, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-76
<PAGE> 204
GVEC RURAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-77
<PAGE> 205
INDEPENDENT AUDITORS' REPORT
The Board of Directors
GVEC Rural TV, Inc.,
Guadalupe Valley Electric Cooperative and
Guadalupe Valley Development Corporation:
We have audited the accompanying balance sheets of GVEC Rural TV, Inc. as
of December 31, 1996 and 1995 and the related statements of operations,
investors' capital and cash flows for each of the years in the three-year period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 GVEC Rural TV, Inc. at
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG LLP
August 8, 1997
Kansas City, Missouri
F-78
<PAGE> 206
GVEC RURAL TV, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 563,055 $ --
Accounts receivable (notes 2 and 7)....................... 214,827 186,101
Inventory................................................. 47,348 286,718
Note receivable (note 3).................................. 50,000 50,000
---------- ----------
Total current assets.............................. 875,230 522,819
Intangible asset (net of accumulated amortization of
$149,760 and $93,600)..................................... 411,883 468,043
Other assets:
Lease receivable -- noncurrent (note 7)................... 492,593 558,065
Note receivable (note 3).................................. 30,000 80,000
NRTC patronage capital (note 5)........................... 41,515 18,848
Organizational costs...................................... 31,436 39,295
---------- ----------
Total assets...................................... $1,882,657 $1,687,070
========== ==========
LIABILITIES AND INVESTORS' CAPITAL
Current liabilities:
Accounts payable.......................................... $ 122,258 $ 45,604
Related party accounts payable (note 6)................... 16,707 --
Unearned revenue.......................................... 108,106 24,571
Other liabilities (note 5)................................ 43,164 18,848
---------- ----------
Total current liabilities......................... 290,235 89,023
---------- ----------
Investors' capital:
Common stock -- class A, $1 par value; 100,000 shares
authorized, 7,500 shares issued and outstanding........ 7,500 --
Common stock -- class B, $1 par value, 10,000 shares
authorized, 2,500 shares issued and outstanding........ 2,500 --
Additional paid-in capital................................ 1,638,047 --
Retained earnings......................................... (55,625) --
Segment equity............................................ -- 1,598,047
---------- ----------
Total investors' capital.......................... 1,592,422 1,598,047
---------- ----------
Total liabilities and investors' capital.......... $1,882,657 $1,687,070
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE> 207
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Revenues:
Programming revenues.................................... $ 752,079 $ 336,503 $ 36,346
Equipment sales......................................... 294,455 740,161 411,023
Other revenues.......................................... 241,862 219,011 181,728
---------- ---------- --------
Total revenues.................................. 1,288,396 1,295,675 629,097
---------- ---------- --------
Cost of revenues:
Programming costs....................................... 431,058 210,394 23,649
Equipment costs......................................... 298,919 545,565 273,326
Rebate expense.......................................... 14,558 10,900 --
Other cost of revenues.................................. 150,407 132,625 175,066
---------- ---------- --------
Total cost of revenues.......................... 894,942 899,484 472,041
---------- ---------- --------
Gross profit.................................... 393,454 396,191 157,056
---------- ---------- --------
Expenses:
Salaries, wages and commissions......................... 213,107 259,808 112,910
Amortization............................................ 64,019 56,160 37,440
Bad debt expense........................................ 96,775 8,735 --
Other................................................... 90,704 112,988 10,911
---------- ---------- --------
Total expenses.................................. 464,605 437,691 161,261
---------- ---------- --------
Operating loss.................................. (71,151) (41,500) (4,205)
Gain on sale of wireless TV rights (note 3)............... -- 230,000 --
---------- ---------- --------
Income (loss) before interest................... (71,151) 188,500 (4,205)
Other income.............................................. 2,141 3,537 --
Interest income........................................... 13,385 8,537 --
---------- ---------- --------
Income (loss)................................... $ (55,625) $ 200,574 $ (4,205)
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 208
GVEC RURAL TV, INC.
STATEMENTS OF INVESTORS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED SEGMENT TOTAL
STOCK STOCK CAPITAL EARNINGS EQUITY EQUITY
------- ------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance -- December 31,
1993........................... $ -- $ -- $ -- $ -- $ 561,643 $ 561,643
Cash investment by GVEC........ -- -- -- -- 359,195 359,195
Net loss....................... -- -- -- -- (4,205) (4,205)
------ ------ ---------- -------- ----------- ----------
Balance at December 31, 1994..... -- -- -- -- 916,633 916,633
Cash investment by GVEC........ -- -- -- -- 480,840 480,840
Net income..................... -- -- -- -- 200,574 200,574
------ ------ ---------- -------- ----------- ----------
Balance at December 31, 1995..... -- -- -- -- 1,598,047 1,598,047
Capitalization of GVEC Rural
TV, Inc. by GVEC in exchange
for 7,500 common shares..... 7,500 -- 1,590,547 -- (1,598,047) --
Sale of 2,500 common shares to
GVDC........................ -- 2,500 47,500 -- -- 50,000
1996 net loss.................. -- -- -- (55,625) -- (55,625)
------ ------ ---------- -------- ----------- ----------
Balance at December 31, 1996..... $7,500 $2,500 $1,638,047 $(55,625) $ -- $1,592,422
====== ====== ========== ======== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 209
GVEC RURAL TV, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................................ $(55,625) $ 200,574 $ (4,205)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization.......................................... 64,019 56,160 37,440
Bad debt expense...................................... 96,775 8,735 --
Gain on sale of wireless TV rights.................... -- (230,000) --
Changes in:
Accounts and leases receivable........................ (60,029) (530,311) (222,590)
Inventory............................................. 239,370 (97,879) (188,839)
Other assets.......................................... -- (39,295) --
Accounts payable...................................... 88,661 34,243 11,361
Unearned revenues..................................... 83,535 16,933 7,638
Other liabilities..................................... 6,349 -- --
-------- --------- ---------
Net cash provided by (used in) operating
activities..................................... 463,055 (580,840) (359,195)
-------- --------- ---------
Investing activities:
Payments on notes receivable............................. 50,000 100,000 --
-------- --------- ---------
Net cash provided by investing activities........ 50,000 100,000 --
-------- --------- ---------
Financing activities:
Cash investments by GVEC................................. -- 480,840 359,195
Proceeds from issuance of stock.......................... 50,000 -- --
-------- --------- ---------
Net cash provided by financing activities........ 50,000 480,840 359,195
-------- --------- ---------
Net change in cash............................... 563,055 -- --
Cash at beginning of year.................................. -- -- --
-------- --------- ---------
Cash at end of year........................................ $563,055 $ -- $ --
======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 210
GVEC RURAL TV, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
GVEC Rural TV, Inc. (the Company) is a Texas Corporation organized for the
purpose of owning and operating direct broadcast services (DBS) television
systems to customers within its franchise areas which include four counties in
central Texas. The Company is an affiliated associate member of the National
Rural Television Cooperative (NRTC). The NRTC has contracted with Hughes
Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for
distribution of DirecTV 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. The Company also provides C-Band satellite
television services.
The Company is owned by Guadalupe Valley Electric Cooperative (GVEC) and
Guadalupe Valley Development Corporation (GVDC).
Prior to January 1, 1996, the operations of the Company were reported as a
segment of GVEC. On January 1, 1996, GVEC incorporated its rural television
segment into a separate entity (the Company). This was achieved by GVEC's
contribution of certain assets in exchange for Company stock.
The financial statements presented as of and for the year ended December
31, 1996 present the financial position and operations of the Company. As of and
for the years ended December 31, 1995 and 1994, the financial statements
represent the financial position and operation of GVEC's rural television
segment. This segment was not a separate subsidiary of GVEC nor was it operated
as a separate entity in 1995 or 1994. The financial statements for 1995 and 1994
presented herein have been derived from the records of GVEC 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 were allocated to the segment by GVEC. 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 advance billings and is
deferred until the service is provided. Equipment sales are recognized as
revenue when the equipment is delivered to the customer. Other revenues consist
primarily of the sale of C-Band equipment, G-Band program revenues and various
DBS maintenance revenue. These revenues are recognized in the same manner as DBS
programming and equipment sales.
Cash Equivalents
The Company considers all liquid investments purchased with a maturity of
ninety days or less to be cash equivalents.
Inventory
Inventory is stated at the lower of average cost or market and consists
primarily of receivers, satellite dishes and accessories.
Use of Estimates
The preparation of 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
F-83
<PAGE> 211
GVEC RURAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assets and liabilities, as well as the reported amounts of revenues and expenses
during the 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.
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 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 or fair value less costs to sell.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the financial reporting and tax basis
of certain assets.
Organizational Costs
The cost of legal and other professional fees associated with the formation
of GVEC Rural TV, Inc. on January 1, 1996 were capitalized and were being
amortized over a five-year period.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from subscribers for
monthly programming fees and for rental charges on leased equipment. Accounts
receivable as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Programming (net of allowance of $3,418 and $0 at December
31, 1996 and 1995)........................................ $ 64,117 $ 42,784
Equipment leases -- current portion (note 7)................ 122,967 130,904
Other....................................................... 27,743 12,413
-------- --------
$214,827 $186,101
======== ========
</TABLE>
F-84
<PAGE> 212
GVEC RURAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) NOTE RECEIVABLE
In January 1995, the Company sold for $230,000 its rights to provide
certain wireless television services to an unrelated party. An initial payment
of $100,000 was received at the time of sale, and the buyer signed a note for
the remaining $130,000. The note was paid in full in March 1997.
(4) INCOME TAXES
The Company's deferred tax assets relate principally to nondeductible
reserves for bad debt and a net operating loss carryforward.
A summary of deferred tax assets at December 31, 1996 follows:
<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences..................................... $ 2,056
Net operating loss carryforward........................... 7,552
-------
Total deferred tax assets......................... 9,608
Less asset valuation reserve................................ (9,608)
-------
Net deferred tax assets........................... $ --
=======
</TABLE>
Due to outstanding net operating loss carryforwards, no provision for
income taxes was recorded in 1996. The net operating loss for tax purposes of
$22,211 as of December 31, 1996 expires in 2011.
In 1995 and 1994, the Company was not directly subject to income taxes, as
it was operated as a segment of GVEC. GVEC did not allocate tax expense
(benefit) to the segment and, accordingly, no provision for income taxes has
been made in 1995 or 1994.
(5) NRTC PATRONAGE CAPITAL
The NRTC declares and the Company 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 Company has recorded an asset and an offsetting deferred income liability
for the noncash portion of the patronage dividend. The deferred income will be
recognized as revenue when cash distributions are declared by the NRTC. Deferred
income of $41,515 and $18,848 was included in other liabilities at December 31,
1996 and 1995, respectively.
(6) RELATED PARTY TRANSACTIONS
On January 1, 1996, GVEC contributed all of its satellite television assets
to GVEC Rural TV, Inc. in exchange for 100% of the issued and outstanding 7,500
shares of Class A common stock. These assets were recorded at historical cost.
GVDC purchased 100% of the issued and outstanding 2,500 shares of Class B common
stock in January 1996. Class A and B common shares have identical features
except that dividends may be declared separately on each issue at the discretion
of the Board of Directors. GVEC and GVEC Rural TV, Inc. share the same Board of
Directors as GVDC.
GVEC continues to perform management and accounting functions for GVEC
Rural TV, Inc. and bills GVEC Rural TV, Inc. for such services. A related
payable to GVEC of $16,707 exists at December 31, 1996.
F-85
<PAGE> 213
GVEC RURAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASES
In addition to selling satellite television equipment, the Company also
leases the equipment to customers for periods of three to seven years at a fixed
monthly rental charge. These leases qualify as sales-type capital leases and are
therefore recorded as sales of equipment.
Future minimum rental payments to be received, less a monthly handling fee
and an allowance for uncollectible accounts, are included in accounts
receivable. At December 31, 1996, 1995 and 1994, the net lease receivable was
$615,560, $688,969 and $202,500, respectively. The December 31, 1996 lease
receivable is to be received in subsequent years as follows:
<TABLE>
<S> <C>
1997........................................................ $122,967
1998........................................................ 122,967
1999........................................................ 122,967
2000........................................................ 122,967
2001........................................................ 114,689
Thereafter.................................................. 41,401
Less allowance.............................................. (32,398)
--------
Total............................................. $615,560
========
</TABLE>
Lease receivables due within one year are classified as current receivables
on the Company's balance sheets.
(8) SUBSEQUENT EVENT
On June 3, 1997, the Company contracted to sell certain of its DBS assets
to Golden Sky Systems, Inc. The acquisition closed on July 8, 1997.
F-86
<PAGE> 214
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-87
<PAGE> 215
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Program revenue........................................... $527,263 $376,622
Equipment sales........................................... 57,971 167,092
Other revenue............................................. 70,114 65,193
-------- --------
Total revenues.................................... 655,348 608,907
-------- --------
Costs and expenses:
Programming costs......................................... 307,158 200,738
Equipment costs........................................... 56,781 153,828
Rebate expense............................................ 4,929 6,523
General and Administrative................................ 176,388 133,995
Amortization.............................................. 28,080 28,080
Bad debt expense.......................................... 58,889 48,395
Other..................................................... 111,019 55,512
-------- --------
Total costs and expenses.......................... 743,244 627,071
-------- --------
Operating loss.................................... (87,896) (18,164)
Interest income............................................. 7,663 6,954
-------- --------
Net loss.......................................... $(80,233) $(11,210)
======== ========
</TABLE>
See accompanying notes.
F-88
<PAGE> 216
GVEC RURAL TV, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Operating Activities
Net loss.................................................. $(80,233) $(11,210)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization........................................... 28,080 28,080
Bad Debt Expense....................................... 58,889 48,395
Changes in:
Accounts and leases receivable......................... 146,539 (67,956)
Inventory.............................................. 23,610 160,878
Other assets........................................... (5,348) (18,738)
Accounts payable....................................... (8,445) 14,977
Unearned revenue....................................... (59,937) 55,429
Other liabilities...................................... (34,834) 11,442
-------- --------
Net cash provided by operating activities................... 68,321 221,297
-------- --------
Investing activities:
Payments on notes receivable.............................. 80,000 50,000
-------- --------
Net cash provided by investing activities................... 80,000 50,000
-------- --------
Financing activities:
Proceeds from issuance of stock........................... -- 50,000
-------- --------
Net cash provided by financing activities................... -- 50,000
-------- --------
Net increase in cash........................................ 148,321 321,297
Cash at beginning of period................................. 563,055 --
-------- --------
Cash at end of period....................................... $711,376 $321,297
======== ========
</TABLE>
See accompanying notes.
F-89
<PAGE> 217
GVEC RURAL TV, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
GVEC Rural TV, Inc. (the Company) is a Texas corporation organized for the
purpose of owning and operating direct broadcast satellite services (DBS) to
customers within its franchise areas, which include four counties in central
Texas. 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. Hughes controls the satellites that provide
programming for DirecTV. The Company also provides C-Band satellite television
services.
The company is owned by Guadalupe Valley Electric Cooperative (GVEC) and
Guadalupe Valley Development Corporation (GVDC).
Prior to January 1, 1996, the operations of the Company were reported as a
segment of GVEC. On January 1, 1996, GVEC incorporated its rural television
segment into a separate entity (the Company). This was achieved by GVEC's
contribution of certain assets in exchange for Company stock.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenue represents subscriber advance billings and is
deferred until the service is provided. equipment sales are recognized as
revenue when the equipment is delivered to the customer. Other revenues consist
primarily of the sale of C-Band equipment, G-Band program revenues and various
DBS maintenance revenue. These revenues are recognized in the same manner as DBS
programming and equipment sales.
Use of Estimates
The preparation of 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 revenues and expenses during the period. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
Due to outstanding net operating loss carryforwards, no provision for
income taxes has been recorded as it is not recoverable.
(2) SUBSEQUENT EVENTS
On July 8, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-90
<PAGE> 218
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-91
<PAGE> 219
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Jackson Electric Cooperative:
We have audited the accompanying balance sheets JECTV (the Segment) as of
December 31, 1996 and 1995 and the related statements of operations, segment
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. 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 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 JECTV as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG LLP
August 15, 1997, except at to
notes 6 and 7, which
are as of September 2 and
August 26, 1997 respectively
Kansas City, Missouri
F-92
<PAGE> 220
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Current assets:
Cash...................................................... $ 429,507 $ 177,492
Accounts receivable (note 2).............................. 152,778 106,540
Inventory................................................. 187,612 445,896
Notes receivable (note 3)................................. 289,100 441,175
---------- ----------
Total current assets.............................. 1,058,997 1,171,103
Furniture, fixtures and equipment (net of accumulated
depreciation of $224,861 and $41,785) (note 5)............ 775,865 542,015
Intangible assets (net of accumulated amortization of
$179,455 and $107,673).................................... 538,366 610,148
Other assets (note 4)....................................... 75,488 17,731
---------- ----------
Total assets...................................... $2,448,716 $2,340,997
========== ==========
LIABILITIES AND SEGMENT EQUITY
Current liabilities:
Accounts payable (note 6)................................. $ 235,101 $ 118,865
Unearned revenue.......................................... 176,368 54,189
Accrued interest (note 6)................................. 155,807 50,526
Other (note 4)............................................ 80,383 22,871
Note payable (note 6)..................................... 1,451,796 1,340,630
---------- ----------
Total current liabilities......................... 2,099,455 1,587,081
Segment equity.............................................. 349,261 753,916
---------- ----------
Total liabilities and segment equity.............. $2,448,716 $2,340,997
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-93
<PAGE> 221
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Programming revenues................................... $1,609,572 $ 723,437 $ 29,503
Equipment sales........................................ 359,579 644,505 469,865
Lease revenue (note 5)................................. 197,417 48,022 --
Other revenues......................................... 84,816 218,462 58,865
---------- ---------- ---------
Total revenues................................. 2,251,384 1,634,426 558,233
---------- ---------- ---------
Cost of revenues:
Programming costs...................................... 1,007,875 447,331 30,582
Equipment costs........................................ 421,622 604,891 395,433
Rebate expense......................................... 78,703 14,882 472
Other costs of revenues................................ 125,059 160,991 82,104
---------- ---------- ---------
Total cost of revenues......................... 1,633,259 1,228,095 508,591
---------- ---------- ---------
Gross profit................................... 618,125 406,331 49,642
---------- ---------- ---------
Expenses:
Salaries, wages and commissions........................ 225,449 179,332 76,991
Depreciation and amortization.......................... 256,858 105,566 39,435
Bad debt expense....................................... 161,383 165,236 11,607
Marketing.............................................. 104,850 190,631 12,124
Other selling, general and administrative expenses..... 48,636 43,059 16,687
---------- ---------- ---------
797,176 683,824 156,844
---------- ---------- ---------
Operating loss................................. (179,051) (277,493) (107,202)
Interest income.......................................... 40,867 31,437 --
Interest expense......................................... (105,281) (50,526) --
---------- ---------- ---------
Net loss....................................... $ (243,465) $ (296,582) $(107,202)
========== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE> 222
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF SEGMENT EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C>
Balance at December 31, 1993................................ $ 717,821
Additional investment by Jackson Electric................. 730,719
Net loss.................................................. (107,202)
----------
Balance at December 31, 1994................................ 1,341,338
Return of capital to Jackson Electric..................... (290,840)
Net loss.................................................. (296,582)
----------
Balance at December 31, 1995................................ 753,916
Return of capital to Jackson Electric..................... (161,190)
Net loss.................................................. (243,465)
----------
Balance at December 31, 1996................................ $ 349,261
==========
</TABLE>
See accompanying notes to financial statements.
F-95
<PAGE> 223
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Cash from operating activities:
Net loss................................................ $(243,465) $ (296,582) $(107,202)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 256,858 105,566 39,435
Bad debt expense..................................... 161,383 165,236 11,607
Change in:
Accounts receivable.................................. (169,623) (87,112) (75,658)
Inventory............................................ (27,017) (703,393) (157,278)
Other assets......................................... (57,757) (17,731) --
Accounts payable..................................... 116,236 96,037 22,828
Unearned revenue..................................... 122,179 37,819 16,370
Accrued interest..................................... 105,281 50,526 --
Other liabilities.................................... 59,969 16,806 6,065
--------- ---------- ---------
Net cash provided by (used in) operating
activities.................................... 324,044 (632,828) (243,833)
--------- ---------- ---------
Cash flows from investing activities:
Additions to equipment.................................. (136,082) (129,711) (34,857)
Issuance of notes receivable............................ (79,957) (621,246) (174,863)
Payments on notes receivable............................ 194,034 216,594 17,727
--------- ---------- ---------
Net cash used in investment activities.......... (22,005) (534,363) (191,993)
--------- ---------- ---------
Cash flows from financing activities:
Cash invested by (returned to) Jackson Electric......... (161,190) (290,840) 730,719
Proceeds from issuance of debt.......................... 1,006,807 1,552,500 --
Payments on debt........................................ (895,641) (211,870) --
--------- ---------- ---------
Net cash provided by (used in) financing
activities.................................... (50,024) 1,049,790 730,719
--------- ---------- ---------
Net change in cash.............................. 252,015 (117,401) 294,893
Cash at beginning of period............................... 177,492 294,893 --
--------- ---------- ---------
Cash at end of period..................................... $ 429,507 $ 177,492 $ 294,893
========= ========== =========
</TABLE>
See accompanying notes to the financial statements.
F-96
<PAGE> 224
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
JECTV (the Segment) is a segment of Jackson Electric Cooperative (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 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, 1996, 1995 and 1994, the Company had the operating
rights for seven counties in southeast 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 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
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 company 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 accounts receivable, notes receivable,
accounts payable, and long-term debt are carried at cost, which approximates
fair value.
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-97
<PAGE> 225
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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 or fair value less costs to sell.
Income Taxes
The Company, and thus the Segment, is not considered a taxable entity for
federal and state income tax purposes, as it is a not-for-profit entity.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
(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, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accounts receivable:
Programming and leases (net of allowance of $7,700 and
$0).................................................... $124,839 $ 99,858
Equipment sales (net of allowance of $14,200 and $0)...... 27,939 6,682
-------- --------
$152,778 $106,540
======== ========
</TABLE>
(3) NOTES RECEIVABLE
The Segment provides customers the option of purchasing DBS equipment on
credit. These payment plans have terms of three years and carry interest at 7%
to 12%. Upon default by a customer, the Segment repossesses the equipment and
transfers the resale value of the equipment to inventory and records an
allowance for the balance of the unpaid note receivable.
At December 31, 1996 and 1995, the net notes receivable balance consists of
the following:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Notes receivable............................................ $447,711 $ 561,788
Less allowance.............................................. (158,611) (120,613)
-------- ---------
Notes receivable, net............................. $289,100 $ 441,175
======== =========
</TABLE>
(4) 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 the form of NRTC patronage capital certificates,
which will redeemed in cash at a future date at the discretion of the NRTC. The
Segment has recorded an asset and an offsetting deferred income liability for
the noncash portion of the patronage dividend. The deferred income will be
recognized as revenue when cash distributions are declared by the NRTC. Deferred
revenue included in other liabilities at December 31, 1996 and 1995 was $75,488
and $17,731, respectively.
F-98
<PAGE> 226
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) LEASES
In addition to selling satellite television equipment, the Segment also
leases the equipment to customers at fixed monthly rental charges. These leases
have minimum lease terms of two years, which can be extended to up to seven
years at the lessee's option.
These leases qualify as operating leases and accordingly, the leased units
are transferred from the Segment's inventory of existing units and included in
furniture, fixtures and equipment at average cost along with related
installation costs. Leased units are depreciated on a straight line basis over a
five-year period, which approximates the average length of the rental term.
Rental income is recognized in the month earned.
The carrying amount of leased equipment included in furniture, fixtures and
equipment at December 1, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cost........................................................ $936,701 $549,507
Accumulated depreciation.................................... (202,871) (30,845)
-------- --------
Net carrying cost................................. $733,830 $518,662
======== ========
</TABLE>
Future minimum lease payments to be received under the Segment's equipment
leases are approximately $113,000 in 1997 and $20,000 in 1998.
(6) 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 $717,821 prior to the commencement of DBS operations in
mid-1994.
The Company also has a revolving line of credit with a finance company
under which it borrows funds which are used primarily to operate the Segment. A
percentage of the outstanding debt and a percentage of the interest paid to the
finance company under the line of credit is allocated to the Segment. The line
of credit carries interest at a variable rate which ranged from 7% to 6% in 1996
and 1995. Interest expense allocated to the Segment was $105,281, $50,526, and
$0 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company also allocates certain salary costs associated with operating
the Segment to the Segment's expense accounts. All other expenses are paid
directly from the cash accounts of the Segment.
Intercompany liabilities included in the Segment's December 31, 1996 and
1995 balance sheets are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable............................................ $ 34,494 $ --
Long-term debt.............................................. $1,451,796 $1,340,630
Accrued interest............................................ $ 155,807 $ 50,526
</TABLE>
The line of credit noted above was paid off September 2, 1997 in
conjunction with the sale of the Segment noted in note 5.
(7) SUBSEQUENT EVENTS
On July 15, 1997, the Company contracted to sell substantially all of the
Segment's assets to Golden Sky Systems, Inc. The acquisition closed on August
26, 1997.
F-99
<PAGE> 227
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX-MONTHS ENDED JUNE 30, 1997 AND 1996
F-100
<PAGE> 228
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Program revenue........................................... $ 888,822 $ 781,222
Equipment sales........................................... 127,622 176,050
Lease and other revenue................................... 139,278 143,041
---------- ----------
Total revenue..................................... 1,155,722 1,100,313
---------- ----------
Costs and expenses:
Programming costs......................................... 503,259 492,170
Equipment costs........................................... 149,488 205,979
Rebate expense and other costs of revenues................ 167,445 105,928
Selling, general and administrative....................... 230,355 216,807
Depreciation and amortization............................. 139,814 121,517
Bad debt expense.......................................... 103,467 80,692
---------- ----------
Total costs and expenses.......................... 1,293,828 1,223,093
---------- ----------
Operating loss.................................... (138,106) (122,780)
Non-operating items:
Interest income........................................... 13,005 21,971
Interest expense.......................................... (41,981) (55,539)
---------- ----------
(28,976) (33,568)
---------- ----------
Net loss.......................................... $ (167,082) $ (156,348)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-101
<PAGE> 229
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flow from operating activities Net loss................ $(167,082) $(156,348)
Adjustments to reconcile net cash income to net used in
operating activities:
Depreciation and amortization.......................... 139,814 121,517
Bad debt expense....................................... 103,467 80,692
Changes in:
Accounts receivable.................................... (136,180) (153,264)
Inventory.............................................. 30,702 253,161
Accounts payable....................................... (147,322) (2,790)
Unearned revenues...................................... (80,989) 10,267
Accrued interest and other liabilities................. (155,807) (50,701)
--------- ---------
Net cash provided by (used in) operating
activities...................................... (413,397) 102,534
--------- ---------
Cash flows from investing activities:
Issuance of notes receivable.............................. -- (195,354)
Payments on notes receivable.............................. 34,114 61,254
Purchase of equipment..................................... 124,204 (187,690)
--------- ---------
Net cash provided by (used in) investing
activities...................................... 158,318 (321,790)
--------- ---------
Cash flows from financing activities:
Proceeds from new notes payable........................... -- 558,987
Payments on notes payable................................. -- (447,821)
--------- ---------
Net cash provided by financing activities......... -- 111,166
--------- ---------
Net change in cash................................ (255,079) (108,090)
Beginning of period cash and cash equivalents............... 429,507 177,492
--------- ---------
End of period cash and cash equivalents..................... $ 174,428 $ 69,402
========= =========
</TABLE>
See accompanying notes to financial statements.
F-102
<PAGE> 230
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
JECTV (the Company) is a Segment of Jackson Electric Cooperative (the
Parent). The Company was formed for the purpose of operating direct broadcast
satellite (DBS) television systems purchased by the Parent. The Parent 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. Hughes controls the satellites that provide programming for
DirecTV. The Company has the operating rights for seven counties in Texas.
The Company is not a separate subsidiary of the Parent nor has it been
operated as a separate entity. The financial statements presented herein have
been derived from the records of the Parent and have been prepared to present
the Company's 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 Company by the Parent. Such allocated expenses may or
may not be indicative of what such expenses would have been had the Company been
operated as a separate entity.
The Company is party to various intercompany transactions with the Parent.
The Parent purchased the DBS franchise rights under which the Company provides
DBS programming for $717,821 prior to the commencement of DBS operations in
mid-1994.
The Parent also has a revolving line of credit with a finance company under
which it borrows funds which are used primarily to operate the Company. A
percentage of the outstanding debt and a percentage of the interest paid under
the line of credit is allocated to the Company. The line of credit carries
interest at a variable rate which ranged from 7% to 6% in 1996 through June 30,
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. Equipment
sales are recognized as revenue when the equipment is delivered to the customer.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities as well as the
reported amounts of revenues and expenses during the period to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
Notes Receivable
The Company provides customers the option of purchasing DBS equipment on
credit. These payment plans have terms of three years and carry interest at 7%
to 12%. Upon default by a customer, the Company repossesses the equipment and
transfers the resale value of the equipment to inventory and records an
allowance for the balance of the unpaid note receivable.
F-103
<PAGE> 231
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
The Parent, and thus, the Company, is not considered a taxable entity for
federal and state income tax purposes, as it is a not-for-profit entity.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
(2) SUBSEQUENT EVENTS
On August 26, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-104
<PAGE> 232
ARGOS SUPPORT SERVICES COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORTS THEREON)
F-105
<PAGE> 233
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Argos Support Services Company:
We have audited the accompanying balance sheet of Argos Support Services
Company (the Company) as of December 31, 1996 and 1995 and the related
statements of operations, shareholder's deficit 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 Argos Support Services
Company at December 31, 1996 and 1995, the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
August 8, 1997
Kansas City, Missouri
F-106
<PAGE> 234
ARGOS SUPPORT SERVICES COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,271,024 $ 227,358
Restricted cash (note 2).................................. 50,524 135,000
Trade receivables (net allowance of $3,732 and $0)........ 473,905 117,684
Inventory................................................. 79,994 84,478
----------- ----------
Total current assets.............................. 1,875,447 564,520
Furniture, fixtures and equipment (net of accumulated
depreciation of $45,777 and $15,680)...................... 91,681 44,783
Intangible assets (net of accumulated amortization of
$269,920 and $161,952).................................... 910,602 917,728
Other assets................................................ 55,806 13,419
----------- ----------
Total assets...................................... $ 2,933,536 $1,540,450
=========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Liabilities:
Current liabilities:
Trade payables......................................... $ 417,615 $ 470,571
Unearned revenues...................................... 852,696 185,837
Notes payable -- current portion....................... 21,085 --
Line of credit (note 2)................................ 50,000 --
Other current liabilities (note 1)..................... 144,269 40,203
----------- ----------
Total current liabilities......................... 1,485,665 696,611
----------- ----------
Long-term liabilities:
Line of credit (note 2)................................ -- 125,000
Notes payable, less current portion (note 3)........... 10,883 11,577
Long-term debt (note 3)................................ 275,000 --
----------- ----------
Total long-term liabilities....................... 285,883 136,577
----------- ----------
Total liabilities................................. 1,771,548 833,188
----------- ----------
Minority interest (note 5).................................. 529,472 842,091
----------- ----------
Shareholder's equity (deficit):
Capital stock ($1 par value; 10,000 shares authorized,
5,800 shares issued and outstanding)................... 5,800 5,000
Additional paid-in capital................................ 1,968,018 608,818
Accumulated deficit....................................... (1,341,302) (748,647)
----------- ----------
Total shareholder's equity (deficit).............. 632,516 (134,829)
----------- ----------
Total liabilities and shareholder's equity
(deficit)....................................... $ 2,933,536 $1,540,450
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE> 235
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Program revenues.......................................... $2,829,716 $ 836,634
Equipment sales........................................... 912,118 936,914
Other revenues............................................ 23,746 9,110
---------- ----------
Total revenues.................................... 3,765,580 1,782,658
---------- ----------
Cost of revenues:
Programming costs......................................... 1,725,812 556,652
Equipment costs........................................... 683,726 864,008
Rebate expense............................................ 408,958 16,875
Other cost of revenues.................................... 58,594 110
---------- ----------
Total cost of revenues............................ 2,877,090 1,437,645
---------- ----------
Gross profit...................................... 888,490 345,013
---------- ----------
Expenses:
Salaries and wages........................................ 788,020 405,125
Amortization and depreciation............................. 138,065 114,949
Marketing................................................. 82,282 62,771
Bad debt expense.......................................... 20,850 4,540
Professional fees......................................... 102,148 72,724
Other selling, general and administrative................. 361,576 333,355
---------- ----------
1,492,941 993,464
---------- ----------
Net loss before interest.......................... (604,451) (648,451)
Interest income and expense:
Interest income........................................... 36,971 7,511
Interest expense.......................................... (25,175) (8,725)
---------- ----------
Net loss.......................................... $ (592,655) $ (649,665)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-108
<PAGE> 236
ARGOS SUPPORT SERVICE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance -- December 31, 1994.................. $5,000 $ 608,818 $ (98,982) $ 514,836
Net loss.................................... -- -- (649,665) (649,665)
------ ---------- ----------- ----------
Balance -- December 31, 1995.................. 5,000 608,818 (748,647) (134,829)
Sale of additional stock.................... 800 1,359,200 -- 1,360,000
Net loss.................................... -- -- (592,655) (592,655)
------ ---------- ----------- ----------
Balance -- December 31, 1996.................. $5,800 $1,968,018 $(1,341,302) $ 632,516
====== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE> 237
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................. $ (592,655) $(649,665)
Adjustments to reconcile net income to net used in
operating activities:
Depreciation and amortization.......................... 138,065 114,949
Bad debt expense....................................... 20,850 4,540
Changes in:
Trade receivable....................................... (377,071) (122,224)
Inventory.............................................. 4,484 (70,763)
Other assets........................................... (42,387) (11,070)
Trade payables......................................... (52,956) 469,571
Unearned revenues...................................... 666,859 185,837
Other current liabilities.............................. 104,066 22,658
---------- ---------
Net cash used in operating activities............. (130,745) (56,167)
---------- ---------
Cash flows from investing activities:
Additions to equipment.................................... (76,995) (39,663)
Proceeds from maturities of restricted cash investments... 84,476 15,000
---------- ---------
Net cash provided by (used in) investing
activities...................................... 7,481 (24,663)
---------- ---------
Cash flows from financing activities:
Proceeds from issuance of line of credit.................. -- 125,000
Payments on line of credit................................ (75,000) (880,747)
Proceeds from issuance of debt and notes payable.......... 296,691 15,268
Payments on debt and notes payable........................ (1,300) (53,691)
Proceeds from issuance of stock........................... 1,360,000 --
Proceeds from sales of revenue sharing rights............. -- 842,091
Purchase of investor's revenue sharing rights............. (413,461) --
---------- ---------
Net cash provided by financing activities......... 1,166,930 47,921
---------- ---------
Net change in cash................................ 1,043,666 (32,909)
Beginning of year cash and cash equivalents balance......... 227,358 260,267
---------- ---------
End of year cash and cash equivalents balance............... $1,271,024 $ 227,358
========== =========
Cash paid for interest...................................... $ 21,165 $ 8,725
========== =========
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE> 238
ARGOS SUPPORT SERVICES COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Argos Support Services Company (the Company) was formed in March 1993 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 the Company to provide exclusive marketing rights for distribution of
DirecTV satellite television programming in the United States. The marketing
rights give the license 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, 1996 and 1995, the Company has
the operating rights for territories in Texas, Florida and Utah.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings 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
entirely of Direct Satellite Systems which includes receivers, satellite dishes
and accessories.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make a
number of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses during the period. Actual results could
differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consisting of trade receivables, trade payables and
long-term liabilities are carried at cost, which approximates fair value, as a
result of the shortterm 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 the expected useful life of the revenue stream of those services, ten
years.
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 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 or fair value less costs to sell.
F-111
<PAGE> 239
ARGOS SUPPORT SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NRTC Patronage Capital
The NRTC declares and the Company 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 Company has recorded an asset and an offsetting deferred income liability
for the noncash portion of the patronage dividend. The deferred income will be
recognized as revenue when cash distributions are declared by the NRTC. Deferred
income included in other current liabilities was $48,107 and $10,804 at December
31, 1996 and 1995, respectively.
Trade Receivables
Trade receivables consist of amounts due from subscribers for monthly
programming fees.
Depreciation
Depreciation on furniture, fixtures and equipment is computed on a
straight-line basis over the estimated useful lives of the assets, which range
from five to seven years.
Cash and Cash Equivalents
Money market investments are classified as cash and cash equivalents for
balance sheet and statement of cash flow purposes.
(2) RESTRICTED CASH
The Company maintains a line of credit with a local bank for operating cash
needs. As of December 31, 1996 and 1995, the Company had drawn $50,000 and
$125,000, respectively, on this line of credit, which carries an interest rate
of 8.5%, has a final maturity date of March 23, 1997 and is secured by
certificates of deposit held by the bank.
(3) NOTES PAYABLE AND LONG-TERM DEBT
Debt consist primarily of a $275,000 debenture payable to the majority
shareholder of the Company. The debenture requires semiannual interest-only
payments at 8.75% until maturity at April 1, 1999, at which time the principal
is due in full. The Company also has two notes payable to banks totaling $31,968
at December 31, 1996.
Scheduled repayments of long-term debt and notes payable outstanding at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 21,085
1998........................................................ 3,543
1999........................................................ 278,856
2000........................................................ 3,484
--------
$306,968
========
</TABLE>
(4) INCOME TAXES
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement's carrying amounts of existing assets and liabilities and their
respective tax basis.
F-112
<PAGE> 240
ARGOS SUPPORT SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences, which relate primarily to allowances on receivables and
the carrying value of fixed assets, are not significant to the financial
statements.
The Company has not recorded current or deferred tax benefits related to
its taxable operating losses and temporary differences due to uncertainty as to
the likelihood that the results of future operations will generate sufficient
taxable income to realize net operating loss carryforwards and deferred tax
assets.
(5) MINORITY INTEREST
During 1995, the Company sold revenue rights to investors in return for a
cash investment of $842,091. These rights entitle investors to receive a
percentage of any positive net revenues on certain zip codes based on
programming revenues less programming costs related to the zip codes, less an
allocation of marketing and selling, general and administrative expenses. No
amounts were earned or paid on these revenue rights in 1995 or 1996.
As part of the pending sale of the Company described in note 6, the Company
has made offers to repurchase the revenue rights described above. Repurchase
amounts exceeding the original proceeds from the sale of the rights are recorded
as an intangible asset and amortized over the expected useful life of the
franchise. During 1996, the Company paid $413,461 to repurchase certain revenue
rights with a book value of $312,619. At December 31, 1996, the Company has
offered a total of $1,182,307 to buy back the revenue rights of the three
remaining investors having a book value of $529,472.
In August 1997, the Company purchased the rights of one of these investors
(book value of $250,000) for $600,000. As of August 9, 1997, the Company has
outstanding offers to purchase the rights of the remaining two investors for
$582,307. Ultimate amounts paid, if any, could exceed this amount.
(6) SUBSEQUENT EVENTS
On April 3, 1997, the Company's shareholders signed a letter of interest to
sell substantially all its outstanding common stock to Golden Sky Systems, Inc.
(GSS), which owned 20% of the outstanding common stock of the Company. The
acquisition closed on August 8, 1997.
F-113
<PAGE> 241
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-114
<PAGE> 242
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Program revenues.......................................... $2,348,267 $1,171,940
Equipment sales........................................... 252,027 428,730
Other revenues............................................ 95,667 2,625
---------- ----------
Total revenues.................................... 2,695,961 1,603,295
---------- ----------
Cost of revenues:
Programming costs......................................... 1,325,976 621,415
Equipment costs........................................... 195,154 333,805
Rebate expense............................................ 344,437 149,909
Other cost of revenues.................................... 20,922 --
---------- ----------
Total cost of revenues............................ 1,886,489 1,105,129
---------- ----------
Gross profit...................................... 809,472 498,166
---------- ----------
Expenses:
Salaries and wages........................................ 604,895 287,223
Depreciation and amortization............................. 63,528 78,915
Marketing................................................. 80,165 30,831
Bad debt expense.......................................... 2,586 6,880
Professional fees......................................... 63,861 57,153
Other selling, general and administrative................. 181,737 177,856
---------- ----------
996,772 638,858
---------- ----------
Loss before interest.............................. (187,300) (140,692)
Interest:
Interest income........................................... 29,696 9,206
Interest expense.......................................... (16,373) --
---------- ----------
Net loss.......................................... $ (173,977) (131,486)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 243
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................. $ (173,977) $(131,486)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 63,528 78,915
Bad debt expense....................................... 2,586 6,880
Changes in:
Trade receivable....................................... (36,586) (84,014)
Inventory.............................................. (17,600) 25,310
Other assets........................................... 54,566 10,564
Trade payables......................................... (6,374) (63,198)
Unearned revenues...................................... 38,646 30,150
Other current liabilities.............................. (73,370) 12,671
----------- ---------
Net cash used in operating activities............. (148,581) (114,208)
----------- ---------
Cash flows from investing activities:
Additions to equipment.................................... -- (66,085)
Proceeds from the sale of equipment....................... 22,285 --
----------- ---------
Net cash provided by (used in) investing
activities...................................... 22,285 (66,085)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable................... -- 9,300
Payments on line of credit................................ (50,000) (75,000)
Proceeds from issuance of debt and notes payable.......... -- 275,000
Payments on debt and notes payable........................ (9,464) --
----------- ---------
Net cash provided by (used in) financing
activities...................................... (59,464) 209,300
----------- ---------
Net change in cash................................ (185,760) 29,007
Beginning of period cash and cash equivalents............... 1,321,548 362,358
----------- ---------
End of period cash and cash equivalents..................... $ 1,135,788 $ 391,365
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE> 244
ARGOS SUPPORT SERVICES COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Argos Support Services Company (the Company) was formed in March 1993 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 the Company to provide exclusive marketing rights for distribution of
DirecTV satellite television programming in the United States. The marketing
rights give the license owner exclusive rights to distribution of DirecTV
service within the contract area. In 1994, Hughes launched the satellites that
provide programming for DirecTV. At June 30, 1997 and 1996, the Company has the
operating rights for territories in Texas, Florida and Utah.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings and are
deferred until the service is provided. Equipment sales are recognized as
revenue when the equipment is delivered to the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make a
number of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses during the period. 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 the expected useful life of the revenue stream of those services, ten
years.
Depreciation
Depreciation of furniture, fixtures and equipment is computed on a
straight-line basis over the estimated useful lives of the assets, which range
from five to seven years.
(2) INCOME TAXES
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement's carrying amounts of existing assets and liabilities and their
respective tax basis. Temporary differences, which relate primarily to
allowances on receivables and the carrying value of fixed assets, are not
significant to the financial statements.
The Company has not recorded current or deferred tax benefits related to
its taxable operating losses and temporary differences due to uncertainty as to
the likelihood that the results of future operations will generate sufficient
taxable income to realize net operating loss carryforwards and deferred tax
assets.
(3) SUBSEQUENT EVENTS
On August 8, 1997, the Company's shareholders sold substantially all their
outstanding common stock to Golden Sky Systems, Inc. (GSS), which owned 20% of
the outstanding common stock of the Company.
F-117
<PAGE> 245
GARDONVILLE SYSTEMS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-118
<PAGE> 246
INDEPENDENT AUDITORS' REPORT
Board of Directors
Gardonville Systems, Inc.
Brandon, Minnesota
We have audited the accompanying balance sheet of Gardonville Systems, Inc.
(a wholly-owned subsidiary of Gardonville Cooperative Telephone Association) as
of December 31, 1997, and the related statements of income, stockholder's equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gardonville Systems, 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.
OLSEN THIELEN & CO., LTD.
February 10, 1998
Eden Prairie, Minnesota
F-119
<PAGE> 247
GARDONVILLE SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash...................................................... $155,919
Escrow Deposit............................................ 65,000
--------
Total Current Assets.............................. 220,919
--------
Long-Term Assets:
Receivable from Affiliate -- Note 3....................... 570,007
--------
Total Long-Term Assets............................ 570,007
--------
Total Assets...................................... $790,926
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 14,685
--------
Total Current Liabilities......................... 14,685
--------
Stockholder's Equity:
Common Stock -- $1 Par Value, 1,000,000 Shares Authorized,
279,720 Shares Issued and Outstanding.................. 279,720
Paid in Capital........................................... 2,745
Retained Earnings......................................... 493,826
--------
Total Stockholder's Equity........................ 776,291
--------
Total Liabilities and Stockholder's Equity........ $790,926
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-120
<PAGE> 248
GARDONVILLE SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Operating Revenues:
Subscription.............................................. $ 171,063
Sales..................................................... 17,127
Other..................................................... 12,385
----------
Total Operating Revenues.......................... 200,575
----------
Operating Expenses:
Subscription.............................................. 108,510
Cost of Goods Sold........................................ 11,706
Amortization and Depreciation............................. 20,705
Miscellaneous............................................. 42,169
----------
Total Operating Expenses.......................... 183,090
----------
Operating Income............................................ 17,485
----------
Other Income and Expenses:
Gain on Sale -- Note 2.................................... 1,094,035
Brokerage Fees............................................ (61,000)
----------
Net Other Income and Expenses..................... 1,033,035
----------
Income Taxes -- Note 4...................................... (389,932)
----------
Net Income........................................ $ 660,588
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-121
<PAGE> 249
GARDONVILLE SYSTEMS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON (ACCUMULATED PAID IN
STOCK DEFICIT) CAPITAL
-------- ------------ -------
<S> <C> <C> <C>
BALANCE, on December 31, 1996............................... $279,720 $(166,762) $2,745
Net Income........................................ 660,588
-------- --------- ------
BALANCE, on December 31, 1997............................... $279,720 $ 493,826 $2,745
======== ========= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-122
<PAGE> 250
GARDONVILLE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities:
Net Income................................................ $ 660,588
Adjustments to Reconcile Net Income to Net Cash Used In
Operating Activities:
Amortization and Depreciation.......................... 20,705
Gain on Sale........................................... (1,094,035)
(Increase) Decrease in:
Due from Customers................................... 2,090
Escrow Deposit....................................... (65,000)
Increase in:
Accounts Payable..................................... 9,245
-----------
Net Cash Used In Operating Activities............. (466,407)
-----------
Cash Flows From Investing Activities:
Proceeds from Sale of DBS Business........................ 1,298,084
Purchase of Equipment..................................... (1,212)
Decrease in Materials and Supplies........................ 14,289
Decrease in Payable to Affiliate.......................... (237,442)
Increase in Receivable from Affiliate..................... (516,940)
-----------
Net Cash Provided By Investing Activities......... 556,779
-----------
Net Increase in Cash........................................ 90,372
Cash at Beginning of Year................................... 65,547
-----------
Cash at End of Year......................................... $ 155,919
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-123
<PAGE> 251
GARDONVILLE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations -- The Company's principal line of business was
providing direct broadcast satellite television service to residential customers
in the Douglas County area (doing business as Lakes Area TV).
B. Accounting 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,
liabilities, revenues, and expenses and disclosure of contingent assets and
liabilities as of the date of the financial statements. Actual results could
differ from those estimates.
C. Revenue Recognition -- Revenues are recognized when earned, regardless
of when they are billed.
D. Property and Depreciation -- Property and equipment are recorded at
original cost. Additions, improvements or major renewals are capitalized. Any
gains or losses on property and equipment retirements or sales are reflected
currently in operations.
Depreciation was computed using the straight-line method based on estimated
service or remaining useful lives of the assets. Estimated service lives were:
<TABLE>
<S> <C>
Vehicles, Office and Work Equipment, and Computer
Equipment................................................. 5-10 Years
</TABLE>
E. Intangible Asset -- Direct broadcast satellite (DBS) service area rights
(Note 2) were being expensed equally over ten years.
F. Income Taxes -- The provision for income taxes consists of an amount for
taxes currently payable and a provision for tax consequences deferred to future
periods. If applicable, deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
NOTE 2 -- SALE OF BUSINESS
In September 1997, the Company sold substantially all of its DBS assets
(equipment and inventory) and franchise rights for a pre-tax gain of $1,094,035,
which is net of $168,896 of net intangibles expensed at the time of sale.
NOTE 3 -- RELATED PARTY TRANSACTIONS
The Company's parent provided billing and collection, accounting and
management services totaling $29,944 in 1997 to the Company. The parent also
bills the Company for certain actual expenses attributable to the Company such
as income taxes and professional fees. The Company has an unsecured non-current
receivable from its parent company, with no stated interest rate because the
income was not significant to the financial statements. There are no definite
repayment terms for this receivable. Approximately $290,000 of income taxes
payable to the parent company are netted in "receivable from affiliate" on the
balance sheet at December 31, 1997.
NOTE 4 -- INCOME TAXES
The provision for income tax expense consists of current expense only.
F-124
<PAGE> 252
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-125
<PAGE> 253
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CTS Communications Corporation:
We have audited the accompanying balance sheets of Direct Broadcast
Satellite (the Segment), a segment of CTS Communications Corporation, as of
December 31, 1996 and 1995 and the related statements of operations, segment
equity and cash flows for the years ended December 31, 1996 and 1995 and the
period from July 29, 1994 (inception) to December 31, 1994. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Broadcast Satellite
at December 31, 1996 and 1995 and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995 and the period from July
29, 1994 (inception) to December 31, 1994, in conformity with generally accepted
accounting principles.
KPMG LLP
October 10, 1997, except as to note 4,
which is as of November 7, 1997
Kansas City, Missouri
F-126
<PAGE> 254
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $168,051 $ 66,616
Accounts receivable (note 2).............................. 67,287 25,328
Inventory................................................. 10,705 49,805
-------- --------
Total current assets.............................. 246,043 141,749
Equipment................................................. 42,321 42,321
Less, accumulated depreciation............................ 21,346 7,970
-------- --------
Equipment, net.................................... 20,975 34,351
Intangible assets (net of accumulated amortization of
$154,401 and $90,513) (note 1)............................ 484,484 548,372
Other assets -- NRTC patronage capital (note 3)............. 12,788 4,644
-------- --------
Total assets...................................... $764,290 $729,116
======== ========
LIABILITIES AND SEGMENT EQUITY
Current liabilities:
Accounts payable.......................................... $ 70,980 $ 34,377
Unearned revenue.......................................... 118,995 14,031
NRTC Patronage Capital.................................... 12,788 4,644
-------- --------
Total current liabilities......................... 202,763 53,052
Segment equity.............................................. 561,527 676,064
-------- --------
Total liabilities and segment equity.............. $764,290 $729,116
======== ========
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE> 255
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Programming revenues.................................... $ 520,940 $ 207,708 $ 14,094
Equipment sales......................................... 82,980 145,422 96,017
Other revenues.......................................... 280 152
--------- --------- ---------
Total revenues.................................. 604,200 353,282 110,111
--------- --------- ---------
Cost of revenues:
Programming costs....................................... 306,079 140,734 6,357
Equipment costs......................................... 116,614 133,867 82,435
Rebate expense.......................................... 56,538 5,413
--------- --------- ---------
Total cost of revenues.......................... 479,231 280,014 88,792
--------- --------- ---------
Gross profit.................................... 124,969 73,268 21,319
--------- --------- ---------
Expenses:
Salaries, wages and commissions......................... 116,459 98,247 12,281
Depreciation and amortization........................... 77,264 71,250 27,233
Bad debt expense........................................ 7,482 2,276 --
Marketing............................................... 43,061 44,202 88,409
--------- --------- ---------
Total expenses.................................. 244,266 215,975 127,923
--------- --------- ---------
Operating loss.................................. (119,297) (142,707) (106,604)
Other income.............................................. 2,036 1,161
--------- --------- ---------
Net loss........................................ $(117,261) $(141,546) $(106,604)
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE> 256
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF SEGMENT EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
SEGMENT
EQUITY
---------
<S> <C>
Balance at July 1, 1994..................................... $ --
Company contribution to Segment........................... 818,328
1994 net loss............................................. (106,604)
---------
Balance at December 31, 1994................................ 711,724
Company contribution to Segment........................... 105,886
1995 net loss............................................. (141,546)
---------
Balance at December 31, 1995................................ 676,064
Company contribution to Segment........................... 2,724
1996 net loss............................................. (117,261)
---------
Balance at December 31, 1996................................ $ 561,527
=========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE> 257
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss................................................ $(117,261) $(141,546) $(106,604)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 77,264 71,250 27,233
Bad debt expense..................................... 7,482 2,276 --
Changes in:
Accounts receivable.................................. (49,441) (19,051) (8,553)
Inventory............................................ 39,100 (4,693) (82,539)
Accounts payable..................................... 36,603 16,839 17,538
Unearned revenue..................................... 104,964 10,000 4,031
--------- --------- ---------
Net cash provided by (used in) operating
activities...................................... 98,711 (64,925) (148,894)
--------- --------- ---------
Investing activities:
Purchases of equipment.................................. -- -- (4,894)
Purchase of direct broadcast satellite contract areas... -- -- (638,885)
--------- --------- ---------
Net cash used for investing activities............. -- -- (643,779)
--------- --------- ---------
Financing activities -- cash investments by CTS
Communications Corporation.............................. 2,724 105,886 818,328
--------- --------- ---------
Net change in cash.............................. 101,435 40,961 25,655
Cash at beginning of year................................. 66,616 25,655 --
--------- --------- ---------
Cash at end of year....................................... $ 168,051 $ 66,616 $ 25,655
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE> 258
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Direct Broadcast Satellite (the Segment) is a segment of CTS Communication
Corporation (the Company). The Company is a wholly-owned subsidiary of Climax
Telephone Company (the Parent). The Segment was formed in July 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 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,
1996, 1995 and 1994, the Company had the operating rights for portions of two
counties in southern Michigan.
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 advance 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.
Equipment
Equipment has been recorded at cost and is depreciated over the estimated
useful lives using the straight-line method. Estimated useful lives range from
three to seven years.
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.
F-131
<PAGE> 259
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 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 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.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from subscribers for monthly
programming fees.
(3) 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 and an offsetting deferred income liability
for the noncash portion of the patronage dividend. The deferred income is
recognized as revenue when cash distributions are declared by the NRTC. Deferred
revenue included in other liabilities was $12,788 and $4,644 at December 31,
1996 and 1995, respectively.
(4) SUBSEQUENT EVENTS
On 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 on November 7, 1997.
F-132
<PAGE> 260
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
F-133
<PAGE> 261
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Program revenue........................................... $470,475 $365,236
Equipment sales........................................... 9,268 7,846
Other revenue............................................. 2,868 2,300
-------- --------
Total revenues.................................... 482,611 375,382
-------- --------
Costs and expenses:
Programming costs......................................... 292,240 207,709
Equipment costs........................................... 71,312 58,755
Rebate expense............................................ 20,156 15,647
General and Administrative................................ 100,807 104,311
Amortization.............................................. 57,755 57,948
Bad debt expense.......................................... 5,771 4,480
-------- --------
Total costs and expenses.......................... 548,041 448,850
Net loss.......................................... (65,430) (73,468)
======== ========
</TABLE>
See accompanying notes.
F-134
<PAGE> 262
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED FINANCIAL STATEMENT
SEPTEMBER 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Direct Broadcast Satellite (the Segment) is a segment of CTS Communication
Corporation (the Company). The Company is a wholly-owned subsidiary of Climax
Telephone Company (the Parent). The Segment was formed in July 1994 for the
purpose of acquiring, owning and operating direct broadcast satellite services
(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 September 30,
1997 and 1996, the Company had the operating rights for portions of two counties
in southern Michigan.
The statements of operations presented represent the 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 statements of operations presented herein
have been derived from the records of the Company and have been prepared to
present the Segment's results of operations on a stand-alone basis. Accordingly,
the statements of operations 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 advance 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.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities as well as the
reported amounts of revenues and expenses during the period in conformity with
generally accepted accounting principles. 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 the expected useful life of the revenue stream of those services, ten
years.
F-135
<PAGE> 263
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED FINANCIAL STATEMENT -- (CONTINUED)
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.
(2) SUBSEQUENT EVENTS
On November 7, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-136
<PAGE> 264
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
F-137
<PAGE> 265
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Souris River Television, Inc.
Minot, North Dakota
We have audited the accompanying balance sheets of Souris River Television,
Inc. as of December 31, 1996, and 1995 and the related statements of earnings,
shareholder's equity and cash flows for the years ended December 31, 1996, and
1995. 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 Acquisition, Inc. at
December 31, 1996, and 1995 and the results of its operations and its cash flows
for the years ended December 31, 1996, and 1995, in conformity with generally
accepted accounting principles.
EIDE HELMEKE PLLP
October 23, 1997
Sioux Falls, South Dakota
F-138
<PAGE> 266
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
BALANCE SHEETS
DECEMBER 31, 1996, AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 67,573 $ 32,720
Accounts receivable, net of allowance (Note 2)............ 54,353 95,700
Accounts receivable -- associated company................. 377,704 26,124
Inventory................................................. 254,927 259,619
Notes receivable, current maturities (Note 3)............. 105,984 172,166
Other current assets...................................... 2,451
---------- ----------
Total current assets.............................. 862,992 586,329
Property and equipment (net of accumulated depreciation of
$1,186,886 in 1996 and $943,982 in 1995) (Note 4)...... 1,076,776 1,086,569
---------- ----------
Intangible assets (net of accumulated amortization of
$329,891 in 1996 and $206,182 in 1995)................. 907,205 1,030,914
---------- ----------
OTHER ASSETS:
Other investments......................................... 71,741 19,449
Deferred income taxes (Note 5)............................ 8,211
Notes receivable, less current maturities (Note 3)........ 176,117 273,771
---------- ----------
Total other assets................................ 247,858 301,431
---------- ----------
$3,094,831 $3,005,243
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 112,410 $ 66,962
Unearned revenue.......................................... 326,924 109,937
Customer deposits......................................... 85,500 58,300
Other current liabilities................................. 5,955 --
---------- ----------
Total current liabilities......................... 530,789 235,199
---------- ----------
Deferred income taxes (Note 5)............................ 74,223 --
---------- ----------
Total liabilities................................. 605,012 235,199
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock, no par value, authorized 100,000 shares;
issued and outstanding 100 shares...................... 2,963,885 2,963,885
Accumulated deficit....................................... (474,066) (193,841)
---------- ----------
Total stockholder's equity........................ 2,489,819 2,770,044
---------- ----------
Total liabilities and shareholder's equity........ $3,094,831 $3,005,243
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE> 267
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
CATV program revenues..................................... $ 253,708 $ 261,159
DBS program revenue....................................... 1,464,579 567,480
Satellite program revenue................................. 448,568 602,030
Equipment sales........................................... 549,432 819,901
Lease revenue............................................. 236,672 18,186
Other..................................................... 40,926 31,668
---------- ----------
Total revenues.................................... 2,993,885 2,300,424
---------- ----------
COST OF REVENUES:
CATV program costs........................................ 53,997 57,308
DBS program costs......................................... 866,008 324,845
Satellite program costs................................... 339,783 379,333
Equipment costs........................................... 483,894 535,149
Rebate expense............................................ 139,414 14,343
---------- ----------
Total cost of revenues............................ 1,883,096 1,310,978
---------- ----------
Gross Profit...................................... 1,110,789 989,446
---------- ----------
EXPENSES:
Salaries, wages and commissions........................... 789,334 710,009
Depreciation and amortization............................. 384,189 218,727
Bad debt expense.......................................... 35,967 50,899
Marketing................................................. 170,664 129,993
Maintenance and installation.............................. 70,066 81,723
Other selling, general and administrative expenses........ 161,073 166,073
---------- ----------
1,611,293 1,357,424
---------- ----------
NET LOSS BEFORE INTEREST AND TAXES................ (500,504) (367,978)
---------- ----------
INTEREST INCOME............................................. 41,119 50,206
---------- ----------
NET LOSS BEFORE TAXES............................. (459,385) (317,772)
INCOME TAX BENEFIT (Note 5)................................. 179,160 123,931
---------- ----------
NET LOSS.......................................... $ (280,225) $ (193,841)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE> 268
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICITS TOTAL
---------- ----------- ----------
<S> <C> <C> <C>
Balance, January 1, 1995................................. $ -- $ -- $ --
Issuance of common stock for property and franchise
rights.............................................. 2,963,885 -- 2,963,885
Net loss, 1995......................................... -- (193,841) (193,841)
---------- --------- ----------
Balance, December 31, 1995............................... 2,963,885 (193,841) 2,770,044
Net loss, 1996......................................... -- (280,225) (280,225)
---------- --------- ----------
Balance December 31, 1996................................ $2,963,885 $(474,066) $2,489,819
========== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE> 269
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(280,225) $ (193,841)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 384,189 218,727
Bad debt expense....................................... 35,967 50,899
Deferred income taxes.................................. 82,434 (8,211)
(Increase) decrease in assets:
Accounts receivable.................................... 41,347 (81,157)
Accounts receivable -- associated company.............. (351,580) (26,124)
Inventory.............................................. 4,692 (38,514)
Other assets........................................... (2,451) --
(Decrease) increase in liabilities:
Accounts payable....................................... 45,448 66,962
Unearned revenue....................................... 164,695 90,488
Customer deposits...................................... 27,200 57,650
Other liabilities...................................... 5,955 (1,498)
--------- -----------
Net cash provided by operating activities......... 157,671 135,381
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (250,687) (705,050)
Decrease (Increase) in notes receivable................... 127,869 (88,097)
Transfer of DBS franchise rights.......................... -- (1,154,623)
--------- -----------
Net cash (used in) investing activities........... (122,818) (1,947,770)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt -- associated
company................................................ -- (1,118,776)
Issuance of common stock.................................. -- 2,963,885
--------- -----------
Net cash provided by financing activities......... -- 1,845,109
--------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... 34,853 32,720
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 32,720 --
--------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... 67,573 32,720
========= ===========
</TABLE>
See accompanying notes to the financial statements.
F-142
<PAGE> 270
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations -- Souris River Television, Inc. (the
Company) is a wholly-owned subsidiary of Souris River Telecommunications
Cooperative (the Parent). The Company was formed in December 1994 for the
purpose of owning and operating direct broadcast satellite (DBS) and cable
television systems previously purchased by the Parent. The Company is an
affiliated associate member of the National Rural Telecommunications Cooperative
(NRTC). The NRTC has contracted 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 right to distribution of DirecTV service within the contract area. In
1994, Hughes launched the satellite that provides programming for DirecTV. At
December 31, 1996, and 1995, the Company had the operating rights for sixteen
counties in North Dakota.
Revenue Recognition -- Revenues are earned for monthly DBS and cable
television and satellite services and 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.
Inventory -- Inventory is stated at the lower of average cost or market and
consists of receivers, satellite dishes and satellite TV accessories.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities to
prepare the balance sheets in conformity with generally accepted accounting
principles. 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 Company is not directly subjected to income taxes as
its net losses are consolidated with the Parent's operations for tax filing
purposes. The Company records a receivable from the Parent for the tax benefits
arising from the net losses of the Company. All tax benefits arise from losses
from continuing operations.
Investments and Other Assets -- Investments and other assets are stated at
cost.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over the following
estimated useful lives.
Cash and Cash Equivalents -- For purposes of reporting cash flows, the
company considers all deposits with a maturity of three months or less to be
cash equivalents.
