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Filed pursuant to Rule 424(b)(4)
Registration Statement No. 333-64367
PROSPECTUS
GOLDEN SKY SYSTEMS, INC.
OFFER TO EXCHANGE ITS
12 3/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
12 3/8% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
APRIL 23, 1999, UNLESS EXTENDED.
---------------------
Golden Sky Systems, Inc., a Delaware corporation ("GSS" or the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange $1,000 principal amount of its 12 3/8% Senior
Subordinated Notes due 2006, Series B ("New Notes"), which will have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement of which this Prospectus is a part, for
each $1,000 principal amount of its issued and outstanding 12 3/8% Senior
Subordinated Notes due 2006, Series A (the "Old Notes" and, collectively with
the New Notes, the "Notes"), of which $195,000,000 aggregate principal amount is
outstanding, from the holders thereof. The Company will not receive any proceeds
from the Exchange Offer and has agreed to pay all the expenses incident to the
Exchange Offer. The Company is a wholly-owned subsidiary of Golden Sky DBS,
Inc., a Delaware corporation ("Golden Sky DBS"), which is a wholly-owned
subsidiary of Golden Sky Holdings, Inc., a Delaware corporation ("Holdings").
The Notes are unconditionally guaranteed, on a senior subordinated basis, by
GSS's subsidiaries Argos Support Services Company and PrimeWatch, Inc. (together
with any other subsidiaries of the Company that may guarantee the Notes in the
future, the "Guarantors"). Each guarantee is, to the extent set forth in the
Indenture, subordinated in right of payment to the prior payment in full of all
Guarantor Senior Indebtedness (as defined in the Indenture) of such Guarantor.
The terms of the New Notes are identical in all material respects
(including principal amount, interest rate, maturity and guarantees) to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes. The Notes rank pari passu with
all present and future senior subordinated debt of the Company, and senior to
all present and future subordinated debt of the Company. As of December 31,
1998, the aggregate amount of outstanding indebtedness (excluding the Notes) of
the Company was approximately $83.2 million. See "Description of the New Notes."
Upon a Change of Control (as defined herein), each holder of the New Notes may
require the Company to repurchase all or a portion of such holder's New Notes at
a price equal to 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase. In the event of a Change of
Control, the Company may not have sufficient funds to satisfy its obligation to
repurchase the New Notes and other debt that may come due as a result thereof.
See "Description of the New Notes -- Change of Control."
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the registration rights agreement
relating to the Old Notes. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission"), the Company believes that
the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by a holder thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business, and such holder has no arrangement with any person to participate in
the distribution of such New Notes. Each broker-dealer that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such 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 Old Notes where such Old
Notes were acquired by a broker-dealer as a result of market-making activities
or other trading activities. See "Plan of Distribution."
(Cover continued on next page)
SEE "RISK FACTORS" ON PAGE 15 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is March 22, 1999.
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(Continued from cover page)
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be April 23,
1999 unless the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. See "The Exchange Offer."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and will be subject to the
limitations applicable thereto under the Indenture (as defined herein).
Following consummation of the Exchange Offer, the holders of Old Notes will
continue to be subject to the existing restrictions upon transfer thereof, and
the Company will have no further obligation to such holders to provide for
registration under the Securities Act of the Old Notes held by them. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Old Notes could be adversely affected. See
"Risk Factors -- Consequences of the Exchange Offer to Non-Tendering Holders of
the Old Notes" and "The Exchange Offer -- Terms of the Exchange Offer."
The New Notes will initially be available only in book-entry form. The
Company expects that the New Notes issued pursuant to the Exchange Offer will be
issued in the form of one or more Global Notes (as defined herein), which will
be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in a Global Note representing the New Notes will
be shown on, and transfers thereof will be effected through, records maintained
by the Depositary and its participants. After the initial issuance of the Global
Notes, a New Note in certificated form will be issued in exchange for a Global
Note only on the terms set forth in the Indenture. See "Description of the New
Notes -- Book Entry; Delivery and Form."
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THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
---------------------
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of March 22, 1999.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. No dealer-manager is being used in connection with this
Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of the Old Notes in any jurisdiction in which the
making of the Exchange Offer or acceptance thereof would not be in compliance
with the laws of such jurisdiction or would otherwise not be in compliance with
any provision of any applicable security law.