F-143
<PAGE> 271
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACCOUNTS RECEIVABLE
Trade receivables consist primarily of amounts due from subscribers for
monthly programming fees from cable television and direct broadcast satellite
services. Accounts receivables as of December 31, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accounts receivable:
Programming -- DBS........................................ $50,167 $88,695
Programming -- CATV....................................... 6,552 9,203
Less allowance for uncollectibles......................... (2,366) (2,198)
------- -------
$54,353 $95,700
======= =======
</TABLE>
NOTE 3 -- NOTES RECEIVABLE
Notes receivable consist primarily of amounts due from subscribers for DBS
and satellite equipment purchases financed by the Company, repayment of the
notes range from one to five years. Notes receivable as of December 31, 1996,
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes receivable, net of allowance.......................... $282,101 $445,937
Less amount due in one year............................... 105,98 172,166
-------- --------
$176,117 $273,771
======== ========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
PLANT DEPRECIATION PLANT DEPRECIATION
BALANCE RATE BALANCE RATE
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Land and support assets...................... $ 159,352 20.0% $ 178,083 20.0%
Towers and antennas.......................... 81,994 6.7% 81,994 6.7%
CATV equipment............................... 671,460 6.7% 669,505 6.7%
CATV cable................................... 397,957 6.7% 397,957 6.7%
Leased DBS equipment......................... 952,899 20.0% 703,012 20.0%
---------- ----------
Total plant in service............. 2,263,662 2,030,551
Less accumulated depreciation...... 1,186,886 943,982
---------- ----------
$1,076,776 $1,086,569
========== ==========
</TABLE>
NOTE 5 -- INCOME TAXES
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled.
F-144
<PAGE> 272
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income tax benefit for the year ended December 31, 1996 and 1995, is
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal................................................... $207,933 $131,712
State..................................................... 53,661 33,990
-------- --------
Total current tax benefit......................... 261,594 165,702
-------- --------
Deferred:
Federal................................................... (65,524) (33,203)
State..................................................... (16,910) (8,568)
-------- --------
Total deferred tax benefit........................ (82,434) (41,771)
-------- --------
Total income tax benefit.......................... $179,160 $123,931
======== ========
</TABLE>
The tax effects of temporary differences that result in tax assets and
liabilities at December 31, 1996 and 1995, are presented below. There are no
valuation allowances provided.
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Deferred income tax assets (liabilities):
Allowance for uncollectibles.............................. $ 31,790 $22,596
Depreciation.............................................. (106,013) (14,385)
--------- -------
Net deferred income tax assets (liabilities)...... $ (74,223) $ 8,211
========= =======
</TABLE>
NOTE 5 -- RELATED PARTY TRANSACTIONS
Souris River Telecommunications Cooperative owns 100% of the outstanding
shares of Souris River Television, Inc. Souris River Telecommunications
Cooperative provides certain management, customer service, billing and
collection, and other services to the company on a contractual basis. Payments
under this contract for the years ended December 31, 1996 and 1995, were
approximately $931,000 and $797,000 respectively.
Intercompany receivable balances arising from the various intercompany
transactions at December 31, 1996, and 1995 were $377,704, and $26,124,
respectively.
NOTE 6 -- SUBSEQUENT EVENT
On October 16, 1997, the Company contracted to sell 69% of their DBS
franchise area to Golden Sky Systems, Inc. The acquisition closed on November
21, 1997.
F-145
<PAGE> 273
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
F-146
<PAGE> 274
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,993 $ 96,858
Accounts receivable, net of allowance..................... 2,040 54,394
Accounts receivable -- associated company................. 592,592 245,979
Inventory................................................. 107,154 190,429
Notes receivable, current maturities...................... 100,862 87,000
Other current assets...................................... 2,263 4,609
---------- ----------
Total current assets.............................. 812,904 679,269
---------- ----------
Property and equipment (net of accumulated depreciation of
$1,333,271 in 1997 and $1,053,380 in 1996)............. 893,639 1,127,107
---------- ----------
Intangible assets (net of accumulated amortization of
$391,745 in 1997 and $268,036 in 1996)................. 814,424 938,133
---------- ----------
OTHER ASSETS:
Other investments......................................... 101,387 71,741
Deferred income taxes..................................... 8,211
Notes receivable, less current maturities................. 168,257 155,223
---------- ----------
Total other assets................................ 269,644 235,175
---------- ----------
$2,790,611 $2,979,684
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 111,361 $ 70,809
Unearned revenue.......................................... 262,624 148,642
Customer deposits......................................... 81,760 83,750
Other current liabilities................................. 2,596 670
---------- ----------
Total current liabilities......................... 458,341 303,871
---------- ----------
Deferred income taxes..................................... 74,223
---------- ----------
Total liabilities................................. 532,564 303,871
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock, no par value, authorized 100,000 shares;
issued and outstanding 100 shares...................... 2,963,885 2,963,885
Accumulated deficit....................................... (705,838) (288,072)
---------- ----------
Total stockholder's equity........................ 2,258,047 2,675,813
---------- ----------
Total liabilities and shareholder's equity........ $2,790,611 $2,979,684
========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-147
<PAGE> 275
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
CATV program revenues..................................... $ 184,770 $ 199,723
DBS program revenue....................................... 1,625,230 969,998
Satellite program revenue................................. 270,150 342,648
Equipment sales........................................... 576,738 337,051
Lease revenue............................................. 169,010 172,839
Other..................................................... 27,855 30,380
---------- ----------
Total revenues.................................... 2,853,753 2,052,639
---------- ----------
COST OF REVENUES:
CATV program costs........................................ 38,439 42,983
DBS program costs......................................... 918,853 561,138
Satellite program costs................................... 221,967 259,464
Equipment costs........................................... 523,170 190,531
Rebate expense............................................ 93,191 34,873
---------- ----------
Total cost of revenues............................ 1,795,620 1,088,989
---------- ----------
Gross profit...................................... 1,058,133 963,650
---------- ----------
EXPENSES:
Salaries, wages and commissions........................... 503,507 559,863
Depreciation and amortization............................. 315,201 286,268
Bad debt expense.......................................... 6,949 34,548
Marketing................................................. 116,544 101,687
Maintenance and installation.............................. 406,997 55,695
Other selling, general and administrative expenses........ 109,977 109,706
---------- ----------
1,459,175 1,147,767
---------- ----------
NET LOSS BEFORE INTEREST AND TAXES................ (401,042) (184,117)
---------- ----------
INTEREST INCOME............................................. 27,217 32,132
---------- ----------
NET LOSS BEFORE TAXES............................. (373,825) (151,985)
INCOME TAX BENEFIT.......................................... 142,053 57,754
---------- ----------
NET LOSS.......................................... $ (231,772) $ (94,231)
ACCUMULATED DEFICIT, BEGINNING OF THE PERIOD................ (474,066) (193,841)
---------- ----------
ACCUMULATED DEFICIT, END OF THE PERIOD...................... $ (705,838) $ (288,072)
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE> 276
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(231,772) $ (94,231)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 315,201 286,268
Bad debt expense....................................... 6,949 34,548
(Increase) decrease in assets:
Accounts receivable.................................... 52,313 41,306
Accounts receivable -- associated company.............. (214,888) (219,855)
Inventory.............................................. 147,773 69,190
Other assets........................................... 188 (4,609)
(Decrease) increase in liabilities:
Accounts payable....................................... (1,049) (3,847)
Unearned revenue....................................... (93,946) (13,587)
Customer deposits...................................... (3,740) 25,450
Other liabilities...................................... (3,359) 670
--------- ---------
Net cash provided by operating activities......... (26,330) 128,997
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (39,283) (234,025)
(Increase) decrease in notes receivable................... 6,033 169,166
--------- ---------
Net cash (used in) investing activities........... (33,250) (64,859)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (59,580) 64,138
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 67,573 32,720
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,993 $ 96,858
========= =========
</TABLE>
See accompanying notes to the financial statements.
F-149
<PAGE> 277
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations -- Souris River Television, Inc. (the
Company) is a wholly-owned subsidiary of Souris River Telecommunications
Cooperative (the Parent). The Company was formed in December 1994 for the
purpose of owning and operating direct broadcast satellite (DBS) and cable
television systems previously purchased by the Parent. The Company is an
affiliated associate member of the National Rural Telecommunications Cooperative
(NRTC). The NRTC has contracted with Hughes 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
right to distribution of DirecTV service within the contract area. In 1994,
Hughes launched the satellite that provides programming for DirecTV. At
September 30, 1997 and 1996, the Company had the operating rights for sixteen
counties in North Dakota.
Revenue Recognition -- Revenues are earned for monthly DBS and cable
television and satellite services and 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.
Inventory -- Inventory is stated at the lower of average cost or market and
consists of receivers, satellite dishes, and satellite TV accessories.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities to
prepare the balance sheets in conformity with generally accepted accounting
principles. 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 Company is not directly subject to income taxes as its
net losses are consolidated with the Parent's operations for tax filing
purposes. The Company records a receivable from the Parent for the tax benefits
arising from the net losses of the company. All tax benefits arise from losses
from continuing operations.
Investments and Other Assets -- Investments and other assets are stated at
cost.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed by the straight-line method over the following
estimated useful lives.
Cash and Cash Equivalents -- For purposes of reporting cash flows, the
company considers all deposits with a maturity of three months or less to be
cash equivalents.
NOTE 2 -- SUBSEQUENT EVENT
On October 16, 1997, the Company contracted to sell 69% of their DBS
franchise area to Golden Sky DBS, Inc. The acquisition closed late in 1997.
F-150
<PAGE> 278
DBS LC
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997
TO NOVEMBER 17, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-151
<PAGE> 279
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DBS LC:
We have audited the accompanying statements of operations and cash flows of
DBS LC (the Company) for the period from January 1, 1997 to November 17, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 results of operations and cash flows of DBS LC for
the period from January 1, 1997 to November 17, 1997, in conformity with
generally accepted accounting principles.
KPMG LLP
January 13, 1999
Kansas City, Missouri
F-152
<PAGE> 280
DBS LC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 17, 1997
<TABLE>
<S> <C>
Revenue:
Program revenue........................................... $304,481
Equipment sales........................................... 44,620
--------
Total revenue..................................... 349,101
--------
Costs and expenses:
Programming costs......................................... 199,762
Equipment costs........................................... 63,175
Selling, general and administrative....................... 45,780
Depreciation and amortization............................. 30,367
--------
Total costs and expenses.......................... 339,084
--------
Operating income.................................. 10,017
--------
Non-operating items:
Interest and dividend income.............................. 11,306
--------
Net income........................................ $ 21,323
========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE> 281
DBS LC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 17, 1997
<TABLE>
<S> <C>
Cash flow from operating activities
Net income................................................ $ 21,323
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 30,367
Changes in:
Accounts receivable.................................... (875)
Inventory.............................................. 7,379
Unearned revenue....................................... (13,615)
-----------
Net cash provided by operating activities......... 44,579
-----------
Cash flows from investing activities:
Payments received on notes receivable..................... 28,721
-----------
Net cash provided by investing activities......... 28,721
-----------
Cash flows from financing activities:
Proceeds from the sale of DBS rights, net of expenses..... 1,686,389
Distributions to unit holders............................. (1,746,390)
-----------
Net cash used in financing activities............. (60,001)
-----------
Net change in cash................................ 13,299
Beginning of period cash and cash equivalents............... 45,976
-----------
End of period cash and cash equivalents..................... $ 59,275
===========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE> 282
DBS LC
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 17, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
DBS LC (the Company) is a limited-liability company organized in Iowa in
1994 for the purpose of supplying direct broadcast satellite services (DBS) to
customers within its franchise areas, which include certain zip codes in Iowa.
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. Hughes controls the satellites that provide
programming for DirecTV.
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.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities as well as the reported
amounts of revenues and expenses during the period in conformity with generally
accepted accounting principles. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
DBS LC is a limited-liability company. All taxes are the responsibility of
DBS LC's unit holders. Accordingly, no provision for income taxes is included in
the accompanying financial statements.
(2) SUBSEQUENT EVENTS
On November 17, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-155
<PAGE> 283
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
AUDITED FINANCIAL STATEMENTS
AS OF
DECEMBER 22, 1997 AND DECEMBER 31, 1996
F-156
<PAGE> 284
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Montana Entertainment Television, Inc.
Missoula, Montana
We have audited the accompanying balance sheets of Western Montana
Entertainment Television, Inc., d.b.a. WMET, a wholly owned subsidiary of
Missoula Electric Cooperative, Inc., as of December 22, 1997 and December 31,
1996, and the related statements of revenues and accumulated deficit, and cash
flows for the period January 1, 1997 through December 22, 1997 and for the year
then ended, respectively. 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 Western Montana
Entertainment Television, Inc. as of December 22, 1997 and December 31, 1996,
and the results of its operations and cash flows for the periods then ended, in
conformity with generally accepted accounting principles.
Summers, McNea and Company, P.C.
Certified Public Accountants
February 9, 1998
Missoula, Montana
F-157
<PAGE> 285
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
BALANCE SHEETS
DECEMBER 22, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Cash...................................................... $ 123,645 $ 180,058
Accounts Receivable -- Net................................ 93,054 103,574
Investment in Associated Organization -- Note 2........... 47,341 33,796
Inventories............................................... 26,282 30,712
Prepaid Expenses.......................................... 0 37,833
Retail Installment Contracts -- Note 3.................... 15,376 109,365
Property and Equipment -- Net of Depreciation............. 33,342 50,713
Organization Costs -- Net of Amortization................. 55,210 63,721
Franchise Fees -- Net of Amortization..................... 266,149 307,095
--------- ----------
Total Assets...................................... $ 660,399 $ 916,867
========= ==========
LIABILITIES AND STOCKHOLDER'S (DEFICIT)
Liabilities:
Accounts Payable -- Trade................................. $ 178,161 $ 97,958
Customer Deposits and Advance Payments.................... 7,373 4,000
Deferred Revenues......................................... 88,180 133,938
Due to Affiliated Cooperative............................. 666,118 897,980
--------- ----------
Total Liabilities................................. $ 939,832 $1,133,876
--------- ----------
Commitments and Contingencies: -- Note 4 -- --
Stockholder's (Deficit):
Common Stock -- 50,000 shares no par value common stock
authorized; 10,000 shares issued and outstanding....... $ 0 $ 0
(Accumulated Deficit)..................................... (279,433) (217,009)
--------- ----------
Total Stockholder's (Deficit)..................... $(279,433) $ (217,009)
--------- ----------
Total Liabilities and Stockholder's (Deficit)..... $ 660,399 $ 916,867
========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-158
<PAGE> 286
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 22, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Sales:
Programming Fees.......................................... $1,362,006 $ 816,783
Equipment Sales -- Net.................................... 191,833 328,499
Other Income.............................................. 42,871 49,604
---------- ----------
Total Sales....................................... $1,596,710 $1,194,886
Cost of Sales:
NRTC Wholesale Programming................................ $ 869,555 $ 537,133
Cost of Equipment Sold -- Net............................. 235,719 335,288
Commissions............................................... 80,508 64,851
Installation Costs........................................ 1,193 6,303
Coupon Expense............................................ 96,626 36,935
Other Costs of Sales...................................... 3,601 5,130
---------- ----------
Total Costs of Sales.............................. $1,287,202 $ 985,640
---------- ----------
Gross Profit...................................... $ 309,508 $ 209,246
General and Administrative Expenses:
Advertising and Marketing................................. $ 50,501 $ 44,713
Amortization.............................................. 52,013 52,252
Bad Debts................................................. 34,854 7,078
Depreciation.............................................. 10,614 13,948
Director Fees and Expenses................................ 5,808 2,404
Labor, Benefits and Taxes................................. 158,167 123,319
Miscellaneous............................................. 2,628 3,773
Office Expenses and Utilities............................. 12,688 16,101
Professional Fees......................................... 4,370 9,153
Rent...................................................... 9,750 9,000
Telephone................................................. 29,880 37,064
Training and Education.................................... 659 6,436
---------- ----------
Total General and Administrative Expenses......... $ 371,932 $ 325,241
---------- ----------
Net (Loss)........................................ $ (62,424) $ (115,995)
(Accumulated Deficit) -- Beginning.......................... (217,009) (101,014)
---------- ----------
(Accumulated Deficit) -- Ending............................. $ (279,433) $ (217,009)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-159
<PAGE> 287
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 22, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss)................................................ $ (62,424) $(115,995)
Adjustments to Reconcile Net (Loss) to Net Cash Provided
by Operating Activities:
Loss on Disposition of Assets.......................... 9,776 0
Amortization........................................... 52,013 52,252
Depreciation........................................... 10,614 13,948
Patronage Capital Income............................... (19,351) (20,155)
Changes in Operating Assets and Liabilities:
Accounts Receivable.................................. 10,520 (54,269)
Inventories.......................................... 4,430 53,652
Prepaid Expenses..................................... 37,833 (37,833)
Accounts Payable..................................... 80,202 53,429
Customer Deposits and Advance Payments............... 3,373 1,778
Deferred Revenues.................................... (45,758) 133,938
--------- ---------
Net Cash Provided by Operating Activities......... $ 81,228 $ 100,900
Cash Flows From Investing Activities:
Purchase of Property and Equipment........................ $ (5,574) $ (3,324)
Proceeds from Investments in Associated Organization...... 5,806 0
Proceeds from Installment Contracts....................... 93,989 142,601
--------- ---------
Net Cash Provided by Investing Activities......... $ 94,221 $ 119,122
Cash Flows From Financing Activities:
Payments to Affiliated Cooperative........................ $(231,862) $(135,632)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents...... $ (56,413) $ 84,390
Cash and Cash Equivalents -- Beginning of Year............ 180,058 95,668
--------- ---------
Cash and Cash Equivalents -- End of Period................ $ 123,645 $ 180,058
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-160
<PAGE> 288
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 22, 1997 AND DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Activities
On June 15, 1993, Missoula Electric Cooperative, Inc. (MEC) served as the
incorporator for Western Montana Entertainment Television, Inc. (WMET), a
taxable subsidiary of the Cooperative. WMET was incorporated under the laws of
the State of Montana for the primary purpose of engaging in the general business
of selling, leasing, installing, delivering, distributing and otherwise
providing direct satellite broadcast television service, and programming
therefore, in prescribed areas of the State of Montana.
WMET was authorized to issue 50,000 shares of no par value, common stock.
There are currently 10,000 shares of such stock issued and outstanding, all of
which are owned by Missoula Electric Cooperative, Inc.
Accounting Records
The Company maintains its accounting records and prepares its financial
statements on the accrual basis of accounting. Accordingly, revenues are
recognized when earned and expenses are recorded when incurred.
Organization Cost, Franchise Fees and Property and Equipment
WMET acquired, from National Rural Telecommunications Cooperative (NRTC),
the rights to market and distribute direct broadcast service (DBS) for the
Montana counties of Missoula, Mineral, Granite and Powell. The franchise fee
paid for areas in the counties already having access to cable television totaled
$234,434. For "non-cabled" areas in those counties, the franchise fee totaled
$175,026. The franchise agreement remains in effect until the applicable
satellite is removed from its assigned orbital location. If such satellite
expiration date is less than ten (10) years from the effective date of the
franchise agreement, there was to be a partial refund of the franchise fees
paid. Franchise fees were being amortized over a ten (10) year period.
In addition to paying the franchise fees, WMET incurred organizational
costs in the amount of $85,118, which are also being amortized over a ten (10)
year period.
Property and Equipment consists of office furniture and fixtures and
computer equipment and is being depreciated using the straight-line method over
estimated useful lives ranging from three (3) to five (5) years.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment were capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred. The Company has not established
a dollar threshold amount in determining when an item is capitalized or
expensed.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of less than three (3) months when purchased to be cash equivalents
for purposes of the statements of cash flows.
Inventories
Inventories consists of direct digital satellite broadcast television
equipment held for resale to its customers, and is stated at the lower of cost
or market (determined on the first-in, first-out basis).
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of certain assets and
liabilities for financial and tax reporting.
F-161
<PAGE> 289
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENT IN ASSOCIATED ORGANIZATION:
Represents patronage allocation from National Rural Telecommunications
Cooperative. Capital Credits, net of patronage dividends, were allocated for the
years ending December 31, as follows:
<TABLE>
<S> <C>
1994....................................................... $13,641
1995....................................................... 20,155
-------
33,796
1996....................................................... 13,545
-------
Total...................................................... $47,341
=======
</TABLE>
3. RETAIL INSTALLMENT CONTRACTS:
Retail installment contracts consists of the sales of digital satellite
equipment and is generally due from its customers in monthly installments of
$30, over a two year purchase period.
4. LEASES AND COMMITMENTS:
The Company conducts its operations from facilities that are leased from
Missoula Electric Cooperative, Inc. under a month-to-month operating lease
requiring monthly rental payments of $750. Rental expense paid to the affiliated
cooperative for the periods ended December 22, 1997 and December 31, 1996
totaled $9,750 and $9,000, respectively.
The Company had entered into a Retail Agreement with National Rural
Telecommunications Cooperative (NRTC) for the non-exclusive right to market and
sell, as an authorized dealer, electronics products bearing specified trademarks
(DSS(TM) products). The agreement contained a firm order commitment defined as a
"non-cancelable, non-changeable purchase order for DSS(TM) products listed for
one-month, 150-days in advance, subject to NRTC's then standard terms and
conditions.....". In addition, the Retail Agreement contained a 12-month rolling
forecast from committing WMET to acquire DSS(TM) products on a monthly basis.
Total DSS(TM) products to be purchased under the firm commitment and the
12-month rolling forecast were approximately $271,000 and $1,935,700,
respectively. Failure to maintain a "performance level" in accordance with
evaluation criteria established by NRTC and/or DSS(TM) products manufacturer,
would be cause for early termination of the agreement.
Under the terms of the franchise agreement with NRTC, WMET was committed to
pay, in addition to monthly broadcasting fees subscribed to by customers,
various monthly operating fees. Such fees amounted to approximately $3.16 per
active subscriber, $.04 per inactive subscriber, and $2.00 initial set-up fee
per subscriber.
The retail and franchise agreements were assumed by Golden Sky System, Inc.
on December 22, 1997, as more fully disclosed below in footnote number 8 to the
financial statements.
F-162
<PAGE> 290
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. CONCENTRATIONS OF CREDIT RISKS:
The Company maintains its general checking account in one financial
institution whose balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 22, 1997 and December 31, 1996, the
general checking account balances in this financial institution aggregated
$122,889 and $169,561, respectively.
6. RELATED PARTY TRANSACTIONS:
Western Montana Entertainment Television, Inc. (WMET) and Missoula Electric
Cooperative, Inc. (MEC) had entered into a Services Agreement dated October 17,
1996 which was to continue for perpetuity but could be terminated by ninety (90)
days written notice by either party. The Services Agreement provided that MEC
could provide, and WMET could purchase a variety of services provided by MEC.
Such services were charged to WMET at MEC's actual costs incurred (i.e no profit
was realized by MEC on services provided). Such services were billed by MEC to
WMET through an intercompany payable/receivable account. In addition to costs
incurred under the Services Agreement, the intercompany account has been charged
for franchise fee costs, organizational costs, and equipment purchases. The
balance owing to MEC as reflected in the accompanying balance sheets as due to
affiliated cooperative as of December 22, 1997 and December 31, 1996 was
$666,118 and $897,980, respectively. No definite terms of repayment have been
provided for.
7. INCOME TAXES:
The Company had net operating loss carryforwards, for tax purposes, in the
amount of approximately $288,057 that were due to expire in the years 2009
through 2011. These tax net operating losses were used to offset federal and
state income taxes upon filing the Company December 31, 1997 tax return due to
the gain on sale of WMET assets to Golden Sky Systems, Inc. as discussed below.
8. SUBSEQUENT EVENT -- SALES AGREEMENT WITH GOLDEN SKY SYSTEMS, INC.
On December 22, 1997 all operating assets and franchise agreements of WMRT
were purchased by Golden Sky Systems, Inc. for $6,604,874. The allocation was as
follows:
<TABLE>
<S> <C>
Non-Compete Agreements and Commissions...................... $ 338,072
Accounts Receivable -- Net.................................. 93,054
Unearned Revenue............................................ (88,180)
Customer Lists.............................................. 536,100
Property, Equipment, Contracts and Agreements............... 431,648
Goodwill.................................................... 5,294,180
----------
Total assets purchased................................. $6,604,874
==========
</TABLE>
This acquisition was consummated with a wire transfer and direct payments
of commissions and covenant not to compete on December 22, 1997 of $1,554,874
and a promissory note of $5,050,000 from Golden Sky Systems, Inc. This note
receivable, dated December 22, 1997, bears interest at 7%, with the first
installment of $1,300,000 due April, 1998 and the remainder due in annual
installments of $1,121,868, including interest each January 5, through January
5, 2002. The note is secured by a bank irrevocable letter of credit.
F-163
<PAGE> 291
SOUTH PLAINS DBS LIMITED PARTNERSHIP
TAHOKA, TEXAS
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
BOLINGER, SEGARS, GILBERT & MOSS, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
LUBBOCK, TEXAS
F-164
<PAGE> 292
INDEPENDENT AUDITORS' REPORT
To the Partners
South Plains DBS Limited Partnership
Tahoka, Texas
We have audited the accompanying balance sheets of South Plains DBS Limited
Partnership as of December 31, 1996 and 1995, and the related statements of
income, changes in partners' capital, and cash flows for the years then ended.
These financial statements are the responsibility of the partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of South Plains DBS Limited
Partnership as of December 31, 1996 and 1995, and the results of its operations,
changes in partners' capital and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
BOLINGER, SEGARS, GILBERT & MOSS,
L.L.P.
Certified Public Accountants
Lubbock, Texas
February 28, 1997
F-165
<PAGE> 293
SOUTH PLAINS DBS LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current assets
Cash...................................................... $ 195,586 $ 175,287
Accounts Receivable (Less allowance for uncollectibles of
$2,875 in 1996 and $2,073 in 1995)..................... 54,216 53,770
Inventory................................................. 39,928 554,323
Prepaid Expenses.......................................... 5,905 5,937
---------- ----------
$ 295,635 $ 789,317
---------- ----------
Other assets
Investment in Associated Organizations.................... $ 61,084 $ 37,853
Franchise License (Less Accumulated Amortization of
$339,114 in 1996 and $198,791 in 1995)................. 1,064,115 1,204,438
Membership................................................ 1,000 1,000
Deposits.................................................. 1,617 1,617
---------- ----------
$1,127,816 $1,244,908
---------- ----------
Fixed assets
Office Furniture and Fixtures............................. $ 98,152 $ 99,119
Office Equipment.......................................... 22,439 22,439
Leased Equipment.......................................... 27,694 25,342
Leasehold Improvements.................................... 10,888 10,888
---------- ----------
$ 159,173 $ 157,788
Less: Accumulated Depreciation and Amortization........... 37,021 18,503
---------- ----------
$ 122,152 $ 139,285
---------- ----------
$1,545,603 $2,173,510
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts Payable -- Operating Partner..................... $ 202,090 $ 311,760
Accounts Payable -- Trade................................. 20,504 96,042
Advance Billing........................................... 232,682 3,360
Equipment Deposits........................................ 2,210 62,014
Other Accrued Liabilities................................. 4,100 17,221
---------- ----------
$ 461,586 $ 490,397
---------- ----------
Noncurrent liabilities
Line of Credit Outstanding -- RTFC........................ $1,724,642 $1,484,642
---------- ----------
Partners' capital
Poka-Lambro Telecommunications, Inc....................... $ (152,149) $ 47,136
South Plains Development Corporation...................... (152,149) 47,136
S.P.A.C.E., Inc........................................... (152,149) 47,136
L. E. C. Development, Inc................................. (152,149) 47,136
Rural Vision Development Corporation...................... (32,029) 9,927
---------- ----------
$ (640,625) $ 198,471
---------- ----------
$1,545,603 $2,173,510
========== ==========
</TABLE>
See accompanying notes to financial statements
F-166
<PAGE> 294
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Operating Revenues
Satellite Service Revenue................................. $1,410,801 $ 740,420
Equipment Sales and Installation.......................... 379,520 553,388
Subscriber Activations.................................... 53,650 34,403
Miscellaneous Revenues.................................... 67,287 6,154
---------- ----------
$1,911,258 $1,334,365
---------- ----------
Cost of Sales and Services
Equipment Sales and Installation.......................... $ 622,157 $ 547,157
Wholesale Service Costs................................... 999,466 517,744
---------- ----------
$1,621,623 $1,064,901
---------- ----------
Gross Profit................................................ $ 289,635 $ 269,464
---------- ----------
Operating Expenses
Advertising............................................... $ 224,919 $ 319,592
Commercial Office Expenses................................ 249,694 136,045
Depreciation and Amortization............................. 159,442 154,140
General and Administrative................................ 69,290 61,924
Legal and Accounting...................................... 6,450 21,761
Management Expense........................................ 143,122 128,984
Office Supplies and Expenses.............................. 25,782 19,978
Property Tax.............................................. 16,046 6,862
Rent Expense.............................................. 32,982 31,675
Repair and Maintenance.................................... 16,072 22,649
Sales Commissions......................................... 55,455 33,785
Utilities and Telephone................................... 32,236 29,921
Interest.................................................. 102,975 75,689
Bad Debt Expense.......................................... 20,765 14,337
---------- ----------
$1,155,230 $1,057,342
---------- ----------
Net Operating Loss................................ $ (865,595) $ (787,878)
---------- ----------
Non Operating Income (Expenses)
Interest Income........................................... $ 6 $ --
Capital Credits........................................... 31,780 46,533
Loss on Disposal of Assets................................ (5,287) --
---------- ----------
Net Loss.......................................... $ (839,096) $ (741,345)
========== ==========
</TABLE>
See accompanying notes to financial statements
F-167
<PAGE> 295
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
POKA
LAMBRO SOUTH RURAL
TELECOM- PLAINS L.E.C. VISION
MUNICATIONS, DEVELOPMENT S.P.A.C.E. DEVELOPMENT, DEVELOPMENT
INC. CORPORATION INC. INC. CORPORATION TOTAL
------------ ----------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance -- January 1,
1995.................... $ 223,206 $ 223,206 $ 223,206 $ 223,206 $ 46,992 $ 939,816
Net Loss -- 1995........ (176,070) (176,070) (176,070) (176,070) (37,065) (741,345)
--------- --------- --------- --------- -------- ---------
Balance -- December 31,
1995.................... $ 47,136 $ 47,136 $ 47,136 $ 47,136 $ 9,927 $ 198,471
Net Loss -- 1996.......... (199,285) (199,285) (199,285) (199,285) (41,956) (839,096)
--------- --------- --------- --------- -------- ---------
Balance -- December 31,
1996.................... $(152,149) $(152,149) $(152,149) $(152,149) $(32,029) $(640,625)
========= ========= ========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements
F-168
<PAGE> 296
SOUTH PLAINS DBS, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss.................................................. $(839,096) $ (741,345)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities
Depreciation and Amortization.......................... 159,442 154,140
Loss on Disposal of Assets............................. 5,287
Capital Credits -- Non-Cash............................ (31,780) (46,533)
Accounts Receivable.................................... (446) 11,712
Inventory.............................................. 514,395 226,129
Prepaid Expenses....................................... 32 (4,197)
Accounts Payable -- Trade.............................. (75,538) (505,314)
Equipment Deposits..................................... (59,804) (2,900)
Advanced Billing....................................... 229,322 43,111
Other Accrued Liabilities.............................. (13,120) 14,388
--------- ----------
Net Cash Used in Operating Activities............. $(111,306) $ (850,809)
--------- ----------
Cash Flows From Investing Activities
Additions to Fixed Assets................................. $ (7,274) $ (67,199)
Investments in Associated Organizations................... 8,549 8,680
--------- ----------
Net Cash Provided by (Used in) Investing
Activities...................................... $ 1,275 $ (58,519)
--------- ----------
Cash Flows From Financing Activities
Advances an Line-of-Credit -- RTFC........................ $ 240,000 $1,484,642
Accounts Payable -- General Partner....................... (109,670) (490,727)
--------- ----------
Net Cash Provided by Financing Activities......... $ 130,330 $ 993,915
--------- ----------
Increase in Cash............................................ $ 20,299 $ 84,587
--------- ----------
Cash -- Beginning of Year................................... 175,287 90,700
--------- ----------
Cash -- End of Year......................................... $ 195,586 $ 175,287
--------- ----------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
Interest.................................................. $ 102,975 $ 75,689
--------- ----------
Income Taxes.............................................. $ 0 $ 0
========= ==========
</TABLE>
See accompanying notes to financial statements
F-169
<PAGE> 297
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
South Plains DBS Limited Partnership is a partnership among Poka Lambro
Telecommunications, Inc., South Plains Development Corporation, S.P.A.C.E.,
Inc., L.E.C. Development, Inc., and Rural Vision Development Corporation. The
partnership interests are as follows:
<TABLE>
<S> <C>
Poka Lambro Telecommunications, Inc. (General).............. 23.75%
South Plains Development Corporation (General).............. 23.75%
S.P.A.C.E., Inc. (General).................................. 23.75%
L.E.C. Development, Inc. (General).......................... 23.75%
Rural Vision Development Corporation (Limited).............. 5.00%
</TABLE>
The partnership was formed on August 27, 1992 to fund, establish and
provide direct broadcast satellite services to its franchised TVGSA (TV
Geographical Service Area). Poka Lambro Telecommunications, Inc. (the
Corporation) serves as the operating partner.
Operating Partner Responsibilities
The operating partner is responsible for the books and records of the
partnership and the oversight of operations. Costs incurred by the operating
partner associated with partnership operations are to be periodically
reimbursed, at cost.
Allowance for Uncollectible Accounts
The partnership records a monthly allowance for bad debts associated with
equipment sales. Accruals are charged to bad debt expense and recoveries are
charged back to the allowance.
The direct write-off method is used for bad debts associated with satellite
service. This method does not produce results materially different from using
the reserve method.
Inventory
Inventory is stated at average unit cost and consists primarily of the
direct broadcast satellite receivers and the related installation kits and
supplies.
Patronage Capital Certificates
Patronage capital from associated organizations is recorded at the stated
amount of the certificates.
Accounts Payable -- Operating Partner, Related Party Transactions
Accounts payable -- general partner represents costs borne by the operating
partner of the partnership which are to be reimbursed periodically.
Recognition of Income
Direct broadcast satellite television programming revenues are billed in
advance and are recognized when earned. Unearned amounts are classified as
advance billing on the balance sheet. All other revenues are recognized at the
time of the sales and at the time a service is provided.
F-170
<PAGE> 298
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Customer Billing and Collection of Digital Satellite TV (DSTV) Services
The National Rural Telecommunications Cooperative (NRTC), under contractual
arrangements with the partnership, performs the billing and collection for the
DSTV services provided to customers. The arrangements require NRTC to remit
monthly total revenue billed less applicable billing and service expenses and to
remit subsequent collection of this revenue. The sales revenue and the customer
receivables for the DSTV services, as reflected in the financial statements, are
recorded from the monthly billing and collection reports provided by NRTC.
Concentration of Credit Risk
The partnership maintains its cash balances in federally insured financial
institutions. At times during the year, these cash balances exceeded the
insurance limit of $100,000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. ASSETS PLEDGED
All assets are pledged as security for the long-term debt due Rural
Telephone Finance Corporation.
NOTE 3. FRANCHISE LICENSE
The franchise license represents the cost paid to extend direct broadcast
satellite services to consumers located in the TVGSA. The partnership is
amortizing the cost over the term of the franchise, which is ten years.
Amortization of the license commenced during the calendar year ended December
31, 1994 as the satellite service began. Amortization for the years ended
December 31, 1996 and 1995 amounted to $140,323 and $140,323, respectively.
NOTE 4. FIXED ASSETS
Fixed assets are stated at the original purchase cost.
The major classes of fixed assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Office Furniture and Fixtures............................... $ 98,152 $ 99,119
Office Equipment............................................ 22,439 22,439
Lease Equipment............................................. 27,694 25,342
Leasehold Improvements...................................... 10,888 10,888
-------- --------
$159,173 $157,788
======== ========
</TABLE>
Provision for the depreciation of fixed assets is computed using
straight-line rates as follows:
<TABLE>
<S> <C>
Office Furniture and Fixtures............................... 7.50%
Office Equipment............................................ 14.30%
Leased Equipment............................................ 14.30%
</TABLE>
F-171
<PAGE> 299
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense on the office furniture, fixtures and equipment for
the years ended December 31, 1996 and 1995 was $14,767 and $9,331, respectively.
The leasehold improvements relate to improvements made at the partnership's
retail location and are being amortized over approximately a two year period.
Amortization of leasehold improvements for the years ended December 31, 1996 and
1995 amounted to $4,352 and $4,486, respectively.
NOTE 5. LINE OF CREDIT -- RTFC
In 1995, the partnership executed two line-of-credit agreements with the
Rural Telephone Finance Cooperative (RTFC). The partnership was approved for a
line of credit of $3,000,000 and $600,000 for DBS inventory purchases and
general operating expenses, respectively. For both loans the annual interest
rate is 6.9 percent. At December 31, 1996, the partnership had $1,649,642
outstanding on the inventory purchases loan and $75,000 outstanding on the
general operating expenses loan. Terms include quarterly interest payments at
6.9 percent, with the total principal outstanding due November 28, 1999. The
notes are secured by the assets of the partnership and are guaranteed by the
parent companies of the partners in proportion to each partner's ownership
percentage. Total interest expense for the years ended December 31, 1996 and
1995, was $102,975 and $75,689, respectively.
NOTE 6. EQUIPMENT DEPOSITS
Equipment deposits represent amounts collected from subscribers for the
purpose of reserving a satellite receiver. The deposits made by subscribers are
applied as down payments on the receivers when purchased. Upon request, deposits
are refunded and the reservations are withdrawn.
NOTE 7. PARTNERS' CAPITAL ACCOUNTS
Capital calls are recognized as receivables from the partner upon issuance
of the call. If participating, the partners are required to fund the calls
within the time frame specified in the calls. Requests for capital are issued as
required by the operating partner. The capital accounts have been adjusted for
each partner's proportionate share of the accumulated losses as reflected on the
statement of changes in partners' capital.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The partnership is liable to Poka Lambro Telecommunications, Inc., for all
costs incurred by the corporation in its capacity as operating partner. If
additional capital is necessary for the satisfaction of these commitments, this
capital will be provided by the above referenced capital calls of each partner.
The partnership has executed a non-cancelable operating lease for the use
of retail office space in Lubbock, Texas. The lease term is for four years
commencing on August 1, 1994. The minimum monthly rent requirements escalate on
an annual basis over the term of the lease. Future minimum rental payments
required under the terms of this lease are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997........................................................ $32,280
1998........................................................ $19,040
</TABLE>
Lease expense recognized under this lease for the year ended December 31,
1996 and 1995, amounted to $32,982 and $31,675, respectively.
The partnership also leases a copier and a fax machine for use in its daily
operations. The lease terms are for three years commencing on August 18, 1995.
Rental expense recognized under the terms noted above amounted to $2,830 and
$2,548 for the years ended December 31, 1996 and 1995, respectively.
F-172
<PAGE> 300
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Amounts reflected in the financial statements related to revenues and
billings from the National Rural Telecommunications Cooperative (NRTC) system
may be subject to adjustment in a subsequent accounting period. Differences from
these adjustments, if any, will normally be recorded in that accounting period,
if not material.
NOTE 9. INCOME TAXES
The partnership is not a taxable entity and the results of its operations
are includable in the tax returns of the partners. Accordingly, income taxes are
not reflected in the accompanying financial statements.
F-173
<PAGE> 301
SOUTH PLAINS DBS LIMITED PARTNERSHIP
TAHOKA, TEXAS
FINANCIAL STATEMENTS
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
AND
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
F-174
<PAGE> 302
INDEPENDENT AUDITORS' REPORT
To the Partners
South Plains DBS Limited Partnership
Tahoka, Texas
We have audited the accompanying balance sheets of South Plains DBS Limited
Partnership as of December 22, 1997 and December 31, 1996, and the related
statements of income, changes in partners' capital, and cash flows for the
periods then ended. These financial statements are the responsibility of the
partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As referenced in Note 10 to the financial statements, the Partnership
effectively dissolved as of December 23, 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of South Plains DBS Limited
Partnership as of December 22, 1997 and December 31, 1996, and the results of
its operations, changes in partners' capital and its cash flows for the periods
then ended in conformity with generally accepted accounting principles.
BOLINGER, SEGARS, GILBERT & MOSS,
L.L.P.
Certified Public Accountants
Lubbock, Texas
March 3, 1998
F-175
<PAGE> 303
SOUTH PLAINS DBS LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 22, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets
Cash...................................................... $ 192,989 $ 195,586
Accounts Receivable (Less allowance for uncollectibles of
$5,173 in 1997 and $2,875 in 1996)..................... 110,012 54,216
Inventory................................................. 95,773 39,928
Prepaid Expenses.......................................... 1,909 5,905
---------- ----------
$ 400,683 $ 295,635
---------- ----------
Other assets
Investment in Associated Organizations.................... $ 83,619 $ 61,084
Franchise License (Less Accumulated Amortization of
$479,436 in 1997 and $339,114 in 1996)................. 923,793 1,064,115
Membership................................................ 1,000 1,000
Deposits.................................................. 1,688 1,617
---------- ----------
$1,010,100 $1,127,816
---------- ----------
Fixed assets
Office Furniture and Fixtures............................. $ 114,053 $ 98,152
Office Equipment.......................................... 22,439 22,439
Leased Equipment.......................................... 14,821 27,694
Leasehold Improvements.................................... 10,888 10,888
---------- ----------
$ 162,201 $ 159,173
Less: Accumulated Depreciation and Amortization........... 47,879 37,021
---------- ----------
$ 114,322 $ 122,152
---------- ----------
$1,525,106 $1,545,603
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts Payable -- Operating Partner..................... $ 208,295 $ 202,090
Accounts Payable -- Trade................................. 116,427 20,504
Advance Billing........................................... 183,632 232,682
Equipment Deposits........................................ 2,060 2,210
Other Accrued Liabilities................................. 23,056 4,100
---------- ----------
$ 533,470 $ 461,586
---------- ----------
Noncurrent liabilities
Line of Credit Outstanding -- RTFC........................ $ -- $1,724,642
---------- ----------
Partners' capital
Golden Sky Systems, Inc. ................................. $ 235,514 $ --
L. E. C. Development, Inc. ............................... 235,513 (152,149)
Poka-Lambro Telecommunications, Inc. ..................... 520,608 (152,149)
South Plains Development Corporation...................... -- (152,149)
S.P.A.C.E., Inc. ......................................... -- (152,149)
Rural Vision Development Corporation...................... -- (32,029)
---------- ----------
$ 991,635 $ (640,625)
---------- ----------
$1,525,105 $1,545,603
========== ==========
</TABLE>
See accompanying notes to financial statements
F-176
<PAGE> 304
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF INCOME (LOSS)
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Operating Revenues
Satellite Service Revenue................................. $2,220,480 $1,410,801
Equipment Sales and Installation.......................... 550,741 379,520
Subscriber Activations.................................... 104,067 53,650
Miscellaneous Revenues.................................... 146,479 67,287
---------- ----------
$3,021,767 $1,911,258
---------- ----------
Cost of Sales and Services
Equipment Sales and Installation.......................... $ 853,203 $ 622,157
Wholesale Service Costs................................... 1,523,393 999,466
---------- ----------
$2,376,596 $1,621,623
---------- ----------
Gross Profit................................................ $ 645,171 $ 289,635
---------- ----------
Operating Expenses
Advertising............................................... $ 359,490 $ 224,919
Commercial Office Expenses................................ 375,448 249,694
Depreciation and Amortization............................. 153,137 159,442
General and Administrative................................ 82,340 69,290
Legal and Accounting...................................... 11,770 6,450
Management Expense........................................ 78,668 143,122
Office Supplies and Expenses.............................. 27,850 25,782
Property Tax.............................................. 3,599 16,046
Rent Expense.............................................. 33,993 32,982
Repair and Maintenance.................................... 17,065 16,072
Sales Commissions......................................... 205,516 55,455
Utilities and Telephone................................... 46,514 32,236
Interest.................................................. 111,681 102,975
Bad Debt Expense.......................................... 33,858 20,765
---------- ----------
$1,540,929 $1,155,230
---------- ----------
Net Operating Loss................................ $ (895,758) $ (865,595)
---------- ----------
Non Operating Income (Expenses)
Interest Income........................................... $ -- $ 6
Capital Credits........................................... 39,510 31,780
Loss on Disposal of Assets................................ (11,492) (5,287)
---------- ----------
Net Loss.......................................... $ (867,740) $ (839,096)
========== ==========
</TABLE>
See accompanying notes to financial statements
F-177
<PAGE> 305
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
POKA
LAMBRO SOUTH RURAL
L. E. C. TELECOM- PLAINS VISION
GOLDEN SKY DEVELOPMENT, MUNICATIONS, DEVELOPMENT S.P.A.C.E. DEVELOPMENT
SYSTEMS, INC. INC. INC. CORPORATION INC. CORPORATION TOTAL
------------- ------------ ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -- January 1,
1996............... $ -- $ 47,136 $ 47,136 $ 47,136 $ 47,136 $ 9,927 $ 198,471
Net Loss -- 1996... -- (199,285) (199,285) (199,285) (199,285) (41,956) (839,096)
-------- --------- ---------- --------- --------- -------- ----------
Balance -- December
31, 1996........... $ -- $(152,149) $ (152,149) $(152,149) $(152,149) $(32,029) $ (640,625)
Capital
Contributions -- 1997.. -- 593,750 1,312,500 -- 593,750 -- 2,500,000
Net Loss -- 1997..... (8,870) (206,088) (363,592) (75,978) (197,217) (15,995) (867,740)
Transfer of
Ownership.......... 244,384 -- (276,151) 228,127 (244,384) 48,024 --
-------- --------- ---------- --------- --------- -------- ----------
Balance -- December
22, 1997........... $235,514 $ 235,513 $ 520,608 $ -- $ -- $ -- $ 991,635
======== ========= ========== ========= ========= ======== ==========
</TABLE>
See accompanying notes to financial statements
F-178
<PAGE> 306
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss.................................................. $ (867,740) $(839,096)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities
Depreciation and Amortization.......................... 153,137 159,442
Loss on Disposal of Assets............................. 11,492 5,287
Capital Credits -- Non-Cash............................ (39,510) (31,780)
Accounts Receivable.................................... (55,796) (446)
Inventory.............................................. (55,845) 514,395
Prepaid Expenses....................................... 3,996 32
Deposits............................................... (71) --
Accounts Payable -- Trade.............................. 95,923 (75,538)
Equipment Deposits..................................... (150) (59,804)
Advanced Billing....................................... (49,050) 229,322
Other Accrued Liabilities.............................. 18,956 (13,120)
----------- ---------
Net Cash Used in Operating Activities............. $ (784,658) $(111,306)
----------- ---------
Cash Flows From Investing Activities
Additions to Fixed Assets................................. $ (16,477) $ (7,274)
Investments in Associated Organizations................... 16,975 8,549
----------- ---------
Net Cash Provided by Investing Activities......... $ 498 $ 1,275
----------- ---------
Cash Flows From Financing Activities
Accounts Payable -- General Partner....................... $ 6,205 $(109,670)
Advances on Line-of-Credit -- RTFC........................ 185,000 240,000
Payments on Line-of-Credit -- RTFC........................ (1,909,642) --
Capital Contributions..................................... 2,500,000 --
----------- ---------
Net Cash Provided by Financing Activities......... $ 781,563 $ 130,330
----------- ---------
Increase (Decrease) in Cash................................. $ (2,597) $ 20,299
----------- ---------
Cash -- Beginning of Year................................... 195,586 175,287
----------- ---------
Cash -- End of Year......................................... $ 192,989 $ 195,586
=========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest.................................................. $ 111,681 $ 102,975
=========== =========
Income Taxes.............................................. $ -- $ --
=========== =========
</TABLE>
See accompanying notes to financial statements
F-179
<PAGE> 307
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
South Plains DBS Limited Partnership was originally a partnership among
Poka Lambro Telecommunications, Inc., South Plains Development Corporation,
S.P.A.C.E., Inc., L.E.C. Development, Inc., and Rural Vision Development
Corporation. The partnership interests were as follows:
<TABLE>
<S> <C>
Poka Lambro Telecommunications, Inc. (General).............. 23.75%
South Plains Development Corporation (General).............. 23.75%
S.P.A.C.E., Inc. (General).................................. 23.75%
L.E.C. Development, Inc. (General).......................... 23.75%
Rural Vision Development Corporation (Limited).............. 5.00%
</TABLE>
Effective June 30, 1997, Poka Lambro Telecommunications purchased the
23.75% interest of South Plains Development Corporation and the 5.00% interest
of Rural Vision Development Corporation. Additionally, S.P.A.C.E., Inc. sold its
23.75% interest effective December 12, 1997 to Golden Sky Systems, Inc.
Effective December 23, 1997, Poka Lambro Telecommunications sold its existing
52.50% interest to Golden Sky Systems, Inc. and the partnership was effectively
dissolved.
The partnership was formed on August 27, 1992 to fund, establish and
provide direct broadcast satellite services to its franchised TVGSA (TV
Geographical Service Area). Poka Lambro Telecommunications, Inc. (the
Corporation) served as the operating partner.
Operating Partner Responsibilities
The operating partner is responsible for the books and records of the
partnership and the oversight of operations. Costs incurred by the operating
partner associated with partnership operations are to be periodically
reimbursed, at cost.
Allowance for Uncollectible Accounts
The partnership records a monthly allowance for bad debts associated with
equipment sales. Accruals are charged to bad debt expense and recoveries are
charged back to the allowance.
The direct write-off method is used for bad debts associated with satellite
service. This method does not produce results materially different from using
the reserve method.
Inventory
Inventory is stated at average unit cost and consists primarily of the
direct broadcast satellite receivers and the related installation kits and
supplies.
Patronage Capital Certificates
Patronage capital from associated organizations is recorded at the stated
amount of the certificates.
Accounts Payable -- Operating Partner, Related Party Transactions
Accounts payable -- general partner represents costs borne by the operating
partner of the partnership which are to be reimbursed periodically.
F-180
<PAGE> 308
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recognition of Income
Direct broadcast satellite television programming revenues are billed in
advance and are recognized when earned. Unearned amounts are classified as
advance billing on the balance sheet. All other revenues are recognized at the
time of the sales and at the time a service is provided.
Customer Billing and Collection of Digital Satellite TV (DSTV) Services
The National Rural Telecommunications Cooperative (NRTC), under contractual
arrangements with the partnership, performs the billing and collection for the
DSTV services provided to customers. The arrangements require NRTC to remit
monthly total revenue billed less applicable billing and service expenses and to
remit subsequent collection of this revenue. The sales revenue and the customer
receivables for the DSTV services, as reflected in the financial statements, are
recorded from the monthly billing and collection reports provided by NRTC.
Concentration of Credit Risk
The partnership maintains its cash balances in federally insured financial
institutions. At times during the year, these cash balances exceeded the
insurance limit of $100,000.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. ASSETS PLEDGED
All assets were pledged as security for the long-term debt due Rural
Telephone Finance Corporation, which was paid in full during the period ended
December 22, 1997.
NOTE 3. FRANCHISE LICENSE
The franchise license represents the cost paid to extend direct broadcast
satellite services to consumers located in the TVGSA. The partnership is
amortizing the cost over the term of the franchise, which is ten years.
Amortization of the license commenced during the calendar year ended December
31, 1994 as the satellite service began. Amortization for the each of the
periods amounted to $140,323.
NOTE 4. FIXED ASSETS
Fixed assets are stated at the original purchase cost.
The major classes of fixed assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Office Furniture and Fixtures............................... $114,053 $ 98,152
Office Equipment............................................ 22,439 22,439
Lease Equipment............................................. 14,821 27,694
Leasehold Improvements...................................... 10,888 10,888
-------- --------
$162,201 $159,173
======== ========
</TABLE>
F-181
<PAGE> 309
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Provision for the depreciation of fixed assets is computed using
straight-line rates as follows:
<TABLE>
<S> <C>
Office Furniture and Fixtures............................... 7.50%
Office Equipment............................................ 14.30%
Leased Equipment............................................ 14.30%
</TABLE>
Depreciation expense on the office furniture, fixtures and equipment for
the periods ended December 22, 1997 and December 31, 1996 was $12,814 and
$14,767, respectively.
The leasehold improvements relate to improvements made at the partnership's
retail location and are being amortized over approximately a two year period.
Amortization of leasehold improvements for the year ended December 31, 1998
amounted to $4,352. The leasehold improvements fully amortized during the year
ended December 31, 1996.
NOTE 5. LINE OF CREDIT -- RTFC
In 1995, the partnership executed two line-of-credit agreements with the
Rural Telephone Finance Cooperative (RTFC). The partnership was approved for a
line of credit of $3,000,000 and $600,000 for DBS inventory purchases and
general operating expenses, respectively. For both loans the annual interest
rate was 6.9 percent. At December 31, 1996, the partnership had $1,649,642
outstanding on the inventory purchases loan and $75,000 outstanding on the
general operating expenses loan. Terms included quarterly interest payments at
6.9 percent, with the total principal outstanding due November 28, 1999. The
notes were secured by the assets of the partnership and were guaranteed by the
parent companies of the partners in proportion to each partner's ownership
percentage. These notes were fully paid during the period ended December 22,
1997. Total interest expense for the periods ended December 22, 1997 and
December 31, 1996, was $111,681 and $102,975, respectively.
NOTE 6. EQUIPMENT DEPOSITS
Equipment deposits represent amounts collected from subscribers for the
purpose of reserving a satellite receiver. The deposits made by subscribers are
applied as down payments on the receivers when purchased. Upon request, deposits
are refunded and the reservations are withdrawn.
NOTE 7. PARTNERS' CAPITAL ACCOUNTS
Capital calls are recognized as receivables from the partner upon issuance
of the call. If participating, the partners are required to fund the calls
within the time frame specified in the calls. Requests for capital are issued as
required by the operating partner. The capital accounts have been adjusted for
each partner's proportionate share of the accumulated losses as reflected on the
statement of changes in partners' capital.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The partnership is liable to Poka Lambro Telecommunications, Inc., for all
costs incurred by the corporation in its capacity as operating partner.
The partnership has executed a non-cancelable operating lease for the use
of retail office space in Lubbock, Texas. The lease term is for four years
commencing on August 1, 1994. The minimum monthly rent requirements escalate on
an annual basis over the term of the lease. Future minimum rental payments
required under the terms of this lease are as follows at December 22, 1997:
<TABLE>
<S> <C>
1998........................................................ $19,040
</TABLE>
F-182
<PAGE> 310
SOUTH PLAINS DBS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Lease expense recognized under this lease for the period ended December 22,
1997 and December 31, 1996, amounted to $33,993 and $32,982, respectively.
Amounts reflected in the financial statements related to revenues and
billings from the National Rural Telecommunications Cooperative (NRTC) system
may be subject to adjustment in a subsequent accounting period. Differences from
these adjustments, if any, will normally be recorded in that accounting period,
if not material
NOTE 9. INCOME TAXES
The partnership is not a taxable entity and the results of its operations
are includable in the tax returns of the partners. Accordingly, income taxes are
not reflected in the accompanying financial statements.
NOTE 10. SUBSEQUENT EVENTS/GOING CONCERN
Effective December 23, 1997, Golden Sky Systems, Inc. purchased the
existing 52.50% interest owned by Poka Lambro Telecommunications. As such, the
partnership effectively dissolved as of that date.
F-183
<PAGE> 311
CAL-ORE DIGITAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-184
<PAGE> 312
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors Golden Sky Systems, Inc.:
We have audited the accompanying balance sheet of Cal-Ore Digital TV, Inc.
(the Company) as of December 31, 1996 and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These consolidated
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 Cal-Ore Digital TV, Inc. as
of December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
KPMG LLP
November 26, 1997, except as to
note 5, which is as of December 8, 1997.
Kansas City, Missouri
F-185
<PAGE> 313
CAL-ORE DIGITAL TV, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 108,471
Accounts receivable....................................... 65,388
Income taxes receivable (note 1).......................... 24,556
Inventory................................................. 11,956
Prepaid expenses.......................................... 1,860
---------
Total current assets.............................. 212,231
Land........................................................ 110,000
Furniture, fixtures and equipment (net of accumulated
depreciation of $68,798) (note 2)......................... 42,137
Intangible assets (net of accumulated amortization of
$73,670) (note 4)......................................... 294,681
Other assets (note 3)....................................... 17,323
---------
Total assets...................................... $ 676,372
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Current liabilities:
Trade accounts payable................................. 72,763
Payable to affiliate (note 4).......................... --
Unearned revenue....................................... 104,411
Interest payable....................................... --
Other liabilities (note 3)............................. 20,257
---------
Total current liabilities......................... 197,431
Shareholders' equity:
Common stock, par value $1, 10,000 shares authorized,
1,000 shares issued and outstanding.................... 1,000
Additional paid-in capital................................ 647,174
Accumulated deficit....................................... (169,233)
---------
Total shareholders' equity........................ 478,941
---------
Total liabilities and shareholders' equity........ $ 676,372
=========
</TABLE>
See accompanying notes to financial statements.
F-186
<PAGE> 314
CAL-ORE DIGITAL TV, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Programming............................................... $563,573
Equipment and installation sales.......................... 97,173
Lease and other (note 2).................................. 42,835
--------
Total revenues.................................... 703,581
--------
Cost of revenues:
Programming costs......................................... 373,032
Equipment and installation costs.......................... 106,027
Rebate expense............................................ 61,848
--------
Total cost of revenues............................ 540,907
--------
Gross profit...................................... 162,674
--------
Expenses:
Selling, general and administrative....................... 134,352
Depreciation and amortization............................. 74,569
Marketing................................................. 22,744
Provision for doubtful accounts........................... 9,740
--------
241,405
--------
Operating loss.................................... (78,731)
Interest:
Interest and dividend income.............................. 2,749
Interest expense.......................................... (1,634)
--------
Net loss before income taxes...................... (77,616)
--------
Income tax expense (note 1)................................. (8,404)
--------
Net loss.......................................... $(86,020)
========
</TABLE>
See accompanying notes to financial statements.
F-187
<PAGE> 315
CAL-ORE DIGITAL TV, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995..................... $1,000 $547,174 $ (83,213) $464,961
Additional cash contribution by Cal-Ore
Telecommunications Company.................. -- 100,000 -- 100,000
Net loss....................................... -- -- (86,020) (86,020)
------ -------- --------- --------
Balance at December 31, 1996..................... $1,000 $647,174 $(169,233) $478,941
====== ======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-188
<PAGE> 316
CAL-ORE DIGITAL TV, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Operating activities:
Net loss.................................................. $ (86,020)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 74,569
Provision for doubtful accounts........................ 9,740
Change in operating assets and liabilities:
Accounts receivable.................................. (37,551)
Income Tax Receivable................................ (6,336)
Inventory............................................ (307)
Prepaid expenses..................................... (980)
Trade accounts payable............................... 30,058
Unearned revenue..................................... 85,517
Interest payable..................................... (4,082)
Other liabilities.................................... (93)
---------
Net cash provided by operating activities......... 64,515
---------
Investing activities:
Purchases of furniture, fixtures, and equipment........... (4,065)
Purchase of land.......................................... (110,000)
---------
Net cash used in investing activities............. (114,065)
---------
Financing activities:
Cash contribution from parent............................. 100,000
Repayment of loan to parent............................... (100,000)
---------
Net cash provided by financing activities......... --
---------
Net decrease in cash.............................. (49,550)
Cash and cash equivalents, beginning of year................ 158,021
---------
Cash and cash equivalents, end of year...................... $ 108,471
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 5,716
=========
</TABLE>
See accompanying notes to financial statements.
F-189
<PAGE> 317
CAL-ORE DIGITAL TV, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Cal-Ore Digital TV, Inc. (the Company) is a California corporation formed
in November 1993 for the purpose of acquiring, owning and operating direct
broadcast satellite (DBS) television systems. The Company is a wholly-owned
subsidiary of California Oregon Telecommunications Company (the Parent), who has
owned all 1,000 shares of the Company since the Company's inception. 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, 1996, the Company had the operating rights for
portions of four counties in California and Oregon. These rights were purchased
by the parent in 1993 and transferred to the Company as a contribution of
capital in 1994.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings for one
or more months 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
receivers, satellite dishes, and satellite TV accessories.
Accounts Receivable
Accounts receivable consist primarily of amounts due from subscribers for
monthly programming and equipment lease billings.
Cash and Cash Equivalents
Cash and cash equivalents consists of cash in checking accounts and money
market checking accounts.
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 fifteen 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 a number of estimates
and assumptions which 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 these estimates.
F-190
<PAGE> 318
CAL-ORE DIGITAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 is practicable to estimate that
value:
Cash and Cash Equivalents -- The carrying amounts approximates fair
value because of the short maturity of those instruments.
Receivables and Accounts Payable -- These assets are carried at cost,
which approximates fair value, as a result of the short-term nature of the
instruments.
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 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 or fair value less costs to sell.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment, consisting primarily of computer and
office equipment and equipment leased to customers, is recorded at cost.
Depreciation expense is recorded over the estimated useful lives which range
from two to seven years.
Income Taxes
The Company is a C Corporation for federal and state income tax purposes
and files its taxes on a consolidated basis with the Parent and its other
wholly-owned subsidiaries. The Company's income tax expense or benefit is an
allocation of the Parent's consolidated income tax expense or benefit and is
recoverable from the Parent.
(2) LEASING ARRANGEMENTS FOR SUBSCRIBER EQUIPMENT
In addition to selling satellite television equipment, in 1995 the Company
began leasing the equipment to customers under operating lease arrangements.
These leases are at fixed monthly rental charges ranging from $15 to $19 per
month, and are month-to-month leases which can be terminated at any time upon
return of the DBS equipment to the Company. Accordingly, the Company accounts
for these leases as operating leases.
The cost of leased equipment is included as a component of furniture,
fixtures, and equipment and depreciated over a two-year period. The net amount
of leased equipment included in furniture, fixtures, and equipment at December
31, 1996 is as follows:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Cost........................................................ $ 77,051
Accumulated Depreciation.................................... (52,560)
--------
Net carrying value................................ $ 25,491
========
</TABLE>
Lease income under the above agreements is recognized billed to the
customer and totaled $25,464 in 1996.
F-191
<PAGE> 319
CAL-ORE DIGITAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) NRTC PATRONAGE DIVIDENDS
The NRTC declares and the Company 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 redeemed in cash at a future date at the discretion of the NRTC. The
Company has recorded an asset and an offsetting deferred income liability for
the noncash portion of the patronage dividend. The deferred income will be
recognized as revenue when cash distributions are declared by the NRTC. Deferred
revenue included in other liabilities at December 31, 1996 was $17,323.
(4) RELATED-PARTY TRANSACTIONS
The Company was capitalized by the Parent in early 1994 through the
transfer of $26,000 in cash and franchise rights with a cost of $522,174. In
April 1994, the Company sold the franchise rights for a portion of one county in
California to Siskiyou Ruralvision, a related party which has a common board
member. These rights were sold at the Parent's cost of $153,823.
The Company also had a $100,000 account payable to the Parent at December
31, 1995, as the result of a short-term loan made in June 1995 for operating
cash needs. This payable carried interest at 7% and was repaid in full in 1996,
along with $5,716 in accrued interest.
Employees of the Parent provide various accounting and administrative
duties for the Company. Accordingly, the Company's financial statements include
allocated selling, general, and administrative expenses in the amount of
$21,391, in 1996.
(5) SUBSEQUENT EVENTS
On September 24, 1997, the Company entered into a letter agreement to sell
its franchise rights and related DBS assets and liabilities to Golden Sky
Systems, Inc. The acquisition closed on December 8, 1997.
F-192
<PAGE> 320
CAL-ORE DIGITAL TV, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-193
<PAGE> 321
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky Systems, Inc.:
We have audited the accompanying statements of operations and cash flows of
Cal-Ore Digital TV, Inc. (the Company) for the period from January 1, 1997 to
December 8, 1997 and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our 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 results of operations and cash flows of Cal-Ore
Digital TV, Inc. for the period from January 1, 1997 to December 8, 1997 and the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG LLP
January 13, 1999
Kansas City, Missouri
F-194
<PAGE> 322
CAL-ORE DIGITAL TV, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Revenues:
Programming............................................... $ 804,916 $563,573
Equipment and installation sales.......................... 166,635 97,173
Lease and other (note 1).................................. 40,580 42,835
---------- --------
Total revenues.................................... 1,012,131 703,581
---------- --------
Cost of revenues:
Programming costs......................................... 511,184 373,032
Equipment and installation costs.......................... 166,747 106,027
Rebate expense............................................ 63,959 61,848
Selling, general and administrative....................... 185,597 134,352
Depreciation and amortization............................. 63,390 74,569
Marketing................................................. 25,492 22,744
Provision for doubtful accounts........................... 9,981 9,740
---------- --------
1,026,350 782,312
---------- --------
Operating loss.................................... (14,219) (78,731)
Interest:
Interest and dividend income.............................. 11,266 2,749
Interest expense.......................................... -- (1,634)
---------- --------
Loss before income taxes (2,953) (77,616)
---------- --------
Income tax benefit (expense) (note 1)....................... 588 (8,404)
---------- --------
Net loss.......................................... $ (2,365) $(86,020)
========== ========
</TABLE>
See accompanying notes to financial statements.
F-195
<PAGE> 323
CAL-ORE DIGITAL TV, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $ (2,365) $(86,020)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 63,390 74,569
Provision for doubtful accounts........................ 9,981 9,740
Change in operating assets and liabilities:
Accounts receivable.................................. 52,552 (37,551)
Income Tax Receivable................................ 14,556 (6,336)
Inventory............................................ 4,439 (307)
Prepaid expenses..................................... 1,860 (980)
Other assets......................................... (10,221) --
Trade accounts payable............................... (12,500) 30,058
Unearned revenue..................................... 1,429 85,517
Accrued interest payable............................. -- (4,082)
Other liabilities.................................... (20,257) (93)
-------- --------
Net cash provided by operating activities......... 102,864 64,515
-------- --------
Investing activities:
Purchases of furniture, fixtures, and equipment........... (20,643) (4,065)
Purchase of land.......................................... -- (110,000)
-------- --------
Net cash used in investing activities............. (20,643) (114,065)
-------- --------
Financing activities:
Cash contribution from parent............................. -- 100,000
Repayment of loan to parent............................... -- (100,000)
-------- --------
Net cash provided by financing activities......... -- --
-------- --------
Net increase (decrease)........................... 82,221 (49,550)
Cash and cash equivalents, beginning of period.............. 108,471 158,021
-------- --------
Cash and cash equivalents, end of period.................... $190,692 $108,471
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ -- $ 5,716
======== ========
</TABLE>
See accompanying notes to financial statements.
F-196
<PAGE> 324
CAL-ORE DIGITAL TV, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 8, 1997 AND
DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Cal-Ore Digital TV, Inc. (the Company) is a California corporation formed
in November 1993 for the purpose of acquiring, owning and operating direct
broadcast satellite (DBS) television systems. The Company is a wholly-owned
subsidiary of California Oregon Telecommunications Company (the Parent), who has
owned all 1,000 shares of the Company since the Company's inception. 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 9, 1997 and December 31, 1996, the Company had the
operating rights for portions of four counties in California and Oregon. These
rights were purchased by the parent in 1993 and transferred to the Company as a
contribution of capital in 1994.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings for one
or more months 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.
In addition to selling satellite television equipment, in 1995 the Company
began leasing the equipment to customers under operating lease arrangements.
These leases are at fixed monthly rental charges ranging form $15 to $19 per
month, and are month-to-month leases which can be terminated at any time upon
return of the DBS equipment to the Company.
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 fifteen 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 a number of estimates
and assumptions which 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 these estimates.
Income Taxes
The Company is a C Corporation for federal and state income tax purposes
and files its taxes on a consolidated basis with the Parent and its other
wholly-owned subsidiaries. The Company's income tax expense or benefit is an
allocation of the Parent's consolidated income tax expense or benefit and is
recoverable from or payable to the Parent.
F-197
<PAGE> 325
CAL-ORE DIGITAL TV, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) RELATED-PARTY TRANSACTIONS
The Company had a $100,000 loan payable to the Parent at December 31, 1995,
as the result of a short-term loan made in June 1995 for operating cash needs.
This payable carried interest at 7% and was repaid in full in 1996, along with
$5,716 in accrued interest.
(3) SUBSEQUENT EVENTS
On December 8, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-198
<PAGE> 326
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-199
<PAGE> 327
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cable and Communications Corporation:
We have audited the accompanying balance sheets of NRTC System No. 0093, a
segment of Cable and Communications Corporation, as of December 31, 1996 and
1995 and the related statements of operations, segment equity and cash flows for
each of the years in the three year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 NRTC System No. 0093, a
segment of Cable and Communications Corporation, at December 31, 1996 and 1995
and the results of its operations and its cash flows for each of the years in
the three year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG LLP
November 14, 1997
Kansas City, Missouri
F-200
<PAGE> 328
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 12,674 $ 18,023
Accounts receivable....................................... 86,951 37,820
Notes receivable, current portion (note 3)................ 79,150 54,044
Inventory................................................. 24,630 25,424
Total current assets.............................. 203,405 135,311
Franchise costs (net of accumulated amortization of $62,713
and $36,763 in 1996 and 1995, respectively)............... 196,737 222,687
Notes receivable, long-term portion (note 3)................ 89,231 99,895
-------- --------
Total assets...................................... $489,373 $457,893
======== ========
LIABILITIES AND SEGMENT EQUITY
Current liabilities:
Accounts payable.......................................... $ 44,204 $ 37,236
Due to related party (note 5)............................. 13,050 6,165
Unearned revenue.......................................... 60,324 14,033
Other liabilities......................................... 5,075 3,388
-------- --------
Total current liabilities......................... 122,653 60,822
Segment equity.............................................. 366,720 397,071
-------- --------
Commitments Total liabilities and segment equity............ $489,373 $457,893
======== ========
</TABLE>
See accompanying notes to financial statements.
F-201
<PAGE> 329
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Programming revenues...................................... $553,123 $292,826 $ 21,057
Equipment sales........................................... 168,781 387,991 220,823
-------- -------- --------
Total revenues.................................... 721,904 680,817 241,880
-------- -------- --------
Cost of revenues:
Programming costs......................................... 391,977 186,048 13,000
Equipment costs........................................... 139,134 311,501 185,415
-------- -------- --------
Total cost of revenues............................ 531,111 497,549 198,415
-------- -------- --------
Gross profit................................................ 190,793 183,268 43,465
-------- -------- --------
Expenses:
Salaries, wages and benefits.............................. 86,274 56,561 16,533
Amortization.............................................. 25,950 25,950 10,813
Other general and administrative.......................... 63,523 53,035 1,977
-------- -------- --------
Total expenses.................................... 175,747 135,546 29,323
-------- -------- --------
Net income........................................ $ 15,046 $ 47,722 $ 14,142
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-202
<PAGE> 330
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF SEGMENT EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<S> <C>
Balance at December 31, 1993................................ $264,085
Net income................................................ 14,142
--------
Balance at December 31, 1994................................ 278,227
Investments by parent..................................... 71,122
Net income................................................ 47,722
--------
Balance at December 31, 1995................................ 397,071
Distributions to parent................................... (45,397)
Net income................................................ 15,046
--------
Balance at December 31, 1996................................ $366,720
========
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE> 331
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income................................................ $ 15,046 $ 47,722 $ 14,142
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Bad debt expense....................................... 1,128 9,101 --
Amortization........................................... 25,950 25,950 10,813
Changes in:
Accounts receivable.................................. (49,131) (27,025) (10,795)
Notes receivable..................................... (15,570) (163,040) --
Inventory............................................ 794 7,682 (33,106)
Accounts payable..................................... 6,968 21,915 15,321
Due to related party................................. 6,885 (3,428) 14,228
Unearned revenues.................................... 46,291 7,562 6,471
Other liabilities.................................... 1,687 2,520 868
Customer deposits.................................... -- (7,989) 7,989
-------- --------- --------
Net cash provided by (used in) operating activities......... 40,048 (79,030) 25,931
-------- --------- --------
Cash flows from financing activities --
Cash investments (distributions) by Cable & Communications
Corporation............................................ (45,397) 71,122 --
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (5,349) (7,908) 25,931
Cash and cash equivalents at beginning of year.............. 18,023 25,931 --
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 12,674 $ 18,023 $ 25,931
======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE> 332
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
The NRTC System No. 0093 is a segment (the Segment) of Cable and
Communications Corporation (C&CC) which provides rural direct broadcasting
satellite (DBS) television service to customers within its franchise areas which
includes fifteen counties in eastern Montana. C&CC is a wholly-owned subsidiary
of Mid-Rivers Telephone Cooperative, Inc. (MRTC). MRTC 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 television
programming in the rural territories of 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.
The financial statements presented as of and for the years ended December
31, 1996, 1995 and 1994, represent the financial position and operation of the
Segment. The Segment was not operated as a separate entity or a separate
subsidiary of C&CC in 1996, 1995 or 1994. The financial statements presented
herein have been derived from the records of C&CC and have been prepared to
present the Segment's financial position, results of operations and cash flows
on a stand-alone basis. The financial statements do not include certain costs
and expenses which could be allocable to the segment by C&CC. Accordingly, costs
and expenses presented 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 advance billings for one
or more months and is deferred until the service is provided. Equipment sales
are recognized as revenue when the equipment is delivered to the customer. Other
revenues consist primarily of various DBS service and maintenance revenue. These
revenues are recognized in the same manner as DBS programming and equipment
sales.
Cash Equivalents
The Segment considers all liquid investments purchased with a maturity of
ninety days or less to be cash equivalents.
Inventory
Inventory is stated at the lower of average cost (first-in, first-out) or
market and consists primarily of receivers, satellite dishes and accessories.
Use of Estimates
The preparation of 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 revenues and expenses during the period. Actual
results could differ from these estimates.
F-205
<PAGE> 333
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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 or fair value less costs to sell.
Income Taxes
The Segment is not directly subject to income taxes, as it is operated as a
segment of C&CC. C&CC did not allocate tax expense to the segment and,
accordingly, no provision for income taxes has been made.
(2) ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from subscribers for
monthly programming fees.
(3) NOTES RECEIVABLE
The Segment finances DBS equipment sales to customers. These sales
contracts are executed for periods varying from twelve to thirty-six months.
These notes are amortized through monthly payments. The contracts are
collateralized by security interests in the equipment purchased. Notes
receivable as of December 30, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes receivable (net of allowance of $10,229 and $9,101 in
1996 and 1995, respectively).............................. $168,381 $153,939
Less current portion........................................ 79,150 54,044
-------- --------
$ 89,231 $ 99,895
======== ========
</TABLE>
(4) NRTC PATRONAGE CAPITAL
The NRTC declares and the Segment receives a yearly patronage dividend
based on the NRTC's profitability. The patronage dividend can be either
qualified or nonqualified upon the election of the Segment. If qualified, 20% of
the dividend is received in cash while 80% is distributed in patronage capital
certificates, which can be redeemed in cash at a future date at the discretion
of the NRTC. Nonqualified dividends are distributed entirely as patronage
capital certificates, which will generally be redeemable only upon the
dissolution of the NRTC. The Segment has elected to receive the nonqualified
dividend. As such, the asset
F-206
<PAGE> 334
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
and equally offsetting deferred income liability have not been recorded as there
is no financial statement impact.
(5) RELATED PARTY TRANSACTIONS
C&CC performs management and service and maintenance functions for the
Segment and allocates such labor and benefit Segment. A related payable to C&CC
of $13,050 and $6,165 exists at December 31, 1996, and 1995, respectively.
(6) SUBSEQUENT EVENT
The Segment contracted to sell certain of its DBS assets to Golden Sky
Systems, Inc. The acquisition closed on December 17, 1997.
F-207
<PAGE> 335
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
F-208
<PAGE> 336
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenue:
Program revenue........................................... $597,387 $383,438
Equipment sales........................................... 72,194 115,589
-------- --------
Total revenue..................................... 669,581 499,027
-------- --------
Costs and expenses:
Programming costs......................................... 429,875 271,728
Equipment costs........................................... 63,251 95,624
General and administrative................................ 138,941 103,549
Amortization.............................................. 19,463 19,463
-------- --------
Total costs and expenses.......................... 651,530 490,364
-------- --------
Net income........................................ $ 18,051 $ 8,663
======== ========
</TABLE>
See accompanying notes.
F-209
<PAGE> 337
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Operating Activities
Net income................................................ $ 18,051 $ 8,663
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization........................................... 19,463 19,463
Changes in:
Accounts receivable.................................... 12,144 (23,243)
Notes receivable....................................... 39,913 (14,598)
Inventory.............................................. (103,417) (68,914)
Accounts payables...................................... 20,031 10,568
Due to related party................................... (13,050) (6,165)
Unearned revenues...................................... (2,999) 60,204
Other liabilities...................................... 1,403 1,770
--------- --------
Net cash used in operating activities....................... (8,461) (12,252)
--------- --------
Net decrease in cash........................................ (8,461) (12,252)
Cash at beginning of period................................. 12,674 18,023
--------- --------
Cash at end of period....................................... $ 4,213 $ 5,771
========= ========
</TABLE>
See accompanying notes.
F-210
<PAGE> 338
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
The NRTC System No. 0093 is a segment (the Segment) of Cable and
Communications Corporation (the Company) which provides rural direct broadcast
satellite services (DBS) to customers within its franchise areas, which include
fifteen counties in eastern Montana. The Company is a wholly-owned subsidiary of
Mid-Rivers Telephone Cooperative, Inc. (the Parent). The Parent 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 rural territories of 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.
The Segment was not operated as a separate entity or a separate subsidiary
of the Company. The financial statements presented herein have been derived from
the records of the Company and have been prepared to present the Segment's
results of operations and cash flows on a stand-alone basis. The financial
statements do not include certain costs and expenses which could be allocable to
the Segment by the Company. Accordingly, costs and expenses presented 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 advance billings for one
or more months and is deferred until the service is provided. Equipment sales
are recognized as revenue when the equipment is delivered to the customer.
Use of Estimates
The preparation of 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 revenues and expenses during the period. 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 the expected useful life of the revenue stream of those services, ten
years.
Income Taxes
The Company is not directly subject to income taxes, as it is operated as a
segment of the Parent. The Parent did not allocate tax expense to the Company
and, accordingly, no provision for income taxes has been made.
(2) SUBSEQUENT EVENTS
On December 17, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-211
<PAGE> 339
LAKELAND DBS, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997 AND
THE YEAR ENDED DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-212
<PAGE> 340
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky Systems, Inc.:
We have audited the accompanying statements of operations and cash flows of
Lakeland DBS, Inc. (the Company) for the period from January 1, 1997 to December
24, 1997 and the year ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 results of operations and cash flows of Lakeland
DBS, Inc. for the period from January 1, 1997 to December 24, 1997 and the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG LLP
January 20, 1999
Kansas City, Missouri
F-213
<PAGE> 341
LAKELAND DBS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Revenue:
Program revenue........................................... $ 774,548 $524,964
Equipment sales........................................... 69,929 80,393
Lease revenue............................................. 52,711 59,852
Other..................................................... 15,298 15,279
---------- --------
Total revenue..................................... 912,486 680,488
---------- --------
Costs and expenses:
Programming costs......................................... 473,578 309,176
Equipment and installation costs.......................... 378,873 170,408
Selling, general and administrative....................... 268,399 140,273
Rebate expense............................................ 44,591 35,618
Bad debt expense.......................................... 8,546 12,377
Depreciation.............................................. 60,244 38,119
---------- --------
Total costs and expenses.......................... 1,234,231 705,971
---------- --------
Operating loss.................................... (321,745) (25,483)
---------- --------
Non-operating items:
Interest income........................................... 3,294 2,646
Interest expense.......................................... (23,382) (36,137)
---------- --------
(20,088) (33,491)
---------- --------
Net loss.......................................... $ (341,833) $(58,974)
========== ========
</TABLE>
See accompanying notes to financial statements.
F-214
<PAGE> 342
LAKELAND DBS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash flow from operating activities
Net loss.................................................. $(341,833) $(58,974)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 60,244 38,119
Bad debt expense....................................... 8,546 12,377
Changes in:
Accounts receivable.................................... (9,183) (31,618)
Inventory.............................................. 13,767 34,742
Unearned revenue....................................... (34,308) 59,247
Accounts payables...................................... (14,805) 32,550
Other assets........................................... 723 723
Other liabilities...................................... (2,202) 1,365
--------- --------
Net cash provided by (used in) operating
activities...................................... (319,051) 88,531
--------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment................. (67,148) (92,141)
--------- --------
Net cash used in investing activities............. (67,148) (92,141)
--------- --------
Cash flows from financing activities:
Increase in payable to related party...................... 403,770 27,691
--------- --------
Net cash provided by financing activities......... 403,770 27,691
--------- --------
Net change in cash................................ 17,571 24,081
Beginning of period cash and cash equivalents............... 32,192 8,111
--------- --------
End of period cash and cash equivalents..................... $ 49,763 $ 32,192
========= ========
</TABLE>
See accompanying notes to financial statements.
F-215
<PAGE> 343
LAKELAND DBS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Lakeland DBS, Inc. (the Company) is an Oklahoma S-corporation formed for
the purpose of operating direct broadcast satellite (DBS) television systems and
is owned Charles O. Smith, Betty R. Smith, and Orlean M. Smith (Stockholders).
The Company is an affiliate of Canadian Valley Telephone Company (Canadian
Valley). Canadian Valley owns the DBS rights for which the Company provides
management services. Canadian Valley 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 24,
1997 and December 31, 1996, Canadian Valley had the operating rights for
portions of six counties in Oklahoma and Colorado. Canadian Valley transferred
the DBS rights to the Company on December 24, 1997.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings for one
or more months 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.
In addition to selling satellite television equipment, in December of 1997
the Company began leasing the equipment to customers under operating lease
arrangements. These leases are at fixed monthly rental charges ranging from $10
to $16 per month, and are month-to-month leases which can be terminated at any
time upon return of the DBS equipment to the Company.
Intangible Assets
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are amortized on a straight-line basis over
ten years, which is the expected useful life of the satellites providing DBS
services. Because, until December 24, 1997 Canadian Valley owned such rights,
the intangible asset was maintained on Canadian Valley's accounts, therefore no
amortization expense was recorded on the Company's books. Had the Company owned
the marketing rights, they would have recorded additional amortization expense
of $50,492 and $51,336 for the period from January 1, 1997 to December 24, 1997
and the year ended December 31, 1996, respectively.
Use of Estimates
The preparation of 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 revenues and expenses during the period. Actual
results could differ from these estimates.
Income Taxes
The Company is an S Corporation for federal and state income tax purposes
and files its taxes on a consolidated basis with the Parent and its other
wholly-owned subsidiaries. Accordingly, income taxes are the responsibility of
the stockholders and are not reflected in the accompanying financial statements.
F-216
<PAGE> 344
LAKELAND DBS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) RELATED-PARTY TRANSACTIONS
The Company had $631,298 and $174,628 of accounts payable to Canadian
Valley at December 24, 1997 and December 31, 1996, respectively, as the result
of a short-term loan made for operating cash needs and the transfer of DBS
marketing rights. This payable carried no interest and was repaid in full in
1998.
The Company also had an $29,800 account payable to Charles & Betty Smith at
December 31, 1996. This account payable was paid in full in 1997.
The Company also had an $23,100 account payable to Lakeland Cable TV at
December 31, 1996. This account payable was paid in full in 1997.
(3) SUBSEQUENT EVENTS
On December 24, 1997, the Company sold all of its DBS rights to Golden Sky
Systems, Inc.
F-217
<PAGE> 345
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
F-218
<PAGE> 346
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-219
<PAGE> 347
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-220
<PAGE> 348
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-221
<PAGE> 349
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-222
<PAGE> 350
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-223
<PAGE> 351
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-224
<PAGE> 352
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-225
<PAGE> 353
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-226
<PAGE> 354
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-227
<PAGE> 355
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-228
<PAGE> 356
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-229
<PAGE> 357
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-230
<PAGE> 358
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-231
<PAGE> 359
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-232
<PAGE> 360
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-233
<PAGE> 361
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-234
<PAGE> 362
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-235
<PAGE> 363
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-236
<PAGE> 364
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY, TEXAS
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
AS OF DECEMBER 31, 1997
WITH INDEPENDENT AUDITOR'S REPORT
F-237
<PAGE> 365
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-238
<PAGE> 366
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-239
<PAGE> 367
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-240
<PAGE> 368
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-241
<PAGE> 369
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-242
<PAGE> 370
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-243
<PAGE> 371
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-244
<PAGE> 372
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY TEXAS
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
(UNAUDITED)
F-245
<PAGE> 373
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-246
<PAGE> 374
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-247
<PAGE> 375
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-248
<PAGE> 376
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-249
<PAGE> 377
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-250
<PAGE> 378
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
PINE GROVE, CALIFORNIA
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-251
<PAGE> 379
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-252
<PAGE> 380
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-253
<PAGE> 381
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-254
<PAGE> 382
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-255
<PAGE> 383
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-256
<PAGE> 384
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-257
<PAGE> 385
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-258
<PAGE> 386
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-259
<PAGE> 387
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-260
<PAGE> 388
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-261
<PAGE> 389
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-262
<PAGE> 390
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-263
<PAGE> 391
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-264
<PAGE> 392
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-265
<PAGE> 393
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-266
<PAGE> 394
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-267
<PAGE> 395
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-268
<PAGE> 396
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-269
<PAGE> 397
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-270
<PAGE> 398
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-271
<PAGE> 399
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-272
<PAGE> 400
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-273
<PAGE> 401
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-274
<PAGE> 402
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-275
<PAGE> 403
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-276
<PAGE> 404
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-277
<PAGE> 405
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-278
<PAGE> 406
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-279
<PAGE> 407
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-280
<PAGE> 408
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-281
<PAGE> 409
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-282
<PAGE> 410
================================================================================
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL. IF ANY PERSON DOES GIVE
SUCH INFORMATION OR MAKES SUCH A REPRESENTATION, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. NEITHER
THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH TOGETHER
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
LETTER OF TRANSMITTAL OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
THE EXCHANGE AGENT FOR THIS EXCHANGE OFFER IS UNITED STATES TRUST COMPANY OF NEW
YORK AND MAY BE CONTACTED AS FOLLOWS:
BY OVERNIGHT COURIER AND BY HAND DELIVERY AFTER 4:30 PM ON EXPIRATION DATE:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
ATTN: CORPORATE TRUST SERVICES
NEW YORK, NEW YORK 10003
BY HAND DELIVERY TO 4:30 PM:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY, LOWER LEVEL
ATTN: CORPORATE TRUST WINDOW
NEW YORK, NEW YORK 10006
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844, COOPER STATION
ATTN: CORPORATE TRUST SERVICES
NEW YORK, NEW YORK 10276-0844
================================================================================
================================================================================
[GOLDEN SKY LOGO]
GOLDEN SKY DBS, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES
DUE 2007, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES
DUE 2007, SERIES A
---------------------------
PROSPECTUS
---------------------------
, 1999
================================================================================
<PAGE> 411
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
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 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 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 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 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-1
<PAGE> 412
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 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 Rock
Mountain DBS and the stockholders of Western Montana DBS,
Inc. named therein (incorporated by reference to Exhibit
2.3 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).*
3.1 -- Certificate of Incorporation of the registrant.
3.2 -- By-Laws of the registrant, adopted as of February 2,
1999.
4.1 -- 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.
4.2 -- Form of 13 1/2% Senior Discount Note due 2007, Series B
of the Registrant (included as Exhibit A-2 in Exhibit
4.1).
4.3 -- 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.
5.1 -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
as to the legality of the securities being registered.
10.1 -- Purchase Agreement, dated February 11, 1999, among
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.
10.2 -- Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC,
relating to the issuance and sale of $195,000,000
aggregate principal amount of the registrant's 12 3/8%
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 the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A and 12 3/8%
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 3/8% 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 Exhibits
4.1 and 4.2 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> 413
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 -- Registration Rights Agreement, dated as of July 31, 1998,
by and among Golden Sky Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, as initial purchasers
(incorporated by reference to Exhibit 4.3 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).*
10.6 -- Escrow Agreement, dated as of July 31, 1998, by and among
State Street Bank and Trust Company of Missouri, N.A., as
escrow Agent, and State Street Bank and Trust Company of
Missouri, N.A., as trustee under the Indenture, and
Golden Sky Systems, Inc. (incorporated by reference to
Exhibit 4.4 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).*
10.7 -- Account Control Agreement, dated as of July 31, 1998, by
and among Golden Sky Systems, Inc., State Street Bank and
Trust Company of Missouri, N.A., as escrow agent, and
State Street Bank and Trust Company, as custodian and
securities intermediary (incorporated by reference to
Exhibit 4.5 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).*
10.8 -- Guarantee of Argos Support Services Company, dated July
31, 1998 (incorporated by reference to Exhibit 4.6 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).*
10.9 -- Guaranty of PrimeWatch, Inc., dated July 31, 1998
(incorporated by reference to Exhibit 4.7 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 33-64367) which became effective on
March 22, 1999).*
10.10 -- Amended and Restated Credit Agreement, dated as of July
7, 1997, amended and restated as of May 8, 1998, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.'s,
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 10.2 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).*
10.11 -- Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended (incorporated by
reference to Exhibit 10.3 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).*
10.12 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Rodney A. Weary
(incorporated by reference to Exhibit 10.6 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).*
10.13 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated
by reference to Exhibit 10.7 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-3
<PAGE> 414
<TABLE>
<CAPTION>
EXHIBIT
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 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 August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.10 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 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 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 August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.13 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
February 12, 1997, between Golden Sky Holdings, Inc. and
each of the members of Golden Sky Holdings' Board of
Directors (incorporated by reference to Exhibit 10.14 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
August 24, 1998, between Golden Sky Systems, Inc. and
John R. Hager (incorporated by reference to Exhibit 10.15
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 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., the registrant, 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 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 January 27, 1999, between
Belletower Partners, L.L.C. and the registrant
(incorporated by reference to Exhibit 10.18 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).*
12.1 -- Statements re Computation of Ratios.
21.1 -- Subsidiaries of the registrant.
</TABLE>
II-4
<PAGE> 415
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol
(included in their opinion filed as Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick 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 Bolinger, Segars, Gilbert & Moss, L.L.P.
23.6 -- Consent of Moss Adams LLP.
23.7 -- Consent of Curtis Blakely & Co., P.C.
23.8 -- Consent of CHMS P.C.
23.9 -- Consent of Anderson & Company.
23.10 -- Consent of Olsen Thielen & Co., LTD
23.11 -- Consent of Summers, McNea & Company, P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc. (included in the
signature pages).
25.1 -- Statement on Form T-1 of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Stock Purchase Agreement, dated as of February 12, 1997,
among Golden Sky Systems, Inc., Rodney A. Weary and the
investors named herein (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).*
99.4 -- 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).*
99.5 -- 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>
- ---------------
* Previously filed.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts (included as Note 12 in
the Consolidated Financial Statements of Golden Sky Systems, Inc.)
II-5
<PAGE> 416
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933:
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered could not exceed that which was registered) and any
division from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information required
by Section 10(a)(3) of the Act need not be furnished, provided that the
registrant includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the prospectus is
at least as current as the date of those financial statements. Notwithstanding
the foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter
if such financial statements and information are contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
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
II-6
<PAGE> 417
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.
II-7
<PAGE> 418
SIGNATURES
Pursuant to the requirements of the Securities Act, 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 April 16, 1999.
GOLDEN SKY DBS, INC.
By: /s/ JOHN R. HAGER
----------------------------------
John R. Hager
Chief Financial Officer
The undersigned directors and officers of Golden Sky DBS, Inc., hereby
appoint Rodney A. Weary and John R. Hager, or either of them individually, as
attorney-in-fact for the undersigned, with full power of substitution for, and
in the name, place and stead of the undersigned, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
any and all amendments (including post-effective amendments) and exhibits to
this registration statement on Form S-4 and any and all applications and other
documents to be filed with the Securities and Exchange Commission pertaining to
the registration of the securities covered hereby, with full power and authority
to do and perform any and all acts and things whatsoever requisite and necessary
or desirable, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities 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, Chief April 16, 1999
- ----------------------------------------------------- Executive Officer and Director
Rodney A. Weary (Principal Executive Officer)
/s/ JOHN R. HAGER Chief Financial Officer (Principal April 16, 1999
- ----------------------------------------------------- Financial and Accounting
John R. Hager Officer)
/s/ ROBERT F. BENBOW Director April 16, 1999
- -----------------------------------------------------
Robert F. Benbow
/s/ WILLIAM O. CHARMAN Director April 16, 1999
- -----------------------------------------------------
William O. Charman
/s/ WILLIAM P. COLLATOS Director April 16, 1999
- -----------------------------------------------------
William P. Collatos
/s/ WILLIAM A. JOHNSTON Director April 16, 1999
- -----------------------------------------------------
William A. Johnston
</TABLE>
<PAGE> 419
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT B. LIEPOLD Director April 16, 1999
- -----------------------------------------------------
Robert B. Liepold
/s/ ERIK M. TORGERSON Director April 16, 1999
- -----------------------------------------------------
Erik M. Torgerson
</TABLE>
<PAGE> 420
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky DBS, Inc.:
The audits referred to in our report dated February 3, 1999 included the
related financial statements schedule II, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set fourth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
KPMG LLP
Kansas City, Missouri
<PAGE> 421
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 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 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 Rock
Mountain DBS and the stockholders of Western Montana DBS,
Inc. named therein (incorporated by reference to Exhibit
2.3 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).*
3.1 -- Certificate of Incorporation of the registrant.
3.2 -- By-Laws of the registrant, adopted as of February 2,
1999.
4.1 -- 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.
4.2 -- Form of 13 1/2% Senior Discount Note due 2007, Series B
of the Registrant (included as Exhibit A-2 in Exhibit
4.1).
4.3 -- 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.
5.1 -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
as to the legality of the securities being registered.
10.1 -- Purchase Agreement, dated February 11, 1999, among
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.
10.2 -- Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC,
relating to the issuance and sale of $195,000,000
aggregate principal amount of the registrant's 12 3/8%
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 the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A and 12 3/8%
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).*
</TABLE>
<PAGE> 422
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.4 -- Form of 12 3/8% 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 Exhibits
4.1 and 4.2 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 -- Registration Rights Agreement, dated as of July 31, 1998,
by and among Golden Sky Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, as initial purchasers
(incorporated by reference to Exhibit 4.3 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).*
10.6 -- Escrow Agreement, dated as of July 31, 1998, by and among
State Street Bank and Trust Company of Missouri, N.A., as
escrow Agent, and State Street Bank and Trust Company of
Missouri, N.A., as trustee under the Indenture, and
Golden Sky Systems, Inc. (incorporated by reference to
Exhibit 4.4 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).*
10.7 -- Account Control Agreement, dated as of July 31, 1998, by
and among Golden Sky Systems, Inc., State Street Bank and
Trust Company of Missouri, N.A., as escrow agent, and
State Street Bank and Trust Company, as custodian and
securities intermediary (incorporated by reference to
Exhibit 4.5 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).*
10.8 -- Guarantee of Argos Support Services Company, dated July
31, 1998 (incorporated by reference to Exhibit 4.6 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).*
10.9 -- Guaranty of PrimeWatch, Inc., dated July 31, 1998
(incorporated by reference to Exhibit 4.7 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 33-64367) which became effective on
March 22, 1999).*
10.10 -- Amended and Restated Credit Agreement, dated as of July
7, 1997, amended and restated as of May 8, 1998, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.'s,
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 10.2 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).*
10.11 -- Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended (incorporated by
reference to Exhibit 10.3 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).*
10.12 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Rodney A. Weary
(incorporated by reference to Exhibit 10.6 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).*
10.13 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated
by reference to Exhibit 10.7 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>
<PAGE> 423
<TABLE>
<CAPTION>
EXHIBIT
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 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 August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.10 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 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 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 August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.13 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
February 12, 1997, between Golden Sky Holdings, Inc. and
each of the members of Golden Sky Holdings' Board of
Directors (incorporated by reference to Exhibit 10.14 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
August 24, 1998, between Golden Sky Systems, Inc. and
John R. Hager (incorporated by reference to Exhibit 10.15
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 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., the registrant, 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 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 January 27, 1999, between
Belletower Partners, L.L.C. and the registrant
(incorporated by reference to Exhibit 10.18 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).*
12.1 -- Statements re Computation of Ratios.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol
(included in their opinion filed as Exhibit 5.1).
23.2 -- Consent of KPMG Peat Marwick LLP.
23.3 -- Consent of Eide Bailly LLP (formerly known as Eide
Helmeke PLLP).
</TABLE>
<PAGE> 424
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.4 -- Consent of Loucks & Glassley, pllp.
23.5 -- Consent of Bolinger, Segars, Gilbert & Moss, L.L.P.
23.6 -- Consent of Moss Adams LLP.
23.7 -- Consent of Curtis Blakely & Co., P.C.
23.8 -- Consent of CHMS P.C.
23.9 -- Consent of Anderson & Company.
23.10 -- Consent of Olsen Thielen & Co., LTD
23.11 -- Consent of Summers, McNea & Company, P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc. (included in the
signature pages).
25.1 -- Statement on Form T-1 of Eligibility of Trustee.
27.1 -- Financial Data Schedule.
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.
99.3 -- Stock Purchase Agreement, dated as of February 12, 1997,
among Golden Sky Systems, Inc., Rodney A. Weary and the
investors named herein (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).*
99.4 -- 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).*
99.5 -- 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>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
GOLDEN SKY DBS, INC.
---------------------
This Certificate of Incorporation has been duly adopted by the GOLDEN SKY
DBS, INC. (the "Corporation") in accordance with Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
FIRST: The name of the Corporation is
Golden Sky DBS, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle. The name of the Corporation's registered agent at such address is
Corporation Service Company.
THIRD: The purposes for which the Corporation is formed are to engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 1,000 shares of the par value of $.01 per share. All
such shares shall be of one class and shall be designated Common Stock.
<PAGE> 2
FIFTH: The name and mailing address of the sole incorporator of the
Corporation are as follows:
Carl P. Marcellino
45 Rockefeller Plaza - 11th Floor
New York, New York 10111
SIXTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors of the Corporation is
expressly authorized and empowered to make, alter or repeal the By-laws of the
Corporation, subject to the power of the stockholders of the Corporation to
alter or repeal any By-law made by the Board of Directors.
SEVENTH: The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provisions contained in this
Certificate of Incorporation, and other provisions authorized by the laws of
the State of Delaware at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law, and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Certificate of Incorporation
in its present form or as hereafter amended are granted subject to the right
reserved in this Article.
EIGHTH: No person shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided, however, that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the General Corporation Law of the State of Delaware
or (iv) for any transaction
<PAGE> 3
from which the director derived an improper personal benefit. If the General
Corporation Law is subsequently amended to further eliminate or limit the
liability of a director, then a director of the Corporation, in addition to the
circumstances in which a director is not personally liable as set forth in the
preceding sentence, shall not be liable to the fullest extent permitted by the
amended General Corporation Law. For purposes of this Article EIGHTH,
"fiduciary duty as a director" shall include any fiduciary duty arising out of
serving at the Corporation's request as a director of another corporation,
partnership, joint venture or other enterprise, and "personal liability to the
Corporation or its stockholders" shall include any liability to such other
corporation, partnership, joint venture, trust or other enterprise, and any
liability to the Corporation in its capacity as a security holder, joint
venturer, partner, beneficiary, creditor or investor of or in any such other
corporation, partnership, joint venture, trust or other enterprise.
NINTH: Elections of directors need not be by written ballot except to the
extent required by the By-laws of the Corporation.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove
named, for the purpose of forming a corporation pursuant to the General
Corporation Law of the State of Delaware, does make this Certificate, hereby
declaring, certifying and acknowledging under penalties of perjury that the
facts herein stated are true and that this Certificate is his act and deed, and
accordingly has hereunto set his hand, as of the 2nd day of February, 1999.
/s/ CARL P. MARCELLINO
-----------------------------
Carl P. Marcellino
Sole Incorporator
<PAGE> 1
EXHIBIT 3.2
===============================================================================
BY-LAWS
OF
GOLDEN SKY DBS, INC.
------------
Incorporated under the Laws of the
State of Delaware
------------
Adopted as of
February 2, 1999
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Offices............................................. 1
ARTICLE II Meetings of Stockholders............................ 1
Section 1 Place of Meetings........................................ 1
Section 2 Annual Meetings.......................................... 1
Section 3 Special Meetings......................................... 1
Section 4 Notice of Meetings....................................... 2
Section 5 List of Stockholders..................................... 2
Section 6 Quorum................................................... 2
Section 7 Voting................................................... 2
Section 8 Proxies.................................................. 3
Section 9 Action Without a Meeting................................. 3
ARTICLE III Board of Directors.................................. 3
Section 1 Powers................................................... 3
Section 2 Election and Term........................................ 3
Section 3 Number................................................... 3
Section 4 Quorum and Manner of Acting.............................. 4
Section 5 Organization Meeting..................................... 4
Section 6 Regular Meetings......................................... 4
Section 7 Special Meetings; Notice................................. 4
Section 8 Removal of Directors..................................... 4
Section 9 Resignations............................................. 5
Section 10 Vacancies................................................ 5
Section 11 Compensation of Directors................................ 5
Section 12 Action Without a Meeting................................. 5
Section 13 Telephonic Participation in Meetings..................... 5
ARTICLE IV Officers............................................ 5
Section 1 Principal Officers....................................... 5
Section 2 Election and Term of Office.............................. 6
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3 Other Officers........................................... 6
Section 4 Removal.................................................. 6
Section 5 Resignations............................................. 6
Section 6 Vacancies................................................ 6
Section 7 Chairman of the Board.................................... 6
Section 8 President................................................ 6
Section 9 Vice President........................................... 7
Section 10 Treasurer................................................ 7
Section 11 Secretary................................................ 7
Section 12 Salaries................................................. 7
ARTICLE V Indemnification of Officers and Directors........... 7
Section 1 Right of Indemnification................................. 7
Section 2 Expenses................................................. 7
Section 3 Other Rights of Indemnification.......................... 8
ARTICLE VI Shares and Their Transfer........................... 8
Section 1 Certificate for Stock.................................... 8
Section 2 Stock Certificate Signature.............................. 8
Section 3 Stock Ledger............................................. 8
Section 4 Cancellation............................................. 8
Section 5 Registrations of Transfers of Stock...................... 9
Section 6 Regulations.............................................. 9
Section 7 Lost, Stolen, Destroyed or Mutilated Certificates........ 9
Section 8 Record Dates............................................. 9
ARTICLE VII Miscellaneous Provisions............................ 9
Section 1 Corporate Seal........................................... 9
Section 2 Voting of Stocks Owned by the Corporation................ 10
Section 3 Dividends................................................ 10
ARTICLE VIII Amendments.......................................... 10
</TABLE>
ii
<PAGE> 4
BY-LAWS
OF
GOLDEN SKY DBS, INC.
(a Delaware corporation)
-----------
ARTICLE I
OFFICES
The registered office of the Corporation in the State of Delaware shall be
located in the City of Wilmington, County of New Castle. The Corporation may
establish or discontinue, from time to time, such other offices within or
without the State of Delaware as may be deemed proper for the conduct of the
Corporation's business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of stockholders shall be held
at such place or places, within or without the State of Delaware, as may from
time to time be fixed by the Board of Directors, or as shall be specified in
the respective notices, or waivers of notice, thereof.
Section 2. Annual Meeting. The annual meeting of stockholders for the
election of Directors and the transaction of other business shall be held on
such date and at such place as may be designated by the Board of Directors. At
each annual meeting the stockholders entitled to vote shall elect a Board of
Directors and may transact such other proper business as may come before the
meeting.
Section 3. Special Meetings. A special meeting of the stockholders, or of
any class thereof entitled to vote, for any purpose or purposes, may be called
at any time by the Chairman of the Board, if any, or the President or by order
of the Board of Directors and shall be called by the Secretary upon the written
request of stockholders holding of record at least 50% of the outstanding shares
of stock of the Corporation entitled to vote at such meeting. Such written
request shall state the purpose or purposes for which such meeting is to be
called.
<PAGE> 5
Section 4. Notice of Meetings. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, stating the
place, date and hour of the meeting shall be given not less than ten days or
more than sixty days before the date on which the meeting is to be held to each
stockholder of record entitled to vote thereat by delivering a notice thereof to
him personally or by mailing such notice in a postage prepaid envelope directed
to him at his address as it appears on the records of the Corporation, unless he
shall have filed with the Secretary of the Corporation a written request that
notices intended for him be directed to another address, in which case such
notice shall be directed to him at the address designated in such request.
Notice shall not be required to be given to any stockholder who shall waive such
notice in writing, whether prior to or after such meeting, or who shall attend
such meeting in person or by proxy unless such attendance is for the express
purpose of objecting, at the beginning of such meeting, to the transaction of
any business because the meeting is not lawfully called or convened. Every
notice of a special meeting of the stockholders, besides the time and place of
the meeting, shall state briefly the objects or purposes thereof.
Section 5. List of Stockholders. It shall be the duty of the Secretary or
other officer of the Corporation who shall have charge of the stock ledger to
prepare and make, at least ten days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in his name. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall be kept and produced at the time
and place of the meeting during the whole time thereof and subject to the
inspection of any stockholder who may be present. The original or duplicate
ledger shall be the only evidence as to who are the stockholders entitled to
examine such list or the books of the Corporation or to vote in person or by
proxy at such meeting.
Section 6. Quorum. At each meeting of the stockholders, the holders of
record of a majority of the issued and outstanding stock of the Corporation
entitled to vote at such meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business, except where otherwise
provided by law, the Certificate of Incorporation or these By-laws. In the
absence of a quorum, any officer entitled to preside at, or act as Secretary
of, such meeting shall have the power to adjourn the meeting from time to time
until a quorum shall be constituted.
Section 7. Voting. Every stockholder of record who is entitled to vote
shall at every meeting of the stockholders be entitled to one vote for each
share of stock held by him on the record date; except, however, that shares of
its own stock belonging to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation is held by the Corporation, shall neither be entitled to vote
nor counted for quorum purposes. Nothing in this Section shall be construed as
limiting the right of the Corporation to vote its own stock held by it in a
fiduciary capacity. At all meetings of the stockholders, a
2
<PAGE> 6
quorum being present, all matters shall be decided by majority vote of the
shares of stock entitled to vote held by stockholders present in person or by
proxy, except as otherwise required by law or the Certificate of Incorporation.
Unless demanded by a stockholder of the Corporation present in person or by
proxy at any meeting of the stockholders and entitled to vote thereat or so
directed by the chairman of the meeting or required by law, the vote thereat on
any question need not be by written ballot. On a vote by written ballot, each
ballot shall be signed by the stockholder voting, or in his name by his proxy,
if there be such proxy, and shall state the number of shares voted by him and
the number of votes to which each share is entitled.
Section 8. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. A proxy
acting for any stockholder shall be duly appointed by an instrument in writing
subscribed by such stockholder. No proxy shall be valid after the expiration of
three years from the date thereof unless the proxy provides for a longer period.
Section 9. Action Without a Meeting. Any action required to be taken at any
annual or special meeting of stockholders or any action which may be taken at
any annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing setting forth
the action so taken shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the Corporation shall be
managed under the direction of the Board of Directors.
Section 2. Election and Term. Except as otherwise provided by law,
Directors shall be elected at the annual meeting of stockholders and shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualify, or until they sooner die, resign or are removed. At
each annual meeting of stockholders, at which a quorum is present, the persons
receiving a plurality of the votes cast shall be the Directors. Acceptance of
the office of Director may be expressed orally or in writing, and attendance at
the organization meeting shall constitute such acceptance.
Section 3. Number. The number of Directors shall be such number as shall be
determined from time to time by the Board of Directors, but shall not be less
than one nor more than seven and initially shall be five.
3
<PAGE> 7
Section 4. Quorum and Manner of Acting. Unless otherwise provided by law,
the presence of 50% of the whole Board of Directors shall be necessary to
constitute a quorum for the transaction of business. In the absence of a
quorum, a majority of the Directors present may adjourn the meeting from time
to time until a quorum shall be present. Notice of any adjourned meeting need
not be given. At all meetings of Directors, a quorum being present, all matters
shall be decided by the affirmative vote of a majority of the Directors
present, except as otherwise required by law. The Board of Directors may hold
its meetings at such place or places within or without the State of Delaware as
the Board of Directors may from time to time determine or as shall be specified
in the respective notices, or waivers of notice, thereof.
Section 5. Organization Meeting. Immediately after each annual meeting of
stockholders for the election of Directors the Board of Directors shall meet at
the place of the annual meeting of stockholders for the purpose of
organization, the election of officers and the transaction of other business.
Notice of such meeting need not be given. If such meeting is held at any other
time or place, notice thereof must be given as hereinafter provided for special
meetings of the Board of Directors, subject to the execution of a waiver of the
notice thereof signed by, of the attendance at such meeting of, all Directors
who may not have received such notice.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
may be held at such place, within or without the State of Delaware, as shall
from time to time be determined by the Board of Directors. After there has
been such determination, and notice thereof has been once given to each member
of the Board of Directors as hereinafter provided for special meetings, regular
meetings may be held without further notice being given.
Section 7. Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any,
the President or by a majority of the Directors. Notice of each such meeting
shall be mailed to each Director, addressed to him at his residence or usual
place of business, at least five days before the date on which the meeting is
to be held, or shall be sent to him at such place by telex or facsimile, or be
delivered personally or by telephone, not later than the day before the day on
which such meeting is to be held. Each such notice shall state the time and
place of the meeting and, as may be required, the purposes thereof. Notice of
any meeting of the Board of Directors need not be given to any Director if he
shall sign a written waiver thereof either before or after the time stated
therein for such meeting, or if he shall be present at the meeting. Unless
limited by law, the Certificate of Incorporation, these By-laws or the terms of
the notice thereof, any and all business may be transacted at any meeting
without the notice thereof having specifically identified the matters to be
acted upon.
Section 8. Removal of Directors. Any Director or the entire Board of
Directors may be removed, with or without cause, at any time, by action of the
holders of record of the majority of the issued and outstanding stock of the
Corporation (a) present in person or by proxy at a meeting of holders of such
stock and entitled to vote thereon or (b) by a consent in writing in the manner
contemplated in Section 9 of Article II, and the vacancy or vacancies in the
Board of Directors caused by any such removal may be filled by action of such a
majority at such meeting or at any subsequent meeting or by consent.
4
<PAGE> 8
Section 9. Resignations. Any Director of the Corporation may resign at any
time by giving written notice to the Chairman of the Board, if any, the
President, the Vice President or the Secretary of the Corporation. The
resignation of any Director shall take effect upon receipt of notice thereof or
at such later time as shall be specified in such notice; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 10. Vacancies. Any newly created directorships and vacancies
occurring in the Board by reason of death, resignation, retirement,
disqualification or removal, with or without cause, may be filled by the action
of the holders of record of the majority of the issued and outstanding stock of
the Corporation (a) present in person or by proxy at a meeting of holders of
such stock and entitled to vote thereon or (b) by a consent in writing in the
manner contemplated in Section 9 of Article II. The Director so chosen, whether
selected to fill a vacancy or elected to a new directorship, shall hold office
until the next meeting of stockholders at which the election of Directors is in
the regular order of business, and until his successor has been elected and
qualifies, or until he sooner dies, resigns or is removed.
Section 11. Compensation of Directors. Directors, as such, shall not receive
any stated salary for their services, but, by resolution of the Board, a
specific sum fixed by the Board plus expenses may be allowed for attendance at
each regular or special meeting of the Board; provided, however, that nothing
herein contained shall be construed to preclude any Director from serving the
Corporation or any parent or subsidiary corporation thereof in any
other capacity and receiving compensation therefor.
Section 12. Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
a written consent thereto is signed by all members of the Board, and such
written consent is filed with the minutes or proceedings of the Board.
Section 13. Telephonic Participation in Meetings. Members of the Board of
Directors may participate in a meeting of the Board by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
Section 1. Principal Officers. The Board of Directors shall elect a
President, a Secretary and a Treasurer, and may in addition elect a Chairman of
the Board, one or more Vice Presidents and such other officers as it deems fit;
the President, the Secretary, the Treasurer, the Chairman of the Board (if any)
and the Vice Presidents (if any) being the principal officers of the
Corporation. One person may hold, and perform the duties of, any two or more of
said offices.
Section 2. Election and Term of Office. The principal officers of the
Corporation shall be elected annually by the Board of Directors at the
organization meeting thereof. Each such
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officer shall hold office until his successor shall have been elected and shall
qualify, or until his earlier death, resignation or removal.
Section 3. Other Officers. In addition, the Board may elect, or the
Chairman of the Board, if any, or the President may appoint, such other officers
as they deem fit. Any such other officers chosen by the Board of Directors shall
be subordinate officers and shall hold office for such period, have such
authority and perform such duties as the Board of Directors, the Chairman of the
Board, if any, or the President may from time to time determine.
Section 4. Removal. Any officer may be removed, either with or without
cause, at any time, by resolution adopted by the Board of Directors at any
regular meeting of the Board, or at any special meeting of the Board called for
that purpose, at which a quorum is present.
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Chairman of the Board, if any, the President, the
Secretary of the Board of Directors. Any such resignation shall take effect upon
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 6. Vacancies. A vacancy in any office may be filled for the
unexpired portion of the term in the manner prescribed in these By-laws for
election or appointment to such office for such term.
Section 7. Chairman of the Board. The Chairman of the Board of Directors,
if one be elected, shall preside if present at all meetings of the Board of
Directors, and he shall have and perform such other duties as from time to time
may be assigned to him by the Board of Directors.
Section 8. President. The President shall be the chief executive officer of
the Corporation and shall have the general powers and duties of supervision and
management usually vested in the office of president of a corporation. He shall
preside at all meetings of the stockholders if present thereat, and in the
absence or non-election of the Chairman of the Board of Directors, at all
meetings of the Board of Directors and shall have general supervision, direction
and control of the business of the Corporation. Except as the Board of Directors
shall authorize the execution thereof in some other manner, he shall execute
bonds, mortgages, and other contracts on behalf of the Corporation, and shall
cause the seal to be affixed to any instrument requiring it and when so affixed
the seal shall be attested by the signature of the Secretary or the Treasurer.
Section 9. Vice President. Each Vice President, if such be elected, shall
have such powers and shall perform such duties as shall be assigned to him by
the President or the Board of Directors.
Section 10. Treasurer. The Treasurer shall have charge and custody of, and
be responsible for, all funds and securities of the Corporation. He shall
exhibit at all reasonable times
6
<PAGE> 10
his books of account and records to any of the Directors of the Corporation upon
application during business hours at the office of the Corporation where such
books and records shall be kept; when requested by the Board of Directors, he
shall render a statement of the condition of the finances of the Corporation at
any meeting of the Board or at the annual meeting of stockholders; he shall
receive, and give receipt for, moneys due and payable to the Corporation from
any source whatsoever; in general, he shall perform all the duties incident to
the office of Treasurer and such other duties as from time to time may be
assigned to him by the Chairman of the Board of Directors, the President or the
Board of Directors. The Treasurer shall give such bond, if any, for the faithful
discharge of his duties as the Board of Directors may require.
Section 11. Secretary. The Secretary, if present, shall act as secretary at
all meetings of the Board of Directors and of the stockholders and keep the
minutes thereof in a book or books to be provided for that purpose; he shall see
that all notices required to be given by the Corporation are duly given and
served; he shall have charge of the stock records of the Corporation; he shall
see that all reports, statements and other documents required by law are
properly kept and filed; and in general he shall perform all the duties incident
to the office of Secretary and such other duties as from time to time may be
assigned to him by the President or the Board of Directors.
Section 12. Salaries. The salaries of the principal officers shall be fixed
from time to time by the Board of Directors, and the salaries of any other
officers may be fixed by the President.
ARTICLE V
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1. Right of Indemnification. Every person now or hereafter serving
as a Director or officer of the Corporation and every such Director or officer
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the Corporation in accordance with and to
the fullest extent permitted by law for the defense of, or in connection with,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
Section 2. Expenses. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors in the specific case upon receipt of an undertaking by or on behalf
of such Director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation as
authorized in this Article V.
Section 3. Other Rights of Indemnification. The right of indemnification
herein provided shall not be deemed exclusive of any other rights to which any
such Director or officer may now or hereafter be entitled under any by-law,
agreement, vote of stockholders or
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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 or officer and shall
inure to the benefit of the heirs, executors and administrators of such person.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 1. Certificate for Stock. Every stockholder of the Corporation
shall be entitled to a certificate or certificates, to be in such form as the
Board of Directors shall prescribe, certifying the number of shares of the
capital stock of the Corporation owned by him. No certificate shall be issued
for partly paid shares.
Section 2. Stock Certificate Signature. The certificates for such stock
shall be numbered in the order in which they shall be issued and shall be
signed by the Chairman of the Board, if any, or the President or any Vice
President and by the Secretary or an Assistant Secretary or the Treasurer of
the Corporation, and its seal shall be affixed thereto. If such certificate is
countersigned (1) by a transfer agent other than the Corporation or its
employee, or, (2) by a registrar other than the Corporation or its employee,
the signatures of such officers of the Corporation may be facsimiles. In case
any officer of the Corporation who has signed, or whose facsimile signature
has been placed upon, any such certificate shall have ceased to be such officer
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer at the date of issue.
Section 3. Stock Ledger. A record shall be kept by the Secretary or by
any other officer, employee or agent designated by the Board of Directors of
the name of each person, firm or corporation holding capital stock of the
Corporation, the number of shares represented by, and the respective dates of,
each certificate for such capital stock, and in case of cancellation of any
such certificate, the respective dates of cancellation.
Section 4. Cancellation. Every certificate surrendered to the Corporation
for exchange or registration of transfer shall be canceled, and no new
certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled,
except, subject to Section 7 of this Article VI, in cases provided for by
applicable law.
Section 5. Registrations of Transfers of Stock. Registrations of transfers
of shares of the capital stock of the Corporation shall be made on the books of
the Corporation by the registered holder thereof, or by his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary of
the Corporation or with a transfer clerk or a transfer agent appointed as in
Section 6 of this Article VI provided, and on surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes
thereon. The person in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation; provided, however, that whenever any transfer of shares shall be
made for collateral security, and not absolutely, it shall be so expressed
8
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in the entry of the transfer if, when the certificates are presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
Section 6. Regulations. The Board of Directors may make such rules and
regulations as it may deem expedient, not inconsistent with the Certificate of
Incorporation or these By-laws, concerning the issue, transfer and registration
of certificates for shares of the stock of the Corporation. It may appoint, or
authorize any principal officer or officers to appoint, one or more transfer
clerks or one or more transfer agents and one or more registrars, and may
require all certificates of stock to bear the signature or signatures of any of
them.
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. Before any
certificates for stock of the Corporation shall be issued in exchange for
certificates which shall become mutilated or shall be lost, stolen or destroyed,
proper evidence of such loss, theft, mutilation or destruction shall be procured
for the Board of Directors, if it so requires.
Section 8. Record Dates. For the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a date as
a record date for any such determination of stockholders. Such record date
shall not be more than sixty or less than ten days before the date of such
meeting, or more than sixty days prior to any other action.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 1. Corporate Seal. The Board of Directors shall provide a
corporate seal, which shall be in the form of a circle and shall bear the name
of the Corporation and words and figures showing that it was incorporated in
the State of Delaware in the year 1999. The Secretary shall be the custodian of
the seal. The Board of Directors may authorize a duplicate seal to be kept and
used by any other officer.
Section 2. Voting of Stocks Owned by the Corporation. The Board of
Directors may authorize any person on behalf of the Corporation to attend, vote
and grant proxies to be used at any meeting of stockholders of any corporation
(except the Corporation) in which the Corporation may hold stock.
Section 3. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefor, at any regular or special meeting declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the
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Corporation available for dividends such sum or sums as the Directors from time
to time in their discretion deem proper for working capital or as a reserve fund
to meet contingencies or for equalizing dividends or for such other purposes as
the Board of Directors shall deem conducive to the interests of the Corporation.
ARTICLE VIII
AMENDMENTS
These By-laws of the Corporation may be altered, amended or repealed by
the Board of Directors at any regular or special meeting of the Board of
Directors or by the affirmative vote of the holders of record of a majority of
the issued and outstanding stock of the Corporation (i) present in person or by
proxy at a meeting of holders of such stock and entitled to vote thereon or
(ii) by a consent in writing in the manner contemplated in Section 9 of Article
II, provided, however, that notice of the proposed alteration, amendment or
repeal is contained in the notice of such meeting. By-laws, whether made or
altered by the stockholders or by the Board of Directors, shall be subject to
alteration or repeal by the stockholders as in this Article VIII above provided.
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EXHIBIT 4.1
================================================================================
GOLDEN SKY DBS, INC., as Issuer,
and
UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee
---------------------
INDENTURE
Dated as of February 19, 1999
--------------------
$193,100,000 Principal Amount at Maturity
13 1/2% Senior Discount Notes due 2007, Series A
13 1/2% Senior Discount Notes due 2007, Series B
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- ----------------------- ----------------
<S> <C>
Section 310 (a)(1)........................................................... 6.09
(a)(2)........................................................... 6.09
(a)(3)........................................................... Not Applicable
(a)(4)........................................................... Not Applicable
(b).............................................................. 6.08, 6.10
Section 311 (a).............................................................. 6.07
(b).............................................................. 6.07
(c).............................................................. Not Applicable
Section 312 (a).............................................................. 7.01
(b).............................................................. 7.02
(c).............................................................. 7.02
Section 313 (a).............................................................. 7.03
(b).............................................................. 7.03
(c).............................................................. 7.03
(d).............................................................. 7.03
Section 314 (a).............................................................. 7.04, 10.09
(b).............................................................. Not Applicable
(c)(1)........................................................... 1.04, 4.04
(c)(2)........................................................... 1.04, 4.04,
(c)(3)........................................................... Not Applicable
(d).............................................................. Not Applicable
(e).............................................................. 1.04
Section 315 (a).............................................................. 6.01(a)
(b).............................................................. 6.02
(c).............................................................. 6.01(b)
(d).............................................................. 6.01(c)
(e).............................................................. 5.14
Section 316 (a) (last sentence) ............................................. 3.14
(a)(1)(A)........................................................ 5.12
(a)(1)(B)........................................................ 5.13
(a)(2)........................................................... Not Applicable
(b).............................................................. 5.08
Section 317 (a)(1)........................................................... 5.03
(a)(2)........................................................... 5.04
(b).............................................................. 10.03
Section 318 (a).............................................................. 1.08
</TABLE>
- --------------------------
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of this Indenture.
<PAGE> 3
TABLE OF CONTENTS
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PARTIES......................................................................................1
RECITALS.....................................................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions................................................................ 1
Section 1.02. Other Definitions......................................................... 29
Section 1.03. Rules of Construction..................................................... 30
Section 1.04. Form of Documents Delivered
to Trustee............................................................. 31
Section 1.05. Acts of Holders........................................................... 31
Section 1.06. Notices, etc., to the Trustee and the Company............................. 32
Section 1.07. Notice to Holders; Waiver................................................. 33
Section 1.08. Conflict with Trust Indenture Act......................................... 33
Section 1.09. Effect of Headings and Table of
Contents............................................................... 34
Section 1.10. Successors and Assigns.................................................... 34
Section 1.11. Separability Clause....................................................... 34
Section 1.12. Benefits of Indenture..................................................... 34
Section 1.13. GOVERNING LAW............................................................. 34
Section 1.14. No Recourse Against Others................................................ 34
Section 1.15. Independence of Covenants................................................. 35
Section 1.16. Exhibits.................................................................. 35
Section 1.17. Counterparts.............................................................. 35
Section 1.18. Duplicate Originals....................................................... 35
ARTICLE TWO
SECURITY FORMS
Section 2.01. Form and Dating........................................................... 35
ARTICLE THREE
THE SECURITIES
Section 3.01. Title and Terms........................................................... 36
Section 3.02. Registrar and Paying Agent................................................ 37
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Section 3.03. Execution and Authentication.............................................. 37
Section 3.04. Temporary Securities...................................................... 40
Section 3.05. Transfer and Exchange..................................................... 40
Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities.......................... 41
Section 3.07. Payment of Interest; Interest Rights Preserved............................ 42
Section 3.08. Persons Deemed Owners..................................................... 43
Section 3.09. Cancellation.............................................................. 44
Section 3.10. Computation of Interest................................................... 44
Section 3.11. Legal Holidays............................................................ 44
Section 3.12. CUSIP Number.............................................................. 45
Section 3.13. Paying Agent To Hold Money in Trust....................................... 45
Section 3.14. Treasury Securities....................................................... 45
Section 3.15. Deposits of Monies........................................................ 46
Section 3.16. Book-Entry Provisions for Global
Securities............................................................. 46
Section 3.17. Special Transfer Provisions............................................... 47
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance.............. 50
Section 4.02. Defeasance and Discharge.................................................. 51
Section 4.03. Covenant Defeasance....................................................... 51
Section 4.04. Conditions to Defeasance or Covenant Defeasance........................... 52
Section 4.05. Deposited Money and Government Securities To Be Held in Trust; Other
Miscellaneous Provisions............................................... 54
Section 4.06. Reinstatement............................................................. 55
ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default......................................................... 56
Section 5.02. Acceleration of Maturity; Rescission and Annulment........................ 58
Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee........... 59
Section 5.04. Trustee May File Proofs of Claims......................................... 60
Section 5.05. Trustee May Enforce Claims Without Possession of Securities............... 61
Section 5.06. Application of Money Collected............................................ 61
</TABLE>
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Section 5.07. Limitation on Suits....................................................... 62
Section 5.08. Unconditional Right of Holders To Receive Principal, Premium and
Interest............................................................... 63
Section 5.09. Restoration of Rights and Remedies........................................ 63
Section 5.10. Rights and Remedies Cumulative............................................ 63
Section 5.11. Delay or Omission Not Waiver.............................................. 63
Section 5.12. Control by Majority....................................................... 64
Section 5.13. Waiver of Past Defaults................................................... 64
Section 5.14. Undertaking for Costs..................................................... 64
Section 5.15. Waiver of Stay, Extension or Usury Laws................................... 65
Section 5.16. Unconditional Right of Holders To
Institute Certain Suits................................................ 65
ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities....................................... 66
Section 6.02. Notice of Defaults........................................................ 67
Section 6.03. Certain Rights of Trustee................................................. 67
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or
Application of Proceeds Thereof........................................ 69
Section 6.05. Trustee and Agents May Hold
Securities; Collections; Etc........................................... 69
Section 6.06. Money Held in Trust....................................................... 69
Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim........... 70
Section 6.08. Conflicting Interests..................................................... 70
Section 6.09. Corporate Trustee Required;
Eligibility............................................................ 71
Section 6.10. Resignation and Removal; Appointment of Successor Trustee................. 71
Section 6.11. Acceptance of Appointment by
Successor.............................................................. 73
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to
Business............................................................... 74
Section 6.13. Trustee's Application for Instructions
from the Company....................................................... 74
</TABLE>
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ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee Names and
Addresses of Holders................................................... 75
Section 7.02. Communications of Holders................................................. 76
Section 7.03. Reports by Trustee........................................................ 76
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF
ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms...................... 76
Section 8.02. Successor Substituted..................................................... 78
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements
and Waivers Without Consent of Holders................................. 78
Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders... 79
Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers.............. 81
Section 9.04. Effect of Supplemental Indentures......................................... 81
Section 9.05. Conformity with Trust Indenture Act....................................... 81
Section 9.06. Reference in Securities to
Supplemental Indentures................................................ 81
Section 9.07. Record Date............................................................... 82
Section 9.08. Revocation and Effect of Consents......................................... 82
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and
Interest............................................................... 82
Section 10.02. Maintenance of Office or Agency........................................... 83
Section 10.03. Money for Security Payments To Be Held in Trust........................... 83
Section 10.04. Corporate Existence....................................................... 85
</TABLE>
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Section 10.05. Payment of Taxes and Other Claims......................................... 85
Section 10.06. Maintenance of Properties................................................. 86
Section 10.07. Insurance................................................................. 86
Section 10.08. Books and Records......................................................... 86
Section 10.09. Reports................................................................... 86
Section 10.10. Change of Control......................................................... 87
Section 10.11. Limitation on Indebtedness of the Company................................. 90
Section 10.12. Limitation on Additional Indebtedness of Subsidiaries of the Company...... 91
Section 10.13. Statement by Officers as to Default....................................... 91
Section 10.14. Limitation on Liens....................................................... 92
Section 10.15. Designation of Unrestricted Subsidiaries.................................. 92
Section 10.16. Limitation on Restricted Payments......................................... 94
Section 10.17. Ownership of Systems...................................................... 97
Section 10.18. Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries................................................ 97
Section 10.19. Disposition of Proceeds of Asset Sales.................................... 98
Section 10.20. Limitation on Issuances and Sales of Preferred Equity Interests by
Restricted Subsidiaries................................................100
Section 10.21. Limitations on Conduct of Business
of the Company and the Restricted Subsidiaries.........................101
Section 10.22. Limitation on Transactions with
Affiliates.............................................................101
Section 10.23. Compliance Certificates and Opinions......................................102
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
Section 11.01. Right of Redemption.......................................................103
Section 11.02. Applicability of Article..................................................103
Section 11.03. Election To Redeem; Notice to Trustee.....................................103
Section 11.04. Selection by Trustee of Securities To Be Redeemed.........................104
Section 11.05. Notice of Redemption......................................................104
Section 11.06. Deposit of Redemption Price...............................................106
Section 11.07. Securities Payable on Redemption Date.....................................106
Section 11.08. Securities Redeemed or Purchased in Part..................................106
</TABLE>
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ARTICLE TWELVE
SATISFACTION AND DISCHARGE
Section 12.01. Satisfaction and Discharge of
Indenture................................................................107
Section 12.02. Application of Trust Money................................................108
</TABLE>
Exhibit A-1 - Form of Initial Security
Exhibit A-2 - Form of Exchange Security
Exhibit B - Form of Legend for Book-Entry Securities
Exhibit C - Form of Certificate To Be Delivered in
Connection with Transfers to Non-QIB Accredited
Investors
Exhibit D - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S
-vii-
<PAGE> 9
INDENTURE, dated as of February 19, 1999, between Golden Sky
DBS, Inc., a corporation incorporated under the laws of the State of Delaware
(the "Company"), as issuer, and United States Trust Company of New York, a New
York banking corporation, as trustee (the "Trustee").