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TABLE OF CONTENTS
PAGE
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Additional Information...................................... 1
Forward-Looking Statements.................................. 2
Sources of Material Information............................. 2
Summary of the Prospectus................................... 4
Risk Factors................................................ 15
Use of Proceeds............................................. 27
The Exchange Offer.......................................... 27
Capitalization.............................................. 32
Pro Forma Financial Statements.............................. 33
Selected Consolidated Financial Data........................ 38
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 39
Business.................................................... 48
Management.................................................. 62
Principal Stockholders...................................... 67
Certain Relationships and Related Transactions.............. 71
Description of Other Indebtedness........................... 74
Description of the New Notes................................ 77
Certain Federal Income Tax Considerations................... 107
Plan of Distribution........................................ 108
Legal Matters............................................... 108
Experts..................................................... 109
Index to Financial Statements............................... F-1
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to the
New Notes. This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. The Registration Statement and the exhibits and
schedules thereto may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
also maintains a Web site that contains reports, proxy statements and other
information regarding registrants, including the Company, that file such
information electronically with the Commission. The address of the Commission's
Web site is http://www.sec.gov.
As a result of the filing of the Registration Statement with the
Commission, the Company will become subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The Company's obligation to file periodic
reports with the Commission pursuant to the Exchange Act may be suspended if the
New Notes are held of record by fewer than 300 holders at the beginning of any
fiscal year of the Company, other than the fiscal year in which such
registration statement or registered exchange offer for the New Notes becomes
effective. However, the indenture, dated as of July 31, 1998 (the "Indenture"),
by and among the Company, 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 (the "Trustee"), provides that the Company
must file with the Commission and provide the holders of
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the Notes with copies of annual reports and other information, documents and
reports specified in Sections 13 and 15(d) of the Exchange Act as long as the
Notes are outstanding.
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT THE COMPANY THAT IS NOT INCLUDED IN, OR DELIVERED WITH, THE PROSPECTUS.
THIS INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS UPON WRITTEN OR
ORAL REQUEST TO THE COMPANY AT 605 WEST 47TH STREET, SUITE 300, KANSAS CITY,
MISSOURI 64112, ATTENTION: INVESTOR RELATIONS, (816) 753-5544. IN ORDER TO
OBTAIN TIMELY DELIVERY OF SUCH INFORMATION, SECURITY HOLDERS MUST REQUEST THE
INFORMATION NO LATER THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE OF THE
EXCHANGE OFFER.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements involving known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, among others: general economic and
business conditions and industry trends, including consolidation; the continued
growth of the direct-to-home television industry; uncertainties regarding
business strategies, including the Company's acquisition strategy; the ability
of the Company to obtain and retain subscribers; changes in the regulatory
environment affecting the Company; and actions of the Company's competitors. All
statements herein other than statements of historical fact, including, without
limitation, the statements under "Summary of the Prospectus," "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Liquidity and Capital Resources," and "Business" regarding the Company's
profitability, financial position, liquidity and capital requirements are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurances that those expectations will prove to have been correct. Certain
other important factors that could cause actual results to differ materially
from the Company's expectations ("Cautionary Statements") are disclosed in this
Prospectus, including, without limitation, under "Risk Factors." All written
forward-looking statements by or attributable to the Company or persons acting
on its behalf contained in this Prospectus are expressly qualified in their
entirety by the Cautionary Statements.
SOURCES OF MATERIAL INFORMATION
THIS PROSPECTUS CONTAINS INFORMATION OBTAINED FROM SOURCES OTHER THAN THE
COMPANY CONCERNING, AMONG OTHER THINGS, THE COMPANY'S INDUSTRY AND MARKETS, THE
COMPANY'S PRINCIPAL DIRECT AND INDIRECT SUPPLIERS OF SERVICES, DIRECTV, INC.
("DIRECTV"), THE NRTC (AS DEFINED HEREIN), THE RURAL DIRECTV MARKETS (AS DEFINED
HEREIN), AND THE NRTC'S RELATIONSHIP (CONTRACTUAL AND OTHERWISE) WITH DIRECTV.