RECITALS
The Company has duly authorized the creation of an issue of
13 1/2% Senior Discount Notes due 2007, Series A, and 13 1/2% Senior Discount
Notes due 2007, Series B, to be issued in exchange for the 13 1/2% Senior
Discount Notes due 2007, Series A, pursuant to a Registration Rights Agreement
(as defined herein), and to provide therefor the Company has duly authorized the
execution and delivery of this Indenture.
All things necessary have been done to make the Securities (as
defined herein), when executed by the Company and authenticated and delivered
hereunder and duly issued by the Company, the valid obligations of the Company
and to make this Indenture a valid agreement of each of the Company and the
Trustee in accordance with the terms hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders (as hereinafter defined) of
the Securities, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.
"Accreted Value" as of any date (the "Specified Date") means,
with respect to each $1,000 principal amount at maturity of Securities:
(i) if the Specified Date is one of the following dates (each
a "Semi-Annual Accreted Date"), the amount set forth opposite such date
below:
<PAGE> 10
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ACCRETED
SEMI-ANNUAL ACCRETED DATE VALUE
-------------------------- -------------
<S> <C>
February 19, 1999 518.12
September 1, 1999 555.51
March 1, 2000 593.00
September 1, 2000 633.03
March 1, 2001 675.76
September 1, 2001 721.37
March 1, 2002 770.07
September 1, 2002 822.05
March 1, 2003 877.53
September 1, 2003 936.77
March 1, 2004 1000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual
Accreted Dates, the sum of (A) the Accreted Value for the Semi-Annual
Accreted Date immediately preceding the Specified Date and (B) an
amount equal to the product of (i) the Accreted Value for the
immediately following Semi- Annual Accreted Date less the Accreted
Value for the immediately preceding Semi-Annual Accreted Date and (ii)
a fraction, the numerator of which is the number of days from the
immediately preceding Semi-Annual Accreted Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of
which is 180.
"Acquired Indebtedness" means Indebtedness of a Person (a)
assumed in connection with an Acquisition from such Person or (b) existing at
the time such Person becomes a Restricted Subsidiary or is merged or
consolidated with or into the Company or any Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person,
any other Person that merges with or into or becomes a Subsidiary of such
specified Person.
"Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Equity Interests of any other Person by the Company or any Restricted
Subsidiary, in either case pursuant to which such Person shall become a
Restricted Subsidiary or shall be consolidated or merged with or into the
Company or any Restricted Subsidiary or (ii) any acquisition by the Company or
any Restricted Subsidiary of the assets of any Person which constitute
substantially
<PAGE> 11
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all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Additional Interest" has the meaning provided in the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided, however, that (i) beneficial ownership of 10.0% or more of
the voting power of the then outstanding voting securities of a Person shall be
deemed to be control and (ii) no individual, other than a director of the
Company or an officer of the Company with a policy making function, shall be
deemed an Affiliate of the Company or any of the Company's Subsidiaries solely
by reason of such individual's employment, position or responsibilities by or
with respect to the Company or any of the Company's Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance,
transfer, lease (that has the effect of a disposition) or other disposition
(including, without limitation, any merger, consolidation or sale-leaseback
transaction) to any Person other than the Company or a Restricted Subsidiary, in
one transaction or a series of related transactions, of (i) any Equity Interest
of any Restricted Subsidiary; (ii) any material license, franchise or other
authorization of the Company or any Restricted Subsidiary; (iii) any assets of
the Company or any Restricted Subsidiary that constitute substantially all of an
operating unit or line of business of the Company or any Restricted Subsidiary;
or (iv) any other property or asset of the Company or any Restricted Subsidiary
outside of the ordinary course of business (including the receipt of proceeds
paid on account of the loss of or damage to any property or asset, except to the
extent used to repurchase or repair such property or asset, and awards of
compensation for any asset taken by condemnation, eminent domain or similar
proceedings). The term "Asset Sale" shall not include (a) any transaction
consummated in compliance with Article Eight and the creation of any Lien not
prohibited by Section 10.14; provided, however, that any transaction consummated
in compliance with Article Eight involving
<PAGE> 12
-4-
a sale, conveyance, assignment, transfer, lease or other disposal of less than
all of the properties or assets of the Company and the Restricted Subsidiaries
shall be deemed to be an Asset Sale with respect to the properties or assets of
the Company and Restricted Subsidiaries that are not so sold, conveyed,
assigned, transferred, leased or otherwise disposed of in such transaction; (b)
sales of property or equipment that has become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Restricted Subsidiary, as the case may be; and (c) any transaction
consummated in compliance with Section 10.15.
"Bankruptcy Law" means Title 11, United States Code or any
similar federal or state law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization or relief of debtors or the law of any
other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization or relief of debtors or any amendment to, succession
to or change in any such law.
"Bankruptcy Order" means any court order made in a proceeding
pursuant to or within the meaning of any Bankruptcy Law, containing an
adjudication of bankruptcy or insolvency, or providing for liquidation,
receivership, winding-up, dissolution, "concordate" or reorganization, or
appointing a Custodian of a debtor or of all or any substantial part of a
debtor's property, or providing for the staying, arrangement, adjustment or
composition of indebtedness or other relief of a debtor.
"Board" means the Board of Directors of the Company.
"Board of Directors" means (i) in the case of a Person that is
a corporation, the board of directors of such Person and (ii) in the case of any
other Person, the board of directors, board of managers, management committee or
similar governing body of such Person (or in the case of a limited partnership,
of such Person's general partner, or in the case of a limited liability company,
of such Person's manager), or any authorized committee thereof responsible for
the management of the business and affairs of such Person.
"Board Resolution" means a copy of a resolution delivered to
the Trustee and certified by the Secretary or an Assistant Secretary of the
Company to have been duly adopted by the Board and to be in full force and
effect on the date of such certification.
<PAGE> 13
-5-
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in The City of New
York, State of New York are authorized or obligated by law, regulation or
executive order to close.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be so required to be capitalized on the
balance sheet in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness
(with, for purposes of Section 10.19 only, a maturity of 365 days or less)
issued or directly and fully guaranteed or insured by the United States or any
agency or instrumentality thereof that (provided that the full faith and credit
of the United States is pledged in support thereof or such Indebtedness
constitutes a general obligation of such country) have maturities of not more
than six months from the date of acquisition; (ii) time deposits, certificates
of deposit or acceptances (with, for purposes of Section 10.19 only, a maturity
of 365 days or less) of any financial institution that is a member of the
Federal Reserve System, in each case having combined capital and surplus and
undivided profits (or any similar capital concept) of not less than $200.0
million and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1"
by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by
a corporation (other than an Affiliate of the Company) organized under the laws
of the United States or any State thereof and rated at least "A-1" by S&P or
"P-1" by Moody's and in each case maturing not more than six months after the
date of acquisition; (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
and entered into with any bank meeting the qualifications specified in clause
(ii) above; and (v) money market funds that invest substantially all of their
assets in securities described in the preceding clauses (i) through (iv).
"Change of Control" is defined to mean the occurrence of any
of the following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately
<PAGE> 14
-6-
or only after the passage of time), directly or indirectly, of more than 50% of
the total Voting Equity Interests of the Company; or (b) the Company
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into, the Company, in any such event pursuant to a transaction in which the
outstanding Voting Equity Interests of the Company are converted into or
exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Equity Interests of the Company are
converted into or exchanged for (1) Voting Equity Interests (other than
Disqualified Equity Interests) of the surviving or transferee corporation or its
parent corporation and/or (2) cash, securities and other property in an amount
that could be paid by the Company as a Restricted Payment under this Indenture
and (ii) immediately after such transaction no "person" or "group" (as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Equity
Interests of the surviving or transferee corporation or its parent corporation,
as applicable; or (c) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors (together with
any new directors whose election by the Board of Directors or whose nomination
for election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason (other than by action of the
Permitted Holders) to constitute a majority of the Board of Directors then in
office; or (d) the approval by stockholders of the Company of any liquidation or
dissolution of the Company.
"Common Stock" means, with respect to any Person, any and all
shares, interests or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of, such Person's common stock
whether outstanding at the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor person
<PAGE> 15
-7-
shall have become such pursuant to the applicable provisions of this Indenture,
and thereafter "Company" shall mean such successor person.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by any one of its Chairman of the
Board, its Vice-Chairman, its Chief Executive Officer, its President, its Chief
Financial Officer or a Vice President, and by its Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Consolidated Income Tax Expense" means, with respect to the
Company for any period, the provision for federal, state, local and foreign
income taxes payable by the Company and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the
Company for any period, without duplication, the sum of (i) the interest expense
of the Company and the Restricted Subsidiaries for such period as determined on
a consolidated basis in accordance with GAAP, including, without limitation, (a)
any amortization of debt discount; (b) the net cost under Interest Rate
Protection Obligations (including any amortization of discounts); (c) the
interest portion of any deferred payment obligation; (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing; and (e) all capitalized interest and all accrued
interest; (ii) the interest component of Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Company and the Restricted
Subsidiaries during such period as determined on a consolidated basis in
accordance with GAAP; and (iii) dividends and distributions in respect of
Disqualified Equity Interests actually paid in cash by the Company during such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period,
the net income of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such net income, by excluding, without
duplication, (a) all extraordinary gains or losses and all gains and losses from
the sales or other dispositions of assets out of the ordinary course of business
(net of taxes, fees and expenses relating to the transaction giving rise
thereto) for such period; (b) that portion of such net income derived from or in
respect
<PAGE> 16
-8-
of investments in Persons other than Restricted Subsidiaries, except to the
extent actually received in cash by the Company or any Restricted Subsidiary
(subject, in the case of any Restricted Subsidiary, to the provisions of clause
(e) of this definition); (c) the portion of such net income (or loss) allocable
to minority interests in any Person (other than a Restricted Subsidiary) for
such period, except to the extent actually received in cash by the Company or
any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to
the provisions of clause (e) of this definition); (d) net income (or loss) of
any other Person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination; and (e) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its Equity
Interest holders, except, solely for the purposes of Section 10.12 and for
determining the amount available under clause (iii) of Section 10.16 for a
proposed Restricted Payment constituting an Investment, for any restriction in
any agreement or instrument governing Indebtedness outstanding on the Issue Date
or Incurred in compliance with this Indenture.
"Consolidated Operating Cash Flow" means, with respect to any
period, Consolidated Net Income for such period increased (without duplication)
by the sum of (a) Consolidated Income Tax Expense for such period to the extent
deducted in determining Consolidated Net Income for such period; (b)
Consolidated Interest Expense for such period to the extent deducted in
determining Consolidated Net Income for such period; (c) all dividends on
Preferred Equity Interests to the extent taken into account for computing
Consolidated Net Income for that period; and (d) depreciation, amortization and
any other non-cash items for such period to the extent deducted in determining
Consolidated Net Income for such period (other than any non-cash item that
requires the accrual of, or a reserve for, cash charges for any future period)
of the Company and the Restricted Subsidiaries, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus
non-cash items to the extent they increase Consolidated Net Income (including
the partial or entire reversal of reserves taken in prior periods, except to the
extent any such reserves were not permitted to be added back in the calculation
of Consolidated Operating Cash Flow for a prior period pursuant to clause (d)
above) for such period.
<PAGE> 17
-9-
"control" means, with respect to any specified Person, the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of Voting Stock, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Corporate Trust Office" means the office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office at the date of execution of this Indenture is located
at 114 West 47th Street, Attn: Corporate Business Unit, New York, New York
10036.
"Credit Facility" means the Amended and Restated Credit
Agreement dated as of July 7, 1997, amended and restated as of May 8, 1998,
amended as of February 10, 1999, among Holdings, 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, including any deferrals,
renewals, extensions, replacements, refinancings or refundings thereof, or
amendments, modifications or supplements thereto (including, without limitation,
any such deferrals, renewals, extensions, replacements, refinancings,
refundings, amendments, modifications or supplements that increase the aggregate
amount of commitments or borrowings thereunder or add Subsidiaries of the
Company as additional borrower or guarantor thereunder), and any agreements
providing therefor, whether by or with the same or any other lender, creditor or
group of lenders or creditors, and including related notes, guarantees, security
agreements, pledge agreements, mortgages, note agreements, other collateral
documents and note agreements and other instruments and agreements executed in
connection therewith.
"Cumulative Operating Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on the Issue Date and ending on the last day of the
most recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
<PAGE> 18
-10-
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other law respecting secured
creditors and the enforcement of their security or any other person with like
powers whether appointed judicially or out of court and whether pursuant to an
interim or final appointment.
"DBS" means direct broadcast satellite.
"Debt to Operating Cash Flow Ratio" means the ratio of (a) an
amount equal to the Total Consolidated Indebtedness as of the date of
calculation (the "Determination Date") to (b) four times the Consolidated
Operating Cash Flow for the latest fiscal quarter for which financial
information is available immediately preceding such Determination Date (the
"Measurement Period"). For purposes of calculating Consolidated Operating Cash
Flow for the Measurement Period immediately prior to the relevant Determination
Date, (I) any Person that is a Restricted Subsidiary on the Determination Date
(or would become a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Consolidated Operating Cash Flow) will be deemed to have been a Restricted
Subsidiary at all times during such Measurement Period, (II) any Person that is
not a Restricted Subsidiary on such Determination Date (or would cease to be a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed not to have been a Restricted Subsidiary at any time during
such Measurement Period, and (III) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (including through an Acquisition or the
commencement of activities constituting such operating business) or (y) disposed
of (including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement of
activities constituting such operating business, all such transactions had been
consummated on the first day of such Measurement Period and, in the case of an
Asset Sale or termination or discontinuance of activities constituting such
operating business, all such transactions had been consummated prior to the
first day of such Measurement Period; provided, however, that such pro forma
adjustment shall not give effect to the Operating Cash Flow of any Acquired
Person
<PAGE> 19
-11-
to the extent that such Person's net income would be excluded pursuant to clause
(e) of the definition of Consolidated Net Income.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"Default Amount" means, (i) prior to March 1, 2004, the
Accreted Value of the Securities as of the payment date, and (ii) after March 1,
2004, the principal amount at maturity thereof, plus, in the case of clause
(ii), accrued and unpaid interest thereon, if any, to the payment date.
"Depository" means The Depository Trust Company, its nominees
and successors.
"DIRECTV Services" means DBS television services and all other
video, audio, data packages, "a la carte" programming services and other
services offered by DIRECTV, Inc., the predecessor-in-interest of Hughes
Communications Galaxy, Inc., or its successors or assigns.
"Disinterested Director" means, with respect to any
transaction or series of related transactions, a member of the Board other than
a director who (i) has any material direct or indirect financial interest in or
with respect to such transaction or series of related transactions or (ii) is an
employee or officer of the Company or an Affiliate that is itself a party to
such transaction or series of transactions or an Affiliate of a party to such
transactions or series of related transactions.
"Disposition" means, with respect to any Person, any merger,
consolidation or other business combination involving such Person (whether or
not such Person is the Surviving Person) or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets.
"Disqualified Equity Interest" means any Equity Interest
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder
thereof), or upon the happening of any event (other than a Change of Control),
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or redeemable, at the option of the holder thereof, in whole or in
part, or exchangeable into Indebtedness on or prior
<PAGE> 20
-12-
to the earlier of the maturity date of the Securities or the date on which no
Securities remain outstanding.
"Eligible Institution" means a commercial banking institution
that has combined capital and surplus of not less than $500.0 million or its
equivalent in foreign currency, whose debt is rated Investment Grade at the time
as of which any investment or rollover therein is made.
"Equity Interest" in any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate stock or other
equity participations, including partnership interests, whether general or
limited, or member interests in such Person, including any Preferred Equity
Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the SEC thereunder.
"Exchange Securities" means 13 1/2% Senior Discount Notes due
2007, Series B (the terms of which are identical to the Initial Securities
except that the Exchange Securities shall be registered under the Securities Act
and shall not contain the restrictive legend on the face of the form of Initial
Securities), issued pursuant to this Indenture.
"Existing Indebtedness" means any Indebtedness of the Company
and the Restricted Subsidiaries in existence on the Issue Date until such
amounts are repaid.
"Fair Market Value" means, with respect to any asset, the
price (after taking into account any liabilities relating to such assets) that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of which is under
any compulsion to complete the transaction; provided, however, that the Fair
Market Value of any such asset or assets shall be determined conclusively by the
Board acting in good faith, and shall be evidenced by resolutions of the Board
delivered to the Trustee.
"GAAP" means, at any date of determination, generally accepted
accounting principles in effect in the United States that are applicable at the
date of determination and that are consistently applied for all applicable
periods.
<PAGE> 21
-13-
"Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America are pledged.
"guarantee" means, as applied to any obligation, (i) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of any part
or all of such obligation and (ii) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other Person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"High Power Satellite Transmission Business" means the
business of the acquisition, transmission or sale of programming in the high
power DBS business utilizing broadcast satellite service (including any
provision of such services to cable operators or other media providers), which
may utilize all or part of satellites owned by DIRECTV, Inc. or Hughes
Communications Galaxy, Inc., and all other activities relating thereto or
arising therefrom.
"Holder" means the Person in whose name a Security is
registered on the Registrar's books, as the context requires.
"Holdings" means Golden Sky Holdings, Inc. or any successor or
assign thereof that owns 100% of the Equity Interests of the Company.
"Incur" means, with respect to any Indebtedness or other
obligation of any Person, to create, issue, incur (including by conversion,
exchange or otherwise), assume, guarantee or otherwise become liable in respect
of such Indebtedness or other obligation or the recording, as required pursuant
to GAAP or otherwise, of any such Indebtedness or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall
have meanings correlative to the foregoing).
"Indebtedness" means (without duplication), with respect to
any Person, whether recourse is to all or a portion of the assets of such Person
and whether or not contingent, (a)
<PAGE> 22
-14-
every obligation of such Person for money borrowed; (b) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable incurred in the ordinary course of business and payable
in accordance with industry practices, or other accrued liabilities arising in
the ordinary course of business that are not overdue or that are being contested
in good faith); (e) every Capital Lease Obligation of such Person; (f) every net
obligation under Interest Rate Protection Obligations; (g) every obligation of
the type referred to in clauses (a) through (f) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable for, directly or indirectly, as
obligor, guarantor or otherwise; and (h) any and all deferrals, renewals,
extensions and refundings of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a) through
(g) above. Indebtedness (a) shall never be calculated taking into account any
cash and Cash Equivalents held by such Person; (b) shall not include obligations
of any Person (x) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business, provided that such
obligations are extinguished within two Business Days of their incurrence unless
covered by an overdraft line, (y) resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business and consistent
with past business practices and (z) under standby letters of credit to the
extent collateralized by cash or Cash Equivalents; (c) that provides that an
amount less than the principal amount thereof shall be due upon any declaration
of acceleration thereof shall be deemed to be incurred or outstanding in an
amount equal to the accreted value thereof at the date of determination; (d)
shall include the liquidation preference and any mandatory redemption payment
obligations in respect of any Disqualified Equity Interests of the Company or
any Restricted Subsidiary; and (e) shall not include obligations under
performance bonds, performance guarantees, surety bonds and appeal bonds,
letters of credit or similar obligations Incurred in the ordinary course of
business (including standby letters of credit securing obligations to the NRTC
Incurred in the ordinary course of business that are not overdue or that are
being contested in good faith
<PAGE> 23
-15-
by appropriate proceedings) (other than obligations under or in respect of any
direct or indirect credit support for obligations of any Unrestricted
Subsidiary).
"Indenture" means this instrument as originally executed
(including all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company
and any other obligor under this Indenture, the Securities or the Registration
Rights Agreement to pay principal of, premium, if any, and interest on the
Securities when due and payable (including, without limitation, Additional
Interest), whether at maturity, by acceleration, call for redemption or
repurchase or otherwise, and all other amounts due or to become due under or in
connection with this Indenture or the Securities and the performance of all
other obligations to the Trustee (including, but not limited to, payment of all
amounts due the Trustee under Section 6.07 hereof), and the Holders of the
Securities under this Indenture and the Securities, according to the terms
thereof.
"Independent Financial Advisor" means a nationally recognized
accounting, appraisal or investment banking firm or consultant with experience
advising DBS businesses that is, in the judgment of the Board, qualified to
perform the task for which it has been engaged (i) that does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) that, in the judgment of the
Board, is otherwise independent and qualified to perform the task for which it
is to be engaged.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner &
Smith Incorporated, NationsBanc Montgomery Securities LLC, Donaldson, Lufkin &
Jenrette Securities Corporation and Fleet Securities, Inc.
"Initial Securities" means the 13 1/2% Senior Discount Notes
due 2007, Series A, for so long as such securities constitute Restricted
Securities.
"Insolvency or Liquidation Proceeding" means, with respect to
any Person, any liquidation, dissolution or winding up of such Person, or any
bankruptcy, reorganization, insolvency,
<PAGE> 24
-16-
receivership or similar proceeding with respect to such Person, whether
voluntary or involuntary.
"Institutional Accredited Investor" means an institution that
is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act.
"interest" means, with respect to the Securities, the sum of
any cash interest and any Additional Interest on the Securities.
"Interest Payment Date" means, when used with respect to any
Security, the Stated Maturity of an installment of interest on such Security, as
set forth in such Security.
"Interest Rate Protection Obligations" means, with respect to
any Person, the Obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
and (ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or
indirect loan, advance, guarantee or other extension of credit or capital
contribution to (by means of transfers of cash or other property or assets to
others or payments for property or services for the account or use of others, or
otherwise), or purchase or acquisition of capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any other
Person. In no event will the issuance by the Company of Qualified Equity
Interests of the Company in exchange for any such capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness constitute an
Investment. The amount of any Investment shall be the original cost of such
Investment, plus the cost of all additions thereto, and minus the amount of any
portion of such Investment repaid to such Person in cash or other property or
assets that would not otherwise constitute an Investment as a repayment of
principal or a return of capital, as the case may be, but without any other
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment. In determining the amount of any
Investment or any repayment in respect of an Investment involving a transfer of
any property or asset other than cash, such property shall be valued at its Fair
Market Value at the time of such transfer, as determined in good faith by the
Board of Directors (or comparable body) of the Person making such transfer or
receiving such repayment.
<PAGE> 25
-17-
"Investment Grade" means, with respect to a security, that
such security is rated by at least two nationally recognized statistical rating
organizations in one of each such organization's four highest generic rating
categories.
"Issue Date" means the original issue date of the Securities.
"Lien" means any lien, mortgage, charge, security interest,
hypothecation, assignment for security or encumbrance of any kind (including any
conditional sale or capital lease or other title retention agreement, any lease
in the nature thereof, and any agreement to give any security interest).
"Marketable Securities" means: (a) Government Securities; (b)
any certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with an
Investment Grade rating, at the time as of which any investment therein is made,
issued or offered by an Eligible Institution; (d) any bankers' acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(e) any fund investing substantially in investments of the types described in
clauses (a) through (d) above.
"Maturity Date" means the date, which is set forth on the face
of the Securities, on which the Securities will mature.
"Net Cash Proceeds" means the aggregate proceeds in the form
of cash or Cash Equivalents received by the Company or any Restricted Subsidiary
in respect of any Asset Sale, including all cash or Cash Equivalents received
upon any sale, liquidation or other exchange of proceeds of Asset Sales received
in a form other than cash or Cash Equivalents, net of (a) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets that are the subject of such
Asset Sale (provided
<PAGE> 26
-18-
that the amount of any such reserves shall be deemed to constitute Net Cash
Proceeds at the time such reserves shall have been released or are not otherwise
required to be retained as a reserve); and (e) with respect to Asset Sales by
Restricted Subsidiaries, the portion of such cash payments attributable to
Persons holding a minority interest in such Restricted Subsidiary.
"NRTC" means the National Rural Telecommunications Cooperative
and any successor entity to it.
"Obligations" means any principal, interest, premium,
penalties, fees, indemnifications, reimbursement obligations, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Offer" has the meaning set forth under Section 10.19.
"Offering Memorandum" means the Offering Memorandum dated
February 11, 1999 pursuant to which the Initial Securities were offered, and any
supplement thereto.
"Officer" means, with respect to the Company, the Chairman of
the Board, a Vice Chairman, the Chief Executive Officer, the President, the
Chief Financial Officer, a Vice President, the Secretary, an Assistant
Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, the Chief Executive Officer, a Vice Chairman, the Chief
Financial Officer, the President or a Vice President, and by the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer, of the Company and
delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel who
may be counsel for the Company or the Trustee, and who shall be reasonably
acceptable to the Trustee.
"Outstanding" means, as of the date of determination, all
Securities theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or
delivered to the Trustee for cancellation;
<PAGE> 27
-19-
(ii) Securities, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Company or any
Affiliate thereof) in trust or set aside and segregated in trust by the
Company or any Affiliate thereof (if the Company or Affiliate shall act
as Paying Agent) for the Holders of such Securities; provided, however,
that if such Securities are to be redeemed, notice of such redemption
has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made;
(iii) Securities with respect to which the Company has
effected defeasance or covenant defeasance as provided in Article Four,
to the extent provided in Sections 4.02 and 4.03; and
(iv) Securities in exchange for or in lieu of which other
Securities have been authenticated and delivered pursuant to this
Indenture, other than any such Securities in respect of which there
shall have been presented to the Trustee proof satisfactory to it that
such Securities are held by a bona fide purchaser in whose hands the
Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities that a Responsible Officer of the Trustee
actually knows to be so owned shall be so disregarded. The Company shall notify
the Trustee, in writing, when it repurchases or otherwise acquires Securities,
of the aggregate principal amount of such Securities so repurchased or otherwise
acquired. Securities so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or such other obligor. If the Paying Agent holds, in
its capacity as such, on any Maturity Date or on any optional redemption date
money sufficient to pay all accrued interest and principal with respect to such
Securities payable
<PAGE> 28
-20-
on that date and is not prohibited from paying such money to the Holders thereof
pursuant to the terms of this Indenture, then on and after that date such
Securities cease to be Outstanding and interest on them ceases to accrue.
Securities may also cease to be outstanding to the extent expressly provided in
Article Four.
"Permitted Acquisition Deposits" means any advance or payment
of funds, whether as consideration for an option to purchase or as a deposit,
binder or earnest money, whether or not refundable, and whether or not made into
escrow, made pursuant to any written agreement, term sheet, letter of intent or
other instrument providing for the Acquisition of any High Power Satellite
Transmission Business.
"Permitted Business" means those businesses in which the
Company and the Restricted Subsidiaries are engaged on the Issue Date or
business reasonably related thereto (including, without limitation, the High
Power Satellite Transmission Business and the business of satellite data
transmission).
"Permitted Holders" any of (i) means Burr, Egan, Deleage &
Co., Spectrum Equity Investors, L.P., BancBoston Ventures Inc., Norwest Equity
Partners and HarbourVest Partners, LLC and (ii) their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness
(each of which shall be given independent effect):
(a) Indebtedness of any Restricted Subsidiary outstanding on
the Issue Date;
(b) (1) Indebtedness under the Credit Facility of any
Restricted Subsidiary, and, without duplication, any guarantee thereof
by any other Restricted Subsidiary, Incurred in an aggregate principal
amount at any one time outstanding not to exceed $150.0 million, which
amount shall be reduced by (x) any permanent reduction of commitments
thereunder and (y) any other repayment accompanied by a permanent
reduction of commitments thereunder (other than in connection with any
refinancing thereof where the aggregate principal amount outstanding
and commitments thereunder immediately prior thereto are not greater
than such amounts immediately thereafter); and (2) Indebtedness of any
Restricted Subsidiary, and, without duplication, any guarantee thereof
by any other Restricted Subsidiary, Incurred to fund Acquisitions of
Permitted Businesses, Capital Lease Obligations, Investments permitted
under
<PAGE> 29
-21-
this Indenture and working capital to support a Permitted Business in
an aggregate principal amount at any one time outstanding not to exceed
$65.0 million, which amount shall be reduced by any permanent reduction
of commitments thereunder;
(c) Indebtedness of Systems such that, at the time of and
after giving effect to the Incurrence thereof, the total aggregate
principal amount of Indebtedness Incurred under this clause (c) and any
refinancing thereof (whether initial or successive) Incurred pursuant
to and otherwise Incurred in compliance with this Indenture would not
exceed 200% of Total Incremental Invested Equity (which includes the
contributed proceeds from the issuance of the Notes);
(d) Indebtedness of any Restricted Subsidiary owed to and held
by the Company or any Restricted Subsidiary; provided, however, that an
Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon (i) any sale or other disposition
of any Indebtedness of any Restricted Subsidiary referred to in this
clause (d) to a Person (other than the Company or any other Restricted
Subsidiary) or (ii) the Designation of a Restricted Subsidiary that
holds Indebtedness of any other Restricted Subsidiary as an
Unrestricted Subsidiary;
(e) Interest Rate Protection Obligations of any Restricted
Subsidiary relating to Indebtedness of a Restricted Subsidiary (which
Indebtedness (i) bears interest at fluctuating interest rates and (ii)
is otherwise permitted to be Incurred under this covenant) and
guarantees by any Restricted Subsidiary thereof; provided, however,
that the notional principal amount of such Interest Rate Protection
Obligations does not exceed the principal amount of the Indebtedness to
which such Interest Rate Protection Obligations relate;
(f) indemnification obligations of any Restricted Subsidiary
and guarantees thereof under agreements providing for the disposition
of assets or one or more businesses or Restricted Subsidiaries;
provided, however, that such obligations do not exceed at any time the
Fair Market Value of the gross proceeds received by the Restricted
Subsidiaries for such disposition;
(g) Indebtedness to the extent representing a replacement,
renewal, refinancing or extension (collectively,
<PAGE> 30
-22-
a "refinancing") of outstanding Indebtedness Incurred in compliance
with the Debt to Operating Cash Flow Ratio of Section 10.12 or clause
(a), (b)(2), (h) or (j) of this definition; provided, however, that (i)
any such refinancing shall not exceed the sum of the principal amount
(or, if such Indebtedness provides for a lesser amount to be due and
payable upon a declaration of acceleration thereof at the time of such
refinancing, an amount no greater than such lesser amount) of the
Indebtedness being refinanced, plus the amount of accrued interest or
dividends thereon, plus the amount of an reasonably determined
prepayment premium necessary to accomplish such refinancing and such
reasonable fees and expenses incurred in connection therewith, (ii)
Indebtedness representing a refinancing of Indebtedness shall have a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being refinanced, and
(iii) with respect to any refinancing of Indebtedness Incurred pursuant
to subparagraph (h) or (i) of this definition, such refinancing
pursuant to this clause (g) shall also be deemed to be Incurred
pursuant to clause (h) or (i), as the case may be, of this paragraph
(for the avoidance of doubt, the result of which is that a refinancing
does not create new debt incurrence capacity under such clauses);
(h) Indebtedness of any Restricted Subsidiary Incurred to
finance the acquisition of the exclusive right to distribute DIRECTV
Services within designated Rural DIRECTV Markets; provided, however,
that such Indebtedness shall be Permitted Indebtedness under this
subparagraph (h) in an amount not greater than the face amount of any
letter of credit issued under the Credit Facility to support such
Indebtedness, it being understood that the issuance of such letter of
credit (but only for so long as such letter of credit remains
outstanding) constitutes a reduction in the amount of Permitted
Indebtedness available to be Incurred under clause (b) of this
definition; and;
(i) in addition to the items referred to in subparagraphs (a)
through (h) above, Indebtedness of any of the Restricted Subsidiaries
(including any Indebtedness under the Credit Facility that utilizes
this clause (i)) having an aggregate principal amount for the
Restricted Subsidiaries not to exceed $25.0 million at any time
outstanding.
<PAGE> 31
-23-
Indebtedness of any Person or any of its Subsidiaries existing
at the time such Person becomes a Restricted Subsidiary (or is merged into or
consolidated with the Company or any Restricted Subsidiary), whether or not such
Indebtedness was Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
with the Company or any Restricted Subsidiary), shall be deemed Incurred at the
time any such Person becomes a Restricted Subsidiary or merges into or
consolidates with the Company or any Restricted Subsidiary.
"Permitted Investments" means (a) Cash Equivalents; (b)
Investments by the Company or any Restricted Subsidiary in any Person that is or
will become immediately after such Investment a Restricted Subsidiary or that
will merge or consolidate into the Company or a Restricted Subsidiary; (c)
Investments in the Company by any Restricted Subsidiary; (d) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (e) loans and
advances to employees made in the ordinary course of business not to exceed $1.0
million in the aggregate at any one time outstanding; (f) Interest Rate
Protection Obligations; (g) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under Section 10.19 not to exceed
25% of the total consideration for such Asset Sales (determined and computed as
set forth under Section 10.19); (h) transactions with officers, directors and
employees of the Company or any Restricted Subsidiary entered into in the
ordinary course of business (including compensation or employee benefit
arrangements with any such director or employee) and consistent with past
business practices; (i) Investments existing as of the Issue Date and any
amendment, extension, renewal or modification thereof to the extent that any
such amendment, extension, renewal or modification does not require the Company
or any Restricted Subsidiary to make any additional cash or non-cash payments or
provide additional services in connection therewith; and (j) Permitted
Acquisition Deposits.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, limited
liability limited partnership, trust, unincorporated organization or government
or any agency or political subdivision thereof.
"Predecessor Security" means, with respect to any particular
Security, every previous Security evidencing all or a portion of the same debt
as that evidenced by such particular
<PAGE> 32
-24-
Security; and, for the purposes of this definition, any Security authenticated
and delivered under Section 3.06 hereof in exchange for a mutilated Security or
in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the
same debt as the mutilated, lost, destroyed or stolen Security.
"Preferred Equity Interest," in any Person, means an Equity
Interest of any class or classes (however designated) that is preferred as to
the payment of dividends or distributions, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such Person,
over Equity Interests of any other class in such Person.
"principal amount at maturity" means $1,000 per $1,000 face
amount of the Securities.
"Private Exchange Securities" shall have the meaning set forth
in the Registration Rights Agreement.
"Private Placement Legend" shall mean the first paragraph of
the legend initially set forth in the Securities in the form set forth on
Exhibit A-1.
"Public Equity Offering" means an underwritten public offering
of Equity Interests (other than Disqualified Equity Interests) of the Company
made on a primary basis by the Company pursuant to a registration statement
filed with and declared effective by the SEC in accordance with the Securities
Act.
"Purchase Money Indebtedness" means Indebtedness of any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property;
provided, however, that the aggregate principal amount of such Indebtedness does
not exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof as
of the date of refinancing.
"Qualified Equity Interest" in any Person means any Equity
Interest in such Person other than any Disqualified Equity Interest.
"Qualified Institutional Buyer" or "QIB" shall have the
meaning specified in Rule 144A under the Securities Act.
<PAGE> 33
-25-
"Redemption Date" means, with respect to any Security to be
redeemed, the date fixed by the Company for such redemption pursuant to this
Indenture and Securities.
"Redemption Price" means, with respect to any Security to be
redeemed, the price at which it is to be redeemed pursuant to this Indenture and
the terms of the Securities.
"Registered Exchange Offer" means the registration by the
Company under the Securities Act of all Exchange Securities pursuant to a
registration statement under which the Company offers each Holder of Initial
Securities the opportunity to exchange all Initial Securities held by such
Holder for Exchange Securities in an aggregate principal amount equal to the
aggregate principal amount of Initial Securities held by such Holder, all in
accordance with the terms and conditions of the Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of February 19, 1999 by and among the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified
in the Securities.
"Regulation S" means Regulation S under the Securities Act.
"Responsible Officer" means, with respect to the Trustee, any
vice president, any assistant vice president, the secretary, any assistant
secretary, the treasurer, any assistant treasurer, any trust officer or
assistant trust officer, or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer of the Trustee to whom any corporate trust matter is referred
because of his or her knowledge of and familiarity with the particular subject.
"Restricted Payment" means any of the following: (i) the
declaration or payment of any dividend or any other distribution on Equity
Interests of the Company or any payment made to the direct or indirect holders
(in their capacities as such) of Equity Interests of the Company (other than
dividends or distributions payable solely in Equity Interests (other than
Disqualified Equity Interests) of the Company) or in options,
<PAGE> 34
-26-
warrants or other rights to purchase Equity Interests (other than Disqualified
Equity Interests) of the Company; (ii) the purchase, redemption or other
acquisition or retirement for value of any Equity Interests of the Company
(other than any such Equity Interests owned by the Company or a Wholly Owned
Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other
acquisition or retirement for value prior to any scheduled repayment, sinking
fund or maturity of any Subordinated Indebtedness (other than any Subordinated
Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the making
by the Company or any Restricted Subsidiary of any Investment (other than a
Permitted Investment) in any Person.
"Restricted Security" shall have the meaning specified in Rule
144(a)(3) under the Securities Act; provided that the Trustee shall be entitled
to request and conclusively rely upon an Opinion of Counsel with respect to
whether a Security is a Restricted Security.
"Restricted Subsidiary" means any Subsidiary of the Company
that has not been designated by the Board, by a resolution of the Board
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to Section
10.15. Any such designation may be revoked by a resolution of the Board
delivered to the Trustee, subject to the provisions of such covenant.
"Rule 144A" means Rule 144A under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities" means, collectively the Initial Securities, the
Exchange Securities and the Private Exchange Securities, if any, treated a
single class of securities, as amended or supplemented from time to time in
accordance with the terms of this Indenture, that are issued pursuant to this
Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Securityholder" means the Person in whose name a Security is
registered on the Registrar's books, as the context requires.
"Seller Notes" means any promissory notes issued by a
Restricted Subsidiary to any Person selling any assets or properties to the
Company or any Restricted Subsidiary in an Acquisition, including those
outstanding on the Issue Date.
<PAGE> 35
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"Significant Restricted Subsidiary" means, at any date of
determination, (a) any Restricted Subsidiary that, together with its
Subsidiaries that constitute Restricted Subsidiaries, (i) for the most recent
fiscal year of the Company accounted for more than 5.0% of the consolidated
revenues of the Company and the Restricted Subsidiaries or (ii) as of the end of
such fiscal year owned more than 5.0% of the consolidated assets of the Company
and the Restricted Subsidiaries, all as set forth on the consolidated financial
statements of the Company and the Restricted Subsidiaries for such year prepared
in conformity with GAAP, and (b) any Restricted Subsidiary that, when aggregated
with all other Restricted Subsidiaries that are not otherwise Significant
Restricted Subsidiaries and as to which any event described in Section 5.01 (v),
(vii) or (viii) has occurred, would constitute a Significant Restricted
Subsidiary under clause (a) of this definition.
"Special Record Date" means, with respect to the payment of
any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07
hereof.
"Stated Maturity," when used with respect to any Security or
any installment of interest thereon, means the date specified in such Security
as the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subordinated Indebtedness" means with respect to the Company,
Indebtedness of the Company that is expressly subordinated in right of payment
to the Securities.
"Subsidiary" means, with respect to any Person, (a) any
corporation of which the outstanding Voting Equity Interests having at least a
majority of the votes entitled to be cast in the election of directors shall at
the time be owned, directly or indirectly, by such Person, or (b) any other
Person of which at least a majority of Voting Equity Interests are at the time,
directly or indirectly, owned by such first named Person.
"Systems" means Golden Sky Systems, Inc., a Wholly Owned
Restricted Subsidiary.
"Total Consolidated Indebtedness" means, as at any date of
determination, an amount equal to the aggregate amount of all Indebtedness and
Disqualified Equity Interests of the Company and the Restricted Subsidiaries
outstanding as of such date of determination.
<PAGE> 36
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"Total Incremental Invested Equity" means, at any date of
determination, the sum of, without duplication, (a) the aggregate net cash
proceeds received by Systems either (x) as capital contributions to Systems on
or after the Issue Date, including any capital contributions made out of the
proceeds from the issuance of the Securities or (y) from the issue and sale
(other than to a Subsidiary of Systems by Systems) of its Qualified Equity
interests after the Issue Date, plus (b) the aggregate net proceeds received by
Systems or any Restricted Subsidiary after the Issue Date from the issuance
(other than to a Subsidiary of Systems) of Qualified Equity Interests upon the
conversion of, or in exchange for, Indebtedness of the Company or a Restricted
Subsidiary that has been converted into or exchanged for Qualified Equity
Interests of Systems, minus (c) the aggregate amount of all Restricted Payments
made on or after the Issue Date and all Designation Amounts arising after the
Issue Date, but only to the extent the amount set forth in this clause (c) would
exceed the amount determined under subclause (a) of clause (iii) of the first
paragraph under Section 10.16, plus (d) in the case of the disposition or
repayment of any Investment which has been deducted pursuant to clause (c) of
this definition, an amount equal to the lesser of the return of capital with
respect to such Investment and the amount of such Investment which has been
deducted pursuant to such clause (c), plus (e) in the case of any Revocation
with respect to any Subsidiary that was made the subject of Designation after
the Issue Date and as to which a Designation Amount has been deducted pursuant
to clause (c) of this definition, an amount equal to the lesser of such
Designation Amount or the Fair Market Value of the Investment of Systems and the
other Restricted Subsidiaries in such Subsidiary at the time of Revocation.
"12 3/8% Notes" means the $195,000,000 aggregate principal
amount of 12 3/8% Senior Subordinated Notes due 2006 of Systems.
"12 3/8% Notes Indenture" means the indenture dated July 31,
1998 governing the 12 3/8% Notes.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act
of 1939, as amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
<PAGE> 37
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"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to Section 10.15. Any such designation may be
revoked by a resolution of the Board of Directors of the Company delivered to
the Trustee, subject to the provisions of Section 10.15.
"Voting Equity Interests" means Equity Interests in a
corporation or other Person with voting power under ordinary circumstances
entitling the holders thereof to elect the Board of Directors or other governing
body of such corporation or such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the sum
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted
Subsidiary all of the outstanding Voting Equity Interests (other than directors'
qualifying shares) of which are owned, directly or indirectly, by the Company.
Section 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Act" 1.05
"Affiliate Transaction" 10.22
"Agent Member" 3.16
"Change of Control Date" 10.10
"Change of Control Offer" 10.10
"Change of Control Payment Date" 10.10
"Change of Control Purchase Price" 10.10
"covenant defeasance" 4.03
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Securities" 4.01
"Designation" 10.15
"Designation Amount" 10.15
"Global Security" 3.03
"insolvent person" 4.04
</TABLE>
<PAGE> 38
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<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Non-Global Purchasers" 3.03
"Offer to Purchase" 10.19
"Offshore Physical Securities" 3.03
"Paying Agent" 3.02
"Physical Security" 3.03
"Securities Register" 3.05
"Securities Registrar" 3.02
"Surviving Entity" 8.01
"Unutilized Net Cash Proceeds" 10.19
</TABLE>
Section 1.03. Rules of Construction.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;
(d) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision;
(e) all references to "$" or "dollars" shall refer to the
lawful currency of the United States of America; and
(f) the words "include," "included" and "including" as used
herein shall be deemed in each case to be followed by the phrase
"without limitation."
<PAGE> 39
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Section 1.04. Form of Documents Delivered
to Trustee.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion may be based, insofar as it relates
to factual matters, upon a certificate or opinion of, or representations by, an
officer or officers of the Company stating that the information with respect to
such factual matters is in the possession of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated,
with proper identification of each matter covered therein, and form one
instrument.
Section 1.05. Acts of Holders.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution
<PAGE> 40
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(as provided below in subsection (b) of this Section 1.05) of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 6.01 hereof) conclusive in
favor of the Trustee and the Company, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any person of any
such instrument or writing may be proved in any reasonable manner which the
Trustee deems sufficient.
(c) The ownership of Securities shall be proved by the
Security Register.
(d) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Security shall bind every
future Holder of the same Security or the Holder of every Security issued upon
the transfer thereof or in exchange therefor or in lieu thereof to the same
extent as the original Holder, in respect of anything done, suffered or omitted
to be done by the Trustee, any Paying Agent or the Company in reliance thereon,
whether or not notation of such action is made upon such Security.
Section 1.06. Notices, etc., to the Trustee
and the Company
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed, in writing, to or with the Trustee at 114 West 47th Street, New
York, New York 10036, Attention: Corporate Business Unit, or at any
other address previously furnished in writing to the Holders the
Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be
sufficient for every purpose (except as otherwise expressly provided
herein) hereunder if in writing and mailed, first-class postage
prepaid, to the Company addressed to it at Golden Sky DBS, Inc., 605
West 47th Street, Suite 300, Kansas City, Missouri 64112, Attention:
Chief Executive Officer, or at any other address previously furnished
in writing to the Trustee by the Company.
<PAGE> 41
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Section 1.07. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise expressly
provided herein) if in writing and mailed, first-class postage prepaid, to each
Holder affected by such event, at the address of such Holder as it appears in
the Security Register, not later than the latest date, and not earlier than the
earliest date, prescribed for the giving of such notice. In any case where
notice to Holders is given by mail, neither the failure to mail such notice, nor
any defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Any notice when mailed
to a Holder in the aforesaid manner shall be conclusively deemed to have been
received by such Holder whether or not actually received by such Holder. Where
this Indenture provides for notice in any manner, such notice may be waived in
writing by the person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause, it shall be impracticable to mail notice of any
event as required by any provision of this Indenture, then any method of giving
such notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with
any provision of the Trust Indenture Act or another provision which is required
or deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
<PAGE> 42
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Section 1.09. Effect of Headings and Table of
Contents.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company
shall bind its respective successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture or in the Securities
issued pursuant hereto shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
Section 1.12. Benefits of Indenture.
Nothing in this Indenture or in the Securities or issued
pursuant hereto, express or implied, shall give to any person (other than the
parties hereto and their successors hereunder, any Paying Agent and the Holders)
any benefit or any legal or equitable right, remedy or claim under this
Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. No Recourse Against Others.
A director, officer, employee, Subsidiary or stockholder, as
such, of the Company shall not have any liability for any obligations of the
Company under the Securities or this Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. The Trustee and
the Holders agree that they will not seek in any proceeding to cause the assets
of any Subsidiary of the Company to be made available to satisfy any claims
based on, in respect of, or by reason of obligations of the Company under the
Securities or
<PAGE> 43
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this Indenture, including without limitation, by asserting claims of substantive
consolidation.
Section 1.15. Independence of Covenants.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
Section 1.16. Exhibits.
All exhibits attached hereto are by this reference made a part
hereof with the same effect as if herein set forth in full.
Section 1.17. Counterparts.
This Indenture may be executed in any number of counterparts,
each of which shall be an original; but such counterparts shall together
constitute but one and the same instrument.
Section 1.18. Duplicate Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
ARTICLE TWO
SECURITY FORMS
Section 2.01. Form and Dating.
The Initial Securities and the Exchange Securities and the
Trustee's certificate of authentication with respect thereto shall be in
substantially the forms set forth, or referenced, in Exhibit A-1 and Exhibit
A-2, respectively, annexed hereto, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have such letters, numbers or other marks of identification
and such legends or endorsements placed thereon
<PAGE> 44
-36-
as may be required to comply with any applicable law or with the rules of the
Depository, any clearing agency or any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution thereof.
The definitive Securities shall be printed, typewritten,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other manner permitted by the rules of any securities
exchange on which the Securities may be listed, all as determined by the
officers executing such Securities, as evidenced by their execution of such
Securities.
Each Security shall be dated the date of its authentication.
The terms and provisions contained in the Securities shall constitute, and are
expressly made, a part of this Indenture.
ARTICLE THREE
THE SECURITIES
Section 3.01. Title and Terms.
The aggregate principal amount at maturity of Securities which
may be authenticated and delivered under this Indenture is limited to
$193,100,000, except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other Securities
pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10, 10.19 or 11.08.
The Securities will mature on March 1, 2007. The Securities
shall be issued at a discount to yield gross proceeds of $100,048,972. The
Securities shall not accrue cash interest prior to March 1, 2004. Commencing on
March 1, 2004, interest on the Securities will accrue at a rate of 13 1/2% per
annum and will be payable semi-annually in arrears from the most recent Interest
Payment Date to which interest has been paid or, if no interest has been paid,
from September 1, 2004.
The Securities shall be redeemable as provided in Article
Eleven and as provided in the Securities.
At the election of the Company, the entire Indebtedness on the
Securities or certain of the Company's obligations
<PAGE> 45
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and covenants and certain Events of Default thereunder may be defeased as
provided in Article Four.
Section 3.02. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be
located in the Borough of Manhattan in The City of New York, State of New York)
where Securities may be presented for registration of transfer or for exchange
(the "Security Registrar"), an office or agency (which shall be located in the
Borough of Manhattan in The City of New York, State of New York) where
Securities may be presented for payment (the "Paying Agent") and an office or
agency where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Registrar shall keep a register
of the Securities and of their transfer and exchange. The Company may have one
or more co-registrars and one or more additional paying agents. The term "Paying
Agent" includes any additional paying agent. The Company may act as its own
Paying Agent, except for the purposes of payments on account of principal on the
Securities pursuant to Sections 10.10 and 10.19.
The Company shall enter into an appropriate agency agreement
with any Paying Agent not a party to this Indenture, which shall incorporate the
provisions of the Trust Indenture Act. The agreement shall implement the
provisions of this Indenture that relate to such Paying Agent. The Company shall
notify the Trustee of the name and address of any such Paying Agent. If the
Company fails to maintain a Security Registrar or Paying Agent, or fails to give
the foregoing notice, the Trustee shall act as such and shall be entitled to
appropriate compensation in accordance with Section 6.07 hereof.
The Company initially appoints the Trustee as the Security
Registrar and Paying Agent and agent for service of notices and demands in
connection with the Securities.
Section 3.03. Execution and Authentication.
Two Officers shall execute the Securities on behalf of the
Company by either manual or facsimile signature.
Securities bearing the manual or facsimile signature of
individuals who were at any time the proper Officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices on the date of such Securities.
<PAGE> 46
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At any time and from time to time after the execution and
delivery of this Indenture, the Company many deliver Securities executed by the
Company to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with such Company Order shall authenticate and deliver such Securities as
provided in this Indenture and not otherwise.
A Security shall not be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose until the Trustee manually
signs the certificate of authentication on the Security. The Trustee's signature
on such certificate shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate Initial Securities for original
issue in an aggregate principal amount at maturity not to exceed $193,100,000,
upon receipt of a Company Order. In addition, on or prior to the date of the
Registered Exchange Offer, the Trustee or an authenticating agent shall
authenticate Exchange Securities (including any Private Exchange Securities
which will be in the form of Exhibit A-2 but which shall have the restrictive
legend contained in Exhibit A-1) to be issued at the time of the Registered
Exchange Offer in the aggregate principal amount at maturity of up to
$193,100,000 upon receipt of a Company Order of the Company. In each case, the
Company Order shall specify the amount of Securities to be authenticated, the
names of the persons in which such Securities shall be registered and the date
on which such Securities are to be authenticated and direct the Trustee to
authenticate such Securities together with an Officer's Certificate certifying
that all conditions precedent to the issuance of such Securities contained
herein have been complied with. The aggregate principal amount at maturity of
Securities outstanding at any time may not exceed $193,100,000, except as
provided in Section 3.04 hereof.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Securities on behalf of the Trustee.
Unless limited by the terms of such appointment, an authenticating agent may
authenticate Securities whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. Such authenticating agent shall have the same authenticating rights and
duties as the Trustee in any dealings hereunder with the Company or with any
Affiliate of the Company.
<PAGE> 47
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The certificates representing the Securities will be issued in
fully registered form, without coupons and only in denominations of $1,000
principal amount at maturity and any integral multiple thereof. Except as
described below, the Securities will be deposited with, or on behalf of, the
Depository, and registered in the name of Cede & Co. as the Depository's nominee
in the form of a global note certificate substantially in the form of Exhibit
A-1 (the "Global Security").
Securities purchased by or transferred to (i) Institutional
Accredited Investors who are not Qualified Institutional Buyers, (ii) except as
described below, persons outside the United States pursuant to sales in
accordance with Regulation S under the Securities Act or (iii) any other persons
who are not Qualified Institutional Buyers (collectively, "Non-Global
Purchasers") will be issued in registered form without coupons substantially in
the form of Exhibit A-1 (the "U.S. Physical Securities"). Upon the transfer to a
Qualified Institutional Buyer of U.S. Physical Securities initially issued to a
Non-Global Purchaser, such U.S. Physical Security will be exchanged for an
interest in the Global Security or in the Securities in the custody of the
Trustee representing the principal amount at maturity of Securities being
transferred.
Securities purchased by persons outside the United States
pursuant to sales in accordance with Regulation S under the Securities Act will
be represented upon issuance by a temporary global note certificate
substantially in the form of Exhibit A-1 (the "Offshore Physical Securities"
and, together with the U.S. Physical Securities, the "Physical Securities")
which will not be exchangeable for U.S. Physical Securities until the expiration
of the "40-day restricted period" within the meaning of Rule 903(c)(3) of
Regulation S under the Securities Act. The Offshore Physical Securities will be
registered in the name of, and be held by, an offshore physical security holder
(the "Offshore Physical Security Holder") until the expiration of such 40-day
period, at which time the Offshore Physical Securities will be delivered to the
Trustee in exchange for Securities registered in the names requested by the
Offshore Physical Security Holder. In addition, until the expiration of such
40-day period, transfers of interests in the Offshore Physical Securities can
only be effected through the Offshore Physical Security Holder in accordance
with the requirements of Section 3.17 hereof.
<PAGE> 48
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Section 3.04. Temporary Securities.
Until definitive Securities are prepared and ready for
delivery, the Company may execute and upon a Company Order the Trustee shall
authenticate and deliver temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities, in any authorized
denominations, but may have variations that the Company reasonably considers
appropriate for temporary Securities as conclusively evidenced by the Company's
execution of such temporary Securities.
If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay but in no event
later than the date that the Registered Exchange Offer is consummated. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for such purpose
pursuant to Section 10.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities, the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount of definitive Securities of like tenor and of authorized
denominations. Until so exchanged the temporary Securities shall in all respects
be entitled to the same benefits under this Indenture as definitive Securities.
Section 3.05. Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency designated pursuant to Section 10.02 being sometimes
referred to herein as the "Securities Register") in which, subject to such
reasonable regulations as the Securities Registrar may prescribe, the Company
shall provide for the registration of Securities and of transfers and exchanges
of Securities. The Trustee is hereby initially appointed Security Registrar for
the purpose of registering Securities and transfers of Securities as herein
provided.
When Securities are presented to the Registrar or a
co-Registrar with a request from the Holder of such Securities to register the
transfer or exchange for an equal principal amount of Securities of other
authorized denominations, the Registrar shall register the transfer or make the
exchange as requested; provided that every Security presented or surrendered for
registration of transfer or exchange shall be duly
<PAGE> 49
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endorsed or be accompanied by a written instrument of transfer or exchange in
form satisfactory to the Company and the Registrar, duly executed by the Holder
thereof or his attorney duly authorized in writing. Whenever any Securities are
so presented for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the Holder making the exchange is
entitled to receive. No service charge shall be made to the Securityholder for
any registration of transfer or exchange. The Company may require from the
Securityholder payment of a sum sufficient to cover any transfer taxes or other
governmental charge that may be imposed in relation to a transfer or exchange,
but this provision shall not apply to any exchange pursuant to Section 9.06 or
10.10, hereof (in which events the Company will be responsible for the payment
of all such taxes which arise solely as a result of the transfer or exchange and
do not depend on the tax status of the Holder). The Trustee shall not be
required to exchange or register the transfer of any Security for a period of 15
days immediately preceding the first mailing of notice of redemption of
Securities to be redeemed or of any Security selected, called or being called
for redemption except, in the case of any Security where public notice has been
given that such Security is to be redeemed in part, the portion thereof not to
be redeemed.
All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations of the Company, evidencing
the same Indebtedness, and entitled to the same benefits under this Indenture,
as the Securities surrendered upon such registration of transfer or exchange.
Section 3.06. Mutilated, Destroyed, Lost and Stolen
Securities.
If a mutilated Security is surrendered to the Trustee or if
the Holder of a Security of any series claims that the Security has been lost,
destroyed or wrongfully taken, the Company shall execute and upon a Company
Order, the Trustee shall authenticate and deliver a replacement Security of like
tenor and principal amount at maturity bearing a number not contemporaneously
outstanding, if the Holder of such Security furnishes to the Company and to the
Trustee evidence reasonably acceptable to them of the ownership and the
destruction, loss or theft of such Security and an indemnity bond shall be
posted, sufficient in the judgment of the Company or the Trustee, as the case
may be, to protect the Company, the Trustee or the Paying Agent from any loss
that any of them may suffer if such Security is replaced. The Company may charge
such Holder for
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the Company's expenses in replacing such Security (including expenses of the
Trustee charged to the Company) and the Trustee may charge the Company for the
Trustee's expenses (including the reasonable fees and expenses of its agents and
counsel) in replacing such Security.
Every replacement Security issued pursuant to this Section in
lieu of any destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all benefits of this Indenture equally and proportionately with any
and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
Section 3.07. Payment of Interest; Interest Rights
Preserved.
Interest on any Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall be paid to the
person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest.
Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date and interest
on such defaulted interest at the then applicable interest rate borne by the
Securities, to the extent lawful (such defaulted interest and interest thereon
herein collectively called "Defaulted Interest") shall forthwith cease to be
payable to the Holder on the Regular Record Date; and such Defaulted Interest
may be paid by the Company, at its election in each case, as provided in
subsection (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted
Interest to the persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed
payment, and at the same time the Company shall
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deposit with the Trustee an amount of money equal to the aggregate
amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to
be held in trust for the benefit of the persons entitled to such
Defaulted Interest as in this subsection (a) provided. Thereupon the
Trustee shall fix a Special Record Date for the payment of such
Defaulted Interest which shall be not more than 15 days and not less
than 10 days prior to the date of the proposed payment and not less
than 10 days after the actual receipt by a Responsible Officer of the
Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company in writing of such Special Record Date. In
the name and at the expense of the Company, the Trustee shall cause
notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at its address as it appears in the Security Register,
not less than 10 days prior to such Special Record Date. Notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor having been so mailed, such Defaulted Interest shall be paid
to the persons in whose names the Securities (or their respective
Predecessor Securities) are registered on such Special Record Date and
shall no longer be payable pursuant to the following subsection (b).
(b) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be required by such exchange, if, after written
notice given by the Company to the Trustee of the proposed payment
pursuant to this subsection (b), such payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
Section 3.08. Persons Deemed Owners.
Prior to and at the time of due presentment for registration
of transfer, the Company, the Trustee and any agent of the Company or the
Trustee may treat the person in whose
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name any Security is registered in the Security Register as the owner of such
Security for the purpose of receiving payment of principal of, premium, if any,
and (subject to Section 3.07) interest on such Security and for all other
purposes whatsoever, whether or not such Security shall be overdue, and neither
the Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
Section 3.09. Cancellation.
All Securities surrendered for payment, redemption,
registration of transfer or exchange shall be delivered to the Trustee and, if
not already cancelled, shall be promptly cancelled by it. The Company may at any
time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder which the Company may have acquired in any
manner whatsoever, and all Securities so delivered shall be promptly cancelled
by the Trustee. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for registration of transfer or exchange,
redemption or payment. The Trustee and no one else shall cancel all Securities
surrendered for registration of transfer, exchange, payment, replacement or
cancellation. No Securities shall be authenticated in lieu of or in exchange for
any Securities cancelled as provided in this Section 3.09, except as expressly
permitted by this Indenture. All cancelled Securities held by the Trustee shall
be returned to the Company.
Section 3.10. Computation of Interest.
Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months.
Section 3.11. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date,
date established for the payment of Defaulted Interest or Stated Maturity of any
Security shall not be a Business Day, then (notwithstanding any other provision
of this Indenture or of the Securities) payment of principal, premium, if any,
or interest need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the
Interest Payment Date, Redemption Date, date established
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for the payment of Defaulted Interest or at the Stated Maturity, as the case may
be, and no interest shall accrue with respect to such payment for the period
from and after such Interest Payment Date, Redemption Date, date established for
the payment of Defaulted Interest or Stated Maturity, as the case may be, to the
next succeeding Business Day.
Section 3.12. CUSIP Number.
The Company in issuing the Securities may use a "CUSIP" number
(if then generally in use), and if so, the Trustee may use the CUSIP numbers in
notices of redemption or exchange as a convenience to Holders; provided,
however, that any such notice may state that no representation is made as to the
correctness or accuracy of the CUSIP number printed in the notice or on the
Securities, and that reliance may be placed only on the other identification
numbers printed on the Securities. The Company shall promptly notify the Trustee
in writing of any change in the CUSIP number of either series of Securities.
Section 3.13. Paying Agent To Hold Money in Trust.
Each Paying Agent shall hold in trust for the benefit of the
Securityholders or the Trustee all money held by the Paying Agent for the
payment of principal of, premium, if any, or interest on the Securities, and
shall notify the Trustee of any default by the Company in making any such
payment. Money held in trust by the Paying Agent need not be segregated except
as required by law and in no event shall the Paying Agent be liable for any
interest on any money received by it hereunder. The Company at any time may
require the Paying Agent to pay all money held by it to the Trustee and account
for any funds disbursed and the Trustee may at any time during the continuance
of any Event of Default, upon a Company Order to the Paying Agent, require such
Paying Agent to pay forthwith all money so held by it to the Trustee and to
account for any funds disbursed. Upon making such payment, the Paying Agent
shall have no further liability for the money delivered to the Trustee.
Section 3.14. Treasury Securities.
In determining whether the Holders of the required aggregate
principal amount at maturity of Securities have concurred in any direction,
waiver, consent or notice, Securities owned by the Company or an Affiliate of
the Company shall be considered as though they are not outstanding, except that
for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Securities which a
Responsible Officer of the Trustee actually knows are so owned shall be so
considered. The Company shall notify the Trustee, in writing, when it or any of
its Affiliates repurchases or otherwise acquires Securities, of the
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aggregate principal amount at maturity of such Securities so repurchased or
otherwise acquired.