SUCH INFORMATION IS MATERIAL TO UNDERSTANDING THE COMPANY'S BUSINESS AND
PROSPECTS. SPECIFICALLY, WHILE THE COMPANY'S SOLE BUSINESS IS THE OFFERING OF
DIRECTV SERVICES, THE COMPANY HAS NO DIRECT CONTRACTUAL RELATIONSHIP WITH
DIRECTV RELATING TO ITS PRINCIPAL MARKETS AND OBTAINS 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. THE COMPANY RELIES
UPON THE NRTC TO HAVE ACCURATELY REPRESENTED THE SCOPE AND TERM OF ITS
ARRANGEMENTS WITH HUGHES (AS DEFINED HEREIN) AND DIRECTV. UNDER THE COMPANY'S
ARRANGEMENTS WITH THE NRTC, THE NRTC PROVIDES SUBSTANTIAL SERVICES TO THE
COMPANY, INCLUDING BILLING AND CUSTOMER AUTHORIZATION, AND THE COMPANY RELIES
UPON THE NRTC TO PROVIDE IT WITH ACCURATE AND COMPLETE INFORMATION CONCERNING
THE COMPANY'S CUSTOMERS. INFOR-
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MATION CONCERNING THE NRTC AND ITS ARRANGEMENTS WITH DIRECTV IS BASED UPON
INFORMATION THAT HAS BEEN MADE AVAILABLE TO THE COMPANY 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 THE COMPANY HAS
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 THE COMPANY BELIEVES THESE AND OTHER THIRD-PARTY SOURCES OF
INFORMATION TO BE RELIABLE, IT HAS NOT INDEPENDENTLY VERIFIED SUCH INFORMATION
AND IS NOT IN A POSITION TO DO SO. SEE "RISK FACTORS -- RISKS RELATED TO
RELATIONSHIP WITH 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
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, including the risk factors
and consolidated financial statements and the notes thereto included elsewhere
in this Prospectus. As used herein, unless the context requires otherwise, the
term "Company" includes Golden Sky Systems, Inc. and its consolidated
subsidiaries. The term "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. The term "Rural DIRECTV
Markets" means those areas in the United States in which the NRTC and certain of
its members and affiliates (including the Company) have the exclusive right to
provide DIRECTV services to residential customers.
THE COMPANY
The Company is the second largest independent provider of DIRECTV, the
leading Direct Broadcast Satellite ("DBS") company serving the continental
United States. The Company markets and provides DIRECTV's programming package
("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 ("MDUs") and commercial customers. The Company has
obtained the exclusive right to provide DIRECTV Programming to homes in its
Rural DIRECTV Markets under agreements between the Company and the NRTC. The
NRTC and its DBS members and affiliates (including the Company) provide DIRECTV
Programming in Rural DIRECTV Markets pursuant to an agreement between the NRTC
and Hughes Communications Galaxy, Inc. ("Hughes"), DIRECTV's
predecessor-in-interest. The Company estimates 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 its formation by management in June 1996 through January 31, 1999,
the Company has:
- acquired 50 Rural DIRECTV Markets in 23 states with approximately 1.8
million households and 129,800 subscribers at the dates of acquisition;
- increased its subscriber base in these markets by approximately 83.3% in
aggregate, to approximately 238,000, achieving a subscriber penetration
rate of approximately 13.5% through aggressive marketing and a local,
service-driven approach to the customer;
- 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; and
- together with its corporate parent, raised $87.4 million of equity
capital from several institutional venture capital firms and Company
management, and secured $150.0 million of senior bank financing.
Since inception, the Company's recurring revenue has increased rapidly due
to internal subscriber growth and a low average annual subscriber disconnect
("churn") rate (approximately 8.8% for the twelve months ended December 31,
1998). The Company's net internal subscriber growth in its Rural DIRECTV Markets
during 1998 totaled approximately 80,300. This represented approximately 6.9% of
DIRECTV's net new subscribers nationwide for the period, although total
households in the Company's Rural DIRECTV Markets approximated just 1.5% of all
television households in the continental United States. Although the Company
incurs substantial costs to add subscribers, it has relatively low recurring
costs to service them. The Company believes these factors provide an opportunity
to increase operating leverage and provide strong growth in EBITDA (as defined
herein). The Company had EBITDA of negative $5.4 million and negative $20.0
million for the years ended December 31, 1997 and 1998, respectively.
The Company believes that its exclusive right to provide DIRECTV
Programming in its Rural DIRECTV Markets is attractive for the following
reasons:
- The Company believes that marketing DIRECTV, the country's leading DBS
provider, gives it a competitive advantage over providers of other
subscription television services.
- Competition from cable television providers in Rural DIRECTV Markets is
often limited.
- Local providers of DIRECTV Programming, such as the Company, are
supported by DIRECTV's national marketing campaigns and extensive retail
distribution network. Additionally, three major
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consumer electronics manufacturers currently compete to provide customers
with satellite receivers and related equipment required to receive
DIRECTV Programming ("DBS Equipment").