Section 3.15. Deposits of Monies.
Prior to 10:30 a.m. New York City time on each Interest
Payment Date, maturity date and Change of Control Payment Date, the Company
shall have deposited with the Paying Agent in immediately available funds money
sufficient to make cash payments, if any, due on such Interest Payment Date,
maturity date and Change of Control Payment Date, as the case may be, in a
timely manner which permits the Paying Agent to remit payment to the Holders on
such Interest Payment Date, maturity date and Change of Control Payment Date, as
the case may be.
Section 3.16. Book-Entry Provisions for Global
Securities.
(a) The Global Securities initially shall (i) be registered in
the name of the Depository or the nominee of such Depository, (ii) be delivered
to the Trustee as custodian for such Depository and (iii) bear legends as set
forth in Exhibit B.
Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depository, or the Trustee as its
custodian, or under the Global Security, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of the Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or impair, as between the Depository and its Agent Members, the operation of
customary practices governing the exercise of the rights of a Holder of any
Security.
(b) Transfers of Global Securities shall be limited to
transfers in whole, but not in part, to the Depository, its successors or their
respective nominees. Interests of beneficial owners in the Global Securities may
be transferred or exchanged for Physical Securities in accordance with the rules
and procedures of the Depository and the provisions of Section 3.17. In
addition, Physical Securities shall be transferred to all beneficial owners in
exchange for their beneficial interests in Global Securities if (i) the
Depository notifies the
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Company that it is unwilling or unable to continue as Depository for any Global
Security and a successor Depository is not appointed by the Company within 90
days of such notice or (ii) an Event of Default has occurred and is continuing
and the Registrar has received a written request from the Depository to issue
Physical Securities.
(c) In connection with any transfer or exchange of a portion
of the beneficial interest in any Global Security to beneficial owners pursuant
to paragraph (b), the Registrar shall (if one or more Physical Securities are to
be issued) reflect on its books and records the date and a decrease in the
principal amount at maturity of the Global Security in an amount equal to the
principal amount of the beneficial interest in the Global Security to be
transferred, and the Company shall execute, and the Trustee shall authenticate
and deliver, one or more Physical Securities of like tenor and principal amount
of authorized denominations.
(d) In connection with the transfer of Global Securities as an
entirety to beneficial owners pursuant to paragraph (b), the Global Securities
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depository in exchange for its beneficial
interest in the Global Securities, an equal aggregate principal amount at
maturity of Physical Securities of like tenor of authorized denominations.
(e) Any Physical Security constituting a Restricted Security
delivered in exchange for an interest in a Global Security pursuant to
subparagraphs (b) or (c) of this Section 3.16 shall, except as otherwise
provided by paragraphs (a)(l)(x) and (c) of Section 3.17, bear the legend
regarding transfer restrictions applicable to the Physical Securities set forth
in Exhibit A-1.
(f) The Holder of any Global Security may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
Section 3.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors
and Non-U.S. persons. The following provisions shall apply with respect to the
registration of any proposed transfer
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of a Security constituting a Restricted Security to any Institutional Accredited
Investor which is not a QIB or to any non-U.S. person:
(1) the Registrar shall register the transfer of any Security
constituting a Restricted Security, whether or not such Security bears
the Private Placement Legend, if (x) the requested transfer is not
prior to the date which is two years (or such shorter period as may be
prescribed by Rule 144(k) under the Securities Act or any successor
provision thereunder) after the later of the original Issue Date of
such Security (or of any Predecessor Security) or the last day on which
the Company or any Affiliate of the Company was the owner of such
Security or any Predecessor Security or (y) (1) in the case of a
transfer to a person purporting to be an Institutional Accredited
Investor which is not a QIB (excluding non-U.S. persons), the proposed
transferee has delivered to the Registrar a certificate substantially
in the form of Exhibit C hereto or (2) in the case of a transfer to a
person purporting to be a non-U.S. person, the proposed transferee has
delivered to the Registrar a certificate substantially in the form of
Exhibit D hereto; and
(2) if the proposed transferor is an Agent Member holding a
beneficial interest in a Global Security, upon receipt by the Registrar
of (x) the certificate, if any, required by paragraph (1) above and (y)
instructions given in accordance with the Depository's and the
Registrar's procedures;
whereupon (a) the Registrar shall reflect on its books and records the date and
(if the transfer does not involve a transfer of Outstanding Physical Securities)
a decrease in the principal amount at maturity of a Global Security in an amount
equal to the principal amount at maturity of the beneficial interest in a Global
Security to be transferred, and (b) the Company shall execute and the Trustee
shall authenticate and deliver one or more Physical Securities of like tenor and
principal amount at maturity of authorized denominations.
(b) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of a Security constituting
a Restricted Security to a person purporting to be a QIB (excluding transfers to
non-U.S. persons):
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(1) the Registrar shall register the transfer if such transfer
is being made by a proposed transferor who has checked the box provided
for on the form of Security stating, or has otherwise advised the
Company and the Registrar in writing, that the transfer has been made
in compliance with the exemption from registration under the Securities
Act provided under Rule 144A to a transferee who has signed the
certification provided for on the form of Security stating, or has
otherwise advised the Company and the Registrar in writing, that such
transferee represents and warrants that it is purchasing the Security
for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a QIB
within the meaning of Rule 144A, and is aware that the sale to it is
being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as it has requested
pursuant to Rule 144A or has determined not to request such information
and that it is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A; and
(2) if the proposed transferee is an Agent Member, and the
Securities to be transferred consist of Physical Securities which after
transfer are to be evidenced by an interest in the Global Security,
upon receipt by the Registrar of instructions given in accordance with
the Depository's and the Registrar's procedures, the Registrar shall
reflect on the Security Register the date and an increase in the
principal amount at maturity of the Global Security in an amount equal
to the principal amount at maturity of the Physical Securities to be
transferred, and the Trustee shall cancel the Physical Securities so
transferred.
(c) Private Placement Legend. Upon the registration of
transfer, exchange or replacement of Securities not bearing the Private
Placement Legend, the Registrar shall deliver Securities that do not bear the
Private Placement Legend. Upon the registration of transfer, exchange or
replacement of Securities bearing the Private Placement Legend, the Registrar
shall deliver only Securities that bear the Private Placement Legend unless (i)
the circumstances contemplated by paragraph (a)(l)(x) of this Section 3.17
exist, (ii) there is delivered to the Registrar an Opinion of Counsel
satisfactory to the Company and the Trustee to the effect that neither such
legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act
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or (iii) such Security has been sold pursuant to an effective registration
statement under the Securities Act.
(d) Other Transfers. If a Holder proposes to transfer a
Security constituting a Restricted Security pursuant to any exemption from the
registration requirements of the Securities Act other than as provided for by
Section 3.17(a) and (b), the Registrar shall only register such transfer or
exchange if such transferor delivers an Opinion of Counsel satisfactory to the
Company and the Registrar that such transfer is in compliance with the
Securities Act and the terms of this Indenture; provided that the Company may,
based upon the opinion of its counsel, instruct the Registrar by a Company Order
not to register such transfer in any case where the proposed transferee is not a
QIB, non-U.S. person or Institutional Accredited Investor.
(e) General. By its acceptance of any Security bearing the
Private Placement Legend, each Holder of such a Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Security only as
provided in this Indenture.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 3.16 or this Section
3.17 for a period of two years at which time such letters, notices and other
written communications shall be delivered to the Company. The Company shall have
the right to inspect and make copies of all such letters, notices or other
written communications at any time during normal business hours upon the giving
of reasonable prior written notice to the Registrar.
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance
or Covenant Defeasance.
The Company may, at its option by Board Resolution, at any
time, with respect to the Securities, elect to have either Section 4.02 or
Section 4.03 be applied to all of the Outstanding Securities (the "Defeased
Securities"), upon compliance with the conditions set forth below in this
Article Four.
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Section 4.02. Defeasance and Discharge.
Upon the Company's exercise under Section 4.01 of the option
applicable to this Section 4.02, the Company shall be deemed to have been
discharged from its obligations with respect to the Defeased Securities on the
date the conditions set forth below are satisfied (hereinafter, "defeasance").
For this purpose, such defeasance means that the Company shall be deemed to have
paid and discharged the entire indebtedness represented by the Defeased
Securities, which shall thereafter be deemed to be "Outstanding" only for the
purposes of Section 4.05 and the other Sections of this Indenture referred to in
(a) and (b) below, and to have satisfied all its other Obligations under such
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Company and upon Company Request, shall execute
proper instruments acknowledging the same), except for the following, which
shall survive until otherwise terminated or discharged hereunder: (a) the rights
of Holders of Defeased Securities to receive, solely from the trust fund
described in Section 4.04 and as more fully set forth in such Section, payments
in respect of the principal of, premium, if any, and interest on such Securities
when such payments are due, (b) the Company's Obligations with respect to such
Defeased Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (c) the
rights, powers, trusts, duties and immunities of the Trustee hereunder,
including, without limitation, the Trustee's rights under Section 6.07, and (d)
this Article Four. Subject to compliance with this Article Four, the Company may
exercise its option under this Section 4.02 notwithstanding the prior exercise
of its option under Section 4.03 with respect to the Securities.
Section 4.03. Covenant Defeasance.
Upon the Company's exercise under Section 4.01 of the option
applicable to this Section 4.03, the Company shall be released from its
obligations under any covenant or provision contained in Sections 10.06 through
10.23 and the provisions of Articles Eight and Eleven shall not apply, with
respect to the Defeased Securities on and after the date the conditions set
forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased
Securities shall thereafter be deemed not to be "Outstanding" for the purposes
of any direction, waiver, consent or declaration or Act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "Outstanding" for all other purposes hereunder. For this
purpose, such covenant defeasance means that, with respect to the Defeased
Securities, the Company may
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omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such Section or Article, whether
directly or indirectly, by reason of any reference elsewhere herein to any such
Section or Article or by reason of any reference in any such Section or Article
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section
5.01(iii)-(vi), but, except as specified above, the remainder of this Indenture
and such Defeased Securities shall be unaffected thereby.
Section 4.04. Conditions to Defeasance or Covenant
Defeasance.
The following shall be the conditions to application of either
Section 4.02 or Section 4.03 to the Defeased Securities:
(1) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee (or another trustee satisfying the
requirements of Section 6.09 who shall agree to comply with the
provisions of this Article Four applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Securities, (a) U.S. dollars in an amount, or (b)
Government Securities which through the scheduled payment of principal,
premium, if any, and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of
any payment, money in an amount, or (c) a combination thereof, in any
such case, sufficient, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge and which shall
be applied by the Trustee (or other qualifying trustee) to pay and
discharge, the principal of, premium, if any, and interest on the
Defeased Securities upon redemption or at the Stated Maturity of such
principal or installment of principal, premium, if any, or interest;
provided, however, that the Trustee shall have been irrevocably
instructed in writing to apply such money or the proceeds of such
Government Securities to said payments with respect to the Securities;
(2) No Default shall have occurred and be continuing on the
date of such deposit;
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(3) Neither the Company nor any Subsidiary of the Company is
an "insolvent person" within the meaning of any applicable Bankruptcy
Law on the date of such deposit or at any time during the period ending
on the ninety-first day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period);
(4) Such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest in violation of Section 6.08 and
for purposes of the Trust Indenture Act with respect to any securities
of the Company;
(5) Such defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a default under, this Indenture
or any other agreement or instrument to which the Company is a party or
by which it is bound;
(6) In the case of an election under Section 4.02, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(x) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (y) since the date hereof, there
has been a change in the applicable Federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm
that, the Holders of the Outstanding Securities will not recognize
income, gain or loss for Federal income tax purposes as a result of
such defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred;
(7) In the case of an election under Section 4.03, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize
income, gain or loss for Federal income tax purposes as a result of
such covenant defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred;
(8) The Company shall have delivered to the Trustee, an
Opinion of Counsel to the effect that immediately following the
ninety-first day after the deposit, the trust funds established
pursuant to this Article will not be subject to the effect of any
applicable bankruptcy, insolvency,
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reorganization or similar laws affecting creditors' rights generally
under any applicable U.S. Federal or state law;
(9) The Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit made by the Company
pursuant to its election under Section 4.02 or 4.03 was not made by the
Company with the intent of preferring the Holders over the other
creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and
(10) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that (i)
all conditions precedent (other than conditions requiring the passage
of time) provided for relating to either the defeasance under Section
4.02 or the covenant defeasance under Section 4.03 (as the case may be)
have been complied with as contemplated by this Section 4.04 and (ii)
if any other Indebtedness of the Company shall then be outstanding or
committed, such defeasance or covenant defeasance will not violate the
provisions of the agreements or instruments evidencing such
Indebtedness.
Opinions required to be delivered under this Section may have
such qualifications as are customary for opinions of the type required and
acceptable to the Trustee.
Section 4.05. Deposited Money and Government
Securities To Be Held in Trust; Other
Miscellaneous Provisions.
Subject to the proviso of the last paragraph of Section 10.03,
all money and Government Securities (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased
Securities shall be held in trust and applied by the Trustee, in accordance with
the provisions of such Securities and this Indenture, to the payment, either
directly or through any Paying Agent (other than the Company) as the Trustee may
determine, to the Holders of such Securities of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
need not be segregated from other funds except to the extent required by law.
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The Company shall pay and indemnify the Trustee and hold it
harmless against any tax, fee or other charge imposed on or assessed against the
Government Securities deposited pursuant to Section 4.04 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the
Defeased Securities.
Anything in this Article Four to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or Government Securities held by it as provided in Section
4.04 which, in the opinion of an internationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to a
Responsible Officer of the Trustee, are in excess of the amount thereof which
would then be required to be deposited to effect an equivalent defeasance or
covenant defeasance.
Section 4.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 4.02 or 4.03, as the case may
be, by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
obligations of the Company under this Indenture, the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 4.02 or
4.03, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money and Government Securities in accordance with
Section 4.02 or 4.03, as the case may be; provided, however, that if the Company
makes any payment of principal, premium, if any, or interest on any Security
following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money and Government Securities held by the Trustee or Paying Agent.
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ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body):
(i) default in the payment of interest on the Securities
issued thereunder when it becomes due and payable and continuance of
such default for a period of 30 days or more; or
(ii) default in the payment of (a) if prior to March 1,
2004, the Accreted Value of, and (b) if on or after March 1, 2004, the
principal amount at maturity of and premium, if any, on the Securities
when due (including the failure to make a payment to purchase
Securities pursuant to a Change of Control Offer); or
(iii) default in the performance, or breach, of any covenant
described under Section 10.19 or Article Eight; or
(iv) default in the performance, or breach, of any covenant
in this Indenture (other than defaults specified in clause (i), (ii) or
(iii) above) and continuance of such default or breach for a period of
30 days or more after written notice to the Company by the Trustee or
to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount at maturity of the outstanding Securities
(in each case, when such notice is deemed received in accordance with
this Indenture); or
(v) failure to perform any term, covenant, condition or
provision of one or more classes or issues of Indebtedness in an
aggregate principal amount of $15.0 million or more under which the
Company or a Restricted Subsidiary is obligated, and either (a) such
Indebtedness is already due and payable in full and has not been paid
in full (and such failure continues for a period of 30 days or more) or
(b) such failure results in the acceleration of the final
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maturity of such Indebtedness (which acceleration has not been
rescinded prior to any declaration of acceleration of the Securities);
or
(vi) one or more judgments, orders or decrees, not subject to
appeal, for the payment of money of $15.0 million or more, either
individually or in the aggregate (in all cases net of amounts covered
by insurance for which coverage is not being challenged or denied),
shall be entered against the Company or any of the Company's
Significant Restricted Subsidiaries or any of their respective
properties and shall not be discharged, paid or stayed within 60 days
after the right of appeal has expired; or
(vii) the Company or any Significant Restricted Subsidiary of
the Company pursuant to or under or within the meaning of any
Bankruptcy Law:
(a) commences a voluntary case or proceeding;
(b) consents to the making of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any case against
it;
(c) consents to the appointment of a Custodian of it or
for any substantial part of its property;
(d) makes a general assignment for the benefit of
its creditors;
(e) files an answer or consent seeking reorganization
or relief;
(f) shall admit in writing its inability to pay its debts
generally; or
(g) consents to the filing of a petition in bankruptcy; or
(viii) a court of competent jurisdiction in any involuntary
case or proceeding enters a Bankruptcy Order against the Company or any
Significant Restricted Subsidiary, and such Bankruptcy Order remains
unstayed and in effect for 60 consecutive days; or
(ix) a Custodian shall be appointed out of court with
respect to the Company or any Significant Restricted Subsidiary or with
respect to all or any substantial part
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of the assets or properties of the Company or any Significant
Restricted Subsidiary.
Section 5.02. Acceleration of Maturity; Rescission and
Annulment.
If an Event of Default with respect to the Securities (other
than an Event of Default with respect to the Company described in clause (vii)
of the preceding paragraph) occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount at maturity of the outstanding
Securities by notice in writing to the Company may declare the Default Amount of
all the outstanding Securities to be due and payable immediately and, upon any
such declaration, such Default Amount will become immediately due and payable.
If an Event of Default specified in clause (vi) of the preceding paragraph with
respect to the Company occurs under the Indenture, the outstanding Securities
will ipso facto become immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of the Securities.
Notwithstanding the foregoing, in the event of a declaration
of acceleration in respect of the Securities because an Event of Default
specified in clause (v) above shall have occurred and be continuing, such
declaration of acceleration shall be automatically annulled if the Indebtedness
that is the subject of such Event of Default has been discharged or paid or such
Event of Default shall have been cured or waived by the holders of such
Indebtedness and written notice of such discharge, cure or waiver, as the case
may be, shall have been given to the Trustee by the Company or by the requisite
holders of such Indebtedness or a trustee, fiduciary or agent for such holders,
within 30 days after such declaration of acceleration in respect of the
Securities, and no other Event of Default shall have occurred which has not been
cured or waived during such 30-day period.
After a declaration of acceleration, the Holders of a majority
in aggregate principal amount at maturity of the outstanding Securities may, by
notice to the Trustee, rescind such declaration of acceleration if all existing
Events of Default have been cured or waived, other than nonpayment of principal
of, premium, if any, and accrued interest on the Securities that has become due
solely as a result of the acceleration thereof, and if the rescission of
acceleration would not conflict with any judgment or decree. Past defaults under
this Indenture (except a default in the payment of the principal of, premium, if
any, or interest on any Security issued thereunder or in respect
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of a covenant or a provision which cannot be modified or amended without the
consent of all Holders of such Securities) may be waived by the Holders of a
majority in aggregate principal amount of the outstanding Securities.
Section 5.03. Collection of Indebtedness and Suits for
Enforcement by Trustee.
The Company covenants that if an Event of Default specified in
Section 5.01(i), 5.01(ii) or 5.01(iii) (to the extent relating to the payment
required by Section 10.19) shall have occurred and be continuing, the Company
will, upon demand of the Trustee, pay to the Trustee, for the benefit of the
Holders, the whole amount then due and payable on such Securities for principal,
premium, if any, and interest, with interest upon the overdue principal,
premium, if any, and, to the extent that payment of such interest shall be
legally enforceable, upon overdue installments of interest, at the rate then
borne by the Securities; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may,
but is not obligated under this paragraph to, at the expense of the Company,
institute a judicial proceeding for the collection of the sums so due and unpaid
and may, but is not obligated under this paragraph to, prosecute such proceeding
to judgment or final decree, and may, but is not obligated under this paragraph
to, enforce the same against the Company or any other obligor upon the
Securities and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or any other obligor
upon the Securities, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion, but is not obligated under this paragraph to, (i) proceed
to protect and enforce its rights and the rights of the Holders under this
Indenture by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce such rights, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or
in aid of the exercise of any power granted herein, or (ii) proceed to protect
and enforce any other proper remedy. No recovery of any such judgment upon any
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property of the Company shall affect or impair any rights, powers or remedies of
the Trustee or the Holders.
Section 5.04. Trustee May File Proofs of Claims.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Securities, including the property of the Company or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of overdue principal or interest) shall be
entitled and empowered, by intervention in such proceeding or otherwise,
(a) to file and prove a claim for the whole amount of
principal, premium, if any, and interest owing and unpaid in respect of
the Securities and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel) and
of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the same;
and any Custodian in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
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Section 5.05. Trustee May Enforce Claims Without Possession
of Securities.
All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name and as trustee of an express trust, and any recovery of judgment
shall, after provision for the payment of the reasonable compensation, fees,
expenses, disbursements and advances of the Trustee, its agents and counsel, be
for the ratable benefit of the Holders in respect of which such judgment has
been recovered.
Section 5.06. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article,
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal,
premium, if any, or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Securities,
ratably, without preference or priority of any kind, according to the
amounts due and payable on the Securities for interest;
Third: to Holders for principal and premium, if any, amounts
owing under the Securities, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Securities
for principal and premium, if any; and
Fourth: the balance, if any, to the Company.
The Trustee, upon prior written notice to the Company, may fix
a record date and payment date for any payment to Securityholders pursuant to
this Section 5.06.
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Section 5.07. Limitation on Suits.
No Holder of any Security will have any right to institute any
proceeding with respect to this Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default thereunder and unless the Holders of at least 25% of
the aggregate principal amount of the outstanding Securities under this
Indenture shall have made written request, and offered reasonable indemnity, to
the Trustee to institute such proceeding as Trustee, and the Trustee shall have
not received from the Holders of a majority in aggregate principal amount at
maturity of outstanding Securities a direction inconsistent with such request
and shall have failed to institute such proceeding within 45 days. However, such
limitations do not apply to a suit instituted by a holder of a Security for
enforcement of payment of the principal of and premium, if any, or interest on
such Security on or after the respective due dates expressed in such Security.
During the existence of an Event of Default under this
Indenture, the Trustee is required to exercise such rights and powers vested in
it under this Indenture and use the same degree of care and skill in its
exercise thereof as a prudent Person would exercise under the circumstances in
the conduct of such Person's own affairs. Subject to the provisions of this
Indenture relating to the duties of the Trustee, in case an Event of Default
shall occur and be continuing, the Trustee is not under any obligation to
exercise any of its rights or powers under this Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to such
Trustee security or indemnity satisfactory to it. Subject to certain provisions
of this Indenture concerning the rights of the Trustee, the Holders of a
majority in aggregate principal amount of the applicable issue of outstanding
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee under this Indenture, or
exercising any trust, or power conferred on the Trustee.
It is understood and intended that no one or more Holders
shall have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture or any Security to affect, disturb or prejudice the
rights of any other Holders, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture
or any Security, except in the manner provided in this Indenture and for the
equal and ratable benefit of all the Holders.
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Section 5.08. Unconditional Right of Holders To Receive
Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive cash payment of the principal of, premium, if any, and
(subject to Section 3.07 hereof) interest on such Security on the respective
Stated Maturities expressed in such Security (or, in the case of redemption, on
the respective Redemption Date) and to institute suit for the enforcement of any
such payment, and such rights shall not be impaired without the consent of such
Holder.
Section 5.09. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture or any Security and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, the Trustee and the Holders shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as provided in Section 3.06, no right or remedy herein
conferred upon or reserved to the Trustee or to the Holders is intended to be
exclusive of any other right or remedy, and every right and remedy shall, to the
extent permitted by law, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
Section 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article Five or by law to the Trustee or to the Holders may be
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exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
Section 5.12. Control by Majority.
The Holders of a majority in aggregate principal amount at
maturity of the Outstanding Securities shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee, provided,
however, that:
(a) such direction shall not be in conflict with any rule of
law or with this Indenture or any Security or expose the Trustee to
personal liability; and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal
amount at maturity of the Outstanding Securities may on behalf of the Holders of
all the Securities waive any past Default hereunder and its consequences, except
a Default
(a) in the payment of the principal of, premium, if any, or
interest on any Security or
(b) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right consequent
thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any
Security by his acceptance thereof shall be deemed to have agreed, that any
court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Indenture, or in any suit against the Trustee for any
action
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taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit of an undertaking to pay the costs of such suit, and that such court
may in its discretion assess reasonable costs, including reasonable attorneys'
fees and expenses, against any party litigant in such suit, having due regard to
the merits and good faith of the claims or defenses made by such party litigant;
but the provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount at maturity of the Outstanding
Securities, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of, premium, if any, or interest on any Security on or
after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the respective Redemption Dates).
Section 5.15. Waiver of Stay, Extension or Usury Laws.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury or other law wherever enacted, now or at any time hereafter in
force, which would prohibit or forgive the Company from paying all or any
portion of the principal of, premium, if any, or interest on the Securities
contemplated herein or in the Securities or which may affect the covenants or
the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
Section 5.16. Unconditional Right of Holders To Institute
Certain Suits.
Notwithstanding any other provision in this Indenture and any
other provision of any Security, the right of any Holder of any Security to
receive payment of the principal of, premium, if any, and interest on such
Security on or after the respective Stated Maturities (or the respective
Redemption Dates, in the case of redemption) expressed in such Security, or
after such respective dates, shall not be impaired or affected without the
consent of such Holder.
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ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions
which by provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this
Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein).
(b) In case an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent person would exercise or use under the circumstances in
the conduct of such person's own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own gross negligent action, its own
gross negligent failure to act, or its own willful misconduct, except that no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
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(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section 6.01.
Section 6.02. Notice of Defaults.
Within 90 days after the occurrence of any Default or Event of
Default with respect to the outstanding Securities, the Trustee shall give the
Holders notice of all uncured Defaults or Events of Default known to it;
provided, however, that, except in the case of an Event of Default in payment
with respect to such Securities or a Default or Event of Default in complying
with Article Eight, the Trustee shall be protected in withholding such notice if
and so long as a committee of its trust officers in good faith determines that
the withholding of such notice is in the interest of the Holders.
Section 6.03. Certain Rights of Trustee.
Subject to Section 6.01 hereof and the provisions of Section
315 of the Trust Indenture Act:
(a) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document (whether in its original or
facsimile form) believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors of the Company may be
sufficiently evidenced by a Board Resolution thereof;
(c) the Trustee may consult with counsel of its selection and
any advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon in accordance with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the
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Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee security or indemnity satisfactory to it against
the costs, expenses and liabilities which might be incurred by the
Trustee in compliance with such request or direction;
(e) the Trustee shall not be liable for any action taken or
omitted by it in good faith and believed by it to be authorized or
within the discretion, rights or powers conferred upon it by this
Indenture other than any liabilities arising out of its own gross
negligence;
(f) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, approval, appraisal, bond, debenture, note, coupon,
security, other evidence of indebtedness or other paper or document
unless requested in writing so to do by the Holders of not less than a
majority in aggregate principal amount of the Securities then
Outstanding; provided, however, that, if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities
likely to be incurred by it in the making of such investigation is, in
the opinion of the Trustee, not reasonably assured to the Trustee by
the security afforded to it by the terms of this Indenture, the Trustee
may require indemnity satisfactory to it against such expenses or
liabilities as a condition to proceeding; the reasonable expenses of
every such investigation shall be paid by the Company or, if paid by
the Trustee or any predecessor Trustee, shall be repaid by the Company
upon demand; provided, further, the Trustee in its discretion may make
such further inquiry or investigation into such facts or matters as it
may deem fit, and, if the Trustee shall determine to make such further
inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney
at the sole cost of the Company and shall incur no liability or
additional liability of any kind by reason of such inquiry or
investigation; and
(g) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
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Section 6.04. Trustee Not Responsible for Recitals,
Dispositions of Securities or Application of
Proceeds Thereof.
The recitals contained herein and in the Securities, except
the Trustee's certificates of authentication, shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities except that the Trustee represents that it is
duly authorized to execute and deliver this Indenture, authenticate the
Securities and perform its obligations hereunder and that the statements made by
it in a Statement of Eligibility and Qualification on Form T-1, if any, to be
supplied to the Company are true and accurate subject to the qualifications set
forth therein. The Trustee shall not be accountable for the use or application
by the Company of Securities or the proceeds thereof.
Section 6.05. Trustee and Agents May Hold Securities;
Collections; Etc.
The Trustee, any Paying Agent, Security Registrar or any other
agent of the Company, in its individual or any other capacity, may become the
owner or pledgee of Securities, with the same rights it would have if it were
not the Trustee, Paying Agent, Security Registrar or such other agent and,
subject to Sections 6.08 and 6.13 hereof and Sections 310 and 311 of the Trust
Indenture Act, may otherwise deal with the Company and receive, collect, hold
and retain collections from the Company with the same rights it would have if it
were not the Trustee, Paying Agent, Security Registrar or such other agent.
Section 6.06. Money Held in Trust.
All moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except to the extent
required herein or by law. The Trustee shall not be under any liability for
interest on any moneys received by it hereunder.
Section 6.07. Compensation and Indemnification of Trustee and
Its Prior Claim.
The Company covenants and agrees: (a) to pay to the Trustee
from time to time, and the Trustee shall be entitled to, compensation for all
services rendered by it hereunder
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(which shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust) as the Company and the Trustee
shall, from time to time, agree in writing; (b) to reimburse the Trustee and
each predecessor Trustee upon its request for all reasonable expenses, fees,
disbursements and advances incurred or made by or on behalf of it in accordance
with any of the provisions of this Indenture (including the reasonable
compensation, fees, and the expenses and disbursements of its counsel and of all
agents and other persons not regularly in its employ), except any such expense,
disbursement or advance as may arise from its gross negligence, bad faith or
willful misconduct; and (c) to indemnify the Trustee (which for purposes of this
Section 6.07 shall include its officers, directors, employees and agents) and
each predecessor Trustee for, and to hold it harmless against, any and all loss,
liability, claim, damage, or expense (including taxes other than taxes based
upon the income of the Trustee) incurred without negligence, bad faith or
willful misconduct on its part, arising out of or in connection with the
acceptance or administration of this Indenture or the trusts hereunder and its
duties hereunder, including enforcement of this Section 6.07. The obligations of
the Company under this Section to compensate and indemnify the Trustee and each
predecessor Trustee and to pay or reimburse the Trustee and each predecessor
Trustee for such expenses, fees, disbursements and advances shall constitute an
additional obligation hereunder and shall survive the satisfaction and discharge
of this Indenture and the resignation or removal of the Trustee. To secure the
obligations of the Company to the Trustee under this Section 6.07, the Trustee
shall have a prior Lien upon all property and funds held or collected by the
Trustee as such, except funds and property paid by the Company held in trust for
the benefit of the Holders of Securities.
Section 6.08. Conflicting Interests.
The Trustee shall be subject to and comply with the provisions
of Section 310(b) of the Trust Indenture Act.
Section 6.09. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have or be wholly owned by an entity having a combined capital
and surplus of at least $50,000,000, and have a Corporate Trust Office in the
Borough of Manhattan in The City of New York, State of New
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York. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of any Federal, state, territorial or
District of Columbia supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Trustee shall
resign immediately in the manner and with the effect hereinafter specified in
this Article.
Section 6.10. Resignation and Removal; Appointment of
Successor Trustee.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee under
Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter
appointed, may at any time resign by giving written notice thereof to the
Company at least 20 Business Days prior to the date of such proposed
resignation. Upon receiving such notice of resignation, the Company shall
promptly appoint a successor trustee by written instrument executed by authority
of the Board of Directors of the Company, a copy of which shall be delivered to
the resigning Trustee and a copy to the successor Trustee. If an instrument of
acceptance by a successor Trustee shall not have been delivered to the Trustee
within 20 Business Days after the giving of such notice of resignation, the
resigning Trustee may, or any Holder who has been a bona fide Holder of a
Security for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee. Such court may thereupon, after such notice,
if any, as it may deem proper, appoint a successor Trustee.
(c) The Trustee may be removed at any time by an Act of the
Holders of a majority in principal amount at maturity of the Outstanding
Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of
Section 310(b) of the Trust Indenture Act in
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accordance with Section 6.08 hereof after written request therefor by
the Company or by any Holder who has been a bona fide Holder of a
Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09
hereof and shall fail to resign after written request therefor by the
Company or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take charge
or control of the Trustee or of its property or affairs for the purpose
or rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 5.14, the Holder of any Security who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution of its Board of Directors, shall
promptly appoint a successor Trustee. If, within one year after such
resignation, removal or incapability, or the occurrence of such vacancy, a
successor Trustee shall be appointed by Act of the Holders of a majority in
principal amount of the Outstanding Securities delivered to the Company and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment, become the successor Trustee and supersede the
successor Trustee appointed by the Company. If no successor Trustee shall have
been so appointed by the Company or the Holders of the Securities and accepted
appointment in the manner hereinafter provided, the Holder of any Security who
has been a bona fide Holder for at least six months may, subject to Section
5.14, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by
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first-class mail, postage prepaid, to the Holders of Securities as their names
and addresses appear in the Security Register. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.
Section 6.11. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee as if originally named as
Trustee hereunder; but, nevertheless, on the written request of the Company or
the successor Trustee, upon payment of any and all amounts due it pursuant to
Section 6.07, such retiring Trustee shall duly assign, transfer and deliver to
the successor Trustee all moneys and property at the time held by it hereunder
and shall execute and deliver an instrument transferring to such successor
Trustee all the rights, powers, duties and obligations of the retiring Trustee.
Upon request of any such successor Trustee, the Company shall execute any and
all instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights and powers. Any Trustee ceasing to act shall,
nevertheless, retain a prior claim upon all property or funds held or collected
by such Trustee to secure any amounts then due it pursuant to the provisions of
Section 6.07.
No successor Trustee with respect to the Securities shall
accept appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as
provided in this Section 6.11, the successor shall give notice thereof to the
Holders of the Securities, by mailing such notice to such Holders at their
addresses as they shall appear on the Security Register. If the acceptance of
appointment is substantially contemporaneous with the resignation, then the
notice called for by the preceding sentence may be combined with the notice
called for by Section 6.10. If the Company fails to give such notice within 10
days after acceptance of appointment by the successor Trustee, the successor
Trustee shall cause such notice to be given at the expense of the Company.
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Section 6.12. Merger, Conversion, Amalgamation, Consolidation
or Succession to Business.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated or amalgamated, or any
corporation resulting from any merger, conversion, amalgamation or consolidation
to which the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder without the execution or filing of any paper
or any further act on the part of any of the parties hereto, provided such
corporation shall be eligible under this Article to serve as Trustee hereunder.
In case at the time such successor to the Trustee under this
Section 6.12 shall succeed to the trusts created by this Indenture any of the
Securities shall have been authenticated but not delivered, any such successor
to the Trustee may adopt the certificate of authentication of any predecessor
Trustee and deliver such Securities so authenticated; and, in case at that time
any of the Securities shall not have been authenticated, any successor to the
Trustee under this Section 6.12 may authenticate such Securities either in the
name of any predecessor hereunder or in the name of the successor Trustee; and
in all such cases such certificate shall have the full force which it is
anywhere in the Securities or in this Indenture provided that the certificate of
the Trustee shall have been authenticated.
Section 6.13. Trustee's Application for Instructions from the
Company.
Any application by the Trustee for written instructions from
the Company may, at the option of the Trustee, set forth in writing any action
proposed to be taken or omitted by the Trustee under this Indenture and the date
on and/or after which such action shall be taken or such omission shall be
effective. The Trustee shall not be liable for any action taken by, or omission
of, the Trustee in accordance with a proposal included in such application on or
after the date specified in such application (which date shall not be less than
three Business Days after the date any officer of the Company actually receives
such application, unless any such officer shall have consented in writing to any
earlier date) unless prior to taking any such action (or the effective date in
the case of an omission), the Trustee shall have received written instructions
in response to such application concerning the action to be taken or omitted.
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ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders.
(a) The Trustee shall preserve the names and addresses of the
Securityholders and otherwise comply with Section 312(a) of the Trust Indenture
Act. If the Trustee is not the Registrar, the Company shall furnish or cause the
Registrar to furnish to the Trustee before each Interest Payment Date, and at
such other times as the Trustee may request in writing, a list in such form and
as of such date as the Trustee may reasonably require of the names and addresses
of the Securityholders. Neither the Company nor the Trustee shall be under any
responsibility with regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the
Trustee:
(i) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date; and
(ii) at such other times as the Trustee may request in
writing, within 30 days after receipt by the Company of any such
request, a list of similar form and content as of a date not more than
15 days prior to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Security
Registrar, no such list need be furnished pursuant to this Subsection 7.01(b).
Section 7.02. Communications of Holders.
Holders may communicate with other Holders with respect to
their rights under this Indenture or under the Securities pursuant to Section
312(b) of the Trust Indenture Act. The Company and the Trustee and any and all
other persons
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benefited by this Indenture shall have the protection afforded by Section 312(c)
of the Trust Indenture Act.
Section 7.03. Reports by Trustee.
Within 60 days after June 1 of each year commencing with the
first June 1 following the date of this Indenture, the Trustee shall mail to all
Holders, as their names and addresses appear in the Security Register, a brief
report dated as of such June 1, in accordance with, and to the extent required
under Section 313 of the Trust Indenture Act. At the time of its mailing to
Holders, a copy of each such report shall be filed by the Trustee with the
Company, the SEC and with each stock exchange on which the Securities are
listed. The Company shall notify the Trustee when the Securities are listed on
any stock exchange or delisted therefrom.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF
ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain
Terms.
The Company shall not consolidate with or merge with or into
(whether or not the Company is the Surviving Person) any other entity and the
Company shall not, and shall not cause or permit any Restricted Subsidiary to,
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Company's properties and assets (determined on a
consolidated basis for the Company and the Restricted Subsidiaries) to any
entity in a single transaction or series of related transactions, unless: (i)
either (x) the Company shall be the Surviving Person or (y) the Surviving Person
(if other than the Company) shall be a corporation, partnership or limited
liability company organized and validly existing under the laws of the United
States of America or any State thereof or the District of Columbia, and shall
expressly assume by a supplemental indenture the due and punctual payment of the
principal of, premium, if any, and interest on all the Securities and the
performance and observance of every covenant of this Indenture and the
Registration Rights Agreement to be performed or observed on the part of the
Company; (ii) immediately thereafter, no Default shall have occurred and be
continuing; (iii) immediately after giving effect to any such transaction
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involving the Incurrence by the Company or any Restricted Subsidiary, directly
or indirectly, of additional Indebtedness (and treating any Indebtedness not
previously an obligation of the Company or any Restricted Subsidiary in
connection with or as a result of such transaction as having been Incurred at
the time of such transaction), the Company or the Surviving Person, as
applicable, could Incur, on a pro forma basis after giving effect to such
transaction as if it had occurred at the beginning of the latest fiscal quarter
for which consolidated financial statements of the Company are available, at
least $1.00 of additional Indebtedness under the proviso in Section 10.12; and
(iv) the Company has delivered to the Trustee an opinion of counsel to the
effect that the Holders will not recognize gain or loss for federal income tax
purposes as a result of such transaction; provided, however, that the Company
may consolidate with or merge with or into Holdings without complying with
clause (iii) of this Section 8.01.
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions) of all or substantially all the properties and assets of one or
more Restricted Subsidiaries the Equity Interests of which constitute all or
substantially all the properties and assets of the Company shall be deemed to be
the transfer of all or substantially all the properties and assets of the
Company.
The meaning of the phrase "all or substantially all" as used
above varies according to the facts and circumstances of the subject
transaction, has no clearly established meaning under relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances, there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the assets of the
Company, and therefore it may be unclear whether the foregoing provisions are
applicable.
Section 8.02. Successor Substituted.
In the event of any transaction (other than a lease) described
in and complying with the conditions listed above in which the Company is not
the Surviving Person and the Surviving Person is to assume all of the
Obligations of the Company under the Securities, this Indenture and the
Registration Rights Agreement pursuant to a supplemental indenture, such
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company and the Company
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shall be discharged from its Obligations under this Indenture and the
Securities.
For all purposes of this Indenture and the Securities
(including the provision of this Section 8.02 and the covenants described in
Sections 10.11, 10.14 and 10.16), Subsidiaries of any Surviving Entity shall,
upon such transaction or series of related transactions, become Restricted
Subsidiaries unless and until designated as Unrestricted Subsidiaries pursuant
to and in accordance with Section 10.15.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders.
Without the consent of any Holders, the Company, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form and
substance satisfactory to the Trustee, or waiver for any of the following
purposes:
(a) to evidence the succession of another person to the
Company, and the assumption by any such successor of the covenants of
the Company herein and in the Securities;
(b) to add to the covenants of the Company for the benefit of
the Holders, or to surrender any right or power herein conferred upon
the Company, as applicable, herein, in the Securities, as the case may
be;
(c) to cure any ambiguity, to correct or supplement any
provision herein, in the Securities which may be defective or
inconsistent with any other provision herein or to make any other
provisions with respect to matters or questions arising under this
Indenture and the Securities; provided, however, that, in each case,
such provisions shall not materially adversely affect the interests of
the Holders;
(d) to comply with the requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act, as contemplated by Section 9.05 hereof or otherwise;
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(e) to evidence and provide the acceptance of the appointment
of a successor Trustee hereunder;
(f) to mortgage, pledge, hypothecate or grant a security
interest in any property or assets in favor of the Trustee for the
benefit of the Holders as security for the payment and performance of
this Indenture Obligations; or
(g) to increase the rate of interest on the Securities or
otherwise amend its indenture in a manner benefiting the Holders;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such change, agreement or waiver does not materially
adversely affect the interests or legal rights of any Holders.
Section 9.02. Supplemental Indentures, Agreements and Waivers
with Consent of Holders.
With the written consent of the Holders of not less than a
majority in aggregate principal amount at maturity of the Outstanding Securities
delivered to the Company and the Trustee, the Company, when authorized by a
Board Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto satisfactory to the Trustee for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or the Securities, or of modifying in any manner the rights of
the Holders under this Indenture or the Securities. The Holders of not less than
a majority in aggregate principal amount at maturity of the Outstanding
Securities may waive compliance by the Company with any provision of this
Indenture or the Securities. However, no such supplemental indenture, agreement
or instrument, including any waiver pursuant to Section 5.13, shall, without the
written consent or waiver of the Holder of each Outstanding Security affected
thereby:
(a) reduce the principal amount at maturity of, change the
fixed maturity of, or alter the redemption provisions of, the
Securities;
(b) change the currency in which any Securities or amounts
owing thereon are payable;
(c) reduce the percentage of the aggregate principal amount at
maturity outstanding of Securities which must
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consent to an amendment, supplement or waiver or consent to take any
action under this Indenture or the Securities;
(d) impair the right to institute suit for the enforcement of
any payment on or with respect to the Securities;
(e) waive a default in payment with respect to the Securities;
(f) reduce the rate or extend the time for payment of interest
on the Securities;
(g) following the occurrence of a Change of Control or an
Asset Sale, alter the Company's obligation to purchase the Securities
in accordance with this Indenture or waive any default in the
performance thereof; or
(h) affect the ranking of the Securities in a manner adverse
to the Holder.
Upon the written request of the Company accompanied by a copy
of a Board Resolution authorizing the execution of any such supplemental
indenture or other agreement, instrument or waiver, and upon the filing with the
Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall
join with the Company in the execution of such supplemental indenture or other
agreement, instrument or waiver.
It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture or
other agreement, instrument or waiver, but it shall be sufficient if such Act
shall approve the substance thereof.
Section 9.03. Execution of Supplemental Indentures,
Agreements and Waivers.
In executing, or accepting the additional trusts created by,
any supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and
an Officers' Certificate from each obligor under the Securities entering into
such supplemental indenture, agreement, instrument or waiver, each stating that
the execution of such supplemental indenture, agreement, instrument or
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waiver (a) is authorized or permitted by this Indenture and (b) does not violate
the provisions of any agreement or instrument evidencing any other Indebtedness
of the Company or any Subsidiary of the Company. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture, agreement,
instrument or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture, the Securities or otherwise.
Section 9.04. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this
Article Nine, this Indenture and/or the Securities shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture and/or the Securities, as the case may be, for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 9.05. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article
Nine shall conform to the requirements of the Trust Indenture Act as then in
effect.
Section 9.06. Reference in Securities to Supplemental
Indentures.
Securities authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Board of Directors of the Company, to any such supplemental indenture may be
prepared and executed by the Company and authenticated and delivered by the
Trustee upon a Company Order in exchange for Outstanding Securities.
Section 9.07. Record Date.
The Company may, but shall not be obligated to, fix, a record
date for the purpose of determining the Holders entitled to consent to any
supplemental indenture, agreement or instrument or any waiver, and shall
promptly notify the Trustee of any such record date. If a record date is fixed
those persons who were Holders at such record date (or their duly designated
proxies), and only those persons, shall be entitled to
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consent to such supplemental indenture, agreement or instrument or waiver or to
revoke any consent previously given, whether or not such persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date.
Section 9.08. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to
it by a Holder of a Security is a continuing consent by the Holder and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security, even if a notation of the consent is
not made on any Security. However, any such Holder, or subsequent Holder, may
revoke the consent as to his Security or portion of a Security if the Trustee
receives the notice of revocation before the date the amendment or waiver
becomes effective. An amendment or waiver shall become effective in accordance
with its terms and thereafter bind every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of,
premium, if any, and interest on the Securities in accordance with the terms of
the Securities and this Indenture.
Section 10.02. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan in The
City of New York, State of New York, an office or agency where Securities may be
presented or surrendered for payment, where Securities may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Company in respect of the Securities and this Indenture may be served. The
office of the Trustee at its Corporate Trust Office will be such office or
agency of the Company, unless the Company shall designate and maintain some
other office or agency for one or more of such purposes. The Company will give
prompt written notice to the Trustee of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or
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shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside of The City of New York, State of New
York) where the Securities may be presented or surrendered for any or all such
purposes, and may from time to time rescind such designation; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in The City of New York, State
of New York for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and any change in the location
of any such other office or agency.
Section 10.03. Money for Security Payments To Be Held in
Trust.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of, premium, if any, or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Holders entitled thereto a sum sufficient to pay the principal, premium,
if any, or interest so becoming due until such sums shall be paid to such
persons or otherwise disposed of as herein provided, and will promptly notify
the Trustee of its action or failure so to act.
If the Company is not acting as Paying Agent, the Company
will, on or before each due date of the principal of, premium, if any, or
interest on, any Securities, deposit with a Paying Agent a sum in same day funds
sufficient to pay the principal, premium, if any, or interest so becoming due,
such sum to be held in trust for the benefit of the Holders entitled to such
principal, premium or interest, and (unless such Paying Agent is the Trustee)
the Company will promptly notify the Trustee of such action or any failure so to
act.
If the Company is not acting as Paying Agent, the Company will
cause each Paying Agent other than the Trustee to execute and deliver to the
Trustee an instrument in which such Paying Agent will agree with the Trustee,
subject to the provisions of this Section 10.03, that such Paying Agent will:
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(a) hold all sums held by it for the payment of the principal
of, premium, if any, or interest on Securities in trust for the benefit
of the Holders entitled thereto until such sums shall be paid to such
Holders or otherwise disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company (or
any other obligor upon the Securities) in the making of any payment of
principal of, premium, if any, or interest on the Securities;
(c) at any time during the continuance of any such Default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects
with the provisions of this Indenture relating to the duties, rights
and liabilities of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Security and remaining unclaimed for two years after
such principal, premium, if any, or interest has become due and payable shall be
paid to the Company upon receipt of a Company Request therefor, or (if then held
by the Company) will be discharged from such trust; and the Holder of such
Security will thereafter, as an unsecured general creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, will thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in the New York Times and the
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the
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date of such notification or publication, any unclaimed balance of such money
then remaining shall be repaid to the Company.
Section 10.04. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory), licenses and franchises of
the Company and each of the Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or franchise if
the Board of Directors of the Company shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company and
the Restricted Subsidiaries as a whole and that the loss thereof is not adverse
in any material respect to the Holders; provided, further, that the foregoing
will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company
or any of its assets in compliance with the terms of this Indenture.
Section 10.05. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (a) all material taxes,
assessments and governmental charges levied or imposed (i) upon the Company or
any of its Subsidiaries or (ii) upon the income, profits or property of the
Company or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; provided, however, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted.
Section 10.06. Maintenance of Properties.
The Company will cause all material properties owned by the
Company or any of the Restricted Subsidiaries or used or held for use in the
conduct of their respective businesses to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in
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connection therewith may be properly and advantageously conducted at all times;
provided, however, that nothing in this Section 10.06 will prevent the Company
from discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any of the Restricted Subsidiaries and is not
disadvantageous in any material respect to the Holders.
Section 10.07. Insurance.
The Company will at all times keep all of its and the
Restricted Subsidiaries' properties which are of an insurable nature insured
with insurers, believed by the Company in good faith to be financially sound and
responsible, against loss or damage to the extent that property of similar
character is usually and customarily so insured by corporations similarly
situated and owning like properties.
Section 10.08. Books and Records.
The Company will, and will cause each of the Restricted
Subsidiaries to, keep proper books of record and account, in which full and
correct entries will be made of all financial transactions and the assets and
business of the Company and each Restricted Subsidiary of the Company in
accordance with GAAP.
Section 10.09. Reports.
Whether or not the Company has a class of securities
registered under the Exchange Act, the Company will furnish without cost to each
holder of Securities and file with the Trustee and, following the effectiveness
of any Exchange Offer Registration Statement or a Shelf Registration Statement,
file with the SEC (i) within the applicable time period required under the
Exchange Act, after the end of each fiscal year of the Company, the information
required by Form 10-K (or any successor form thereto) under the Exchange Act
with respect to such period, (ii) within the applicable time period required
under the Exchange Act after the end of each of the first three fiscal quarters
of each fiscal year of the Company, the information required by Form 10-Q (or
any successor form thereto) under the Exchange Act with respect to such period
and (iii) any current reports on Form 8-K (or any successor forms) required to
be filed under the Exchange Act.
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Section 10.10. Change of Control.
In the event of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company will be obligated,
within 30 days after the Change of Control Date, to make an offer to purchase (a
"Change of Control Offer") on a business day not later than the 60th day
following the Change of Control Date (the "Change of Control Payment Date") all
of the then outstanding Securities at a purchase price (the "Change of Control
Purchase Price") in cash equal to 101% of the Accreted Value of the Securities
on the Change of Control Payment Date, unless the Change of Control Payment Date
is on or after March 1, 2004, in which case such Change of Control Purchase
Price shall be equal to 101% of the principal amount at maturity thereof, plus
accrued and unpaid interest thereon, if any, to the Change of Control Payment
Date. The Company will be required to purchase all Securities properly tendered
and not withdrawn pursuant to the Change of Control Offer.
Prior to the mailing of the notice, referred to below, but in
any event within 30 days following any Change of Control, the Company covenants
to either (i) repay in full and terminate all commitments under all Indebtedness
under the Credit Facility or offer to repay in full and terminate all
commitments under all Indebtedness under the Credit Facility and to repay the
Indebtedness owed to each lender which has accepted such offer or (ii) obtain
the requisite consents under the Credit Facility to permit the repurchase of the
Securities as provided below. The Company shall first comply with the covenant
in the immediately preceding sentence before it shall be required to repurchase
Securities pursuant to the provisions described herein. The Company's failure to
comply with the two immediately preceding sentences shall constitute an Event of
Default described in clause (iv) and not in clause (ii) under Section 5.01.
In order to effect such Change of Control Offer, the Company
will, not later than the 30th day after the Change of Control Date, be obligated
to mail to each Holder of Securities notice of the Change of Control Offer,
which notice will govern the terms of the Change of Control Offer and will
state, among other things, the procedures that Holders must follow to accept the
Change of Control Offer. The Change of Control Offer will be required to be kept
open for a period of at least 20 business days.
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The notice, which shall govern the terms of the Change of
Control Offer, shall include such disclosures as are required by law and shall
state:
(a) that the Change of Control Offer is being made pursuant to
this Section 10.10 and that all Securities tendered into the Change of
Control Offer will be accepted for payment;
(b) the purchase price (including the amount of accrued
interest, if any) for each Security, the Change of Control Purchase
Date and the date on which the Change of Control Offer expires;
(c) that any Security not tendered for payment will continue
to accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of
the purchase price, any Security accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the Change
of Control Purchase Date;
(e) that Holders electing to have Securities purchased
pursuant to a Change of Control Offer will be required to surrender
their Securities to the Paying Agent at the address specified in the
notice prior to 5:00 p.m., New York City time, on the Change of Control
Purchase Date and must complete any form letter of transmittal proposed
by the Company and acceptable to the Trustee and the Paying Agent;
(f) that Holders of Securities will be entitled to withdraw
their election if the Paying Agent receives, not later than 5:00 p.m.,
New York City time, on the Change of Control Purchase Date, a facsimile
transmission or letter setting forth the name of the Holders, the
principal amount of Securities the Holders delivered for purchase, the
Security certificate number (if any) and a statement that such Holder
is withdrawing his election to have such Securities purchased;
(g) that Holders whose Securities are purchased only in part
will be issued Securities of like tenor equal in principal amount to
the unpurchased portion of the Securities surrendered;
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(h) the instructions that Holders must follow in order to
tender their Securities; and
(i) information concerning the business of the Company, the
most recent annual and quarterly reports of the Company filed with the
SEC pursuant to the Exchange Act (or, if the Company is not required to
file any such reports with the SEC, the comparable reports prepared
pursuant to Section 10.09), a description of material developments in
the Company's business, information with respect to pro forma
historical financial information after giving effect to such Change of
Control and such other information concerning the circumstances and
relevant facts regarding such Change of Control and Change of Control
Offer as would, in the good faith judgment of the Company, be material
to a Holder of Securities in connection with the decision of such
Holder as to whether or not it should tender Securities pursuant to the
Change of Control Offer.
On the Change of Control Payment Date, the Company will (i)
accept for payment Securities or portions thereof tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent money, in
immediately available funds, sufficient to pay the purchase price of all
Securities or portions thereof so tendered and accepted and (iii) deliver to the
Trustee the Securities so accepted together with an Officers' Certificate
setting forth the Securities or portions thereof tendered to and accepted for
payment by the Company. The Paying Agent will promptly mail or deliver to the
Holders of Securities so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail or deliver to such
Holders a new Security of like tenor equal in principal amount to any
unpurchased portion of the Security surrendered. Any Securities not so accepted
shall be promptly mailed or delivered by the Company to the Holder thereof. The
Company will publicly announce the results of the Change of Control Offer not
later than the first Business Day following the Change of Control Purchase Date.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act, and any other applicable
securities laws or regulations in connection with the repurchase of Securities
pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations and any applicable requirements of any securities
exchange on which the Securities are listed conflict with the provisions of this
Section 10.10, the Company will comply with the applicable securities laws and
regulations
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and requirements and shall not be deemed to have breached its obligations under
this Section 10.10 by virtue thereof.
Section 10.11. Limitation on Indebtedness of the Company.
The Company will not, directly or indirectly, Incur,
contingently or otherwise, any Indebtedness (including any Acquired
Indebtedness), except that the Company may Incur each and all of the following:
(a) Indebtedness of the Company evidenced by the Securities
and this Indenture;
(b) Indebtedness represented by a guarantee of (1) the
Company's obligations of amounts outstanding under the Credit Facility
and (2) Indebtedness of a Restricted Subsidiary Incurred under clauses
(b)(2), (e), (h) and (i) of the definition of "Permitted Indebtedness,"
and any refinancing thereof under clause (g) of such definition,
pursuant to Section 10.12; and
(c) Indebtedness of the Company the proceeds of which are used
solely to refinance Indebtedness Incurred under clause (a) above;
provided that (i) the principal amount of Indebtedness incurred
pursuant to this clause (c) (or, if such Indebtedness provides for an
amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration of the maturity thereof, the
original issue price of such Indebtedness) shall not exceed the sum of
(x) if prior to March 1, 2004, the total Accreted Value or, if on or
after March 1, 2004, the aggregate principal amount at maturity of the
Securities refinanced, plus (y) the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing
by means of a tender offer or privately negotiated purchase, plus (z)
the amount of expenses in connection therewith, (ii) the new
Indebtedness refinancing such Indebtedness shall have an Weighted
Average Life to Stated Maturity that is equal to or greater than the
remaining Weighted Average Life Stated Maturity of such Indebtedness
and shall have no scheduled principal payment prior to the 91st day
after the Stated Maturity for the final scheduled principal payment of
such Indebtedness, and (iii) in the case of any partial refinancing of
the Securities, such new Indebtedness shall be unsecured.
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Section 10.12. Limitation on Additional Indebtedness of
Subsidiaries of the Company.
The Company will not permit any Restricted Subsidiary to,
directly or indirectly, Incur, contingently or otherwise, any Indebtedness
(including any Acquired Indebtedness), except for Permitted Indebtedness;
provided that the Restricted Subsidiaries will be permitted to Incur
Indebtedness (including Acquired Indebtedness), if, at the time of and
immediately after giving pro forma effect to such Incurrence (including the
application of the net proceeds therefrom), the Debt to Operating Cash Flow
Ratio of the Company would be less than or equal to 6.5 to 1.0.
Section 10.13. Statement by Officers as to Default.
(a) The Company will deliver to the Trustee, within 95 days
after the end of each fiscal year of the Company ending after the date hereof, a
written statement signed by the chairman or a chief executive officer, the
principal financial officer or principal accounting officer of the Company,
stating (i) that a review of the activities of the Company during the preceding
fiscal year has been made under the supervision of the signing officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations under this Indenture and (ii) that, to the knowledge
of each officer signing such certificate, the Company has kept, observed,
performed and fulfilled each and every covenant and condition contained in this
Indenture and is not in default in the performance or observance of any of the
terms, provisions, conditions and covenants hereof (or, if a Default shall have
occurred, describing all such Defaults of which such officers may have
knowledge, their status and what action the Company is taking or proposes to
take with respect thereto).
(b) When any Default under this Indenture has occurred and is
continuing, or if the Trustee or any Holder or the trustee for or the holder of
any other evidence of Indebtedness of the Company or any Restricted Subsidiary
gives any notice or takes any other action with respect to a claimed default
(other than with respect to Indebtedness (other than Indebtedness evidenced by
the Securities) in the principal amount of less than $5,000,000), the Company
will promptly notify a Responsible Officer of the Trustee of such Default,
notice or action and will deliver to the Trustee by registered or certified mail
or by telegram, or facsimile transmission followed by hard copy by registered or
certified mail an Officers' Certificate specifying such event, notice or other
action within five
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Business Days after the Company becomes aware of such occurrence and what action
the Company is taking or proposes to take with respect thereto.
Section 10.14. Limitation on Liens.
The Company will not, directly or indirectly, create, incur,
assume or suffer to exist any Lien of any kind upon any of its property or
assets, whether now owned or acquired after the Issue Date, or any proceeds
therefrom, or assign or convey any right to receive income therefrom to secure
either (i) Subordinated Indebtedness, unless the Securities are secured by a
Lien on such property, assets or proceeds that is senior in priority to the
Liens securing such Subordinated Indebtedness, or (ii) any Indebtedness of the
Company that is not Subordinated Indebtedness, unless the Securities are equally
and ratably secured with the Liens securing such other Indebtedness, except, in
either case for Liens to secure Indebtedness on cash representing the proceeds
of such Indebtedness or Government Securities acquired with such cash and
pledged for the purpose of providing for the payment of interest on such
Indebtedness and except for Liens to secure the Company's guarantee of the
Credit Facility and Interest Rate Protection Obligations of a Restricted
Subsidiary.
Section 10.15. Designation of Unrestricted Subsidiaries.
(a) The Company may designate after the Issue Date any
Subsidiary of the Company (other than Systems) as an "Unrestricted
Subsidiary" under this Section 10.15 (a "Designation") only if:
(i) no Default or Event of Default shall have
occurred and be continuing at the time of or after giving
effect to such Designation;
(ii) at the time of and after giving effect to such
Designation, Systems could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the
proviso in Section 10.12; and
(iii) the Company would be permitted to make an
Investment (other than a Permitted Investment) at the time of
Designation (assuming the effectiveness of such Designation)
pursuant to the first paragraph or subclause (iv) of the
second paragraph of Section 10.16 in an amount (the
"Designation Amount") equal
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to the Fair Market Value of the Company's proportionate
interest of the Company and the Restricted Subsidiaries in
such Subsidiary on such date.
Notwithstanding the above, no Subsidiary of the Company shall
be designated an Unrestricted Subsidiary if such Subsidiary distributes,
directly or indirectly, DIRECTV Services pursuant to an agreement with the NRTC
or has any right, title or interest in the revenue or profits in, or holds any
Lien in respect of, any such agreement.
Neither the Company nor any Restricted Subsidiary shall at any
time (x) provide credit support for, subject any of its property or assets
(other than the Equity Interests of any Unrestricted Subsidiary) to the
satisfaction of, or guarantee, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary, or (z) be directly or indirectly liable for any
Indebtedness that provides that the Holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary,
except, in the case of clause (x) or (y), to the extent otherwise permitted
under the terms of this Indenture, including, without limitation, pursuant to
Sections 10.16 and 10.19.
(b) The Company may revoke any Designation of a Subsidiary as
an Unrestricted Subsidiary (a "Revocation") if:
(i) no Default or Event of Default shall have
occurred and be continuing at the time of and after giving
effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation
would, if incurred at such time, have been permitted to be
incurred for all purposes of this Indenture.
All Designations and Revocations must be evidenced by a Board
Resolution, delivered to the Trustee certifying compliance with the foregoing
provisions.
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Section 10.16. Limitation on Restricted Payments.
The Company will not, and will not permit any of the
Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment
unless:
(i) no Default shall have occurred and be continuing at the
time of or after giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted
Payment, a Restricted Subsidiary would be able to Incur $1.00 of
Indebtedness under the Debt to Operating Cash Flow Ratio set forth in
Section 10.12; and
(iii) immediately after giving effect to such Restricted
Payment, the aggregate amount of all Restricted Payments and
Designation Amounts declared or made on or after the Issue Date does
not exceed an amount equal to the sum of, without duplication, (a) the
difference between (x) the Cumulative Operating Cash Flow determined
for the period commencing on the Issue Date and ending on the last day
of the most recent fiscal quarter immediately preceding the date of
such Restricted Payment and (y) 150% of Cumulative Consolidated
Interest Expense determined for the period commencing on the Issue Date
and ending on the last day of the most recent fiscal quarter
immediately preceding the date of such Restricted Payment, plus (b) the
aggregate net cash proceeds received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from
the issue and sale (other than to a Subsidiary of the Company) of its
Qualified Equity Interests after the Issue Date, plus (c) the aggregate
net cash proceeds received by the Company or any Restricted Subsidiary
after the Issue Date upon the conversion of, or exchange for,
Indebtedness of the Company or a Restricted Subsidiary that has been
converted into or exchanged for Qualified Equity Interests of the
Company, plus (d) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment (other than an Investment
made pursuant to clause (iv) of the following paragraph) made after the
Issue Date, an amount (to the extent not included in the computation of
Cumulative Operating Cash Flow) equal to the lesser of: (i) the return
of capital with respect to such Investment and (ii) the amount of such
Investment that was treated as a Restricted Payment, plus (e) so long
as the Designation thereof was treated as a Restricted Payment made
after the Issue Date,
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with respect to any Unrestricted Subsidiary that has been redesignated
as a Restricted Subsidiary after the Issue Date in accordance with
Section 10.15, the Company's proportionate interest equal to the Fair
Market Value of any Unrestricted Subsidiary that has been redesignated
as a Restricted Subsidiary after the Issue Date in accordance with
Section 10.15 not to exceed in any case the Designation Amount with
respect to such Restricted Subsidiary upon its Designation, minus (f)
the greater of (i) $0 and (ii) the Designation Amount (measured as of
the date of Designation) with respect to any Subsidiary of the Company
that has been Designated as an Unrestricted Subsidiary after the Issue
Date in accordance with Section 10.15 and minus (g) 50% of the
aggregate principal amount of outstanding Indebtedness included in the
calculation of clause (c) of the definition of Permitted Indebtedness
at the time of such Restricted Payment to the extent funded with the
net cash proceeds received by the Company either (x) as capital
contributions to the Company after the Issue Date or (y) from the issue
and sale (other than to a Subsidiary of the Company) of its Qualified
Equity Interests after the Issue Date. For purposes of the preceding
clauses (b) and (c) and without duplication and for purposes of the
definition of Total Incremental Invested Equity, the value of the
aggregate net cash proceeds received by the Company upon the issuance
of Qualified Equity Interests either upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the
exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or
rights plus the incremental cash received by the Company upon the
conversion, exchange or exercise thereof.
The provisions of this Section 10.16 shall not prohibit: (i)
the payment of any dividend or other distribution within 60 days after the date
of declaration thereof, if at such date of declaration such payment would comply
with the provisions of this Indenture; (ii) so long as no Default shall have
occurred and be continuing, the purchase, redemption, retirement or other
acquisition of any Equity Interests of the Company (A) in exchange for or
conversion into or (B) out of the net cash proceeds of the substantially
concurrent issue and sale (other than to a Subsidiary of the Company) of Equity
Interests of the Company (other than Disqualified Equity Interests); provided
that any such net cash proceeds pursuant to the immediately preceding subclause
(B) are excluded from clause (iii)(b) of the preceding paragraph; (iii) so long
as no
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Default shall have occurred and be continuing, the purchase, redemption,
defeasance or other acquisition or retirement for value of Subordinated
Indebtedness made by exchange for (including any such exchange pursuant to the
exercise of a conversion right or privilege in which cash is paid in lieu of
fractional shares or scrip), or out of the net cash proceeds of a substantially
concurrent issue or sale (other than to a Subsidiary of the Company) of, (A)
Equity Interests (other than Disqualified Equity Interests) of the Company;
provided that any such net cash proceeds, to the extent so used, are excluded
from clause (iii) of the preceding paragraph, and/or (B) other Subordinated
Indebtedness, having a Weighted Average Life to Maturity that is equal to or
greater than the Weighted Average Life to Maturity of the Subordinated
Indebtedness being purchased, redeemed, defeased or otherwise acquired or
retired; (iv) Investments constituting Restricted Payments in Persons engaged
primarily in a Permitted Business in an amount not to exceed $10.0 million
outstanding at any time; (v) the making of any Investment in or payment of any
dividend or distribution by the Company to Holdings for bona fide costs and
operating expenses of Holdings directly related to the operations of Holdings
and its Subsidiaries; and (vi) the payment of any dividend or distribution by
the Company to Holdings to enable it to purchase, redeem, or otherwise acquire
or retire for value Equity Interests of Holdings held by employees or former
employees of the Company, or any Subsidiary of the Company (or their estates or
beneficiaries under their estates) upon death, disability, retirement or
termination of employment, not to exceed $1.0 million in any year or $3.0
million in the aggregate since the Issue Date plus, in each case, the amount of
the net proceeds received by the Company or any such Subsidiary from life
insurance policies on the life of the employee whose Equity Interests are being
purchased, redeemed or otherwise acquired or retired for value.
In no event shall a Restricted Payment made on the basis of
consolidated financial statements prepared in good faith in accordance with GAAP
be subject to rescission or constitute a Default by reason of any requisite
subsequent restatement of such financial statements which would have made such
Restricted Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible
under this covenant, amounts expended pursuant to clauses (i), (iv) and (vi) of
the second preceding paragraph shall be included as Restricted Payments and
amounts expended pursuant to clauses (ii), (iii) and (v) shall be excluded. The
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amount of any non-cash Restricted Payment shall be deemed to be equal to the
Fair Market Value thereof at the date of the making of such Restricted Payment.
Section 10.17. Ownership of Systems.
The Company will at all times be the legal and beneficial
owner (as defined in this Indenture) of 100% of the Capital Stock of Systems.
Section 10.18. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries.
The Company will not, and will not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (b) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary, or (c) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) restrictions under the 12 3/8% Notes
Indenture, as the same may from time to time be modified or amended and
restrictions under agreements governing Indebtedness Incurred to refinance the
12 3/8% Notes (or refinancings thereof), in each case, so long as the
restrictions as modified or amended or contained in such agreements governing
such refinancing Indebtedness, as the case may be, are no less favorable to the
holders of the Securities in any material respect than the restrictions under
the 12 3/8% Notes Indenture on the Issue Date; (ii) restrictions under the
Credit Facility so long as such restrictions are no less favorable to the
holders of the Securities in any material respect than the restrictions under
the Credit Facility in effect on the Issue Date; (iii) restrictions under other
agreements governing Indebtedness Incurred in compliance with this Indenture,
provided that any such restrictions permit the payment of dividends to the
Company in amounts and at the times necessary to permit the payment of cash
interest due on the Securities on and after September 1, 2004, but no such
permission need apply when a default or event of default in respect of such
Indebtedness has occurred and is
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continuing; (iv) applicable law; (v) any instrument governing Indebtedness or
Equity Interests of an Acquired Person acquired by the Company or any Restricted
Subsidiary as in effect at the time of such acquisition (except to the extent
such Indebtedness was incurred by such Acquired Person in connection with, as a
result of or in contemplation of such acquisition); provided, however, that such
encumbrances and restrictions are not applicable to the Company or any
Restricted Subsidiary, or the properties or assets of the Company or any
Restricted Subsidiary, other than the Acquired Person; (vi) customary
non-assignment provisions in leases and other contracts entered into in the
ordinary course of business and consistent with past practices (including,
without limitation, non-assignment provisions in agreements between the Company,
Systems or any Restricted Subsidiary and the NRTC with respect to DBS services);
(vii) Purchase Money Indebtedness for property acquired in the ordinary course
of business that only imposes encumbrances and restrictions on the property so
acquired; and (viii) any agreement for the sale or disposition of the Equity
Interests or assets of any Restricted Subsidiary; provided, however, that such
encumbrances and restrictions described in this clause (viii) are only
applicable to such Restricted Subsidiary or assets, as applicable, and any such
sale or disposition is made in compliance with Section 10.19 to the extent
applicable thereto.
Section 10.19. Disposition of Proceeds of Asset Sales.
The Company will not, and will not permit any Restricted
Subsidiary to, make any Asset Sale unless (a) the Company or such Restricted
Subsidiary, as the case may be, receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the assets sold or otherwise
disposed of and (b) at least 85% of such consideration consists of (A) cash or
Cash Equivalents, (B) properties and capital assets to be used in a Permitted
Business and/or (C) Equity Interests in one or more Persons that are primarily
engaged in a Permitted Business so long as upon the consummation of any sale in
accordance with this clause (C), such Person becomes a Wholly Owned Restricted
Subsidiary; provided, however, that, in the case of sales pursuant to clauses
(B) and (C) not involving solely an exchange of a Permitted Business and cash
(if any), if the Fair Market Value of the assets sold or otherwise disposed of
in a single transaction or series of transactions exceeds $5.0 million, the
Company shall be required to obtain the written opinion from an Independent
Financial Advisor (and file
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such opinion with the Trustee) stating that the terms of such Asset Sale are
fair, from a financial point of view, to the Company or the Restricted
Subsidiary involved in such Asset Sale. The amount of any (i) Indebtedness
(other than any Subordinated Indebtedness) of the Company or any Restricted
Subsidiary that is actually assumed by the transferee in such Asset Sale and
from which the Company and the Restricted Subsidiaries are fully released shall
be deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or the Restricted Subsidiaries and (ii)
notes or other similar obligations received by the Company or the Restricted
Subsidiaries from such transferee that are immediately converted, sold or
exchanged (or are converted, sold or exchanged within thirty days of the related
Asset Sale) by the Company or the Restricted Subsidiaries into cash shall be
deemed to be cash, in an amount equal to the net cash proceeds realized upon
such conversion, sale or exchange for purposes of determining the percentage of
cash consideration received by the Company or the Restricted Subsidiaries.
Notwithstanding the foregoing, during the term of the Securities, the Company
and the Restricted Subsidiaries may engage in Asset Sales involving up to $10.0
million without complying with clause (b) of the first sentence of this
paragraph.
Notwithstanding the foregoing, the Company or such Restricted
Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds of any Asset
Sale within 365 days of receipt thereof to repay or purchase or retire
Indebtedness of Systems and permanently reduce any related commitment, (ii)
apply such Net Cash Proceeds to acquire, construct or improve properties and
capital assets to be used on a Permitted Business within 365 days after the
receipt thereof, or (iii) any combination of the foregoing.
To the extent that all or part of the Net Cash Proceeds of any
Asset Sale are not applied (or, in the case of clause (i) above, an offer to
purchase or retire such Indebtedness of Systems has not been made) within 365
days of such Asset Sale as described in clause (i) or (ii) of the immediately
preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company shall, within 20 days after such 365th day, make an
offer to purchase ("Offer to Purchase") all outstanding Securities, at a
purchase price in cash equal to 100% of the Accreted Value of the Securities on
the Purchase Date, unless the Purchase Date is on or after March 1, 2004, in
which case such purchase price shall be an amount in cash equal to 100% of the
principal amount at maturity thereof, plus accrued and unpaid interest
(including Additional Interest, if
<PAGE> 108
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any) thereon, if any, to the Purchase Date; provided, however, that the Offer to
Purchase may be deferred until there are aggregate Unutilized Net Cash Proceeds
equal to or in excess of $10.0 million, at which time the entire amount of such
Unutilized Net Cash Proceeds, and not just the amount in excess of $10.0
million, shall be applied as required pursuant to this paragraph.
With respect to any Offer to Purchase effected pursuant to
this covenant, to the extent that the principal amount at maturity of the
Securities tendered pursuant to such Offer to Purchase exceeds the Net Cash
Proceeds to be applied to the purchase thereof, such Securities shall be
purchased pro rata based on the principal amount at maturity of such Securities
tendered by each holder.
In the event that the Company makes an Offer to Purchase the
Securities, the Company shall comply with any applicable securities laws and
regulations, including any applicable requirements of Section 14(e) of, and Rule
14e-1 under, the Exchange Act, and any violation of the provisions of the
Indenture relating to such Offer to Purchase occurring as a result of such
compliance shall not be deemed an Event of Default or an event that with the
passing of time or giving of notice, or both, would constitute an Event of
Default.
Each holder of Securities shall be entitled to tender all or
any portion of the Securities owned by such holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Security tendered
must be tendered in an integral multiple of $1,000 principal amount at maturity
and subject to any proration among tendering holders as described above.
Section 10.20. Limitation on Issuances and Sales of Preferred
Equity Interests by Restricted Subsidiaries.
The Company (i) will not permit any Restricted Subsidiary to
issue any Preferred Equity Interests (other than to the Company or a Restricted
Subsidiary) and (ii) will not permit any Person (other than the Company or a
Restricted Subsidiary) to own any Preferred Equity Interests of any Restricted
Subsidiary.
<PAGE> 109
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Section 10.21. Limitations on Conduct of Business of the
Company and the Restricted Subsidiaries.
The Company will not, conduct any trade or business, other
than through a Subsidiary and the ownership of Common Stock of Systems, and the
Company will not permit any of the Restricted Subsidiaries to be primarily
engaged in any business, except for a Permitted Business.
Section 10.22. Limitation on Transactions with Affiliates.
The Company will not, and will not permit, cause or suffer any
Restricted Subsidiary to, conduct any business or enter into any transaction (or
series of related transactions that are similar or part of a common plan) with
or for the benefit of any of their respective Affiliates or any beneficial
holder of 10% or more of the Common Stock of the Company or any officer or
director of the Company (each, an "Affiliate Transaction"), unless the terms of
the Affiliate Transaction are set forth in writing, and are fair and reasonable
to the Company or such Restricted Subsidiary, as the case may be. Each Affiliate
Transaction involving aggregate payments or other Fair Market Value in excess of
$5.0 million shall be approved by a majority of the Board of Directors, such
approval to be evidenced by a board resolution stating that the Board of
Directors has determined that such transaction or transactions comply with the
foregoing provisions. In addition to the foregoing, each Affiliate Transaction
involving aggregate consideration of $10.0 million or more shall be approved by
a majority of the Disinterested Directors; provided that, in lieu of such
approval by the Disinterested Directors, the Company may obtain a written
opinion from an Independent Financial Advisor stating that the terms of such
Affiliate Transaction to the Company or the Restricted Subsidiary, as the case
may be, are fair from a financial point of view.
Notwithstanding the foregoing, the restrictions set forth in
this Section 10.22 shall not apply to (i) transactions with or among the Company
and any Restricted Subsidiary or between or among Restricted Subsidiaries; (ii)
customary directors' fees, indemnification and similar arrangements, consulting
fees, employee salaries, bonuses or employment agreements, compensation or
employee benefit arrangements and incentive arrangements with any officer,
director or employee of the Company entered into in the ordinary course of
business (including customary benefits thereunder) and payments under any
indemnification
<PAGE> 110
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arrangements permitted by applicable law; (iii) any transactions undertaken
pursuant to any other contractual obligations in existence on the Issue Date (as
in effect on the Issue Date); (iv) any Restricted Payments made in compliance
with Section 10.16; (v) loans, advances and reimbursements to officers,
directors and employees of the Company and the Restricted Subsidiaries for
travel, entertainment, moving and other relocation expenses, in each case made
in the ordinary course of business and consistent with past business practices;
(vi) the pledge of Equity Interests of Unrestricted Subsidiaries to support the
Indebtedness thereof; (vii) the sale of products or property by any Person to
the Company or a Restricted Subsidiary, or by the Company or any Restricted
Subsidiary to any Person, in the ordinary course of business and consistent with
past practice and (viii) the issuance and sale by Systems of Qualified Equity
Interests.
Section 10.23. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company and any
other obligor on the Securities will furnish to the Trustee an Officers'
Certificate stating that all conditions precedent, if any, provided for in this
Indenture (including any covenants compliance with which constitutes a condition
precedent) relating to the proposed action have been complied with, and an
Opinion of Counsel stating that in the opinion of such counsel all such
conditions precedent, if any, have been complied with, except that, in the case
of any such application or request as to which the furnishing of such documents,
certificates and/or opinions is specifically required by any provision of this
Indenture relating to such particular application or request, no additional
certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture will include:
(i) a statement that each individual signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
<PAGE> 111
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(iii) a statement that, in the opinion of each such
individual, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether
such covenant or condition has been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
Section 11.01. Right of Redemption.
If the Company elects to redeem Securities pursuant to
Paragraph 3 of the Initial Notes or Paragraph 2 of the Exchange Notes, it shall
notify the Trustee of the Redemption Date and principal amount at maturity of
Securities to be redeemed.
Section 11.02. Applicability of Article.
Redemption of Securities at the election of the Company or
otherwise, as permitted or required by any provision of this Indenture, shall be
made in accordance with such provision and this Article.
Section 11.03. Election To Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant
to Section 11.01 shall be evidenced by a Board Resolution and an Officers'
Certificate. In case of any redemption at the election of the Company, the
Company shall, at least 60 days prior to the Redemption Date fixed by the
Company (unless a shorter notice period shall be satisfactory to the Trustee),
notify the Trustee in writing of such Redemption Date and of the principal
amount at maturity of Securities to be redeemed.
Section 11.04. Selection by Trustee of Securities To Be
Redeemed.
In the case of a partial redemption, selection of the
Securities for redemption will be made pro rata, by lot or such
<PAGE> 112
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other method as the Trustee in its sole discretion deems appropriate and just;
provided that any redemption pursuant to the provisions relating to a Public
Equity Offering shall be made on a pro rata basis or on as nearly a pro rata
basis as practicable (subject to procedures of the Depository). No Securities of
a principal amount at maturity of $1,000 or less shall be redeemed in part.
Notice of redemption shall be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each Holder of Securities to be
redeemed at its registered address. If any Security is to be redeemed in part
only, the notice of redemption that relates to such Security shall state the
portion of the principal amount at maturity thereof to be redeemed. A new
Security in a principal amount at maturity equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon surrender for
cancellation of the original Security. Upon giving of a redemption notice,
interest on Securities called for redemption will cease to accrue from and after
the date fixed for redemption (unless the Company defaults in providing the
funds for such redemption) and such Securities will cease to be outstanding.
The Trustee shall promptly notify the Company and each
Security Registrar in writing of the Securities selected for partial redemption
and the principal amount at maturity thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Securities shall
relate, in the case of any Security redeemed or to be redeemed only in part, to
the portion of the principal amount at maturity of such Security which has been
or is to be redeemed.
Section 11.05. Notice of Redemption.
Notice of redemption will be given by first-class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
Redemption Date, to each Holder of Securities to be redeemed, at the address of
such Holder appearing in the Security Register.
All notices of redemption will fully identify the Securities
and will state:
(i) the Redemption Date;
(ii) the Redemption Price;
<PAGE> 113
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(iii) if less than all Outstanding Securities are to be
redeemed, the identification of the particular Securities to be
redeemed;
(iv) in the case of a Security to be redeemed in part, the
principal amount at maturity of such Security to be redeemed and that
after the Redemption Date upon surrender of such Security, a new
Security or Securities in the aggregate principal amount at maturity
equal to the unredeemed portion thereof shall be issued;
(v) that Securities called for redemption must be surrendered
to the Paying Agent to collect the Redemption Price;
(vi) that on the Redemption Date the Redemption Price shall
become due and payable upon each such Security or portion thereof, and
that (unless the Company shall default in payment of the Redemption
Price) interest thereon shall cease to accrue on and after said date;
(vii) the place or places where such Securities are to be
surrendered for payment of the Redemption Price;
(viii) the CUSIP number relating to such Securities; and
(ix) the paragraph of the Securities pursuant to which the
Securities are being redeemed.
Notice of redemption of Securities to be redeemed at the
election of the Company will be given by the Company or, at the Company's
written request, by the Trustee in the name and at the expense of the Company.
The notice if mailed in the manner herein provided will be
conclusively presumed to have been given, whether or not the Holder receives
such notice. In any case, failure to give such notice by mail or any defect in
the notice to the Holder of any Security designated for redemption as a whole or
in part will not affect the validity of the proceedings for the redemption of
any other Security.
Section 11.06. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company will deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold
<PAGE> 114
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in trust as provided in Section 10.03) an amount of money in same day funds
sufficient to pay the Redemption Price of, and accrued interest on, all the
Securities or portions thereof which are to be redeemed on that date.
Section 11.07. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the
Securities so to be redeemed will, on the Redemption Date, become due and
payable at the Redemption Price therein specified and from and after such date
(unless the Company shall default in the payment of the Redemption Price) such
Securities will cease to bear interest. Upon surrender of any such Security for
redemption in accordance with said notice, such Security will be paid by the
Company at the Redemption Price; provided, however, that installments of
interest whose Stated Maturity is on or prior to the Redemption Date will be
payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such on the relevant Regular Record Dates according to
the terms and the provisions of Section 3.07.
If any Security called for redemption shall not be so paid
upon surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate then borne by
such Security.
Section 11.08. Securities Redeemed or Purchased in Part.
Any Security which is to be redeemed or purchased only in part
shall be surrendered to the Paying Agent at the office or agency maintained for
such purpose pursuant to Section 10.02 (with, if the Company, the Security
Registrar or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to, the Company, the Security
Registrar or the Trustee duly executed by the Holder thereof or such Holder's
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder in aggregate principal amount at maturity equal to, and
in exchange for, the unredeemed portion of the principal of the Security so
surrendered that is not redeemed or purchased.
<PAGE> 115
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ARTICLE TWELVE
SATISFACTION AND DISCHARGE
Section 12.01. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect (except as
to surviving rights or registration of transfer or exchange of Securities herein
expressly provided for) and the Trustee, on written demand of and at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when either
(a) all Securities theretofore authenticated and delivered
(other than (A) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 3.06 hereof
and (B) Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust, as
provided in Section 10.03) have been delivered to the Trustee for
cancellation; or
(b) (i) all such Securities not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company
has irrevocably deposited or caused to be deposited with the Trustee in
trust an amount of money in dollars sufficient to pay and discharge the
entire Indebtedness on such Securities not theretofore delivered to the
Trustee for cancellation, for the principal amount at maturity of,
premium, if any, and accrued interest to the date of such deposit;
(ii) the Company has paid all other sums payable hereunder
by the Company; and
(iii) the Company has delivered to the Trustee (i)
irrevocable instructions to apply the deposited money toward payment of
the Securities at maturity or on the Redemption Dates thereof, as the
case may be, and (ii) an Officers' Certificate and an Opinion of
Counsel each stating that all conditions precedent herein provided for
relating to the satisfaction and discharge of this Indenture have been
complied with.
<PAGE> 116
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6.07 and, if money shall
have been deposited with the Trustee pursuant to subclause (a)(ii) of this
Section 12.01, the obligations of the Trustee under Section 12.02 and the last
paragraph of Section 10.03 shall survive such satisfaction and discharge.
Section 12.02. Application of Trust Money.
Subject to the provisions of the last paragraph of Section
10.03, all money deposited with the Trustee pursuant to Section 12.01 shall be
held in trust and applied by it, in accordance with the provisions of the
Securities and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the persons entitled thereto, of the principal of,
premium, if any, and interest on the Securities for whose payment such money has
been deposited with the Trustee.
[signatures on following pages]
<PAGE> 117
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IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the day and year first above written.
GOLDEN SKY DBS, INC.
By: /s/ RODNEY A. WEARY
-------------------------------------------
Name: Rodney A. Weary
Title: Chief Executive Officer
By: /s/ JOHN R. HAGER
-------------------------------------------
Name: John R. Hager
Title: Chief Financial Officer
UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee
By: /s/ GERARD F. GANEY
-------------------------------------------
Name: Gerard F. Ganey
Title: Senior Vice President
<PAGE> 118
EXHIBIT A-1
[Form of Security]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR
OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S, (2) AGREES
THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER
PERIOD AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR
PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF
ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF
THIS SECURITY OR (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE
LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED
INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE
ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION
OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE
TO EACH PERSON
A-1-1
<PAGE> 119
TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS
GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
A-1-2
<PAGE> 120
GOLDEN SKY DBS, INC.
-----------------
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
CUSIP No. __________
No. ___________ $
This Security is issued with original issue discount for
purposes of Section 1271 et seq. of the Internal Revenue Code. For each $1,000
of principal amount of this Security, the issue price is $518.12 and the amount
of original issue discount is $886.88. The issue date of this Security is
February 19, 1999 and the yield to maturity is 13 1/2%.
GOLDEN SKY DBS, INC., a corporation incorporated under the
laws of the State of Delaware (herein called the "Company," which term includes
any successor corporation under the Indenture hereinafter referred to), for
value received, hereby promises to pay to _______________ or registered assigns,
the principal sum of _______________ Dollars on March 1, 2007, at the office or
agency of the Company referred to below, and to pay interest thereon on March 1
and September 1 (each an "Interest Payment Date"), of each year, commencing on
September 1, 2004, accruing from March 1, 2004 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 13 1/2% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Security (or one
or more Predecessor Securities) is registered at the close of business on
February 15 or August 15 (each a "Regular Record Date"), whether or not a
Business Day, as the case may be, next preceding such Interest Payment Date. Any
such interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the then applicable interest rate borne by the Securities,
to the extent lawful, shall forthwith cease to be payable to the Holder on such
Regular Record Date, and may be paid to the
A-1-3
<PAGE> 121
person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such defaulted interest to be fixed by the Trustee, notice of which shall be
given to Holders of Securities not less than 10 days prior to such Special
Record Date, or may be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on
this Security will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as such
address shall appear on the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof.
A-1-4
<PAGE> 122
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Security shall not be entitled to any benefit under the Indenture, or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: February 19, 1999 GOLDEN SKY DBS, INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
A-1-5
<PAGE> 123
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Senior Discount Notes due 2007,
Series A, referred to in the within-mentioned Indenture.
Dated: February 19, 1999 UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By:
-----------------------------
Authorized Signatory
A-1-6
<PAGE> 124
[REVERSE OF SECURITY]
1. Indenture. This Security is one of a duly authorized issue
of Securities of the Company designated as its 13 1/2% Senior Discount Notes due
2007, Series A (herein called the "Initial Securities"). The Securities are
limited (except as otherwise provided in the Indenture referred to below) in
aggregate principal amount at maturity to $193,100,000, which may be issued
under an indenture (herein called the "Indenture") dated as of February 19,
1999, by and among the Company and United States Trust Company of New York, as
trustee (herein called the "Trustee," which term includes any successor Trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Securities, and of the terms upon which the
Securities are, and are to be, authenticated and delivered. The Securities
include the Initial Securities, the Private Exchange Securities and the Exchange
Securities, issued in exchange for the Initial Securities pursuant to the
Registration Rights Agreement. The Initial Securities and the Exchange
Securities are treated as a single class of securities under the Indenture.
All capitalized terms used in this Security which are defined
in the Indenture and not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
The terms of the Securities include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in
effect on the date of the Indenture. Notwithstanding anything to the contrary
herein, the Securities are subject to all such terms, and Holders of Securities
are referred to the Indenture and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, premium,
if any, and interest on this Security at the times, place, and rate, and in the
coin or currency, herein prescribed.
A-1-7
<PAGE> 125
2. Registration Rights. Pursuant to the Registration Rights
Agreement by and among the Company and the Initial Purchasers, the Company will
be obligated to consummate an exchange offer pursuant to which the Holder of
this Security shall have the right to exchange this Security for 13 1/2% Senior
Discount Notes due 2007, Series B, of the Company (herein called the "Exchange
Securities"), which have been registered under the Securities Act, in like
principal amount and having identical terms as the Securities (other than as set
forth in this paragraph). The Holders of Securities shall be entitled to receive
certain additional interest payments in the event such exchange offer is not
consummated and upon certain other conditions, all pursuant to and in accordance
with the terms of the Registration Rights Agreement.
3. Redemption. (a) Optional Redemption. The Securities will be
redeemable, at the option of the Company, in whole or in part, at any time on or
after March 1, 2004 upon not less than 30 nor more than 60 days' written notice
at the redemption prices (expressed as percentages of principal amount at
maturity) set forth below, plus accrued and unpaid interest thereon, if any, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on March 1 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004....................................................... 106.750%
2005....................................................... 103.375%
2006 and thereafter........................................ 100.000%
</TABLE>
(b) Optional Redemption upon Public Equity Offerings. On or
prior to March 1, 2002, the Company may, at its option, redeem up to 35% of the
originally issued aggregate principal amount at maturity of the Securities, at a
redemption price in cash equal to 113.5% of the Accreted Value of the Securities
at the date of redemption solely with the net proceeds of a Public Equity
Offering of the Company or Holdings 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 the
Securities is outstanding following such redemption. Notice of any such
redemption must be given not later than 60 days after the consummation of any
sale resulting in the requisite gross proceeds.
A-1-8
<PAGE> 126
(c) Mandatory Redemption. The Company will not be required to
make any mandatory sinking fund payments in respect of the Securities. However,
(i) following the occurrence of a Change of Control, the Company will be
required to make an offer to purchase all outstanding Securities at a price
equal to 101% of the Accreted Value thereof, or if the Change of Control occurs
on or after March 1, 2004, the principal amount at maturity thereof (in each
case determined at the date of purchase), plus accrued interest thereon, if any,
to the date of purchase and (ii) upon the occurrence of an Asset Sale, the
Company may be obligated to make an offer to purchase all or a portion of the
outstanding Securities at a price equal to 100% of the Accreted Value thereof,
or if the Asset Sale occurs on or after March 1, 2004, the principal amount at
maturity thereof (determined at the date of purchase), plus accrued and unpaid
interest, if any, to the date of purchase.
(d) Interest Payments. In the case of any redemption of Series
A Securities, interest installments whose Stated Maturity is on or prior to the
Redemption Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of business on the relevant
Record Date referred to on the face hereof. Securities (or portions thereof) for
whose redemption and payment provision is made in accordance with the Indenture
shall cease to bear interest from and after the Redemption Date.
(e) Partial Redemption. In the event of redemption of this
Series A Security in part only, a new Series A Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
4. Offers to Purchase. Section 10.10 and 10.19 of the
Indenture provide that upon the occurrence of a Change of Control and following
certain Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Securities in accordance with the procedures set forth in the Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Securities, plus all accrued
and unpaid interest, if any, to and including the date the Securities are paid,
may be declared due and payable in the manner and with the effect provided in
the Indenture.
A-1-9
<PAGE> 127
6. Defeasance. The Indenture contains provisions (which
provisions apply to this Security) for defeasance at any time of (a) the entire
indebtedness of the Company and (b) certain restrictive covenants and related
Defaults and Events of Default, in each case upon compliance by the Company with
certain conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount at maturity of
the Securities at the time Outstanding. The Indenture also contains provisions
permitting the Holders of specified percentages in aggregate principal amount at
maturity of the Securities at the time Outstanding, on behalf of the Holders of
all the Securities, to waive compliance by the Company with certain provisions
of the Indenture and certain past Defaults under the Indenture and this Security
and their consequences. Any such consent or waiver by or on behalf of the Holder
of this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent or waiver is made upon this Security.
8. Denominations, Transfer and Exchange. The Securities are
issuable only in registered form without coupons in denominations of $1,000
principal amount at maturity and any integral multiple thereof. As provided in
the Indenture and subject to certain limitations therein set forth, the
Securities are exchangeable for a like aggregate principal amount at maturity of
Securities of a different authorized denomination, as requested by the Holder
surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable on
the Security Register of the Company, upon surrender of this Security for
registration of transfer at the office or agency of the Company maintained for
such purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Registrar duly executed by,
the Holder hereof or his attorney duly authorized in writing, and thereupon
A-1-10
<PAGE> 128
one or more new Securities, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Securities, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
9. Persons Deemed Owners. Prior to and at the time of due
presentment of this Security for registration of transfer, the Company, the
Trustee and any agent of the Company or the Trustee may treat the person in
whose name this Security is registered as the owner hereof for all purposes,
whether or not this Security shall be overdue, and neither the Company, the
Trustee nor any agent shall be affected by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Security upon
written request and without charge a copy of the Indenture. Requests may be made
to: Golden Sky DBS, Inc., 605 West 47th Street, Suite 300, Kansas City, Missouri
64112.
A-1-11
<PAGE> 129
ASSIGNMENT FORM
If you the holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to ___________________________________
________________________________________________________________________________
(Insert assignee's social security or tax ID number)____________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Security occurring
prior to the date which is the earlier of (i) the date of the declaration by the
SEC of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Security
(which effectiveness shall not have been suspended or terminated at the date of
the transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Security (or any Predecessor Security) or the last date on which the
Company or any Affiliate of the Company was the owner of this Security (or any
Predecessor Security), the undersigned confirms that it has not utilized any
general solicitation or general advertising in connection with the transfer and
that:
A-1-12
<PAGE> 130
[Check One]
[ ] (a) this Security is being transferred in compliance with the
exemption from registration under the Securities Act provided
by Rule 144A thereunder.
or
[ ] (b) this Security is being transferred other than in accordance
with (a) above and documents, including (i) a transferee
certificate substantially in the form of Exhibit C to the
Indenture in the case of a transfer to non-QIB Accredited
Investors or (ii) a transferor certificate substantially in
the form of Exhibit D to the Indenture in the case of a
transfer pursuant to Regulation S, are being furnished which
comply with the conditions of transfer set forth in this
Security and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar shall not be obligated to register this Security in the
name of any person other than the Holder hereof unless and until the conditions
to any such transfer of registration set forth herein and in Section 3.17 of the
Indenture shall have been satisfied.
Date: _______________________ Your signature: _________________________________
(Sign exactly as your name
appears on the other side of this
Security)
By:______________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:____________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing
this Security for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional
A-1-13
<PAGE> 131
buyer" within the meaning of Rule 144A under the Securities Act and is aware
that the sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Company as the undersigned has
requested pursuant to Rule 144A (including the information specified in Rule
144A(d)(4)) or has determined not to request such information and that it is
aware that the transferor is relying upon the undersigned's foregoing
representations in order to claim the exemption from registration provided by
Rule 144A.
Dated:_________________________________ ________________________________
NOTICE: To be executed by an
executive officer
A-1-14
<PAGE> 132
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company
pursuant to Section 10.10 or 10.19 of the Indenture, check the appropriate box:
Section 10.10 [ ] Section 10.19 [ ]
If you wish to have a portion of this Security purchased by
the Company pursuant to Section 10.10 or 10.19 of the Indenture, state the
principal amount at maturity of such portion:
$__________________
Date:__________________________ Your signature:________________________________
(Sign exactly as your name
appears on the other side of
this Security)
By:_____________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:____________________
A-1-15
<PAGE> 133
Exhibit A-2
GOLDEN SKY DBS, INC.
-----------------
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES B
CUSIP No. __________
No. ___________ $
This Security is issued with original issue discount for
purposes of Section 1271 et seq. of the Internal Revenue Code. For each $1,000
of principal amount of this Security, the issue price is $518.12 and the amount
of original issue discount is $886.88. The issue date of this Security is
February 19, 1999 and the yield to maturity is 13 1/2%.
GOLDEN SKY DBS, INC., a corporation incorporated under the
laws of the State of Delaware (herein called the "Company," which term includes
any successor corporation under the Indenture hereinafter referred to), for
value received, hereby promises to pay to _______________ or registered assigns,
the principal sum of _______________ Dollars on March 1, 2007, at the office or
agency of the Company referred to below, and to pay interest thereon on March 1
and September 1 (each an "Interest Payment Date"), of each year, commencing on
September 1, 2004, accruing from March 1, 2004 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 13 1/2% per annum, until the principal hereof is paid or duly provided for.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in the Indenture referred to
on the reverse hereof, be paid to the person in whose name this Security (or one
or more Predecessor Securities) is registered at the close of business on
February 15 or August 15 (each a "Regular Record Date"), whether or not a
Business Day, as the case may be, next preceding such Interest Payment Date. Any
such interest not so punctually paid, or duly provided for, and interest on such
defaulted interest at the then applicable interest rate borne by the Securities,
A-2-1
<PAGE> 134
to the extent lawful, shall forthwith cease to be payable to the Holder on such
Regular Record Date, and may be paid to the person in whose name this Security
(or one or more Predecessor Securities) is registered at the close of business
on a Special Record Date for the payment of such defaulted interest to be fixed
by the Trustee, notice of which shall be given to Holders of Securities not less
than 10 days prior to such Special Record Date, or may be paid at any time in
any other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on
this Security will be made at the office or agency of the Company maintained for
that purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the address of the person entitled thereto as such
address shall appear on the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof.
A-2-2
<PAGE> 135
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Security shall not be entitled to any benefit under the Indenture, or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed.
Dated: February 19, 1999 GOLDEN SKY DBS, INC.
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
A-2-3
<PAGE> 136
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 13 1/2% Senior Discount Notes due 2007,
Series B, referred to in the within-mentioned Indenture.
Dated: February 19, 1999 UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
By:
-------------------------------------
Authorized Signatory
A-2-4
<PAGE> 137
REVERSE OF SECURITY
1. Indenture. This Security is one of a duly authorized issue
of Securities of the Company designated as its 13 1/2% Senior Discount Notes due
2007, Series B (herein called the "Exchange Securities"). The Securities are
limited (except as otherwise provided in the Indenture referred to below) in
aggregate principal amount at maturity to $193,100,000, which may be issued
under an indenture (herein called the "Indenture") dated as of February 19,
1999, by and among the Company and United States Trust Company of New York, as
trustee (herein called the "Trustee," which term includes any successor Trustee
under the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Securities, and of the terms upon which the
Securities are, and are to be, authenticated and delivered. The Securities
include the Initial Securities, the Private Exchange Securities and the Exchange
Securities, issued in exchange for the Initial Securities pursuant to the
Registration Rights Agreement. The Initial Securities and the Exchange
Securities are treated as a single class of securities under the Indenture.
All capitalized terms used in this Security which are defined
in the Indenture and not otherwise defined herein shall have the meanings
assigned to them in the Indenture.
The terms of the Securities include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in
effect on the date of the Indenture. Notwithstanding anything to the contrary
herein, the Securities are subject to all such terms, and Holders of Securities
are referred to the Indenture and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, premium,
if any, and interest on this Security at the times, place, and rate, and in the
coin or currency, herein prescribed.
A-2-5
<PAGE> 138
2. Redemption. (a) Optional Redemption. The Securities will be
redeemable, at the option of the Company, in whole or in part, at any time on or
after March 1, 2004 upon not less than 30 nor more than 60 days' written notice
at the redemption prices (expressed as percentages of principal amount at
maturity) set forth below, plus accrued and unpaid interest thereon, if any, to
the applicable redemption date, if redeemed during the twelve-month period
beginning on March 1 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004....................................................... 106.750%
2005....................................................... 103.375%
2006 and thereafter........................................ 100.000%
</TABLE>
(b) Optional Redemption upon Public Equity Offerings. On or
prior to March 1, 2002, the Company may, at its option, redeem up to 35% of the
originally issued aggregate principal amount at maturity of the Securities, at a
redemption price in cash equal to 113.5% of the Accreted Value of the Securities
at the date of redemption solely with the net proceeds of a Public Equity
Offering of the Company or Holdings 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 the
Securities is outstanding following such redemption. Notice of any such
redemption must be given not later than 60 days after the consummation of any
sale resulting in the requisite gross proceeds.
(c) Mandatory Redemption. The Company will not be required to
make any mandatory sinking fund payments in respect of the Securities. However,
(i) following the occurrence of a Change of Control, the Company will be
required to make an offer to purchase all outstanding Securities at a price
equal to 101% of the Accreted Value thereof, or if the Change of Control occurs
on or after March 1, 2004, the principal amount at maturity thereof (in each
case determined at the date of purchase), plus accrued interest thereon, if any,
to the date of purchase and (ii) upon the occurrence of an Asset Sale, the
Company may be obligated to make an offer to purchase all or a portion of the
outstanding Securities at a price equal to 100% of the Accreted Value thereof,
or if the Asset Sale occurs on or after March 1, 2004, the principal amount at
maturity thereof (determined at the date of purchase), plus accrued and unpaid
interest, if any, to the date of purchase.
A-2-6
<PAGE> 139
(d) Interest Payments. In the case of any redemption of Series
B Securities, interest installments whose Stated Maturity is on or prior to the
Redemption Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of business on the relevant
Record Date referred to on the face hereof. Securities (or portions thereof) for
whose redemption and payment provision is made in accordance with the Indenture
shall cease to bear interest from and after the Redemption Date.
(e) Partial Redemption. In the event of redemption of this
Series B Security in part only, a new Series B Security or Securities for the
unredeemed portion hereof shall be issued in the name of the Holder hereof upon
the cancellation hereof.
3. Offers to Purchase. Section 10.10 and 10.19 of the
Indenture provide that upon the occurrence of a Change of Control and following
certain Asset Sales, and subject to certain conditions and limitations contained
therein, the Company shall make an offer to purchase all or a portion of the
Securities in accordance with the procedures set forth in the Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is
continuing, the principal of all of the Outstanding Securities, plus all accrued
and unpaid interest, if any, to and including the date the Securities are paid,
may be declared due and payable in the manner and with the effect provided in
the Indenture.
5. Defeasance. The Indenture contains provisions (which
provisions apply to this Security) for defeasance at any time of (a) the entire
indebtedness of the Company and (b) certain restrictive covenants and related
Defaults and Events of Default, in each case upon compliance by the Company with
certain conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain
exceptions as provided therein, the amendment thereof and the modification of
the rights and obligations of the Company and the rights of the Holders under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount at maturity of
the Securities at the time Outstanding. The Indenture also contains provisions
permitting the Holders of specified percentages in aggregate principal amount at
maturity of the Securities at the time Outstanding, on behalf of
A-2-7
<PAGE> 140
the Holders of all the Securities, to waive compliance by the Company with
certain provisions of the Indenture and certain past Defaults under the
Indenture and this Security and their consequences. Any such consent or waiver
by or on behalf of the Holder of this Security shall be conclusive and binding
upon such Holder and upon all future Holders of this Security and of any
Security issued upon the registration of transfer hereof or in exchange herefor
or in lieu hereof whether or not notation of such consent or waiver is made upon
this Security.
7. Denominations, Transfer and Exchange. The Securities are
issuable only in registered form without coupons in denominations of $1,000
principal amount at maturity and any integral multiple thereof. As provided in
the Indenture and subject to certain limitations therein set forth, the
Securities are exchangeable for a like aggregate principal amount at maturity of
Securities of a different authorized denomination, as requested by the Holder
surrendering the same.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable on
the Security Register of the Company, upon surrender of this Security for
registration of transfer at the office or agency of the Company maintained for
such purpose in the Borough of Manhattan in The City of New York, State of New
York, or at such other office or agency of the Company as may be maintained for
such purpose, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Registrar duly executed by,
the Holder hereof or his attorney duly authorized in writing, and thereupon one
or more new Securities, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
No service charge shall be made for any registration of
transfer or exchange or redemption of Securities, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
8. Persons Deemed Owners. Prior to and at the time of due
presentment of this Security for registration of transfer, the Company, the
Trustee and any agent of the Company or the Trustee may treat the person in
whose name this Security is registered as the owner hereof for all purposes,
whether or not this Security shall be overdue, and neither the Company, the
Trustee nor any agent shall be affected by notice to the contrary.
A-2-8
<PAGE> 141
9. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
The Company will furnish to any Holder of a Security upon
written request and without charge a copy of the Indenture. Requests may be made
to: Golden Sky DBS, Inc., 605 West 47th Street, Suite 300, Kansas City, Missouri
64112.
A-2-9
<PAGE> 142
ASSIGNMENT FORM
If you the holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to ___________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Insert assignee's social security or tax ID number)____________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for such agent.
Date:_______________________ Your signature:___________________________________
(Sign exactly as your name appears
on the other side of this Security)
By:________________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:___________________________
A-2-10
<PAGE> 143
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Security purchased by the Company
pursuant to Section 10.10 of the Indenture, check the box: [ ]
If you wish to have a portion of this Security purchased by
the Company pursuant to Section 10.10 of the Indenture, state the principal
amount at maturity of such portion:
$______________
Date:_______________________ Your signature:___________________________________
(Sign exactly as your name appears
on the other side of this Security)
By:________________________________
NOTICE: To be executed by an
executive officer
Signature Guarantee:___________________________
A-2-11
<PAGE> 144
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Security authenticated and delivered hereunder
shall bear a legend (which would be in addition to any other legends required in
the case of a Restricted Security) in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS
SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE
DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY
BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B-1
<PAGE> 145
EXHIBIT C
Form of Certificate To Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
Golden Sky DBS, Inc.
605 West 47th Street, Suite 300
Kansas City, Missouri 64112
Ladies and Gentlemen:
In connection with our proposed purchase of $193,100,000
aggregate principal amount at maturity of the 13 1/2% Senior Discount Notes due
2007 (the "Securities") of Golden Sky DBS, Inc. (the "Company"), we confirm
that:
1. We understand that the Securities have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"),
and, unless so registered, may not be sold except as permitted in the
following sentence. We agree on our own behalf and on behalf of any
investor account for which we are purchasing Securities to offer, sell
or otherwise transfer such Securities prior to (x) the date which is
two years (or such shorter period of time as permitted by Rule 144
under the Securities Act) after the later of the date of original issue
of the Securities and (y) such later date, if any, as may be required
by any subsequent change in applicable law (the "Resale Restriction
Termination Date") only (a) to the Company, (b) pursuant to a
registration statement which has been declared effective under the
Securities Act, (c) so long as the Securities are eligible for resale
pursuant to Rule 144A under the Securities Act, to a person we
reasonably believe is a "qualified institutional buyer" under Rule 144A
(a "QIB") that purchases for its own account or for the account of a
QIB and to whom notice is given that the transfer is being made in
reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the United States to "foreign purchasers" (as defined below) in
offshore transactions meeting the requirements of Rule 904 of
Regulation S under the Securities Act, (e) to an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2),
(3) or (7) of Rule 501 under the
C-1
<PAGE> 146
Securities Act (an "Accredited Investor") that is purchasing for its
own account or for the account of such an institutional "accredited
investor," or (f) pursuant to any other available exemption from the
registration requirements of the Securities Act, subject, in each of
the foregoing cases, to any requirement of law that the disposition of
our property or the property of such investor account or accounts be at
all times within our or their control and to compliance with any
applicable state securities laws. The foregoing restrictions on resale
will not apply subsequent to the Resale Restriction Termination Date.
If any resale or other transfer of the Notes is proposed to be made
pursuant to clause (c) above prior to the Resale Restriction
Termination Date, the transferor shall deliver a letter from the
transferee substantially in the form of this letter to the Trustee,
which shall provide, among other things, that the transferee is an
Accredited Investor within the meaning of subparagraph (a)(1), (2), (3)
or (7) of Rule 501 under the Securities Act and that it is acquiring
such Securities for investment purposes and not for distribution in
violation of the Securities Act. Each purchaser acknowledges that the
Company, the Trustee and the Transfer Agent and Registrar reserve the
right prior to any offer, sale or other transfer prior to the Resale
Restriction Termination Date of the Securities pursuant to clause (d),
(e) or (f) above to require the delivery of an opinion of counsel,
certification and/or other information satisfactory to the Company and
the Trustee.
2. We are an Accredited Investor or a QIB purchasing Notes for
our own account or for the account of one or more Accredited Investors,
and we are acquiring the Securities for investment purposes and not
with a view to, or for offer or sale in connection with, any
distribution in violation of the Securities Act or the securities laws
of any state of the United States and we have such knowledge and
experience in financial and business matters as to be capable of
evaluating the merits and risks of our investment in the Securities,
and we and any accounts for which we are acting are each able to bear
the economic risk of our or its investment in the Securities for an
indefinite period.
3. We are acquiring the Securities purchased by us for our own
account or for one or more accounts as to each of which we exercise
sole investment discretion and we and
C-2
<PAGE> 147
any such account are (a) a QIB, aware that the sale is being made in
reliance on Rule 144A under the Securities Act, (b) an Accredited
Investor, or (c) a person other than a U.S. person ("foreign
purchasers"), which term shall include dealers or other professional
fiduciaries in the United States acting on a discretionary basis for
foreign beneficial owners (other than an estate or trust) in offshore
transactions meeting the requirements of Rules 903 and 904 of
Regulation S under the Securities Act.
4. We have received a copy of the Offering Memorandum and
acknowledge that we have had access to such financial and other
information, and have been afforded the opportunity to ask such
questions of representatives of the Company and receive answers
thereto, as we deem necessary in order to verify the information
contained in the Offering Memorandum.
5. We are not purchasing the Securities for or on behalf of,
and will not transfer the Securities to, any pension or welfare plan
(as defined in Section 3 of ERISA), except as may be permitted under
ERISA and as described under "Notice to Investors" in the Offering
Memorandum.
6. In the event that we purchase any Securities, we will
acquire Securities having an outstanding principal amount of at least
$250,000 for our own account and $250,000 for each account for which we
are acting.
We understand that the Trustee and the Transfer Agent will not
be required to accept for registration of transfer any Securities acquired by
us, except upon presentation of evidence satisfactory to the Company and the
Trustee that the foregoing restrictions on transfer have been complied with. We
further understand that the Securities purchased by us will be in the form of
definitive physical certificates and that such certificates will bear a legend
reflecting the substance of this paragraph. We further agree to provide to any
person acquiring any of the Securities from us a notice advising such person
that transfers of such Securities are restricted as stated herein and that
certificates representing such Securities will bear a legend to that effect.
We represent that you, the Company, the Trustee and others are
entitled to rely upon the truth and accuracy of our acknowledgements,
representations and agreements set forth
C-3
<PAGE> 148
herein, and we agree to notify you promptly in writing if any of our
acknowledgements, representations or agreements herein cease to be accurate and
complete. You are also irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal proceeding or
official inquiry with respect to the matters covered hereby.
We represent to you that we have full power to make the
foregoing acknowledgements, representations and agreements on our own behalf and
on behalf of any investor account for which we are acting as fiduciary agent.
As used herein, the terms "offshore transaction," "United
States" and "U.S. person" have the respective meanings given to them in
Regulation S under the Securities Act.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
Very truly yours,
(Name of Purchaser)
By:
--------------------------------------
Date:
------------------------------------
Upon transfer, the Securities would be registered in the name
of the new beneficial owner as follows:
Name:
------------------------------------
Address:
---------------------------------
C-4
<PAGE> 149
EXHIBIT D
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
--------------, ----
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
Attention: Corporate Trust Trustee Administration
Re: Golden Sky DBS, Inc.
(the "Company") 13 1/2% Senior Discount
Notes due 2007 (the "Securities")
Ladies and Gentlemen:
In connection with our proposed sale of $193,100,000 aggregate
principal amount at maturity of the Securities, we confirm that such sale has
been effected pursuant to and in accordance with Regulation S under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we
represent that:
(1) the offer of the Securities was not made to a person in
the United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through
the facilities of a designated off-shore securities market and neither
we nor any person acting on our behalf knows that the transaction has
been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer
restrictions applicable to the Securities; and
D-1
<PAGE> 150
(6) if the circumstances set forth in Rule 904(c) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Securities may be offered and sold during
the restricted period specified in Rule 903(c)(2) or (3), as
applicable; in accordance with the provisions of Regulation S; pursuant
to registration of the Securities under the Securities Act; or pursuant
to an available exemption from the registration requirements under the
Securities Act.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-----------------------------------
Authorized Signature
D-2
<PAGE> 1
EXHIBIT 4.3
REGISTRATION RIGHTS AGREEMENT
Dated as of February 19, 1999
by and among
GOLDEN SKY DBS, INC.
and
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED,
NATIONSBANC MONTGOMERY SECURITIES LLC,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION,
and
FLEET SECURITIES, INC.
as Initial Purchasers
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of February 19, 1999 by and among GOLDEN SKY DBS, INC., a
Delaware corporation (the "Company"), and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, NATIONSBANC MONTGOMERY SECURITIES LLC, DONALDSON, LUFKIN &
JENRETTE SECURITIES CORPORATION and FLEET SECURITIES, INC. (the "Initial
Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated as of
February 11, 1999 by and among the Company and the Initial Purchasers (the
"Purchase Agreement"), that provides for, among other things, the sale by the
Company to the Initial Purchasers of $193,100,000 aggregate principal amount at
maturity of the Company's 13 1/2% Senior Discount Notes due 2007 (the "Notes").
In order to induce the Initial Purchasers to enter into the Purchase Agreement,
the Company has agreed to provide to the Initial Purchasers and their direct and
indirect transferees the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the closing under the
Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following capitalized
defined terms shall have the following meanings:
"Accreted Value" as of any date (the "Specified Date") means, with
respect to each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date is one of the following dates (each a
"Semi-Annual Accreted Date"), the amount set forth opposite such date
below:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRETED DATE VALUE
------------------------- ----------
<S> <C>
February 19, 1999 518.12
September 1, 1999 555.51
March 1, 2000 593.00
September 1, 2000 633.03
March 1, 2001 675.76
September 1, 2001 721.37
March 1, 2002 770.07
September 1, 2002 822.05
March 1, 2003 877.53
September 1, 2003 936.77
March 1, 2004 1000.00
</TABLE>
<PAGE> 3
-2-
(ii) if the Specified Date occurs between two Semi-Annual Accreted
Dates, the sum of (A) the Accreted Value for the Semi-Annual Accreted Date
immediately preceding the Specified Date and (B) an amount equal to the
product of (i) the Accreted Value for the immediately following Semi-
Annual Accreted Date less the Accreted Value for the immediately preceding
Semi-Annual Accreted Date and (ii) a fraction, the numerator of which is
the number of days from the immediately preceding Semi-Annual Accreted Date
to the Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is 180.
"Additional Interest" see Section 2(e) hereof.
"Advice" see the last paragraph Section 3 hereof.
"Applicable Period" see Section 3(s) hereof.
"Business Day" shall mean a day that is not a Saturday, a Sunday, or a
day on which banking institutions in New York, New York are required to be
closed.
"Closing Time" shall mean the Closing Time as defined in the Purchase
Agreement.
"Company" shall have the meaning set forth in the preamble to this
Agreement and also includes the Company's successors and permitted assigns.
"Depositary" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; provided, however, that such
depositary must have an address in the Borough of Manhattan, in The City of
New York.
"Effectiveness Period" see Section 2(b) hereof.
"Effectiveness Target Date" see Section 2(e) hereof.
"Event Date" see Section 2(e) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
<PAGE> 4
-3-
"Exchange Offer" shall mean the exchange offer by the Company of
Exchange Notes for Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the
Securities Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange offer
registration statement on Form S-1, S-3 or S-4 (or, if applicable, on
another appropriate form), and all amendments and supplements to such
registration statement, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Exchange Period" see Section 2(a) hereof.
"Exchange Notes" shall mean the 13 1/2% Senior Discount Notes due 2007,
issued by the Company under the Indenture containing terms identical to the
Notes (except that (i) the transfer restrictions with respect to the Notes
and all registration rights in respect thereof shall be eliminated and (ii)
the provisions relating to Additional Interest shall be eliminated) to be
offered to Holders of Notes in exchange for Notes pursuant to the Exchange
Offer.
"Holders" shall mean the Initial Purchasers, for so long as they own
any Transfer Restricted Notes, each of their direct and indirect
successors, assigns and transferees who become registered owners of
Transfer Restricted Notes under the Indenture and each Participating
Broker-Dealer that holds Exchange Notes for so long as such Participating
Broker-Dealer is required to deliver a prospectus meeting the requirements
of the Securities Act in connection with any resale of such Exchange Notes.
"Indenture" shall mean the Indenture relating to the Notes dated as of
February 19, 1999 between the Company and United States Trust Company of
New York, as trustee, as the same may be amended from time to time in
accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the preamble
to this Agreement.
"Inspectors" see Section 3(m) hereof.
<PAGE> 5
-4-
"Issue Date" shall mean the date on which the Notes are originally
issued.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount at maturity of outstanding Transfer Restricted
Notes.
"Notes" shall have the meaning set forth in the preamble of this
Agreement.
"Participating Broker-Dealer" shall have the meaning set forth in
Section 3(s) hereof.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political
subdivision thereof.
"Private Exchange" see Section 2(a) hereof.
"Private Exchange Notes" see Section 2(a) hereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a
prospectus supplement with respect to the terms of the offering of any
portion of the Transfer Restricted Notes covered by a Shelf Registration
Statement, and by all other amendments and supplements to a prospectus,
including post-effective amendments, and in each case including all
material incorporated by reference therein.
"Purchase Agreement" shall have the meaning set forth in the preamble
to this Agreement.
"Records" see Section 3(m) hereof.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all applicable SEC, stock exchange or National
Association of Securities Dealers, Inc. (the "NASD") registration and
filing fees, (ii) all fees and expenses incurred in connection with
compliance with state securities or blue sky laws (including reasonable
fees and disbursements of one counsel for Holders that are Initial
Purchasers in connection with blue sky qualification of any of the Exchange
Notes or Transfer Restricted Notes) and compliance
<PAGE> 6
-5-
with the rules of the NASD, (iii) all applicable expenses incurred by the
Company in preparing or assisting in preparing, word processing, printing
and distributing any Registration Statement, any Prospectus and any
amendments or supplements thereto, and in preparing or assisting in
preparing any other documents relating to the performance of and compliance
with this Agreement, (iv) all rating agency fees, if any, (v) the fees and
disbursements of counsel for the Company, (vii) all fees and expenses
incurred in connection with the listing, if any, of any of the Transfer
Restricted Notes on any securities exchange or exchanges, if the Company,
in its discretion, elects to make any such listing; but excluding fees of
counsel to the Holders and underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of Transfer
Restricted Notes by a Holder.
"Registration Statement" shall mean any registration statement
(including, without limitation, the Exchange Offer Registration Statement
and the Shelf Registration Statement) of the Company which covers any of
the Exchange Notes or Transfer Restricted Notes pursuant to the provisions
of this Agreement, and all amendments and supplements to any such
Registration Statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Representative" shall mean Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Shelf Registration" shall mean a registration effected pursuant to
Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 2(b) hereof
which covers all of the Transfer Restricted Notes or all of the Private
Exchange Notes, as the case may be, on an appropriate form under Rule 415
under the Securities Act, or any similar rule that may be adopted by the
SEC, and all amendments and supplements to such registration statement,
including
<PAGE> 7
-6-
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Target Effectiveness Date" see Section 2(a).
"TIA" shall have the meaning set forth in Section 3(k) hereof.
"Transfer Restricted Notes" means each Note until (i) the date on which
such has been exchanged by a person other than a broker-dealer for an
Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the
date on which such Exchange Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii)
the date on which such Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, (iv) the date on which such Note is distributed to the public
pursuant to Rule 144(k) under the Securities Act (or any similar provision
then in force, but not Rule 144A under the Securities Act), (v) such Note
shall have been otherwise transferred by the holder thereof and a new Note
not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of such Note shall not require
registration or qualification under the Securities Act or any similar state
law then in force or (vi) such Note ceases to be outstanding.
"Trustee" shall mean the trustee with respect to the Notes under the
Indenture.
2. Registration Under the Securities Act.
(a) Exchange Offer. The Company shall, for the benefit of the Holders,
at the Company's cost, (i) unless the Exchange Offer would not be permitted by
applicable law or SEC policy, file with the SEC within 60 days after the Closing
Time an Exchange Offer Registration Statement on an appropriate form under the
Securities Act covering the offer by the Company to the Holders to exchange all
of the Transfer Restricted Notes (other than Private Exchange Notes (as defined
below)) for a like principal amount at maturity of Exchange Notes, (ii) unless
the Exchange Offer would not be permitted by applicable law or SEC policy, use
its best efforts to have such Exchange
<PAGE> 8
-7-
Offer Registration Statement declared effective under the Securities Act by the
SEC not later than 150 days after the Closing Time (the "Target Effectiveness
Date"), (iii) have such Registration Statement remain effective until the
closing of the Exchange Offer and (iv) unless the Exchange Offer would not be
permitted by applicable law or SEC policy, commence the Exchange Offer and use
its best efforts to issue, on or prior to the 30th Business Day after the date
on which the Exchange Offer Registration Statement was declared effective by the
SEC, Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer. Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Exchange Offer, it being the
objective of such Exchange Offer to enable each Holder eligible and electing to
exchange Transfer Restricted Notes for Exchange Notes (assuming that such Holder
is not an affiliate of the Company within the meaning of Rule 405 under the
Securities Act and is not a broker-dealer tendering Transfer Restricted Notes
acquired directly from the Company for its own account, acquires the Exchange
Notes in the ordinary course of such Holder's business and has no arrangements
or understandings with any Person to participate in the Exchange Offer for the
purpose of distributing (within the meaning of the Securities Act) the Exchange
Notes) and to transfer such Exchange Notes from and after their receipt without
any limitations or restrictions under the Securities Act and under state
securities or blue sky laws.
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(ii) keep the Exchange Offer open for acceptance for a period of not
less than 20 Business Days after the date notice thereof is mailed to the
Holders (or longer if required by applicable law) (such period referred to
herein as the "Exchange Period");
(iii) utilize the services of the Depositary for the Exchange Offer;
(iv) permit Holders to withdraw tendered Notes at any time prior to the
close of business, New York time, on the last Business Day of the Exchange
Period, by sending to the institution specified in the notice, a telegram,
<PAGE> 9
-8-
telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Notes delivered for exchange, and a
statement that such Holder is withdrawing his election to have such Notes
exchanged; and
(v) otherwise comply in all material respects with all applicable laws
relating to the Exchange Offer.
If, prior to consummation of the Exchange Offer the Initial Purchasers
hold any Notes acquired by them and having the status of an unsold allotment in
the initial distribution, the Company upon the request of any Initial Purchaser
shall, simultaneously with the delivery of the Exchange Notes in the Exchange
Offer, issue and deliver to such Initial Purchaser in exchange (the "Private
Exchange") for the Notes held by such Initial Purchaser, a like principal amount
at maturity of debt securities of the Company that are identical (except that
such securities shall bear appropriate transfer restrictions) to the Exchange
Notes (the "Private Exchange Notes").
The Exchange Notes and the Private Exchange Notes shall be issued under
(i) the Indenture or (ii) an indenture identical to all material respects to the
Indenture and that, in either case, has been qualified under the TIA or is
exempt from such qualification and shall provide that the Exchange Notes shall
not be subject to the transfer restrictions set forth in the Indenture. The
Indenture or such indenture shall provide that the Exchange Notes, the Private
Exchange Notes and the Notes shall vote and consent together on all matters as
one class and that none of the Exchange Notes, the Private Exchange Notes or the
Notes will have the right to vote or consent as a separate class on any matter.
The Private Exchange Notes shall be of the same series as and the Company shall
use all commercially reasonable efforts to have the Private Exchange Notes bear
the same CUSIP number as the Exchange Notes. The Company shall not have any
liability under this Agreement solely as a result of such Private Exchange Notes
not bearing the same CUSIP number as the Exchange Notes.
The Exchange Offer and the Private Exchange shall not be subject to any
conditions, other than that (i) the Exchange Offer or Private Exchange, as the
case may be, does not violate applicable law or any applicable interpretation of
the staff of the SEC, (ii) no action or proceeding shall have been instituted or
threatened in any court or by any governmental agency that might materially
impair the ability of the Company to proceed with the Exchange Offer or the
Private Exchange, and no material adverse development shall have occurred in any
existing
<PAGE> 10
-9-
action or proceeding with respect to the Company and (iii) all governmental
approvals shall have been obtained, which approvals the Company deems necessary
for the consummation of the Exchange Offer or Private Exchange. As soon as
practicable after the close of the Exchange Offer and/or the Private Exchange,
as the case may be, the Company shall:
(i) accept for exchange all Transfer Restricted Notes or portions
thereof properly tendered and not validly withdrawn pursuant to the
Exchange Offer in accordance with the terms of the Exchange Offer
Registration Statement and the letter of transmittal that is an exhibit
thereto;
(ii) accept for exchange all Notes properly tendered pursuant to the
Private Exchange; and
(iii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Notes or portions thereof so accepted
for exchange by the Company, and issue, and cause the Trustee under the
Indenture to promptly authenticate and deliver to each Holder, a new
Exchange Note or Private Exchange Note, as the case may be, equal in
principal amount at maturity to the principal amount at maturity of the
Transfer Restricted Notes surrendered by such Holder and accepted for
exchange.
To the extent not prohibited by any law or applicable
interpretation of the staff of the SEC, the Company shall use its reasonable
best efforts to complete the Exchange Offer as provided above and shall comply
with the applicable requirements of the Securities Act, the Exchange Act and
other applicable laws in connection with the Exchange Offer. Each Holder of
Transfer Restricted Notes who wishes to exchange such Transfer Restricted Notes
for Exchange Notes in the Exchange Offer will be required to make certain
customary representations in connection therewith, including representations
that:
(1) any Exchange Notes to be received by it will be acquired in the
ordinary course of its business;
(2) it has no arrangement with any person to participate in the
distribution of the Exchange Notes;
(3) it is not an "affiliate" of the Company, as defined in Rule 405 of
the Securities Act, or if it is an affiliate of the Company, it will comply
with the registration
<PAGE> 11
-10-
and prospectus delivery requirements of the Securities Act to the extent
applicable; and
(4) it is not a broker-dealer tendering notes which it acquired
directly from the Company for its own account.
The Company shall inform the Initial Purchasers of the names and addresses of
the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall
have the right to contact such Holders and otherwise facilitate the tender of
Transfer Restricted Notes in the Exchange Offer.
Upon consummation of the Exchange Offer in accordance with this Section
2(a), the provisions of this Agreement shall continue to apply, mutatis
mutandis, solely with respect to Transfer Restricted Notes that are Private
Exchange Notes and Exchange Notes held by Participating Broker-Dealers, and the
Company shall have no further obligation to register Transfer Restricted Notes
(other than Private Exchange Notes) pursuant to Section 2(b) hereof.
(b) Shelf Registration. The Company will file with the SEC the Shelf
Registration Statement if (i) the Company is not permitted to file the Exchange
Offer Registration Statement or to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or SEC policy, (ii) the
Exchange Offer is not for any other reason consummated within 180 days after the
Issue Date, (iii) any holder of Notes notifies the Company within a specified
time period that (a) due to a change in law or policy, in the opinion of
counsel, it is not entitled to participate in the Exchange Offer, (b) due to a
change in law or policy, in the opinion of counsel, it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and (x) the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder and (y) such prospectus is not promptly amended or modified in order to
be suitable for use in connection with such resales for such holder and all
similarly situated holders or (c) it is a broker-dealer and owns Notes acquired
directly from the Company or an affiliate of the Company or (iv) the holders of
a majority of the Notes may not resell the Exchange Notes acquired by them in
the Exchange Offer to the public without restriction under the Securities Act
and without restriction under applicable blue sky or state securities laws. If
the Company is obligated to file the Shelf Registration Statement, the Company
will use its best efforts to file such Shelf Registration Statement prior to the
later of (a) 60 days after the Issue Date or (b) 30 days after such filing
obligation arises and
<PAGE> 12
-11-
use its best efforts to cause the Shelf Registration Statement to be declared
effective by the Commission on or prior to 60 days after such obligation arises;
provided, however, that if the Company has not consummated the Exchange Offer
within 180 days of the Issue Date, then it will file the Shelf Registration
Statement with the Commission on or prior to the 181st day after the Issue Date.
Each Holder as to which any Shelf Registration is being effected agrees
to furnish to the Company all information with respect to such Holder necessary
to make any information previously furnished to the Company by such Holder not
materially misleading.
The Company agrees to use its best efforts to keep the Shelf
Registration Statement continuously effective, supplemented and amended until
the second anniversary of the effective date of the Shelf Registration Statement
from the Issue Date (subject to extension pursuant to the last paragraph of
Section 3 hereof) (or such shorter period that will terminate when all of the
Transfer Restricted Notes covered by such Shelf Registration Statement have been
sold pursuant thereto, cease to be outstanding or are eligible for resale
pursuant to the provisions of Rule 144(k) under the Securities Act) (the
"Effectiveness Period"); provided, however, that the Effectiveness Period in
respect of the Shelf Registration Statement shall be extended to the extent
required to permit dealers to comply with the applicable prospectus delivery
requirements of Rule 174 under the Securities Act and as otherwise provided
herein. The Company shall not permit any securities other than Transfer
Restricted Notes to be included in the Shelf Registration. The Company further
agrees, if necessary, to supplement or amend the Shelf Registration Statement,
if required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration Statement or
by the Securities Act or by any other rules and regulations thereunder for shelf
registrations, and the Company agrees to furnish to the Holders of Transfer
Restricted Notes copies of any such supplement or amendment promptly after its
being used or filed with the SEC.
(c) Expenses. The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) or 2(b) hereof and the
reasonable fees and expenses of one counsel, if any, designated in writing by
the Majority Holders to act as counsel for the Holders of the Transfer
Restricted Notes in connection with a Shelf Registration Statement. Except as
provided in the preceding sentence, each
<PAGE> 13
-12-
Holder shall pay all expenses of its own counsel, underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Transfer Restricted Notes pursuant to the Shelf Registration
Statement.
(d) Effective Registration Statement. An Exchange Offer Registration
Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement
pursuant to Section 2(b) hereof will not be deemed to have become effective
unless it has been declared effective by the SEC; provided, however, that if,
after it has been declared effective, the offering of Transfer Restricted Notes
pursuant to a Shelf Registration Statement is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other governmental
agency or court, such Registration Statement will be deemed not to have been
effective during the period of such interference, until the offering of Transfer
Restricted Notes may legally resume. The Company will be deemed not to have used
its best efforts to cause the Exchange Offer Registration Statement or the Shelf
Registration Statement, as the case may be, to become, or to remain, effective
during the requisite period if it voluntarily takes any action that would result
in any such Registration Statement not being declared effective or in the
Holders of Transfer Restricted Notes covered thereby not being able to exchange
or offer and sell such Transfer Restricted Notes during that period, unless such
action is required by applicable law and except as otherwise provided in the
second paragraph of Section 2(e) below.
(e) Additional Interest. In the event that (i) the applicable
Registration Statement is not filed with the SEC on or prior to the date
specified herein for such filing, (ii) the applicable Registration Statement is
not declared effective on or prior to the date specified herein for such
effectiveness after such obligation arises (the "Effectiveness Target Date"),
(iii) if the Exchange Offer is required to be consummated hereunder, the Company
fails to consummate the Exchange Offer within 30 Business Days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) the applicable Registration Statement is filed and declared
effective during the period effectiveness is required by Section 2(e) and 3(a)
but shall thereafter cease to be effective or usable without being succeeded
immediately by an additional Registration Statement covering the Transfer
Restricted Notes that has been filed and declared effective (each such event
referred to in clauses (i) through (iv), a "Registration Default"), then the
Company agrees to pay additional amounts on the Transfer Restricted Notes as to
which such Registration Default
<PAGE> 14
-13-
relates ("Additional Interest"), with respect to the first 90-day period (or
portion thereof) while a Registration Default is continuing immediately
following the occurrence of such Registration Default in an amount equal to
0.75% per annum of the Accreted Value of the Notes on the date of such
Registration Default. The rate of Additional Interest will increase by an
additional 0.75% per annum of the Accreted Value of the Notes for each
subsequent 90-day period (or portion thereof) while a Registration Default is
continuing until all Registration Defaults have been cured, up to a maximum
amount of 3.00% of the Accreted Value of the Notes on the date of such
Registration Default. Additional Interest shall be computed based on the actual
number of days elapsed during which any such Registration Defaults exists.
Following the cure of a Registration Default, the accrual of Additional Interest
with respect to such Registration Default will cease.
If the Company issues a notice that the Shelf Registration Statement is
unusable due to the pendency of an announcement of a material corporate
transaction, or such notice is required under applicable securities laws to be
issued by the Company, and the aggregate number of days in any consecutive
twelve-month period for which the Shelf Registration Statement shall not be
usable due to all such notices issued or required to be issued exceeds 60 days
in the aggregate, then the interest rate borne by the Notes will be increased by
0.25% per annum of the principal amount at maturity of the Notes for the first
90-day period (or portion thereof) beginning on the 31st such date that such
Shelf Registration Statement ceases to be usable, which rate shall be increased
by an additional 0.25% per annum of the principal amount at maturity of the
Notes at the beginning of each subsequent 90-day period, up to a maximum amount
of 1.00% of the principal amount at maturity of the Notes. Upon the Shelf
Registration Statement once again becoming usable, the interest rate borne by
the Notes will be reduced to the original interest rate if the Company is
otherwise in compliance with this Agreement at such time. Additional Interest
shall be computed based on the actual number of days elapsed in each 90-day
period in which the Shelf Registration Statement is unusable.
The Company shall notify the Trustee within five Business Days after
each and every date on which an event occurs in respect of which Additional
Interest is required to be paid (an "Event Date"). Additional Interest shall be
paid by depositing with the Trustee, in trust, for the benefit of the Holders of
Transfer Restricted Notes, on or before the applicable semiannual interest
payment date, immediately available
<PAGE> 15
-14-
funds in sums sufficient to pay the Additional Interest then due. The Additional
Interest due shall be payable on each interest payment date to the record Holder
of Notes entitled to receive the interest payment to be paid on such date as set
forth in the Indenture. Each obligation to pay Additional Interest shall be
deemed to accrue from and including the day following the applicable Event Date.
3. Registration Procedures. In connection with the obligations of the
Company with respect to the Registration Statements pursuant to Sections 2(a)
and 2(b) hereof, the Company shall:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed by Sections 2(a) and 2(b) hereof
within the relevant time period specified in Section 2 hereof on the
appropriate form under the Securities Act, which form (i) shall be selected
by the Company, (ii) shall, in the case of a Shelf Registration, be
available for the sale of the Transfer Restricted Notes by the selling
Holders thereof and (iii) shall comply as to form in all material respects
with the requirements of the applicable form and include all financial
statements required by the SEC to be filed therewith; and use their best
efforts to cause such Registration Statement to become effective and remain
effective in accordance with Section 2 hereof. The Company shall not file
any Registration Statement or Prospectus or any amendments or supplements
thereto in respect of which the Holders must provide information for
inclusion therein without the Holders being afforded an opportunity to
review such documentation a reasonable time prior to the filing of such
document if the Majority Holders or such Participating Broker-Dealer, as
the case may be, their counsel or the managing underwriters, if any, shall
reasonably object;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary to keep such
Registration Statement effective for the Effectiveness Period or the
Applicable Period, as the case may be; and cause each Prospectus to be
supplemented by any required prospectus supplement and as so supplemented
to be filed pursuant to Rule 424 (or any similar provision then in force)
under the Securities Act, and comply with the provisions of the Securities
Act, the Exchange Act and the rules and regulations promulgated thereunder
applicable to it with respect to
<PAGE> 16
-15-
the disposition of all securities covered by each Registration Statement
during the Effectiveness Period or the Applicable Period, as the case may
be, in accordance with the intended method or methods of distribution by
the selling Holders thereof described in this Agreement (including sales by
any Participating Broker-Dealer);
(c) in the case of a Shelf Registration, (i) notify each Holder of
Transfer Restricted Notes, at least three Business Days prior to filing,
that a Shelf Registration Statement with respect to the Transfer Restricted
Notes is being filed and advising such Holder that the distribution of
Transfer Restricted Notes will be made in accordance with the method
selected by the Majority Holders; and (ii) furnish to each Holder of
Transfer Restricted Notes, without charge, as many copies of each
Prospectus, and any amendment or supplement thereto and such other
documents as such Holder may reasonably request, in order to facilitate the
disposition of the Transfer Restricted Notes; and (iii) subject to the last
paragraph of Section 3 hereof, hereby consent to the use of the Prospectus
or any amendment or supplement thereto by each of the selling Holders of
Transfer Restricted Notes in connection with the offering and sale of the
Transfer Restricted Notes covered by such Prospectus or any amendment or
supplement thereto subject to the limitations on the use thereof provided
in Sections 2(b) and 2(c);
(d) in the case of a Shelf Registration, use its best efforts to
register or qualify, as may be required by applicable law, the Transfer
Restricted Notes under all applicable state securities or "blue sky" laws
of such jurisdictions by the time the applicable Registration Statement is
declared effective by the SEC as any Holder of Transfer Restricted Notes
covered by a Registration Statement shall reasonably request in advance of
such date of effectiveness, and do any and all other acts and things that
may be reasonably necessary or advisable to enable such Holder to
consummate the disposition in each such jurisdiction of such Transfer
Restricted Notes owned by such Holder; provided, however, that the Company
shall not be required to (i) qualify as a foreign corporation or as a
broker or dealer in securities in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (ii) file any
general consent to service of process or (iii) subject itself to taxation
in any such jurisdiction if it is not so subject;
<PAGE> 17
-16-
(e) in the case of (1) a Shelf Registration or (2) Participating
Broker-Dealers who have notified the Company that they will be utilizing
the Prospectus contained in the Exchange Offer Registration Statement as
provided in Section 3(t) hereof, notify each Holder of Transfer Restricted
Notes, or such Participating Broker-Dealers, as the case may be, their
counsel, if any, promptly and confirm such notice in writing (i) when a
Registration Statement has become effective and when any post-effective
amendments and supplements thereto become effective, (ii) of any request by
the SEC or any state securities authority for amendments and supplements to
a Registration Statement or Prospectus or for additional information after
the Registration Statement has become effective, (iii) of the issuance by
the SEC or any state securities authority of any stop order suspending the
effectiveness of a Registration Statement or the initiation of any
proceedings for that purpose, (iv) if the Company receives any notification
with respect to the suspension of the qualification of the Transfer
Restricted Notes or the Exchange Notes to be sold by any Participating
Broker-Dealer for offer or sale in any jurisdiction or the initiation of
any proceeding for such purpose, (v) of the happening of any event or the
failure of any event to occur or the discovery of any facts or otherwise,
during the period a Shelf Registration Statement is effective that makes
any statement made in such Registration Statement or the related Prospectus
untrue in any material respect or that causes such Registration Statement
or Prospectus to omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be
appropriate;
(f) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement as soon as
practicable;
(g) in the case of a Shelf Registration, furnish to each Holder of
Transfer Restricted Notes, without charge, at least one conformed copy of
each Registration Statement relating to such Shelf Registration and any
post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested);
<PAGE> 18
-17-
(h) in the case of a Shelf Registration, cooperate with the selling
Holders of Transfer Restricted Notes to facilitate the timely preparation
and delivery of certificates not bearing any restrictive legends
representing Notes covered by such Shelf Registration to be sold and
relating to the subsequent transfer of such Notes; and cause such Transfer
Restricted Notes to be in such denominations (consistent with the
provisions of the Indenture) and registered in such names as the selling
Holders may reasonably request at least two Business Days prior to the
closing of any sale of Transfer Restricted Notes;
(i) in the case of a Shelf Registration or an Exchange Offer
Registration, upon the occurrence of any circumstance contemplated by
Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof, use its
best efforts to prepare a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of the Transfer Restricted
Notes, such Prospectus will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and to notify each Holder to suspend use of the Prospectus as
promptly as practicable after the occurrence of such an event, and each
Holder hereby agrees to suspend use of the Prospectus until the Company has
amended or supplemented the Prospectus to correct such misstatement or
omission;
(j) obtain a CUSIP number for all Exchange Notes or Private Exchange
Notes, as the case may be, not later than the effective date of a
Registration Statement, and provide the Trustee with certificates for the
Exchange Notes or the Private Exchange Notes, as the case may be, in a form
eligible for deposit with the Depositary;
(k) cause the Indenture to be qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Notes or Transfer Restricted Notes, as the case may be, cooperate
with the Trustee and the Holders to effect such changes to the Indenture as
may be required for the Indenture to be so qualified in accordance with the
terms of the TIA and execute, and use its best efforts to cause the Trustee
to execute, all documents as may be required to effect such changes, and
all other forms and documents required to be
<PAGE> 19
-18-
filed with the SEC to enable the Indenture to be so qualified in a timely
manner;
(l) in the case of a Shelf Registration, enter into such agreements
(including underwriting agreements) and take all such other appropriate
actions as are reasonably requested in order to expedite or facilitate the
registration or the disposition of such Transfer Restricted Notes, and in
such connection, (i) make such representations and warranties to Holders of
such Transfer Restricted Notes with respect to the business of the Company
and its subsidiaries as then conducted and the Registration Statement,
Prospectus and documents, if any, incorporated or deemed to be incorporated
by reference therein, in each case, as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if and when
requested; (ii) obtain opinions of counsel to the Company and updates
thereof in form and substance reasonably satisfactory to the Holders of a
majority in principal amount of the Transfer Restricted Notes being sold,
addressed to each selling Holder covering the matters customarily covered
in opinions requested in underwritten offerings and such other matters as
may be reasonably requested by such Holders; (iii) obtain "cold comfort"
letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to the selling Holders of Transfer Restricted Notes
that satisfy the applicable requirements of Statement of Accounting
Standards No. 72, such letters to be in customary form and covering matters
of the type customarily covered in "cold comfort" letters in connection
with underwritten offerings and such other matters as reasonably requested
by such selling Holders; and (iv) if an underwriting agreement is entered
into, the same shall contain indemnification provisions and procedures no
less favorable than those set forth in Section 4 hereof (or such other
provisions and procedures acceptable to the Company and the Holders of a
majority in aggregate principal amount of Transfer Restricted Notes covered
by such Registration with respect to all parties to be indemnified pursuant
to said Section including, without limitation, such selling Holders). The
above shall be done at each closing in respect of the sale of Transfer
Restricted Notes, or as and to the extent required thereunder;
<PAGE> 20
-19-
(m) if (1) a Shelf Registration is filed pursuant to Section 2(b) or
(2) a Prospectus contained in an Exchange Offer Registration Statement
filed pursuant to Section 2(a) is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Notes during the Applicable Period, make available for inspection
by each such person who would be an "underwriter" as a result of either (i)
the sale by such person of Notes covered by such Shelf Registration
Statement or (ii) the sale during the Applicable Period by a Participating
Broker-Dealer of Exchange Notes (provided that a Participating
Broker-Dealer shall not be deemed to be an underwriter solely as a result
of it being required to deliver a prospectus in connection with any resale
of Exchange Notes) and any attorney, accountant or other agent retained by
any such person (collectively, the "Inspectors"), at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company and
its subsidiaries (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise any applicable due diligence
responsibilities, and cause the officers, directors and employees of the
Company and its subsidiaries to supply all information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement. Records that the Company determines, in good faith,
to be confidential and any Records that it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the
disclosure of such Records is necessary to avoid or correct a material
misstatement or omission in such Registration Statement, (ii) the release
of such Records is ordered pursuant to a subpoena or other order from a
court of competent jurisdiction or (iii) the information in such Records
has been made generally available to the public. Each selling Holder of
such Transfer Restricted Notes and each such Participating Broker-Dealer
will be required to agree that information obtained by it as a result of
such inspections shall be deemed confidential and shall not be used by it
as the basis for any market transactions in the securities of the Company
unless and until such is made generally available to the public. Each
selling Holder of such Transfer Restricted Notes and each such
Participating Broker-Dealer will be required to further agree that it will,
upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company at
its expense to undertake appropriate action to prevent disclosure of the
Records deemed confidential;
<PAGE> 21
-20-
(n) comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than 60 days after the end of any 12-month period (or 135 days
after the end of any 12-month period if such period is a fiscal year) (i)
commencing at the end of any fiscal quarter in which Transfer Restricted
Notes are sold to underwriters in a firm commitment or best efforts
underwritten offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the
Company after the effective date of a Registration Statement, which
statements shall cover said 12-month periods;
(o) upon consummation of an Exchange Offer or a Private Exchange,
obtain an opinion of counsel to the Company addressed to the Trustee for
the benefit of all Holders of Transfer Restricted Notes participating in
the Exchange Offer or the Private Exchange, as the case may be, or the
includes an opinion that (i) the Company has duly authorized, executed and
delivered the Exchange Notes and Private Exchange Notes, as the case may
be, and (ii) each of the Exchange Notes or the Private Exchange Notes, as
the case may be, constitute a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its respective
terms (in each case, with customary exceptions);
(p) if an Exchange Offer or a Private Exchange is to be consummated,
upon proper delivery of the Transfer Restricted Notes by Holders to the
Company (or to such other Person as directed by the Company) in exchange
for the Exchange Notes or the Private Exchange Notes, as the case may be,
the Company shall mark, or cause to be marked, on such Transfer Restricted
Notes and on the books of the Trustee, the Transfer Agent, the Registrar
and the Depositary delivered by such Holders that such Transfer Restricted
Notes are being canceled in exchange for the Exchange Notes or the Private
Exchange Notes, as the case may be; but in no event shall such Transfer
Restricted Notes be marked as paid or otherwise satisfied solely as a
result of being exchanged for Exchange Notes or Private
<PAGE> 22
-21-
Exchange Notes in the Exchange Offer or the Private Exchange, as the case
may be;
(q) cooperate with each seller of Transfer Restricted Notes covered by
any Registration Statement participating in the disposition of such
Transfer Restricted Notes and one counsel acting on behalf of all such
sellers in connection with the filings, if any, required to be made with
the NASD;
(r) use its best efforts to take all other steps necessary to effect
the registration of the Transfer Restricted Notes covered by a Registration
Statement contemplated hereby; and
(s) (A) in the case of the Exchange Offer Registration Statement (i)
include in the Exchange Offer Registration Statement a section entitled
"Plan of Distribution," which section shall be reasonably acceptable to the
Representative and which shall contain a summary statement of the positions
taken or policies made by the staff of the SEC with respect to the
potential "underwriter" status of any broker-dealer (a "Participating
Broker-Dealer") that holds Transfer Restricted Notes acquired for its own
account as a result of market-making activities or other trading activities
and that will be the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act) of Exchange Notes to be received by such broker-dealer in the
Exchange Offer, whether such positions or policies have been publicly
disseminated by the staff of the SEC or such positions or policies, in the
reasonable judgment of the Representative, represent the prevailing views
of the staff of the SEC, including a statement that any such broker-dealer
who receives Exchange Notes for Transfer Restricted Notes pursuant to the
Exchange Offer may be deemed a statutory underwriter and must deliver a
prospectus meeting the requirements of the Securities Act in connection
with any resale of such Exchange Notes, (ii) furnish to each Participating
Broker-Dealer who has delivered to the Company the notice referred to in
Section 3(e), without charge, as many copies of each Prospectus included in
the Exchange Offer Registration Statement, and any amendment or supplement
thereto, as such Participating Broker-Dealer may reasonably request; (iii)
hereby consent to the use of the Prospectus forming part of the Exchange
Offer Registration Statement or any amendment or supplement thereto, by any
Person subject to the prospectus delivery requirements of the SEC,
including all
<PAGE> 23
-22-
Participating Broker-Dealers, in connection with the sale or transfer of
the Exchange Notes covered by the Prospectus or any amendment or supplement
thereto, (iv) use its best efforts to keep the Exchange Offer Registration
Statement effective and to amend and supplement the Prospectus contained
therein in order to permit such Prospectus to be lawfully delivered by all
Persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such Persons must comply with such
requirements in order to resell the Exchange Notes; provided, however, that
such period shall not be required to exceed 90 days (or such longer period
if extended pursuant to the last sentence of Section 3 hereof) (the
"Applicable Period"), and (iv) include in the transmittal letter or similar
documentation to be executed by an exchange offeree in order to participate
in the Exchange Offer (x) the following provision:
"If the exchange offeree is a broker-dealer holding Transfer
Restricted Notes acquired for its own account as a result of
market-making activities or other trading activities, it will
deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of Exchange Notes
received in respect of such Transfer Restricted Notes pursuant
to the Exchange Offer;"
and (y) a statement to the effect that by a broker-dealer making the
acknowledgment described in clause (x) and by delivering a Prospectus in
connection with the exchange of Transfer Restricted Notes, such
broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act; and
(B) in the case of any Exchange Offer Registration Statement, the
Company agrees to deliver, upon request, to the Trustee or to Participating
Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of
counsel substantially in the form attached hereto as Exhibit A, and (ii) an
officers' certificate containing certifications substantially similar to
those set forth in Section 7(c) of the Purchase Agreement.
The Company may require each seller of Transfer Restricted Notes as to
which any registration is being effected to furnish to the Company such
information regarding such seller and the proposed distribution of such Transfer
<PAGE> 24
-23-
Restricted Notes, as the Company may from time to time reasonably request in
writing. The Company may exclude from such registration the Transfer Restricted
Notes of any seller who fails to furnish such information within a reasonable
time (not to exceed 10 Business Days) after receiving such request and shall be
under no obligation to compensate any such seller for any lost income, interest
or other opportunity forgone, or any liability incurred, as a result of the
Company's decision to exclude such seller.
In the case of (1) a Shelf Registration Statement or (2) Participating
Broker-Dealers who have notified the Company that they will be utilizing the
Prospectus contained in the Exchange Offer Registration Statement as provided in
Section 3(t) hereof, that are seeking to sell Exchange Notes and are required to
deliver Prospectuses, each Holder agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section
3(e)(ii), 3(e)(iii), 3(e)(v), 3(e)(vi) or 3(e)(vii) hereof, such Holder will
forthwith discontinue disposition of Transfer Restricted Notes pursuant to a
Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof or until
it is advised in writing (the "Advice") by the Company that the use of the
applicable Prospectus may be resumed, and, if so directed by the Company, such
Holder will deliver to the Company (at the Company's expense) all copies in such
Holder's possession, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Transfer Restricted Notes or
Exchange Notes, as the case may be, current at the time of receipt of such
notice. If the Company shall give any such notice to suspend the disposition of
Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a
Registration Statement, the Company shall use its best efforts to file and have
declared effective (if an amendment) as soon as practicable an amendment or
supplement to the Registration Statement and, in the case of an amendment, have
such amendment declared effective as soon as practicable and shall extend the
period during which such Registration Statement shall be maintained effective
pursuant to this Agreement by the number of days in the period from and
including the date of the giving of such notice to and including the date when
the Company shall have made available to the Holders (x) copies of the
supplemented or amended Prospectus necessary to resume such dispositions or (y)
the Advice.
4. Indemnification and Contribution. (a) The Company shall indemnify
and hold harmless each Initial Purchaser,
<PAGE> 25
-24-
each Holder, each Participating Broker-Dealer, each underwriter who participates
in an offering of Transfer Restricted Notes, their respective affiliates, each
Person, if any, who controls any of such parties within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement (or any amendment or supplement thereto), covering
Transfer Restricted Notes or Exchange Notes, including all documents
incorporated therein by reference, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, joint or several, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any court or governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission; provided
that (subject to Sections 4(c) and 4(d) below) any such settlement is
effected with the prior written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred (including
reasonable fees and disbursements of one counsel (in addition to any local
counsel) chosen by the Representative, such Holder, such Participating
Broker-Dealer or any underwriter (except to the extent otherwise expressly
provided in Section 4(c) hereof)), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any court or governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent
that any such expense is not paid under subparagraph (i) or (ii) of this
Section 4(a);
<PAGE> 26
-25-
provided, however, that this indemnity does not apply to any loss, liability,
claim, damage or expense to the extent arising out of an untrue statement or
omission or alleged untrue statement or omission (i) made in reliance upon and
in conformity with written information furnished in writing to the Company by or
on behalf of such Initial Purchaser, such Holder, such Participating
Broker-Dealer or any underwriter with respect to such Initial Purchaser, Holder,
Participating Broker-Dealer or underwriter, as the case may be, expressly for
use in the Registration Statement (or any amendment or supplement thereto) or
any Prospectus (or any amendment or supplement thereto) or (ii) contained in any
preliminary prospectus if such Initial Purchaser, such Holder, such
Participating Broker-Dealer or such underwriter failed to send or deliver a copy
of the Prospectus (in the form it was first provided to such parties for
confirmation of sales) to the Person asserting such losses, claims, damages or
liabilities on or prior to the delivery of written confirmation of any sale of
securities covered thereby to such Person in any case where the Company shall
have previously furnished copies thereof to such Initial Purchaser, such Holder,
such Participating Broker-Dealer or such underwriter, as the case may be, in
accordance with this Agreement, at or prior to the written confirmation of the
sale of such Notes to such Person and the untrue statement contained in or the
omission from the preliminary prospectus was corrected in the Final Prospectus
(or any amendment or supplement thereto). Any amounts advanced by the Company to
an indemnified party pursuant to this Section 4 as a result of such losses shall
be returned to the Company if it shall be finally determined by a court of
competent jurisdiction in a judgment not subject to appeal or final review that
such indemnified party was not entitled to indemnification by the Company.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, each Initial Purchaser, each underwriter who
participates in an offering of Transfer Restricted Notes and the other selling
Holders and each of their respective directors and each Person, if any, who
controls any of the Company, any Initial Purchaser, any underwriter or any other
selling Holder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, against any and all loss, liability, claim, damage and expense
whatsoever described in the indemnity contained in Section 4(a) hereof, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment or supplement thereto) or any Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
<PAGE> 27
-26-
furnished to the Company by or on behalf of such selling Holder with respect to
such Holder expressly for use in the Registration Statement (or any supplement
thereto), or any such Prospectus (or any amendment thereto); provided, however,
that, in the case of the Shelf Registration Statement, no such Holder shall be
liable for any claims hereunder in excess of the amount of net proceeds received
by such Holder from the sale of Transfer Restricted Notes pursuant to the Shelf
Registration Statement; provided, further, however, that for purposes of Section
4(a)(iii), such counsel shall (subject to Section 4(c) hereof) be chosen by the
Company.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability that it may have otherwise
than on account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 4(a) above, one counsel to all the indemnified parties shall
be selected by the Representative, and, in the case of parties indemnified
pursuant to Section 4(b) above, counsel to all the indemnified parties shall be
selected by the Company. An indemnifying party may participate at its own
expense in the defense of any such action; provided, however, that counsel to
the indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. Notwithstanding the foregoing,
if it so elects within a reasonable time after receipt of such notice, an
indemnifying party, jointly with any other indemnifying parties receiving such
notice, may assume the defense of such action with counsel chosen by it and
approved by the indemnified parties defendant in such action (which approval
shall not be unreasonably withheld), unless such indemnified parties reasonably
object to such assumption on the ground that there may be legal defenses
available to them which are different from or in addition to those available to
such indemnifying party. If an indemnifying party assumes the defense of such
action, the indemnifying parties shall not be liable for any fees and expenses
of counsel for the indemnified parties incurred thereafter in connection with
such action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
action or separate but similar or related actions arising out of the same
general
<PAGE> 28
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allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 4 (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes a full and unconditional release of each indemnified party
from all liability arising out of such litigation, investigation, proceeding or
claim and the offer and sale of any Notes and (ii) does not include a statement
as to or an admission of fault, culpability or a failure to act by or on behalf
of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees and
expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 4(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) In order to provide for just and equitable contribution in
circumstances under which any of the indemnity provisions set forth in this
Section 4 is for any reason held to be unavailable to the indemnified parties
although applicable in accordance with its terms, the Company, the Initial
Purchasers and the Holders, as applicable, shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
such indemnity agreement incurred by the Company, the Initial Purchasers and the
Holders; provided, however, that no Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person that was not guilty of such
fraudulent misrepresentation. As between the Company and the Initial Purchasers
and the Holders, such parties shall contribute to such aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement in such proportion as shall be appropriate to reflect the
relative fault of the Company on the one hand
<PAGE> 29
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and of the Holder of Transfer Restricted Notes, the Participating Broker-Dealer
or Initial Purchaser, as the case may be, on the other hand in connection with
the statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative fault of the Company on the one hand and the Holder of
Transfer Restricted Notes, the Participating Broker-Dealer or the Initial
Purchasers, as the case may be, on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Holder of Transfer
Restricted Notes, the Participating Broker-Dealer or the Initial Purchasers, as
the case may be, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Holders of the Transfer Restricted Notes and the
Initial Purchasers agree that it would not be just and equitable if contribution
pursuant to this Section 4 were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section 4.
For purposes of this Section 4, each affiliate of any Person, if any,
who controls a Holder of Transfer Restricted Notes, an Initial Purchaser or a
Participating Broker-Dealer within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act shall have the same rights to contribution
as such other Person, and each director of the Company, each affiliate of the
Company, each executive officer of the Company who signed the Registration
Statement, and each Person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.
5. Miscellaneous.
(a) Rule 144 and Rule 144A. The Company shall provide to each Holder
such reports as are required under Section 10.09 of the Indenture and, upon the
request of any Holder of Transfer Restricted Notes (a) make publicly available
such information as is necessary to permit sales pursuant to Rule 144 under the
Securities Act, (b) deliver such information to a prospective purchaser as is
necessary to permit sales pursuant
<PAGE> 30
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to Rule 144A under the Securities Act and it will take such further action as
any Holder of Transfer Restricted Notes may reasonably request, and (c) take
such further action, if any, that is reasonable in the circumstances, in each
case, to the extent required from time to time to enable such Holder to sell its
Transfer Restricted Notes without registration under the Securities Act within
the limitation of the exemptions provided by (i) Rule 144 under the Securities
Act, as such rule may be amended from time to time, (ii) Rule 144A under the
Securities Act, as such rule may be amended from time to time, or (iii) any
similar rules or regulations hereafter adopted by the SEC. Upon the reasonable
request of any Holder of Transfer Restricted Notes, the Company will deliver to
such Holder a written statement as to whether they have complied with such
requirements.
(b) No Inconsistent Agreements. The rights granted to the Holders
hereunder do not, and will not for the term of this Agreement in any way
conflict with and are not, and will not during the term of this Agreement be
inconsistent with the rights granted to the holders of the Company's other
issued and outstanding securities under any other agreements entered into by the
Company.
(c) Amendments and Waivers. The provisions of this Agreement, including
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
otherwise than with the prior written consent of the Company and the Majority
Holders; provided, however, that no amendment, modification, or supplement or
waiver or consent to the departure with respect to the provisions of Section 4
hereof shall be effective as against any Holder of Transfer Restricted Notes or
the Company unless consented to in writing by such Holder of Transfer Restricted
Notes or the Company, as the case may be.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 5(d), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the
Company, initially at the Company's address set forth in the Purchase Agreement
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 5(d).
<PAGE> 31
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All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors, assigns and transferees of the Initial
Purchasers, including, without limitation and without the need for an express
assignment, subsequent Holders; provided, however, that nothing herein shall be
deemed to permit any assignment, transfer or other disposition of Transfer
Restricted Notes in violation of the terms of the Purchase Agreement or the
Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Notes, in any manner, whether by operation of law or otherwise, such Transfer
Restricted Notes shall be held subject to all of the terms of this Agreement,
and by taking and holding such Transfer Restricted Notes, such Person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
(f) Third Party Beneficiary. Each of the Initial Purchasers and each
Holder shall be a third party beneficiary of the agreements made hereunder
between the Company, on the one hand, and the Initial Purchasers, on the other
hand, and shall have the right to enforce such agreements directly to the extent
it deems such enforcement necessary or advisable to protect its rights or the
rights of Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
<PAGE> 32
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(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day refer to New
York City time.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Notes Held by the Company or Any of Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Transfer Restricted
Notes is required hereunder, Transfer Restricted Notes held by the Company or
any of their affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
[Signature Page Follows]
<PAGE> 33
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
GOLDEN SKY DBS, INC.
By: /s/ JOHN R. HAGER
----------------------------------
Name: John R. Hager
Title: Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FLEET SECURITIES, INC.
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: /s/ JOSEPH B. SHEEHAN
------------------------------------------
Name: Joseph B. Sheehan
Title: Director
<PAGE> 34
Exhibit A
Form of Opinion of Counsel
1. Each of the Exchange Offer Registration Statement and the Prospectus
(other than the financial statements, notes or schedules thereto and other
financial and statistical information and supplemental schedules included or
referred to therein or omitted therefrom and the Form T-1, as to which such
counsel need express no opinion), complies as to form in all material respects
with the applicable requirements of the Securities Act and the applicable rules
and regulations promulgated under the Securities Act.
2. In the course of such counsel's review and discussion of the
contents of the Exchange Offer Registration Statement and the Prospectus with
certain officers and other representatives of the Company and representatives of
the independent certified public accountants of the Company, but without
independent check or verification or responsibility for the accuracy,
completeness or fairness of the statements contained therein, on the basis of
the foregoing (relying as to materiality to a large extent upon representations
and opinions of officers and other representatives of the Company), no facts
have come to such counsel's attention which cause such counsel to believe that
the Exchange Offer Registration Statement (other than the financial statements,
notes and schedules thereto and other financial and statistical information
contained or referred to therein and the Form T-1, as to which such counsel need
express no belief), at the time the Exchange Offer Registration Statement became
effective and at the time of the consummation of the Exchange Offer, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading, or that the Prospectus (other than the financial
statements, notes and schedules thereto and other financial and statistical
information contained or referred to therein, as to which such counsel need
express no belief) contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements contained therein, in the
light of the circumstances under which they were made, not misleading.
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Reboul, MacMurray, Hewitt, Maynard & Kristol]
April 16, 1999
Golden Sky DBS, Inc.
4700 Belleview Avenue, Suite 300
Kansas City, Missouri 64112
Golden Sky DBS, Inc.
Registration Statement on Form S-4
(Registration No. 333- )
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Golden Sky DBS, Inc., a Delaware
corporation (the "Company"), in connection with the Company's Registration
Statement on Form S-4 (the "Registration Statement"), filed under the Securities
Act of 1933, as amended (the "Act"), relating to the proposed offer by the
Company to exchange up to $193,100,000 aggregate principal amount at maturity of
its 13 1/2% Senior Discount Notes due 2007, Series B (the "New Notes"), for a
like principal amount at maturity of its outstanding 13 1/2% Senior Discount
Notes due 2007, Series A (the "Old Notes").
In that connection, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for the purposes of this opinion, including the Certificate of
Incorporation and By-laws of the Company.
<PAGE> 2
2
Based upon the foregoing, we are of opinion that:
1. The Company has been duly organized and is validly existing
under the laws of the State of Delaware.
2. The New Notes have been duly and validly authorized by the
Company and, when issued under the Indenture in substantially the form
filed as Exhibit 4.1 to the Registration Statement in exchange for the
Old Notes, upon the terms and subject to the conditions contained in
the Prospectus comprising part of the Registration Statement and in the
Letter of Transmittal substantially in the form filed as Exhibit 99.1
to the Registration Statement, will be valid and binding obligations of
the Company.
We are members of the bar of the State of New York and do not
express any opinion as to the law of any jurisdiction other than the laws of the
State of New York, the federal laws of the United States and the Delaware
General Corporation Law. Our opinions are rendered only with respect to the
laws, and the rules, regulations and orders thereunder, which are currently in
effect.
We hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus comprising a part of the Registration
Statement. By giving the foregoing consent, we do not admit that we come within
the category of persons whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Reboul, MacMurray, Hewitt, Maynard & Kristol
<PAGE> 1
EXHIBIT 10.1
$193,100,000
GOLDEN SKY DBS, INC.
PURCHASE AGREEMENT
February 11, 1999
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FLEET SECURITIES, INC.
c/o Merrill Lynch & Co.
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Golden Sky DBS, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Initial Purchasers named in
Schedule A hereto (collectively, the "Initial Purchasers," which term shall also
include any initial purchaser substituted as hereinafter provided in Section 11
hereof), for whom Merrill Lynch is acting as representative (in such capacity,
the "Representative"), with respect to the issue and sale by the Company and the
purchase by the Initial Purchasers, acting severally and not jointly, of the
respective principal amounts set forth in said Schedule A of $193,100,000
aggregate principal amount at maturity of the Company's 13 1/2% Senior Discount
Notes due 2007 (the "Securities").
The Securities are to be issued pursuant to an indenture dated as of
February 19, 1999 (the "Indenture") between the Company and State Street Bank
and Trust Company of Missouri, N.A., as trustee (the "Trustee"). Securities
issued in book-entry form will be issued to Cede & Co. as nominee of The
Depository Trust Company ("DTC") pursuant to a letter agreement, to be dated as
of the Closing Time (as defined in Section
<PAGE> 2
2(b)) (the "DTC Agreement"), among the Company, the Trustee and DTC.
The Company understands that the Initial Purchasers propose to make an
offering of the Securities on the terms and in the manner set forth herein and
agrees that the Initial Purchasers may resell, subject to the conditions set
forth herein, all or a portion of the Securities to purchasers ("Subsequent
Purchasers") at any time after the date of this Agreement. The Securities are to
be offered and sold through the Initial Purchasers without being registered
under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon
exemptions therefrom. Pursuant to the terms of the Securities and the Indenture,
investors that acquire Securities may only resell or otherwise transfer such
Securities if such Securities are hereafter registered under the 1933 Act or if
an exemption from the registration requirements of the 1933 Act is available
(including the exemption afforded by Rule 144A ("Rule 144A") or Regulation S
("Regulation S") of the rules and regulations promulgated under the 1933 Act by
the Securities and Exchange Commission (the "Commission")).
The holders of Securities (including the Initial Purchasers and subsequent
transferees) will be entitled to the benefits of a registration rights
agreement, to be dated as of February 19, 1999 (the "Registration Rights
Agreement"), by and among the Company and the Initial Purchasers. Pursuant to
the Registration Rights Agreement, the Company will agree to file with the
Commission under the circumstances set forth therein either (i) a registration
statement under the 1933 Act registering the Exchange Securities (as defined in
the Registration Rights Agreement) to be offered in exchange for the Securities
and to use its best efforts to cause such registration statement to be declared
effective and (ii) under certain circumstances set forth therein, to file with
the Commission a shelf registration statement pursuant to Rule 415 under the
1933 Act relating to the resale of the Securities by holders thereof or, if
applicable, relating to the resale of Private Exchange Notes (as defined in the
Registration Rights Agreement) by the Initial Purchasers pursuant to an exchange
of the Securities for Private Exchange Notes, and to use its best efforts to
cause such shelf registration statement to be declared effective.
The Company has prepared and delivered to each Initial Purchaser copies of
a preliminary offering memorandum dated February 4, 1999 (the "Preliminary
Offering Memorandum") and has prepared and will deliver to each Initial
Purchaser, on the date hereof or the next succeeding day, copies of a final
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<PAGE> 3
offering memorandum dated February 11, 1999 (the "Final Offering Memorandum"),
each for use by such Initial Purchaser in connection with its solicitation of
purchases of, or offering of, the Securities. "Offering Memorandum" means, with
respect to any date or time referred to in this Agreement, the most recent
offering memorandum (whether the Preliminary Offering Memorandum, the Final
Offering Memorandum, or any amendment or supplement to either such document),
including exhibits thereto and any documents incorporated therein by reference,
which has been prepared and delivered by the Company to the Initial Purchasers
in connection with their solicitation of purchases of, or offering of, the
Securities.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Initial Purchaser as of the date hereof and as
of the Closing Time referred to in Section 2(b) hereof, and agrees with each
Initial Purchaser as follows:
(i) Similar Offerings. The Company has not, directly or indirectly,
solicited any offer to buy or offered to sell, and will not, directly or
indirectly, solicit any offer to buy or offer to sell, in the United States
or to any United States citizen or resident, any security which is or would
be integrated with the sale of the Securities in a manner that would
require the Securities to be registered under the 1933 Act.
(ii) Offering Memorandum. The Offering Memorandum does not, and at the
Closing Time will not, include an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided that this representation, warranty and agreement shall
not apply to statements in or omissions from the Offering Memorandum made
in reliance upon and in conformity with information furnished to the
Company in writing by any Initial Purchaser through the Representative
expressly for use in the Offering Memorandum.
(iii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Offering
Memorandum are independent certified public accountants with respect to the
Company
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<PAGE> 4
and its subsidiaries within the meaning of Regulation S-X under the 1933
Act.
(iv) Financial Statements. The financial statements (other than the
pro forma financial statements) of the Company and its consolidated
subsidiaries, together with the related schedules and notes, included in
the Offering Memorandum present fairly the financial position of the
Company and its consolidated subsidiaries at the dates indicated and the
statement of operations, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules, if any, included in the
Offering Memorandum present fairly in accordance with GAAP the information
required to be stated therein. The selected financial data and the summary
financial information included in the Offering Memorandum present fairly
the information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the Offering
Memorandum. The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto included in the Offering
Memorandum present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to
pro forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
Each of the Company and its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization; and (4) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
-4-
<PAGE> 5
(v) No Material Adverse Change in Business. Since the respective dates
as of which information is given in the Offering Memorandum, except as
otherwise stated therein, (A) there has been no material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise (a "Material Adverse Effect"), whether or not arising in the
ordinary course of business, (B) there have been no transactions entered
into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company
and its subsidiaries considered as one enterprise and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly organized
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Offering Memorandum and to enter into and perform its obligations under
this Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(vii) Good Standing of Designated Subsidiaries. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Offering
Memorandum and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Offering Memorandum, all of the issued
and outstanding capital stock of each Designated Subsidiary has been duly
authorized and validly issued, is
-5-
<PAGE> 6
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; none of the outstanding shares
of capital stock of the Designated Subsidiaries was issued in violation of
any preemptive or similar rights arising by operation of law, or under the
charter or by-laws of any Designated Subsidiary or under any agreement to
which the Company or any Designated Subsidiary is a party. The subsidiaries
of the Company other than Designated Subsidiaries, considered in the
aggregate as a single subsidiary, do not constitute a "significant
subsidiary" as defined in Rule 1-02 of Regulation S-X.
(viii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the financial statements, including
the schedules and notes, included in the Offering Memorandum in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to employee benefit
plans referred to in the Offering Memorandum or pursuant to the exercise of
convertible securities or options referred to in the Offering Memorandum).
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization of the Indenture. The Indenture has been duly
authorized by the Company and, at the Closing Time, will have been duly
executed and delivered by the Company and will constitute a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency (including, without limitation, all laws relating
to fraudulent transfers), reorganization, moratorium or other similar laws
relating to or affecting enforcement of creditors' rights generally, or by
general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(xi) Authorization of the Registration Rights Agreement. The
Registration Rights Agreement has been duly authorized by the Company and,
when executed and delivered by the Company, will constitute a valid and
binding obligation of the Company, enforceable against the Company in
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<PAGE> 7
accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency (including, without limitation, all laws relating
to fraudulent transfers), reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforcement is sought in a proceeding at law or in equity).
(xii) Authorization of the Securities. The Securities, Exchange
Securities and Private Exchange Notes, if any, have been duly authorized
and, at the Closing Time, will have been duly executed by the Company and,
when authenticated in the manner provided for in the Indenture and
delivered against payment of the purchase price therefor, will constitute
valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency (including, without limitation,
all laws relating to fraudulent transfers), reorganization, moratorium or
other similar laws relating to or affecting enforcement of creditors'
rights generally, or by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law), and will be
in the form contemplated by, and entitled to the benefits of, the
Indenture, and the Exchange Securities and the Private Exchange Notes, if
any, when executed, authenticated, issued and delivered by the Company, in
exchange for the Securities in accordance with the terms of the
Registration Rights Agreement, will constitute valid and binding
obligations of the Company, entitled to the benefits of the Indenture and
enforceable against the Company in accordance with the terms thereof,
except as the enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in
a proceeding at law or in equity).
(xiii) Description of the Securities, the Registration Rights
Agreement and the Indenture. The Securities, the Exchange Securities, the
Private Exchange Notes, if any,
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<PAGE> 8
the Registration Rights Agreement and the Indenture will conform in all
material respects to the respective statements relating thereto contained
in the Offering Memorandum and will be in substantially the respective
forms previously delivered to the Initial Purchasers.
(xiv) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject (collectively, "Agreements
and Instruments"), except for such defaults that would not result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement, the Indenture and the Securities and any other agreement or
instrument entered into or issued or to be entered into or issued by the
Company in connection with the transactions contemplated hereby or thereby
or in the Offering Memorandum and the consummation of the transactions
contemplated herein and in the Offering Memorandum (including the issuance
and sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Offering Memorandum under the caption "Use
of Proceeds") and compliance by the Company with its obligations hereunder
have been duly authorized by all necessary corporate action and do not and
will not, whether with or without the giving of notice or passage of time
or both, conflict with or constitute a breach of, or default or a Repayment
Event (as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company
or any of its subsidiaries pursuant to, the Agreements and Instruments,
except for such conflicts, breaches or defaults or liens, charges or
encumbrances that, singly or in the aggregate, would not result in a
Material Adverse Effect, nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any of its
subsidiaries or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any of
its subsidiaries or any of their assets or properties. As used herein, a
"Repayment Event" means any event or condi-
-8-
<PAGE> 9
tion which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any of its subsidiaries.
(xv) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any of its subsidiaries exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any of its
subsidiaries' principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xvi) Absence of Proceedings. Except as disclosed in the Offering
Memorandum, there is no action, suit, proceeding, inquiry or investigation
before or by any court or governmental agency or body, domestic or foreign,
now pending, or, to the knowledge of the Company, threatened, against or
affecting the Company or any subsidiary thereof which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the properties or assets of
the Company or any of its subsidiaries or the consummation of this
Agreement or the performance by the Company of its obligations hereunder.
The aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary thereof is a party or of which any of their
respective property or assets is the subject which are not described in the
Offering Memorandum, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
(xvii) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or
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<PAGE> 10
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xviii) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement.
(xix) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xx) Title to Property. The Company and its subsidiaries have good and
marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind, except such as (a) are
described in the Offering Memorandum or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property
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<PAGE> 11
by the Company or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Offering Memorandum, are in
full force and effect, and neither the Company nor any of its subsidiaries
has any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any of its subsidiaries
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of such the Company or any subsidiary thereof to the
continued possession of the leased or subleased premises under any such
lease or sublease.
(xxi) Tax Returns. The Company and its subsidiaries have filed all
material federal, state, local and foreign tax returns that are required to
be filed or have duly requested extensions thereof, except as would not,
singly or in the aggregate, have a Material Adverse Effect and have paid
all taxes reflected as due on such returns and any related assessments,
fines or penalties, except for any such tax, assessment, fine or penalty
that is being contested in good faith and by appropriate proceedings and
except as would not, singly or in the aggregate, have a Material Adverse
Effect; and adequate charges, accruals and reserves have been provided for
in the financial statements referred to in Section 1(a)(v) above in respect
of all federal, state, local and foreign taxes for all periods as to which
the tax liability of the Company or any of its subsidiaries has not been
finally determined or remains open to examination by applicable taxing
authorities.
(xxii) Environmental Laws. Except as described in the Offering
Memorandum and except such matters as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company nor
any of its subsidiaries is in violation of any federal, state, local or
foreign statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of
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<PAGE> 12
chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials
(collectively, "Environmental Laws"), (B) the Company and its subsidiaries
have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of its
subsidiaries relating to Hazardous Materials or Environmental Laws.
(xxiii) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Offering
Memorandum will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(xxiv) Rule 144A Eligibility. The Securities are eligible for resale
pursuant to Rule 144A and will not be, at the Closing Time, of the same
class as securities listed on a national securities exchange registered
under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer
quotation system.
(xxv) No General Solicitation. None of the Company, its affiliates, as
such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), or
any person acting on its or any of their behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has engaged or
will engage, in connection with the offering of the Securities, in any form
of general solicitation or general advertising within the meaning of Rule
502(c) under the 1933 Act.
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<PAGE> 13
(xxvi) No Registration Required. Subject to compliance by the Initial
Purchasers with the representations and warranties set forth in Section 2
and the procedures set forth in Section 6 hereof, it is not necessary in
connection with the offer, sale and delivery of the Securities to the
Initial Purchasers and to each Subsequent Purchaser in the manner
contemplated by this Agreement and the Offering Memorandum to register the
Securities under the 1933 Act or to qualify the Indenture under the Trust
Indenture Act of 1939, as amended (the "1939 Act").
(xxvii)No Directed Selling Efforts. With respect to those Securities
sold in reliance on Regulation S, (A) none of the Company, its Affiliates
or any person acting on its or their behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has engaged or
will engage in any directed selling efforts within the meaning of
Regulation S and (B) each of the Company and its Affiliates and any person
acting on its or their behalf (other than the Initial Purchasers, as to
whom the Company makes no representation) has complied and will comply with
the offering restrictions requirement of Regulation S.
(xxviii) Solvency. Neither the Company nor any of its subsidiaries
intend to, nor do any of them believe that they will, incur debts beyond
their ability to pay such debts as they mature. As of the date hereof, the
fair market value of the assets of the Company and its subsidiaries
exceeds, and at the Closing Time the fair market value of the assets of the
Company and its subsidiaries will exceed, the amounts that will be required
to be paid on or in respect of their existing debts and other liabilities
when and as they become absolute and mature. The assets of the Company and
its subsidiaries do not constitute unreasonably small capital to carry on
their respective businesses as conducted or proposed to be conducted.
(xxix) Receipt of Consents. The Company has received all the consents,
waivers and approvals from the lenders under the Credit Facility necessary
to issue the Notes and consummate the transactions contemplated by this
Agreement.
(xxx) No Stabilization or Manipulation. Neither the Company nor any of
its officers, directors or controlling persons has taken, directly or
indirectly, any action de-
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<PAGE> 14
signed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Securities.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representative or to counsel
for the Initial Purchasers shall be deemed a representation and warranty by the
Company to each Initial Purchaser as to the matters covered thereby.
SECTION 2. Sale and Delivery to Initial Purchasers; Closing.
(a) Securities. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to each Initial Purchaser, severally and not jointly, and each
Initial Purchaser, severally and not jointly, agrees to purchase from the
Company, at the price set forth in Schedule B, the aggregate principal amount at
maturity of Securities set forth in Schedule A opposite the name of such Initial
Purchaser, plus any additional principal amount of Securities that such Initial
Purchaser may become obligated to purchase pursuant to the provisions of Section
11 hereof.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the office of Cahill Gordon &
Reindel, 80 Pine Street, New York, New York 10005, or at such other place as
shall be agreed upon by the Representative and the Company, at 9:00 A.M. on the
fifth business day after the date hereof (unless postponed in accordance with
the provisions of Section 11), or such other time not later than ten business
days after such date as shall be agreed upon by the Representative and the
Company (such time and date of payment and delivery being herein called the
"Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representative for the respective accounts of the Initial Purchasers of
certificates for the Securities to be purchased by them. It is understood that
each Initial Purchaser has authorized the Representative, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Securities which it has
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<PAGE> 15
agreed to purchase. Merrill Lynch, individually and not as representative of the
Initial Purchasers, may (but shall not be obligated to) make payment of the
purchase price for the Securities to be purchased by any Initial Purchaser whose
funds have not been received by, the Closing Time, but such payment shall not
relieve such Initial Purchaser from its obligations hereunder. The certificates
representing the Securities shall be registered in the name of Cede & Co.
pursuant to the DTC Agreement and shall be made available for examination and
packaging by the Initial Purchasers in The City of New York not later than 10:00
A.M. on the last business day prior to the Closing Time.
(c) Qualified Institutional Buyer. Each Initial Purchaser severally and not
jointly represents and warrants to, and agrees with, the Company that it is a
"qualified institutional buyer" within the meaning of Rule 144A under the 1933
Act (a "Qualified Institutional Buyer").
(d) Denominations; Registration. Certificates for the Securities shall be
in such denominations ($1,000 or integral multiples thereof) and registered in
such names as the Representative may request in writing at least one full
business day before the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Initial Purchaser as follows:
(a) Offering Memorandum. The Company, as promptly as possible, will furnish
to each Initial Purchaser, without charge, such number of copies of the
Preliminary Offering Memorandum, the Final Offering Memorandum and any
amendments and supplements thereto and documents incorporated by reference
therein as such Initial Purchaser may reasonably request.
(b) Notice and Effect of Material Events. The Company will immediately
notify each Initial Purchaser, and confirm such notice in writing, of (x) any
filing made by the Company of information relating to the offering of the
Securities with any securities exchange or any other regulatory body in the
United States or any other jurisdiction, and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a notice
in writing from the Initial Purchasers to the Company, any material changes in
or affecting the earnings, business affairs or business prospects of the Company
and its subsidiaries that (i) make any statement in the Offering Memorandum
false or misleading or (ii) are not disclosed in the Offering Memorandum. In
such event or if dur-
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<PAGE> 16
ing such time any event shall occur as a result of which it is necessary, in the
reasonable opinion of the Company, its counsel, the Initial Purchasers or
counsel for the Initial Purchasers, to amend or supplement the Final Offering
Memorandum in order that the Final Offering Memorandum not include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein not misleading in the light of the circumstances
then existing, the Company will forthwith amend or supplement the Final Offering
Memorandum by preparing and furnishing to each Initial Purchaser an amendment or
amendments of, or a supplement or supplements to, the Final Offering Memorandum
(in form and substance satisfactory in the reasonable opinion of counsel for the
Initial Purchasers) so that, as so amended or supplemented, the Final Offering
Memorandum will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a Subsequent
Purchaser, not misleading.
(c) Amendment to Offering Memorandum and Supplements. The Company will
advise each Initial Purchaser promptly of any proposal to amend or supplement
the Offering Memorandum and will not effect such amendment or supplement without
the consent of the Initial Purchasers. Neither the consent of the Initial
Purchasers, nor the Initial Purchasers' delivery of any such amendment or
supplement, shall constitute a waiver of any of the conditions set forth in
Section 5 hereof.
(d) Qualification of Securities for Offer and Sale. The Company will use
its best efforts, in cooperation with the Initial Purchasers, to qualify the
Securities for offering and sale under the applicable securities laws of such
jurisdictions as the Representative may designate and will maintain such
qualifications in effect as long as required for the sale of the Securities;
provided, however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction in
which it is not otherwise so subject.
(e) DTC. The Company will cooperate with the Representative and use its
best efforts to permit the Securities to be eligible for clearance and
settlement through the facilities of DTC.
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<PAGE> 17
(f) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Offering
Memorandum under "Use of Proceeds."
(g) Restriction on Sale of Securities. During a period of 180 days from the
date of the Offering Memorandum, the Company will not, without the prior written
consent of Merrill Lynch, directly or indirectly, issue, sell, offer or agree to
sell, grant any option for the sale of, or otherwise dispose of, any other debt
securities of the Company or securities of the Company that are convertible
into, or exchangeable for, the Securities or such other debt securities.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including (i) the preparation and
printing of the Offering Memorandum (including financial statements and any
schedules or exhibits and any document incorporated therein by reference) and of
each amendment or supplement thereto, (ii) the preparation, issuance and
delivery of the certificates for the Securities to the Initial Purchasers,
including any charges of DTC in connection therewith, (iii) the fees and
disbursements of the Company's counsel, accountants and other advisors, (iv) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Initial Purchasers in connection therewith
and in connection with the preparation of the Blue Sky Survey, any supplement
thereto and any Legal Investment Survey, (v) the fees and expenses of the
Trustee, including the fees and disbursements of counsel for the Trustee in
connection with the Indenture and the Securities, (vi) any fees payable in
connection with the rating of the Securities and (vii) any fees payable to the
review by the National Association of Securities Dealers, Inc. (the "NASD") in
connection with the initial and continued designation of the Securities as
PORTAL securities under the PORTAL Market Rules pursuant to NASD Rule 5322 (it
being understood that, except as provided in Sections 4(a)(v) and 4(b), the
Initial Purchasers shall pay their own costs and expenses in connection with the
transactions contemplated hereby).
(b) Termination of Agreement. If this Agreement is terminated by the
Representative in accordance with the provisions of Section 5 or Section
10(a)(i) hereof, the Company
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<PAGE> 18
shall reimburse the Initial Purchasers for all of their documented out-of-pocket
expenses, including the reasonable fees and disbursements of counsel for the
Initial Purchasers.
SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations
of the several Initial Purchasers hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any of its subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Opinion of Counsel for Company. At the Closing Time, the Representative
shall have received the favorable opinion, dated as of the Closing Time, of
Reboul, MacMurray, Hewitt, Maynard & Kristol, counsel for the Company, in form
and substance satisfactory to counsel for the Initial Purchasers, together with
signed or reproduced copies of such letter for each of the other Initial
Purchasers to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the Initial Purchasers may reasonably request.
(b) Opinion of Regulatory Counsel for Company. At the Closing Time, the
Representative shall have received the favorable opinion, dated as of the
Closing Time, of Fleischman and Walsh, L.L.P., regulatory counsel for the
Company, in form and substance satisfactory to counsel for the Initial
Purchasers, to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the Initial Purchasers may reasonably request.
(c) Opinion of Counsel for Initial Purchasers. At the Closing Time, the
Representative shall have received the favorable opinion, dated as of the
Closing Time, of Cahill Gordon & Reindel, counsel for the Initial Purchasers,
with respect to the matters set forth in (vii), (viii), (x) (solely as to the
information in the Offering Memorandum under "Description of the Notes") and
(xiv) of Exhibit A hereto. In giving such opinion such counsel may rely, as to
all matters governed by the laws of jurisdictions other than the law of the
State of New York, upon the opinions of counsel satisfactory to the
Representative. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
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<PAGE> 19
(d) Officers' Certificate. At the Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Offering Memorandum, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representative shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1 hereof are true and correct, in all material respects, with the same
force and effect as though expressly made at and as of the Closing Time (except
the representations and warranties in Section 1 qualified as to materiality
shall be true and correct with the same force and effect as though expressly
made at and as of the Closing Time) and (iii) the Company has complied, in all
material respects, with all agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representative shall have received from each of KPMG LLP, Eide
Bailly LLP, Loucks & Glassley pllp, Bolinger, Segars, Gilbert, & Moss, L.L.P.,
Moss Adams LLP, Curtis Blakely & Co., P.C., CHMS, P.C., Anderson and Company,
Olsen Thielen & Co., LTD. and Summers McNea & Company, P.C. a letter dated such
date, in form and substance satisfactory to the Representative, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to Initial Purchasers with respect to the financial statements
and certain financial information contained in the Offering Memorandum.
(f) Bring-down Comfort Letter. At the Closing Time, the Representative
shall have received from KPMG LLP a letter, dated as of the Closing Time, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to the Closing Time.
(g) Maintenance of Rating. At the Closing Time, and since the date of this
Agreement, there shall not have occurred a downgrading in the rating assigned to
any of the Company's or its subsidiaries' other debt securities by any
nationally rec-
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ognized securities rating agency, and no such securities rating agency shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's or its subsidiaries'
other debt securities.
(h) PORTAL. At the Closing Time, the Securities shall have been designated
for trading on PORTAL.
(i) First Amendment to the Amended and Restated Credit Agreement. At the
Closing Time, the Company shall have entered into the First Amendment to the
Amended and Restated Credit Agreement, which shall be substantially in the form
previously delivered to the Initial Purchasers and counsel for the Initial
Purchasers.
(j) Stockholder Approval. At the Closing Time, the Company shall have
received all stockholder approvals necessary to issue the Notes and consummate
the transactions contemplated by this Agreement.
(k) Additional Documents. At the Closing Time, counsel for the Initial
Purchasers shall have been furnished with such documents and opinions as they
may require for the purpose of enabling them to pass upon the issuance and sale
of the Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein contemplated
shall be satisfactory in form and substance to the Representative and counsel
for the Initial Purchasers.
(l) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representative by notice to the Company at
any time at or prior to the Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 7 and 8 shall survive any such termination and remain in
full force and effect.
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<PAGE> 21
SECTION 6. Subsequent Offers and Resales of the Securities.
(a) Offer and Sale Procedures. Each of the Initial Purchasers and the
Company hereby establish and agree to observe the following procedures in
connection with the offer and sale of the Securities:
(i) Offers and Sales Only to Institutional Accredited Investors or
Non-U.S. Persons. Offers and sales of the Securities will be made only by
the Initial Purchasers or Affiliates thereof qualified to do so in the
jurisdictions in which such offers or sales are made. Each such offer or
sale shall only be made (A) to persons whom the offeror or seller
reasonably believes to be qualified institutional buyers (as defined in
Rule 144A under the 1933 Act and (B) non-U.S. persons outside the United
States to whom the offeror or seller reasonably believes offers and sales
of the Securities may be made in reliance upon Regulation S under the 1933
Act.
(ii) No General Solicitation. The Securities will be offered by
approaching prospective Subsequent Purchasers on an individual basis. No
general solicitation or general advertising (within the meaning of Rule
502(c) under the 1933 Act) will be used in the United States in connection
with the offering of the Securities.
(iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank
Subsequent Purchaser of a Security acting as a fiduciary for one or more
third parties, in connection with an offer and sale to such purchaser
pursuant to clause (a) above, each third party shall, in the judgment of
the applicable Initial Purchaser, be a Qualified Institutional Buyer or a
non-U.S. person outside the United States.
(iv) Subsequent Purchaser Notification. Each Initial Purchaser will
take reasonable steps to inform, and cause each of its U.S. Affiliates to
take reasonable steps to inform, persons acquiring Securities from such
Initial Purchaser or affiliate, as the case may be, in the United States
that the Securities (A) have not been and will not be registered under the
1933 Act, (B) are being sold to them without registration under the 1933
Act in reliance on Rule 144A or in accordance with another exemption from
registration under the 1933 Act, as the case may be, and (C) may not be
offered, sold or otherwise transferred ex-
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<PAGE> 22
cept (1) to the Company, (2) outside the United States in accordance with
Rule 904 of Regulation S, or (3) inside the United States in accordance
with (x) Rule 144A to a person whom the seller reasonably believes is a
Qualified Institutional Buyer that is purchasing such Securities for its
own account or for the account of a Qualified Institutional Buyer to whom
notice is given that the offer, sale or transfer is being made in reliance
on Rule 144A or (y) the exemption from registration under the 1933 Act
provided by Rule 144, if available.
(v) Minimum Principal Amount. No sale of the Securities to any one
Subsequent Purchaser will be for less than U.S. $100,000 principal amount
at maturity and no Security will be issued in a smaller principal amount.
If the Subsequent Purchaser is a non-bank fiduciary acting on behalf of
others, each person for whom it is acting must purchase at least U.S.
$100,000 principal amount at maturity of the Securities.
(vi) Restrictions on Transfer. The transfer restrictions and the other
provisions set forth in Section Two of the Indenture, including the legend
required thereby, shall apply to the Securities except as otherwise agreed
by the Company and the Initial Purchasers. Following the sale of the
Securities by the Initial Purchasers to Subsequent Purchasers pursuant to
the terms hereof, the Initial Purchasers shall not be liable or responsible
to the Company for any losses, damages or liabilities suffered or incurred
by the Company, including any losses, damages or liabilities under the 1933
Act, arising from or relating to any resale or transfer of any Security.
(vii) Delivery of Offering Memorandum. Each Initial Purchaser will
deliver to each purchaser of the Securities from such Initial Purchaser, in
connection with its original distribution of the Securities, a copy of the
Offering Memorandum, as amended and supplemented at the date of such
delivery.
(b) Covenants of the Company. The Company covenants with each Initial
Purchaser as follows:
(i) Due Diligence. In connection with the original distribution of the
Securities, the Company agrees that, prior to any offer or resale of the
Securities by the Initial Purchasers, the Initial Purchasers and counsel
for the Initial Purchasers shall have the right to make rea-
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<PAGE> 23
sonable inquiries into the business of the Company and its subsidiaries.
The Company also agrees to provide answers to each prospective Subsequent
Purchaser of Securities who so requests concerning the Company and its
subsidiaries (to the extent that such information is available or can be
acquired and made available to prospective Subsequent Purchasers without
unreasonable effort or expense and to the extent the provision thereof is
not prohibited by applicable law) and the terms and conditions of the
offering of the Securities, as provided in the Offering Memorandum.
(ii) Integration. The Company agrees that it will not and will cause
its Affiliates not to make any offer or sale of securities of the Company
of any class if, as a result of the doctrine of "integration" referred to
in Rule 502 under the 1933 Act, such offer or sale would render invalid
(for the purpose of (i) the sale of the Securities by the Company to the
Initial Purchasers, (ii) the resale of the Securities by the Initial
Purchasers to Subsequent Purchasers or (iii) the resale of the Securities
by such Subsequent Purchasers to others) the exemption from the
registration requirements of the 1933 Act provided by Section 4(2) thereof
or by Rule 144A OR BY REGULATION S thereunder or otherwise.
(iii) Rule 144A Information. The Company agrees that, in order to
render the Securities eligible for resale pursuant to Rule 144A under the
1933 Act, while any of the Securities remain outstanding, it will make
available, upon request, to any holder of Securities or prospective
purchasers of Securities the information specified in Rule 144A(d)(4),
unless the Company furnishes information to the Commission pursuant to
Section 13 or 15(d) of the 1934 Act (such information, whether made
available to holders or prospective purchasers or furnished to the
Commission, is herein referred to as "Additional Information").
(iv) Restriction on Repurchases. Until the expiration of two years
after the original issuance of the Securities, the Company will not, and
will cause its Affiliates not to, purchase or agree to purchase or
otherwise acquire any Securities which are "restricted securities" (as such
term is defined under Rule 144(a)(3) under the 1933 Act), whether as
beneficial owner or otherwise (except as agent acting as a securities
broker on behalf of and for the account of customers in the ordinary course
of business in unsolicited broker's transactions) unless, immediately upon
any such purchase, the Company or any Af-
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<PAGE> 24
filiate shall submit such Securities to the Trustee for cancellation.
SECTION 7. Indemnification.
(a) Indemnification of Initial Purchasers. The Company agrees to indemnify
and hold harmless each Initial Purchaser and each person, if any, who controls
any Initial Purchaser within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Offering
Memorandum or the Final Offering Memorandum (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
7(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with written information furnished to
the Company by any Initial Purchaser through Merrill Lynch expressly for
use in the Offering Memorandum (or any
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<PAGE> 25
amendment thereto); and provided, further, that the Company will not be
liable to any Initial Purchaser hereunder with respect to any such loss,
liability, claim, damage or expense that resulted from the fact that such
Initial Purchaser sold Securities to a person to whom such Initial
Purchaser failed to send or give, at or prior to the Closing Time, a copy
of the Final Offering Memorandum, as then amended or supplemented, if the
Company has previously furnished copies thereof (sufficiently in advance of
the Closing Time to allow for distribution by the Closing Time) to the
Initial Purchasers and the loss, liability, claim, damage or expense of
such Initial Purchaser resulted from an untrue statement or omission or
alleged untrue statement or omission of a material fact contained in or
omitted from the Preliminary Offering that was corrected in the Final
Offering Memorandum or, if applicable, amended or supplemented prior to the
Closing Time.
(b) Indemnification of Company, Directors and Officers. Each Initial
Purchaser severally agrees to indemnify and hold harmless the Company, its
directors, its officers and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Offering Memorandum in reliance upon and in conformity
with written information furnished to the Company by such Initial Purchaser
through Merrill Lynch expressly for use in the Offering Memorandum.
(c) Actions Against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 7(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 7(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnify-
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<PAGE> 26
ing party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 7 or Section 8 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement Without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 7(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 8. Contribution. If the indemnification provided for in Section 7
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Initial Purchasers on the other hand from the
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<PAGE> 27
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
Initial Purchasers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Initial Purchasers on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Initial
Purchasers, bear to the aggregate initial offering price of the Securities.
The relative fault of the Company on the one hand and the Initial
Purchasers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Initial Purchasers and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 8 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, no Initial Purchaser
shall be required to contribute any amount in excess of the amount by which the
total price at which the Se-
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<PAGE> 28
curities underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Initial Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls an
Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such Initial
Purchaser, and each director of the Company, each officer of the Company, and
each person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company. The Initial Purchasers' respective obligations to
contribute pursuant to this Section 8 are several in proportion to the principal
amount of Securities set forth opposite their respective names in Schedule A
hereto and not joint.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Initial Purchaser or controlling person, or by or on behalf
of the Company, and shall survive delivery of the Securities to the Initial
Purchasers.
SECTION 10. Termination of Agreement.
(a) Termination; General. The Representative may terminate this Agreement,
by notice to the Company, at any time at or prior to the Closing Time (i) if
there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Offering Memorandum,
any material adverse change in the condition, financial or otherwise or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or
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<PAGE> 29
crisis or any change or development involving a prospective change in national
or international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Representative,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or limited by the Commission or, if trading generally on the American
Stock Exchange or the New York Stock Exchange or in the National Market System
has been suspended or limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 7
and 8 shall survive such termination and remain in full force and effect.
SECTION 11. Default by One or More of the Initial Purchasers. If one or
more of the Initial Purchasers shall fail at the Closing Time to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the Representative shall have the right, but not the
obligation, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting Initial Purchasers, or any other Initial Purchasers, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then this Agreement shall terminate without liability on the part of any
non-defaulting Initial Purchaser.
No action pursuant to this Section shall relieve any defaulting Initial
Purchaser from liability in respect of its default.
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<PAGE> 30
In the event of any such default that does not result in a termination of
this Agreement, either the Representative or the Company shall have the right to
postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Offering Memorandum or in any other documents
or arrangement.
SECTION 12. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the Initial
Purchasers shall be directed to the Representative at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Evan Ladouceur;
notices to the Company shall be directed to it at 605 West 47th Street, Suite
300, Kansas City, Missouri 64112, attention of John Hager.
SECTION 13. Parties. This Agreement shall each inure to the benefit of and
be binding upon the Initial Purchasers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Initial Purchasers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Initial Purchasers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any Initial Purchaser shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Section headings herein and the Table
of Contents are for convenience only, and shall not affect the construction
hereof.
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<PAGE> 31
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Initial Purchasers and the Company in accordance with its terms.
Very truly yours,
GOLDEN SKY DBS, INC.
By: /s/ JOHN R. HAGER
---------------------------------------
Name: John R. Hager
Title: Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
FLEET SECURITIES, INC.
By: Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: /s/ JOSEPH B. SHEEHAN
----------------------------------------
Name: Joseph B. Sheehan
Title: Director
<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Principal
Amount at
Maturity of
Name of Initial Purchaser Securities
- ------------------------- -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................... $106,205,000
NationsBanc Montgomery Securities LLC............... 48,275,000
Donaldson, Lufkin & Jenrette
Securities Corporation.......................... 28,965,000
Fleet Securities, Inc............................... 9,655,000
-----------
Total............................................... $193,100,000
===========
</TABLE>
Sch A-1
<PAGE> 33
SCHEDULE B
GOLDEN SKY DBS, INC.
$193,100,000 Senior Discount Notes due 2007
1. The initial public offering price of the Securities shall be 51.8% of
the principal amount thereof at maturity, plus accretion, if any, from the date
of issuance.
2. The purchase price to be paid by the Initial Purchasers for the
Securities shall be 50.1% of the principal amount thereof at maturity.
3. Cash interest will not accrue on the Securities prior to March 1, 2004.
Thereafter, cash interest on the securities will accrue at a rate of 13 1/2% per
annum and will be payable March 1 and September 1 of each year commencing
September 1, 2004.
4. The Securities will mature on March 1, 2007.
Sch B-1
<PAGE> 34
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the Offering
Memorandum and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the Company is
as set forth in the Offering Memorandum in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements, employee
benefit plans or the exercise of convertible securities or options referred to
in the Offering Memorandum); the shares of issued and outstanding capital stock
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable; and none of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar rights of any
security holder of the Company.
(v) Each Designated Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Offering
Memorandum and is duly qualified as a foreign corporation to transact business
and is in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct
A-1
<PAGE> 35
of business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; all of the issued and outstanding
capital stock of each Designated Subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and, to the best of our knowledge and
information, except as disclosed in the Offering Memorandum, is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
(vi) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(vii) The Registration Rights Agreement has been duly authorized by the
Company and, when executed and delivered by the Company, will constitute a valid
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
enforcement of creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered in a proceeding in equity or at law).
(viii) The Indenture has been duly authorized, executed and delivered by
the Company and (assuming the due authorization, execution and delivery thereof
by the Trustee) constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency (including, without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or other similar laws relating to or affecting enforcement of
creditors' rights generally, or by general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
(ix) The Securities are in the form contemplated by the Indenture, have
been duly authorized by the Company and, when executed by the Company and
authenticated by the Trustee in the manner provided in the Indenture (assuming
the due authorization, execution and delivery of the Indenture by the Trustee)
and delivered against payment of the purchase price therefor, and the Exchange
Securities and the Private Exchange Notes (other than with respect to the
delivery in book-entry form), if any, when executed, authenticated and delivered
in exchange for the Securities in accordance with the terms of the
A-2
<PAGE> 36
Registration Rights Agreement, will be entitled to the benefits of the Indenture
and will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium
(including, without limitation, all laws relating to fraudulent transfers), or
other similar laws relating to or affecting enforcement of creditor's rights
generally, or by general principles of equity (regardless of whether enforcement
is considered in a proceeding in equity or at law), and will be entitled to the
benefits of the Indenture.
(x) The Securities, the Exchange Securities, the Private Exchange Notes,
the Registration Rights Agreement and the Indenture conform in all material
respects to the descriptions thereof contained in the Offering Memorandum.
(xi) There is not pending or, to the best of their knowledge, threatened
any action, suit, proceeding, inquiry or investigation, to which the Company or
any subsidiary is a party, or to which the property of the Company or any
subsidiary thereof is subject, before or brought by any court or governmental
agency or body, which might reasonably be expected to result in a Material
Adverse Effect, or which might reasonably be expected to materially and
adversely affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance by the
Company of its obligations thereunder or the transactions contemplated by the
Offering Memorandum.
(xii) The information in the Offering Memorandum under "Offering Memorandum
Summary -- The Offering," "Business--Litigation," "Description of the Notes,"
"Exchange Offer and Registration Rights" and "Certain Federal Income Tax
Considerations," to the extent that it constitutes matters of law, summaries of
legal matters, or legal proceedings, or legal conclusions, has been reviewed by
them and is correct in all material respects.
(xiii) All descriptions in the Offering Memorandum of contracts and other
documents to which the Company or any of its subsidiaries are a party are
accurate in all material respects; and to the best of our knowledge, there are
no franchises, contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments that would be required to be described in the Offering
Memorandum that are not described or referred to in the Offering Memorandum
other than those described or referred to therein.
A-3
<PAGE> 37
(xiv) Neither the Company nor any of its subsidiaries is in violation of
its charter or by-laws and, to the best of our knowledge, no default by the
Company or any of its subsidiaries (other than as described in the Offering
Memorandum) exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Offering Memorandum.
(xv) No authorization, approval, consent or order of any court or
governmental authority or agency, other than such as may be required under the
applicable securities laws of the various jurisdictions in which the Securities
will be offered or sold, as to which no opinion is required in connection with
the due authorization, execution and delivery of the Purchase Agreement or the
due execution, delivery or performance of the Indenture by the Company, or for
the offering, issuance, sale or delivery of the Securities to the Initial
Purchasers or the resale by the Initial Purchasers in accordance with the
Purchase Agreement.
(xvi) It is not necessary in connection with the offer, sale and delivery
of the Securities to the Initial Purchasers and to each Subsequent Purchaser in
the manner contemplated by the Purchase Agreement and the Offering Memorandum to
register the Securities under the 1933 Act or to qualify the Indenture under the
Trust Indenture Act.
(xvii) The execution, delivery and performance of the Purchase Agreement,
the DTC Agreement, the Indenture and the Securities and the consummation of the
transactions contemplated in the Purchase Agreement and in the Offering
Memorandum (including the use of the proceeds from the sale of the Securities as
described in the Offering Memorandum under the caption "Use Of Proceeds") and
compliance by the Company with its obligations under the Purchase Agreement, the
Indenture and the Securities will not, whether with or without the giving of
notice or lapse of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section l(a)(iii) of the Purchase
Agreement) under or result in the creation or imposition of any lien, charge or
encumbrance (other than those created pursuant to the Company's Amended and
Restated Credit Agreement) upon any property or assets of the Company or any
subsidiary thereof pursuant to any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or any other agreement or instrument,
including agreements governing the rights of stockholders of the Company,
A-4
<PAGE> 38
known to us, to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or assets
of the Company or any subsidiary thereof is subject (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not have a
Material Adverse Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company or any of its subsidiaries,
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree, known to us, of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties, assets or operations.
(xviii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Nothing has come to our attention that would lead us to believe that the
Offering Memorandum (except for financial statements and schedules and other
financial data included or incorporated by reference therein as to which we make
no statement), contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Offering Memorandum or any
amendment or supplement thereto (except for financial statements and schedules
and other financial data included therein, as to which such counsel need make no
statement), at the time the Offering Memorandum was issued, at the time any such
amended or supplemented Offering Memorandum was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates of
responsible officers of the Company and public officials. Such opinion shall not
state that it is to be governed or qualified by, or that it is otherwise subject
to, any treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).
A-5
<PAGE> 39
Exhibit B
FORM OF OPINION OF COMPANY'S REGULATORY
COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b)
(i) The statements in the Offering Memorandum under the captions "Risk
Factors-Regulation; PrimeTime 24 Litigation" and "Business-Regulation," insofar
as such statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly summarize the matters referred to
therein and, to our knowledge, such statements, as of the date of the Offering
Memorandum and the date hereof, contain no untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein not
misleading.
B-1
<PAGE> 1
EXHIBIT 12.1
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Six Months Ended June 30,
Inception to Year Ended -------------------------
December 31, 1996 December 31, 1997 1997 1998
------------------ ------------------ ------- --------
<S> <C> <C> <C> <C>
Net Loss $ (1,167) $(15,784) $(2,858) $(22,625)
Net Internet Expense 61 2,918 126 4,942
Rent Expense (Interest Portion) 9 145 33 119
-------- -------- ------- --------
Earnings (as defined) (1,097) (12,721) (2,699) (17,564)
-------- -------- ------- --------
Interest Expense 62 2,958 128 4,971
Rent Expense (Interest Portion) 9 145 33 119
-------- -------- ------- --------
Fixed Charges 71 3,103 161 5,090
-------- -------- ------- --------
Ratio of Earnings to Fixed Charges -- -- -- --
</TABLE>
<TABLE>
<CAPTION> Pro Forma
-------------------------------------
Year Ended Six Months Ended
December 31, 1997 June 30, 1998
------------------ ----------------
<S> <C> <C>
Net Loss $(60,311) $(34,434)
Net Internet Expense 26,754 13,282
Rent Expense (Interest Portion) 145 119
-------- --------
Earnings (as defined) (33,412) (21,033)
-------- --------
Interest Expense 26,794 13,311
Rent Expense (Interest Portion) 145 119
-------- --------
Fixed Charges 26,939 13,430
-------- --------
Ratio of Earnings to Fixed Charges -- --
</TABLE>
The ratio of earnings to fixed charges is determined by dividing Earnings
(defined as the sum of net loss before net interest expense and a portion of
rent expense representative of interest) by Fixed Charges (defined as the sum of
interest expense and such portion of rent expenses). For the periods ended
December 31, 1996 and 1997 and the six month periods ending June 30, 1997 and
1998, the deficiency of earnings to fixed charges was $1,168, $15,824, $2,860
and $22,654, respectively. On a pro forma basis, for the year ended December 31,
1997 and the six month period ended June 30, 1998, the deficiency of earnings to
fixed charges was $60,351 and $34,463, respectively.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation/
Name Organization
- ---- --------------
DIRECT SUBSIDIARIES:
Golden Sky Systems, Inc. ...........................Delaware
GOLDEN SKY SYSTEMS' SUBSIDIARIES:
Argos Support Services Company d/b/a
Argos Direct Broadcast Satellite, Inc. ........Texas
DCE Satellite Entertainment, LLC....................Wisconsin
PrimeWatch, Inc. ...................................North Carolina
South Plains DBS Limited Partnership................Texas
<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 PEAT MARWICK LLP
March 3, 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-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which
this Exhibit forms a part.
/s/ Eide Bailly LLP
March 3, 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-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which
this Exhibit forms a part.
/s/ LOUCKS & GLASSLEY, pllp
Great Falls, Montana
March 3, 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-4 of Golden Sky Systems, Inc. of which this Exhibit forms a
part.
/s/ BOLINGER, SEGARS, GILBERT & MOSS, L.L.P.
Certified Public Accountants
Lubbock, Texas
March 3, 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-4 of Golden Sky Systems, Inc., of which this
Exhibit forms a part.
/s/ Moss Adams LLP
Stockton, California
March 3, 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-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which
this Exhibit forms a part.
CURTIS BLAKELY & CO., P.C.
/s/ Curtis Blakely & Co., P.C.
----------------------------------------
Longview, Texas
March 4, 1999
<PAGE> 1
EXHIBIT 23.8
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-4 of Golden Sky Systems, Inc. of which this Exhibit forms a
part.
CHMS, P.C.
By: /s/ Rocky L. Torgeson
Sidney, Montana
March 3, 1999
<PAGE> 1
EXHIBIT 23.9
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports included herein and to the references to
our firm under the heading "Experts" in the Registration Statement.
/s/ Anderson and Company
January 25, 1999
Anderson and Company
Emmetsburg, Iowa
<PAGE> 1
EXHIBIT 23.10
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Amendment No. 3 of the Registration Statement of
Golden Sky Systems, Inc. on Form S-4 of our report dated February 10, 1998, on
the financial statements of Gardonville Systems, Inc. as of December 31, 1997,
and for the year then ended which report is included in or made part of the
Registration Statement.
/s/ Olsen Thielen & Co., Ltd.
Olsen Thielen & Co., Ltd.
St. Paul, Minnesota
March 3, 1999
<PAGE> 1
EXHIBIT 23.11
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-4 of Golden Sky Systems, Inc. of which this Exhibit forms a
part.
/s/ Summers, McNea & Company, P.C.
Billings, Montana
March 3, 1999
<PAGE> 1
EXHIBIT 25.1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
=====================
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
=====================
UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
NEW YORK 13-3818954
(Jurisdiction of incorporation (I. R. S. Employer
if not a U. S. national bank) Identification No.)
114 WEST 47TH STREET
NEW YORK, NEW YORK 10036-1532
(Address of principal (Zip Code)
executive offices)
NONE
(Name, address and telephone number of agent for service)
========================
GOLDEN SKY DBS, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 43-1839531
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
605 WEST 47TH STREET, SUITE 300
KANSAS CITY, MISSOURI 64112
(Address of principal executive offices) (Zip Code)
13 1/2% Senior Discount Notes Due 2007, Series A
(Title of the indenture securities)
<PAGE> 2
-2-
GENERAL
1. General Information
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
FEDERAL RESERVE BANK OF NEW YORK (2ND DISTRICT), NEW YORK, NEW YORK
(BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM)
FEDERAL DEPOSIT INSURANCE CORPORATION, WASHINGTON, D.C.
NEW YORK STATE BANKING DEPARTMENT, ALBANY, NEW YORK
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
THE TRUSTEE IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
2. Affiliations with the Obligor
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
NONE
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 AND 15:
THE OBLIGOR IS CURRENTLY NOT IN DEFAULT UNDER ANY OF ITS OUTSTANDING
SECURITIES FOR WHICH UNITED STATES TRUST COMPANY OF NEW YORK IS TRUSTEE.
ACCORDINGLY, RESPONSES TO ITEMS 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 AND
15 OF FORM T-1 ARE NOT REQUIRED UNDER GENERAL INSTRUCTION B.
16. List of Exhibits
T-1.1 -- ORGANIZATION CERTIFICATE, AS AMENDED, ISSUED BY
THE STATE OF NEW YORK BANKING DEPARTMENT TO TRANSACT
BUSINESS AS A TRUST COMPANY, IS INCORPORATED BY
REFERENCE TO EXHIBIT T-1.1 TO FORM T-1 FILED ON
SEPTEMBER 15, 1995 WITH THE COMMISSION PURSUANT TO
THE TRUST INDENTURE ACT OF 1939, AS AMENDED BY THE
TRUST INDENTURE REFORM ACT OF 1990 (REGISTRATION NO.
33-97056).
T-1.2 -- INCLUDED IN EXHIBIT T-1.1.
T-1.3 -- INCLUDED IN EXHIBIT T-1.1.
<PAGE> 3
-3-
16. List of Exhibits
(CONT'D)
T-1.4 -- THE BY-LAWS OF UNITED STATES TRUST COMPANY OF NEW
YORK, AS AMENDED, IS INCORPORATED BY REFERENCE TO
EXHIBIT T-1.4 TO FORM T-1 FILED ON SEPTEMBER 15, 1995
WITH THE COMMISSION PURSUANT TO THE TRUST INDENTURE
ACT OF 1939, AS AMENDED BY THE TRUST INDENTURE REFORM
ACT OF 1990 (REGISTRATION NO.
33-97056).
T-1.6 -- THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION
321(B) OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED
BY THE TRUST INDENTURE REFORM ACT OF 1990.
T-1.7 -- A COPY OF THE LATEST REPORT OF CONDITION OF THE
TRUSTEE PURSUANT TO LAW OR THE REQUIREMENTS OF ITS
SUPERVISING OR EXAMINING AUTHORITY.
NOTE
AS OF MARCH 24, 1999, THE TRUSTEE HAD 2,999,020 SHARES OF COMMON STOCK
OUTSTANDING, ALL OF WHICH ARE OWNED BY ITS PARENT COMPANY, U.S. TRUST
CORPORATION. THE TERM "TRUSTEE" IN ITEM 2, REFERS TO EACH OF UNITED STATES TRUST
COMPANY OF NEW YORK AND ITS PARENT COMPANY, U. S. TRUST CORPORATION.
------------------
PURSUANT TO THE REQUIREMENTS OF THE TRUST INDENTURE ACT OF 1939, THE TRUSTEE,
UNITED STATES TRUST COMPANY OF NEW YORK, A CORPORATION ORGANIZED AND EXISTING
UNDER THE LAWS OF THE STATE OF NEW YORK, HAS DULY CAUSED THIS STATEMENT OF
ELIGIBILITY TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, ALL IN THE CITY OF NEW YORK, AND STATE OF NEW YORK, ON THE 24TH OF
MARCH 1999.
UNITED STATES TRUST COMPANY
OF NEW YORK, TRUSTEE
BY: /s/ GERARD F. GANEY
---------------------------
GERARD F. GANEY
SENIOR VICE PRESIDENT
<PAGE> 4
Exhibit T-1.6
THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE ACT.
UNITED STATES TRUST COMPANY OF NEW YORK
114 WEST 47TH STREET
NEW YORK, NY 10036
DECEMBER 19, 1997
SECURITIES AND EXCHANGE COMMISSION
450 5TH STREET, N.W.
WASHINGTON, DC 20549
GENTLEMEN:
PURSUANT TO THE PROVISIONS OF SECTION 321(B) OF THE TRUST INDENTURE ACT OF 1939,
AS AMENDED BY THE TRUST INDENTURE REFORM ACT OF 1990, AND SUBJECT TO THE
LIMITATIONS SET FORTH THEREIN, UNITED STATES TRUST COMPANY OF NEW YORK ("U.S.
TRUST") HEREBY CONSENTS THAT REPORTS OF EXAMINATIONS OF U.S. TRUST BY FEDERAL,
STATE, TERRITORIAL OR DISTRICT AUTHORITIES MAY BE FURNISHED BY SUCH AUTHORITIES
TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST THEREFOR.
VERY TRULY YOURS,
UNITED STATES TRUST COMPANY
OF NEW YORK
BY: /S/ GERARD F. GANEY
---------------------------
SENIOR VICE PRESIDENT
<PAGE> 5
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1998
($ IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CASH AND DUE FROM BANKS $ 104,220
SHORT-TERM INVESTMENTS 207,292
SECURITIES, AVAILABLE FOR SALE 578,874
LOANS 2,061,582
LESS: ALLOWANCE FOR CREDIT LOSSES 17,199
----------
NET LOANS 2,044,383
PREMISES AND EQUIPMENT 58,263
OTHER ASSETS 124,079
----------
Total Assets $3,117,111
==========
LIABILITIES
DEPOSITS:
NON-INTEREST BEARING $ 709,221
INTEREST BEARING 1,908,861
----------
TOTAL DEPOSITS 2,618,082
SHORT-TERM CREDIT FACILITIES 170,644
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 146,324
----------
Total Liabilities $2,935,050
==========
STOCKHOLDER'S EQUITY
COMMON STOCK 14,995
CAPITAL SURPLUS 53,041
RETAINED EARNINGS 111,402
UNREALIZED GAINS ON SECURITIES
AVAILABLE FOR SALE (NET OF TAXES) 2,623
----------
Total Stockholder's Equity 182,061
----------
Total Liabilities and
Stockholder's Equity $3,117,111
==========
</TABLE>
I, RICHARD E. BRINKMANN, MANAGING DIRECTOR & COMPTROLLER OF THE NAMED BANK DO
HEREBY DECLARE THAT THIS STATEMENT OF CONDITION HAS BEEN PREPARED IN CONFORMANCE
WITH THE INSTRUCTIONS ISSUED BY THE APPROPRIATE REGULATORY AUTHORITY AND IS TRUE
TO THE BEST OF MY KNOWLEDGE AND BELIEF.
RICHARD E. BRINKMANN, MANAGING DIRECTOR & CONTROLLER
FEBRUARY 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY SYSTEMS, INC. AT
DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0001082925
<NAME> GOLDEN SKY DBS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,460
<SECURITIES> 0
<RECEIVABLES> 8,925
<ALLOWANCES> (293)
<INVENTORY> 10,146
<CURRENT-ASSETS> 55,645
<PP&E> 8,208
<DEPRECIATION> (3,214)
<TOTAL-ASSETS> 328,071
<CURRENT-LIABILITIES> 40,441
<BONDS> 271,708
0
0
<COMMON> 0
<OTHER-SE> 15,922
<TOTAL-LIABILITY-AND-EQUITY> 328,071
<SALES> 0
<TOTAL-REVENUES> 75,924
<CGS> 0
<TOTAL-COSTS> 45,291
<OTHER-EXPENSES> 73,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,537
<INCOME-PRETAX> (62,150)
<INCOME-TAX> 0
<INCOME-CONTINUING> (62,150)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,577)
<CHANGES> 0
<NET-INCOME> (64,727)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
OF
GOLDEN SKY DBS, INC.
PURSUANT TO THE PROSPECTUS DATED , 1999
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1999 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE
OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION, IN WHICH CASE THE TERM
"EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE
OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
THE EXCHANGE AGENT IS:
UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C> <C>
By Overnight Courier and by
Hand
delivery after 4:30 PM on By Hand Delivery to 4:30 PM: By Registered or Certified
Expiration Date: United States Trust Company Mail:
United States Trust Company of New York United States Trust Company
of New York 111 Broadway, Lower Level of New York
770 Broadway, 13th Floor Attn: Corporate Trust Window P.O. Box 844, Cooper Station
Attn: Corporate Trust Services New York, New York 10006 Attn: Corporate Trust Services
New York, New York 10003 New York, New York 10276-0844
</TABLE>
FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY
ADDITIONAL INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE
AT 800-548-6565, OR BY FACSIMILE AT 212-780-0592
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS
LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL
IS COMPLETED.
1
<PAGE> 2
The undersigned acknowledges receipt of the Prospectus dated ,
1999 (the "Prospectus"), of Golden Sky DBS, Inc., a Delaware corporation (the
"Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which
together with the Prospectus constitutes the Company's offer (the "Exchange
Offer") to exchange $1,000 principal amount at maturity of its 13 1/2% Senior
Discount Notes due 2007, Series B (the "New Notes"), for each $1,000 principal
amount at maturity of its outstanding 13 1/2% Senior Discount Notes due 2007,
Series A (the "Old Notes"). Recipients of the Prospectus should read the
requirements described in such Prospectus with respect to eligibility to
participate in the Exchange Offer.
The undersigned hereby tenders the Old Notes described under "Description
of Old Notes" below pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Old Notes, and the undersigned represents that it has received
from each beneficial owner of Old Notes ("Beneficial Owners") a duly completed
and executed form of "Instruction to Registered Holder from Beneficiary Owner"
accompanying this Letter of Transmittal, instructing the undersigned to take the
action described in this Letter of Transmittal.
This Letter of Transmittal is to be used by a holder of Old Notes (i) if
certificates representing Old Notes are to be forwarded herewith, (ii) if
delivery of Old Notes is to be made by book-entry transfer to the Exchange
Agent's account at The Depository Trust Company ("DTC"), pursuant to the
procedures set forth in the section of the Prospectus entitled "The Exchange
Offer," or (iii) if a tender is made pursuant to the guaranteed delivery
procedures in the section of the Prospectus entitled "The Exchange Offer."
The undersigned hereby represents and warrants that the information
received from the beneficial owners is accurately reflected in the boxes
entitled "Beneficial Owner(s) -- Purchaser Status" and "Beneficial
Owner(s) -- Residence."
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder of Old Notes promptly and
instruct such registered holder of Old Notes to tender on behalf of the
beneficial owner. If such beneficial owner wishes to tender on its own behalf,
such beneficial owner must, prior to completing and executing this Letter of
Transmittal and delivering its Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such beneficial owner's name or obtain
a properly completed bond power from the registered holder of Old Notes. The
transfer of record ownership may take considerable time.
In order to properly complete this Letter of Transmittal, a holder of Old
Notes must (i) complete the box entitled "Description of Old Notes," (ii)
complete the boxes entitled "Beneficial Owner(s) -- Purchaser Status" and
"Beneficial Owner(s) -- Residence," (iii) if appropriate, check and complete the
boxes relating to book-entry transfer, guaranteed delivery, Special Issuance
Instructions and Special Delivery Instructions, (iv) sign the Letter of
Transmittal by completing the box entitled "Sign Here" and (v) complete the
Substitute Form W-9. Each holder of Old Notes should carefully read the detailed
instructions below prior to completing the Letter of Transmittal.
Holders of Old Notes who desire to tender their Old Notes for exchange and
(i) whose Old Notes are not immediately available or (ii) who cannot deliver
their Old Notes, this Letter of Transmittal and all other documents required
hereby to the Exchange Agent on or prior to the Expiration Date, must tender the
Old Notes pursuant to the guaranteed delivery procedures set forth in the
section of the Prospectus entitled "The Exchange Offer." See Instruction 2.
2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- ------------------------------------------------------------------------------------------------------------
(4)
PRINCIPAL
(3) AMOUNT AT MATURITY
AGGREGATE TENDERED
(1) (2) PRINCIPAL FOR EXCHANGE
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) PRIVATE NOTE AMOUNT (MUST BE IN
OF OLD NOTE(S), EXACTLY AS NAME(S) APPEAR(S) ON NUMBERS (ATTACH AT MATURITY INTEGRAL
OLD NOTE(S) SIGNED LIST, IF REPRESENTED BY MULTIPLES OF
CERTIFICATE(S) (PLEASE FILL IN, IF BLANK): NECESSARY) CERTIFICATE(S)(1) $1,000)(2)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT AT MATURITY OF NOTES TENDERED:
- ------------------------------------------------------------------------------------------------------------
1. Unless indicated in the column "Principal Amount at Maturity Tendered For Exchange," any tendering
Holder of 13 1/2% Senior Discounted Notes due 2007, Series A, will be deemed to have tendered the
entire aggregate principal amount at maturity represented by the column labeled "Aggregate Principal
Amount at Maturity Represented by Certificate(s)."
2. The minimum permitted tender is $1,000 in principal amount at maturity of 13 1/2% Senior Discount Notes
due 2007, Series A. All other tenders must be in integral multiples of $1,000.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[ ]CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
[ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER
DEFINED) ONLY):
Name of Tendering Institution:
-----------------------------------------------
Account Number:
--------------------------------------------------------------
Transaction Code Number:
-----------------------------------------------------
[ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING
(FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name of Registered Holder of Private Note(s):
--------------------------------
Date of Execution of Notice of Guaranteed Delivery:
--------------------------
Window Ticket Number (if available):
-----------------------------------------
Name of Institution that Guaranteed Delivery:
--------------------------------
Account Number (if delivered by book-entry transfer):
------------------------
3
<PAGE> 4
[ ]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
- --------------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
4
<PAGE> 5
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY (i) if the New Notes issued in exchange for Old Notes,
certificates for Old Notes in a principal amount at maturity not exchanged for
New Notes, or Old Notes (if any) not tendered for exchange, are to be issued in
the name of someone other than the undersigned or (ii) if Old Notes tendered by
book-entry transfer which are not exchanged are to be returned by credit to an
account maintained at DTC.
Issue to:
Name:
- ----------------------------------------
(Please Type or Print)
Address:
- --------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(Include Zip Code)
- ------------------------------------------------
(Tax Identification or Social Security No.)
Credit Old Notes not exchanged and delivered by book-entry transfer to DTC
account set forth below:
- ------------------------------------------------
(Account Number)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 6, 7 AND 8)
To be completed ONLY if the New Notes issued in exchange for Old Notes,
certificates for Old Notes in a principal amount at maturity not exchanged for
New Notes, or Old Notes (if any) not tendered for exchange, are to be mailed or
delivered (i) to someone other than the undersigned or (ii) to the undersigned
at an address other than the address shown below the undersigned's signature.
Name:
- ----------------------------------------
(Please Type or Print)
Address:
- --------------------------------------
- ------------------------------------------------
- ------------------------------------------------
(Include Zip Code)
- ------------------------------------------------
(Tax Identification or Social Security No.)
5
<PAGE> 6
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------
BENEFICIAL OWNER(S) -- RESIDENCE
- ---------------------------------------------------------------------------------------------
STATE OF DOMICILE/PRINCIPAL PLACE PRINCIPAL AMOUNT AT MATURITY OF PRIVATE
OF BUSINESS OF EACH BENEFICIAL NOTES HELD FOR ACCOUNT OF
OWNER OF OLD NOTES BENEFICIAL OWNER(S)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------
BENEFICIAL OWNER(S) -- PURCHASER STATUS
- ---------------------------------------------------------------------------------------------
The beneficial owner of each of the Old Notes described herein is (check the box that
applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that purchased
the Old Notes outside the United States in accordance with Rule 904 of the Securities
Act
[ ] Other (describe):
-------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
6
<PAGE> 7
Ladies and Gentlemen:
Pursuant to the offer by Golden Sky DBS, Inc., a Delaware corporation (the
"Company"), upon the terms and subject to the conditions set forth in the
Prospectus dated , 1999 (the "Prospectus") and this Letter of
Transmittal (the "Letter of Transmittal"), which together with the Prospectus
constitutes the Company's offer (the "Exchange Offer") to exchange $1,000
principal amount at maturity of its 13 1/2% Senior Discount Notes due 2007,
Series B (the "New Notes"), for each $1,000 principal amount at maturity of its
outstanding 13 1/2% Senior Discount Notes due 2007, Series A (the "Old Notes"),
the undersigned hereby tenders to the Company for exchange the Old Notes
indicated above.
By executing this Letter of Transmittal and subject to and effective upon
acceptance for exchange of the Old Notes tendered for exchange herewith, the
undersigned will have irrevocably sold, assigned, transferred and exchanged, to
the Company, all right, title and interest in, to and under all of the Old Notes
tendered for exchange hereby, and hereby will have appointed the Exchange Agent
as the true and lawful agent and attorney-in-fact (with full knowledge that the
Exchange Agent also acts as agent of the Company) of such holder of Old Notes
with respect to such Old Notes, with full power of substitution to (i) deliver
certificates representing such Old Notes, or transfer ownership of such Old
Notes on the account books maintained by DTC (together, in any such case, with
all accompanying evidences of transfer and authenticity), to the Company, (ii)
present and deliver such Old Notes for transfer on the books of the Company and
(iii) receive all benefits and otherwise exercise all rights and incidents of
beneficial ownership with respect to such Old Notes, in accordance with the
terms of the Exchange offer. The power of attorney granted in this paragraph
shall be deemed to be irrevocable and complete with an interest.
The undersigned hereby represents and warrants that (i) the undersigned is
the owner; (ii) the undersigned has full power and authority to tender,
exchange, assign and transfer the Old Notes; and (iii) that when such Old Notes
are accepted for exchange by the Company, the Company will acquire good and
marketable title thereto, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claims. The undersigned will, upon
receipt, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of the Old Notes tendered for exchange hereby.
By tendering, the undersigned hereby further represents to the Company that
(i) the New Notes to be acquired by the undersigned in exchange for the Old
Notes tendered hereby and any beneficial owner(s) of such Old Notes in
connection with the Exchange Offer will be acquired by the undersigned and such
beneficial owner(s) in the ordinary course of business of the undersigned, (ii)
the undersigned have no arrangement or understanding with any person to
participate in the distribution of the New Notes, (iii) the undersigned and each
beneficial owner acknowledge and agree that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in certain
no-action letters, (iv) the undersigned and each beneficial owner understand
that a secondary resale transaction described in clause (iii) above and any
resales of New Notes obtained by the undersigned in exchange for the Old Notes
acquired by the undersigned directly from the Company should be covered by an
effective registration statement containing the selling securityholder
information required by Item 507 or Item 508, as applicable, of Regulation S-K
of the Commission, and (v) neither the undersigned nor any beneficial owner is
an "affiliate," as defined under Rule 405 under the Securities Act, of the
Company. If the undersigned is a broker-dealer that will receive New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For purposes of the Exchange Offer, the Company will be deemed to have
accepted for exchange, and to have exchanged, validly tendered Old Notes if, as
and when the Company gives oral or written notice thereof
7
<PAGE> 8
to the Exchange Agent. Tenders of Old Notes for exchange may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders" in the Prospectus. Any Old Notes
tendered by the undersigned and not accepted for exchange will be returned to
the undersigned at the address set forth above unless otherwise indicated in the
box above entitled "Special Delivery Instructions" as promptly as practicable
after the Expiration Date.
The undersigned acknowledges that the Company's acceptance of Old Notes
validly tendered for exchange pursuant to any one of the procedures described in
the section of the Prospectus entitled "The Exchange Offer" and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Exchange
Offer.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions," please return any Old Notes not entered for exchange in the
name(s) of the undersigned. Similarly, unless otherwise indicated in the box
entitled "Special Delivery Instructions," please mail any certificates for Old
Notes not tendered or exchanged (and accompanying documents, as appropriate) to
the undersigned at the address shown below the undersigned's signature(s). In
the event that both "Special Issuance Instructions" and "Special Delivery
Instructions" are completed, please issue the certificates representing the New
Notes issued in exchange for the Old Notes accepted for exchange in the name(s)
of, and return any Old Notes not tendered for exchange or not exchanged to, the
person(s) so indicated. The undersigned recognizes that the Company has no
obligation pursuant to the "Special Issuance Instructions" and "Special Delivery
Instructions" to transfer any Old Notes from the name of the holder thereof if
the Company does not accept for exchange any of the Old Notes so tendered for
exchange or if such transfer would not be in compliance with any transfer
restrictions applicable to such Old Notes.
IN ORDER TO VALIDLY TENDER OLD NOTES FOR EXCHANGE, HOLDERS OF OLD NOTES
MUST COMPLETE, EXECUTE, AND DELIVER THIS LETTER OF TRANSMITTAL.
Except as stated in the Prospectus, all authority herein conferred or
agreed to be conferred shall survive the death, incapacity, or dissolution of
the undersigned, and any obligation of the undersigned hereunder shall be
binding upon the heirs, personal representatives, successors and assigns of the
undersigned. Except as otherwise stated in the Prospectus, this tender for
exchange of Old Notes is irrevocable.
8
<PAGE> 9
TENDERING HOLDERS SIGN HERE
- --------------------------------------------------------------------------------
Signature(s) of Owner(s)
Dated:
- ---------------------------------------
Must be signed by the registered holder(s) of Old Notes exactly as name(s)
appear(s) on certificates) representing the Old Notes or on a security position
listing or by person(s) authorized to become registered Old Note holder(s) by
certificates and documents transmitted herewith. If signature is by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, please
provide the following information. (See Instruction 6).
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(Include Zip Code)
Principal place of business (if different from address listed above):
- ------------------------------------
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone No.: (---------)
- ------------------------------
Tax Identification or Social Security Nos.:
- --------------------------------------------------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9
GUARANTEE OF SIGNATURE(S)
(Signature(s) must be guaranteed if required by Instruction 1)
Authorized Signature:
- --------------------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
Name and Title:
- --------------------------------------------------------------------------------
(Please Print)
Name and Title:
- --------------------------------------------------------------------------------
9
<PAGE> 10
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. Guarantee of Signatures. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by an institution
that is (1) a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., (2) a commercial bank or trust
company having an office or correspondent in the United States, or (3) an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Securities Exchange Act of 1934 which is a member of one of the following
recognized Signature Guarantee Programs (an "Eligible Institution"):
a. The Securities Transfer Agents Medallion Program (STAMP)
b. The New York Stock Exchange Medallion Signature Program (MSP)
c. The Stock Exchange Medallion Program (SEMP)
Signatures on this Letter of Transmittal need not be guaranteed (i) if this
Letter of Transmittal is signed by the registered holder(s) of the Old Notes
tendered herewith and such registered holder(s) have not completed the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) if such Old Notes are
tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL
SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
2. Delivery of This Letter of Transmittal and Old Notes; Guaranteed
Delivery Procedures. This Letter of Transmittal is to be completed by holders of
Old Notes (i) if certificates are to be forwarded herewith or (ii) if tenders
are to be made pursuant to the procedures for tender by book-entry transfer or
guaranteed delivery set forth in the section of the Prospectus entitled "The
Exchange Offer." Certificates for all physically tendered Old Notes or any
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation"), as
well as a properly completed and duly executed copy of this Letter of
Transmittal or facsimile hereof, and any other documents required by this Letter
of Transmittal, must be received by the Exchange Agent at its address set forth
on the cover of this Letter of Transmittal prior to 5:00 p.m., New York City
time, on the Expiration Date. Holders of Old Notes who elect to tender Old Notes
and (i) whose Old Notes are not immediately available or (ii) who cannot deliver
the Old Notes, this Letter of Transmittal or other required documents to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date,
must tender their Old Notes according to the guaranteed delivery procedures set
forth in the Prospectus. Holders may have such tender elected if: (a) such
tender is made through an Eligible Institution; (b) prior to 5:00 p.m., New York
City time, on the Expiration Date, the Exchange Agent has received from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery, setting forth the name and address of the holder of such Old Notes,
the certificate numbers(s) of such Old Notes and the principal amount at
maturity of Old Notes tendered for exchange, stating that tender is being made
thereby and guaranteeing that, within five New York Stock Exchange trading days
after the Expiration Date, this Letter of Transmittal (or a facsimile thereof,
together with the certificates) representing such Old Notes (or a Book-Entry
Confirmation), in proper form for transfer, and any other documents required by
this Letter of Transmittal, will be deposited by such Eligible Institution with
the Exchange Agent; and (c) a properly executed Letter of Transmittal (or a
facsimile hereof), as well as the certificates) for all tendered Old Notes in
proper form for transfer or a Book-Entry Confirmation, together with any other
documents required by this Letter of Transmittal, are received by the Exchange
Agent within five New York Stock Exchange trading days after the Expiration
Date.
THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE
ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE
10
<PAGE> 11
EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NEITHER THIS LETTER OF TRANSMITTAL
NOR ANY OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO
EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
No alternative, conditional or contingent tenders will be accepted. All
tendering holders of Old Notes, by execution of this Letter of Transmittal (or
facsimile hereof, if applicable), waive any right to receive notice of the
acceptance of their Old Notes for exchange.
3. Inadequate Space. If the space provided in the box entitled "Description
of Old Notes" above is inadequate, the certificate numbers and principal amounts
at maturity of the Old Notes being tendered should be listed on a separate
signed schedule affixed hereto.
4. Withdrawals. A tender of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date by delivery of written or
facsimile notice of withdrawal to the Exchange Agent at the address set forth on
the cover of this Letter of Transmittal. To be effective, a notice of withdrawal
of Old Notes must (i) specify the name of the person who tendered the Old Notes
to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and aggregate principal amount at
maturity of such Old Notes), and (iii) be signed by the holder of Old Notes in
the same manner as the original signature on the Letter of Transmittal by which
such Old Notes were tendered (including any required signature Guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will thereafter be deemed not validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may
be retendered by following one of the procedures described in the section of the
Prospectus entitled "The Exchange Offer -- Procedures for Tendering" at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
5. Partial Tenders. Tenders of Old Notes will be accepted only in integral
multiples of $1,000 principal amount at maturity . If a tender for exchange is
to be made with respect to less than the entire principal amount at maturity of
any Old Note, fill in the principal amount at maturity of Old Notes which are
tendered for exchange in column (4) of the box entitled "Description of Old
Notes," as more fully described in the footnotes thereto. In case of a partial
tender for exchange, a new certificate, in fully registered form, for the
remainder of the principal amount at maturity of the Old Notes will be sent to
the holders of Old Notes unless otherwise indicated in the appropriate box on
this Letter of Transmittal as promptly as practicable after the expiration or
termination of the Exchange Offer.
6. Signatures on This Letter of Transmittal, Assignment and Endorsements.
(a) The signature(s) of the holder of Old Notes on this Letter of
Transmittal must correspond with the name(s) as written on the face of the
Old Notes without alteration, enlargement or any change whatsoever.
(b) If tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
(c) If any tendered Old Notes are registered in different names on
several certificates, it will be necessary to complete, sign and submit as
many separate copies of this Letter of Transmittal and any necessary or
required documents as there are different registrations or certificates.
(d) When this Letter of Transmittal is signed by the holder of Old
Notes listed and transmitted hereby, no endorsements of Old Notes or bond
powers are required. If, however, Old Notes not tendered or not accepted
are to be issued or returned in the name of a person other than the holder
of Old Notes, then the Old Notes transmitted hereby must be endorsed or
accompanied by a properly completed bond power, in a form satisfactory to
the Company, in either case signed exactly as the name(s) of the holder of
Old Notes appear(s) on the Old Notes. Signatures on such Old Notes or bond
powers must be guaranteed by an Eligible Institution (unless signed by an
Eligible Institution).
11
<PAGE> 12
(e) If this Letter of Transmittal or Old Notes or bond powers are
signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing,
and, unless waived by the Company, evidence satisfactory to the Company of
their authority to so act must be submitted with this Letter of
Transmittal.
(f) If this Letter of Transmittal is signed by a person other than the
registered holder of Old Notes listed, the Old Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by
such registered holder exactly as the name(s) of the registered holder of
Old Notes appear(s) on the certificates. Signatures on such Old Notes or
bond powers must be guaranteed by an Eligible Institution (unless signed by
an Eligible Institution).
7. Transfer Taxes. Except as set forth in this Instruction 7, the Company
will pay all transfer taxes, if any, applicable to the exchange of Old Notes
pursuant to the Exchange offer. If, however, a transfer tax is imposed for any
reason other than the exchange of the Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemptions therefrom is not
submitted with this Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
8. Special Issuance and Delivery Instructions. If the New Notes are to be
issued, or if any Old Notes not tendered for exchange are to be issued or sent
to someone other than the holder of Old Notes or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal should be
completed. Holders of Old Notes tendering Old Notes by book-entry transfer may
request that Old Notes not accepted be credited to such account maintained at
DTC as such holder of Old Notes may designate.
9. Irregularities. All questions as to the validity, form, eligibility
(including time of receipt), compliance with conditions, acceptance and
withdrawal of tendered Old Notes will be determined by the Company in its sole
discretion, which determination will be final and binding. The Company reserves
the absolute right to reject any and all Old Notes not properly tendered or any
Old Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in this Letter of Transmittal, as soon as practicable following the
Expiration Date.
10. Waiver of Conditions. The Company reserves the absolute right to waive,
amend or modify certain of the specified conditions as described under "The
Exchange Offer -- Conditions" in the Prospectus in the case of any Old Notes
tendered (except as otherwise provided in the Prospectus).
11. Requests for Information or Additional Copies. Requests for information
or for additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address or telephone number set forth on
the cover of this Letter of Transmittal.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF, IF
APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE
NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED
BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
12
<PAGE> 13
IMPORTANT TAX INFORMATION
Under current federal income tax law, a holder of Old Notes whose tendered
Old Notes are accepted for exchange may be subject to backup withholding unless
the holder provides the Company (as payor), through the Exchange Agent, with
either (i) such holder's correct taxpayer identification number ("TIN") on the
Substitute Form W-9 attached hereto, certifying that the TIN provided on the
Substitute Form W-9 is correct (or that such holder of Old Notes is awaiting a
TIN) and that (A) the holder of Old Notes has not been notified by the Internal
Revenue Service that he or she is subject to backup withholding as a result of a
failure to report all interest or dividends or (B) the Internal Revenue Service
has notified the holder of Old Notes that he or she is no longer subject to
backup withholding; or (ii) an adequate basis for exemption from backup
withholding. If such holder of Old Notes is an individual, the TIN is such
holder's social security number. If the Exchange Agent is not provided with the
correct taxpayer identification number, the holder of Old Notes may be subject
to certain penalties imposed by the Internal Revenue Service.
Certain holders of Old Notes (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. Exempt holders of Old Notes should indicate their exempt
status on Substitute Form W-9. A foreign individual may qualify as an exempt
recipient by submitting to the Exchange Agent a properly completed Internal
Revenue Service Form W-8 (which the Exchange Agent will provide upon request)
signed under penalty of perjury, attesting to the holder's exempt status. See
the enclosed Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 (the "Guidelines") for additional instructions.
If backup withholding applies, the Company is required to withhold 31% of
any payment made to the holder of Old Notes or other payee. Backup withholding
is not an additional federal income tax. Rather, the federal income tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained from the Internal Revenue Service.
The holder of Old Notes is required to give the Exchange Agent the TIN
(e.g., social security number or employer identification number) of the record
owner of the Old Notes. If the Old Notes are held in more than one name or are
not held in the name of the actual owner, consult the enclosed Guidelines for
additional guidance regarding which number to report.
13
<PAGE> 14
INSTRUCTION TO REGISTERED HOLDER
FROM BENEFICIAL OWNER
OF 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
OF GOLDEN SKY DBS, INC.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1999 (the "Prospectus") of Golden Sky DBS, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), which together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder, as to the action to be taken
by you relating to the Exchange Offer with respect to the 13 1/2% Senior
Discount Notes due 2007, Series A (the "Old Notes"), held by you for the account
of the undersigned.
The aggregate principal amount at maturity of the Old Notes held by you for
the account of the undersigned is (fill in amount): $__________________ of the
Old Notes.
With respect to the Exchange offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if any):
$_____________________ of the Old Notes.
[ ] NOT to TENDER any Old Notes held by you for the account of the undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
the account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner of the Old Notes, including but not limited to the
representations that (i) the undersigned's principal residence is in the state
of (fill in state) ________________________, (ii) the undersigned is acquiring
the New Notes in the ordinary course of business of the undersigned, (iii) the
undersigned has no arrangement or understanding with any person to participate
in the distribution of New Notes, (iv) the undersigned acknowledges that any
person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purpose of distributing the New
Notes must comply with the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended, in connection with a secondary resale
transaction of the New Notes acquired by such person and cannot rely on the
position of the Staff of the Securities and Exchange Commission set forth in
certain no-action letters (See the section of the Prospectus entitled "The
Exchange Offer"), (v) the undersigned understands that a secondary resale
transaction described in clause (iv) above and any resales of New Notes obtained
be the undersigned in exchange for the Old Notes acquired by the undersigned
directly from the Company should be covered by an effective registration
statement containing the selling securityholder information required by Item 507
or Item 508, if applicable, of Regulation S-K of the Commission, (vi) the
undersigned is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company, and (vii) if the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities, it
acknowledges that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act;
(b) to agree, on behalf of the undersigned, as set forth in the Letter of
Transmittal; and (c) to take such other action as necessary under the Prospectus
or the Letter of Transmittal to effect the valid tender of Old Notes.
14
<PAGE> 15
The purchaser status of the undersigned is (check the box that applies):
[ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the
Securities Act)
[ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act)
[ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that
purchased the Old Notes outside the United States in accordance with Rule
904 of the Securities Act
[ ] Other (describe):
- ---------------------------------------------
SIGN HERE
Name of Beneficial Owner(s):
- --------------------------------------------------------------------------
Signature(s):
- --------------------------------------------------------------------------------
Name(s) (please print):
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
Principal place of business (if different from address listed above):
- ------------------------------------
- --------------------------------------------------------------------------------
Telephone Number(s):
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number(s):
- -------------------------------------------------
Date:
- --------------------------------------------------------------------------------
15
<PAGE> 16
TO BE COMPLETED BY ALL TENDERING HOLDERS OF NOTES
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
PAYER'S NAME: GOLDEN SKY DBS, INC.
- --------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- PLEASE PROVIDE YOUR TIN IN THE BOX AT ------------------------------------
RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Social Security Number
FORM W-9 or
Department of the Treasury ------------------------------------
Internal Revenue Service Employer Identification Number
---------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR PART II -- Certification -- Under penalties of perjury, I certify that:
TAXPAYER IDENTIFICATION
NUMBER ("TIN") (1) The number shown on this form is my current taxpayer identification number (or I am
waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because I have not been notified by the
Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result
of a failure to report all interest or dividends, or the IRS has notified me that I am
no longer subject to backup withholding.
Certification Instructions -- You must cross out item (2) in Part II above if you have been
notified by the IRS that you are subject to backup withholding because of underreporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you are subject to backup withholding you receive another notification from the IRS stating
that you are no longer subject to backup withholding, do not cross out item (2).
---------------------------------------------------------------------------------------------
Name: ------------------------------------------- PART III --
(Please Print)
Awaiting TIN [ ]
Address: -----------------------------------------
(Including Zip Code)
Signature ----------------------------------------
Date ---------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE
REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECK
THE BOX IN PART III OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification Number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver such an application in the near future. I understand
that if I do not provide a Taxpayer Identification Number within sixty (60)
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide such a number.
Signature
- ------------------------------------------------ Date
- ---------------------------------
16
<PAGE> 17
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER -- Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e., 00-0000000. The table below will help determine the
number to give the payer.
- ---------------------------------------------------------
- ---------------------------------------------------------
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE
SOCIAL
SECURITY
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner of
(joint account) the account or, if
combined funds, any
one of the
individuals(1)
3. Husband and wife (joint The actual owner of
account) the account or, if
joint funds, either
person(1)
4. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
5. Adult and minor (joint The adult or, if the
account) minor is the only
contributor, the
minor(1)
6. Account in the name of The ward, minor, or
guardian or committee for a incompetent person(3)
designated ward, minor, or
incompetent person
7. a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also trustee)
b. So-called trust account The actual owner(1)
that is not a legal or
valid trust under State
law
8. Sole proprietorship account The owner(4)
</TABLE>
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE
EMPLOYER
IDENTIFICATION
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
9. A valid trust, estate, or Legal entity (Do not
pension trust furnish the
identifying number of
the personal
representative or
trustee unless the
legal entity itself is
not designated in the
account title.)(5)
10. Corporate account The corporation
11. Religious, charitable, or The organization
educational organization
account
12. Partnership held in the name The partnership
of the business
13. Association, club or other The organization
tax-exempt organization
14. A broker or registered The broker or nominee
nominee
15. Account with the Department The public entity
of Agriculture in the name
of a public entity (such as
a State or local
governmental, school
district or prison) that
receives agricultural
program payments
</TABLE>
- ---------------------------------------------------------
---------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE> 18
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include the
following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), or an individual
retirement plan.
- The United States or any agency or instrumentality thereof.
- A State, The District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government, or any
agency or instrumentality thereof.
- An international organization or any agency or instrumentality thereof.
- A registered dealer in securities or commodities registered in the U.S. or a
possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An exempt charitable remainder trust, or a nonexempt trust described in
section 4947(a) (1).
- An entity registered at all times under the Investment Company Act of 1940.
- A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- Payments to nonresident aliens subject to withholding under section 1441.
- Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- Payments of patronage dividends where the amount renewed is not paid in
money.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
- Payments of interest on obligations issued by individuals. Note: You may be
subject to backup withholding if this interest is $6.00 or more and is paid
in the course of the payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
- Payments described in section 6049(b)(5) to non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045, and F6050A.
PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend,
interest, or other payments to give taxpayer identification numbers to payers
who must report the payments to IRS. IRS uses the numbers for identification
purposes. Payers must be given the numbers whether or not recipients are
required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
OF
GOLDEN SKY DBS, INC.
THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY
HOLDER OF 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A (THE "OLD NOTES"), OF
GOLDEN SKY DBS, INC., A DELAWARE CORPORATION (THE "COMPANY"), WHO WISHES TO
TENDER OLD NOTES PURSUANT TO THE COMPANY'S EXCHANGE OFFER, AS DEFINED IN THE
PROSPECTUS DATED , 1999 (THE "PROSPECTUS") AND (I) WHOSE OLD NOTES
ARE NOT IMMEDIATELY AVAILABLE OR (II) WHO CANNOT DELIVER SUCH OLD NOTES OR ANY
OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL ON OR BEFORE THE
EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS) OR (III) WHO CANNOT COMPLY WITH
THE BOOK ENTRY TRANSFER PROCEDURE ON A TIMELY BASIS. SUCH FORM MAY BE DELIVERED
BY FACSIMILE TRANSMISSION, MAIL OR HAND DELIVERY TO THE EXCHANGE AGENT. SEE "THE
EXCHANGE OFFER" IN THE PROSPECTUS.
GOLDEN SKY DBS, INC.
NOTICE OF GUARANTEED DELIVERY
TO: UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C> <C>
By Overnight Courier and by
Hand
delivery after 4:30 PM on By Hand Delivery to 4:30 PM: By Registered or Certified
Expiration Date: United States Trust Company Mail:
United States Trust Company of New York United States Trust Company
of New York 111 Broadway, Lower Level of New York
770 Broadway, 13th Floor Attn: Corporate Trust Window P.O. Box 844, Cooper Station
Attn: Corporate Trust Services New York, New York 10006 Attn: Corporate Trust Services
New York, New York 10003 New York, New York 10276-0844
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE> 2
Ladies and Gentlemen:
The undersigned hereby tenders to the Company upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount at
maturity of Old Notes specified below pursuant to the guaranteed delivery
procedures set forth under "The Exchange Offer" in the Prospectus. By so
tendering, the undersigned does hereby make, at and as of the date hereof, the
representations and warranties of a tendering Holder of Old Notes set forth in
the Letter or Transmittal. The undersigned hereby tenders the Old Notes listed
below:
<TABLE>
- ---------------------------------------------------------------------------------------------
CERTIFICATE NUMBERS (IF AVAILABLE) PRINCIPAL AMOUNT AT MATURITY TENDERED
- ---------------------------------------------------------------------------------------------
<S> <C>
- ---------------------------------------------------------------------------------------------
</TABLE>
All authority herein conferred or agreed to be conferred shall survive the
death, incapacity, or dissolution of the undersigned, and every obligation of
the undersigned hereunder shall be binding upon the heirs, personal
representatives, successors and assigns of the undersigned.
If Old Notes will be tendered by book-entry transfer:
Name of Tendering Institution:
- -------------------------------------------------------------------------------
The Depository Trust Company Account No.:
- ----------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
SIGN HERE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s)
Name (Please Print)
- --------------------------------------------------------------------------------
Address (Include Zip Code)
- --------------------------------------------------------------------------------
Area Code and Telephone No.
- --------------------------------------------------------------------------------
2
<PAGE> 3
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a participant in a Recognized Signature Guarantee
Medallion Program, guarantees deposit with the Exchange Agent of the Letter of
Transmittal (or facsimile thereof), together with the Old Notes tendered hereby
in proper form for transfer, or confirmation of the book-entry transfer of such
Old Notes into the Exchange Agent's account at the Depository Trust Company,
pursuant to the procedure for book-entry transfer set forth in the Prospectus,
and any other required documents, all by 5:00 p.m., New York City time, on the
fifth New York Stock Exchange trading day following the Expiration Date (as
defined in the Prospectus).
Name of Firm:
- --------------------------------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
SIGN HERE
- --------------------------------------------------------------------------------
Authorized Signature
Name (Please Print)
- --------------------------------------------------------------------------------
Address (Include Zip Code)
- --------------------------------------------------------------------------------
Area Code and Telephone No.
- --------------------------------------------------------------------------------
3
<PAGE> 4
DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF
CERTIFICATES FOR OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL.
INSTRUCTIONS
1. Delivery of This Notice of Guaranteed Delivery. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Exchange
Agent at one of its addresses set forth on the cover hereof prior to the
Expiration Date. The method of delivery of this Notice of Guaranteed Delivery
and all other required documents to the Exchange Agent is at the election and
risk of the holder, but, except as otherwise provided below, the delivery will
be deemed made only when actually received by the Exchange Agent. Instead of
delivery by mail, it is recommended that holders use an overnight or hand
delivery service, properly insured. If such delivery is by mail, it is
recommended that the holder use properly insured, registered mail with return
receipt requested. For a full description of the guaranteed delivery procedures,
see the Prospectus under "The Exchange Offer." In all cases, sufficient time
should be allowed to assure timely delivery. No Notice of Guaranteed Delivery
should be sent to the Company.
2. Signature on This Notice of Guaranteed Delivery; Guarantee of
Signatures. If this Notice of Guaranteed Delivery is signed by the registered
holder(s) of the Old Notes referred to herein, then the signature must
correspond with the name(s) as written on the face of the Old Notes without
alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Old Notes listed, this Notice of Guaranteed Delivery
must be accompanied by a properly completed bond power signed as the name of the
registered holder(s) appear(s) on the face of the Old Notes without alteration,
enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and, unless waived by the Company, evidence satisfactory
to the Company of their authority so to act must be submitted with this Notice
of Guaranteed Delivery.
3. Requests for Assistance or Additional Copies. Questions relating to the
Exchange Offer or the procedure for consenting and tendering as well as requests
for assistance or for additional copies of the Prospectus, the Letter of
Transmittal and this Notice of Guaranteed Delivery, may be directed to the
Exchange Agent at the address set forth on the cover hereof or to your broker,
dealer, commercial bank or trust company.
Holders of Old Notes who wish to tender their Old Notes for exchange must
complete columns (1) through (3) in the box below entitled "Description of Old
Notes," complete the boxes entitled and sign the box below entitled "Sign Here."
If only those columns are completed, such holder of Old Notes will have tendered
for exchange all Old Notes listed in column (3) below. If the holder of Old
Notes wishes to tender for exchange less than all of such Old Notes, column (4)
must be completed in full. In such case, such holder of Old Notes should refer
to Instruction 5.
4