- Ownership of Rural DIRECTV Markets has historically been fragmented,
creating an opportunity for the Company to grow through acquisitions,
rationalize operations and create operating leverage.
The Company intends to leverage its competitive strengths by pursuing the
following strategies:
- emphasizing direct sales and local customer service, which the Company
believes generates rapid subscriber growth, higher customer satisfaction
and lower churn;
- acquiring additional Rural DIRECTV Markets to continue the expansion of
the Company's core business; and
- developing related business opportunities that rely on the Company's
existing local sales and service organization.
In addition to its business in Rural DIRECTV Markets under agreements with
the NRTC, the Company has developed other business relationships with DIRECTV
and its affiliated companies. For example, the Company was chosen in January
1998 by DIRECTV as a Master System Operator to market and provide DIRECTV
Programming nationally to residents of MDUs and commercial establishments. In
February 1998, the Company began marketing and providing DIRECTV Programming to
residents of MDUs and commercial establishments in five major metropolitan areas
near its rural territories. The Company intends to focus its MDU and commercial
activities on high-growth urban areas near its Rural DIRECTV Markets to create a
larger universe of potential subscribers while maintaining its fixed cost base.
Also during 1998, the Company began test marketing DirecPC, a satellite-based
Internet access service.
RECENT INDUSTRY DEVELOPMENTS
On November 20, 1998, EchoStar Communications Corporation ("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. (an orbital location
providing DBS service to the entire continental United States), two satellites
to be delivered in orbit, and a direct broadcast operations facility. If
EchoStar completes these asset purchases, it may be able to significantly expand
its DBS and other programming offerings, thereby potentially strengthening its
competitive position relative to DIRECTV and the Company. The Company believes
that it can successfully compete with EchoStar in the DBS market because of
DIRECTV's brand name, nationwide marketing program and significantly larger
distribution network.
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. Each of
these acquisitions is subject to conditions, and there can be no assurance that
either will be consummated. The Company is not yet able to assess the effect of
either acquisition on its future business, financial position or results of
operations. The information contained in this Prospectus related to the number
of households and subscribers in the Company's Rural DIRECTV Markets does not
reflect the impact, if any, of these announced acquisitions. The Company cannot
yet determine whether and how these acquisitions, if consummated, would affect
the Company's rights in its Rural DIRECTV Markets or the Company's capital
requirements.
RECENT TRANSACTIONS
Golden Sky DBS was formed as a wholly-owned subsidiary of Holdings on
February 2, 1999 for the purpose of issuing $193.1 million in principal amount
at maturity of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2% Notes"). On
February 19, 1999, Golden Sky DBS consummated its offering of 13 1/2% Notes (the
"13 1/2% Notes Offering"). The 13 1/2% Notes were issued to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC,
Donaldson Lufkin & Jenrette Securities Corporation and Fleet Securities, Inc.
(collectively, the "13 1/2% Notes Initial Purchasers"). The 13 1/2% Notes
Offering resulted in gross proceeds to Golden Sky DBS of approximately $100.0
million. Golden Sky DBS contributed the net proceeds of the 13 1/2% Notes
Offering (approximately $96.8 million) to the Company. The Company
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will use the contributed proceeds to repay existing senior bank indebtedness,
fund potential acquisitions, provide working capital and for general corporate
purposes. Immediately before the 13 1/2% Notes were issued, Holdings transferred
all the outstanding capital stock of the Company (together with $100 in cash) to
Golden Sky DBS in exchange for 100 shares of common stock, $.01 par value, of
Golden Sky DBS. As a result of these transactions, Golden Sky DBS became an
intermediate holding company between Holdings and the Company. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition --
Recent Developments."
Subsequent to December 31, 1998, the Company acquired four Rural DIRECTV
Markets, which territories include approximately 54,000 households and 10,600
subscribers, for an aggregate purchase price of approximately $19.9 million. The
Company is continually evaluating acquisition prospects and expects to enter
into additional acquisition agreements and complete further acquisitions of
Rural DIRECTV Markets consistent with the Company's growth strategy.
RISK FACTORS
An investment in the Notes is subject to a number of risks, including,
without limitation, the following:
- net losses and negative EBITDA,
- substantial leverage,
- ability to service indebtedness,
- subordination of the New Notes,
- asset encumbrances,
- restrictions imposed by terms of indebtedness,
- substantial capital requirements,
- risks attendant to acquisition strategy,
- dependence upon DIRECTV,
- reliance upon the NRTC,
- ability to acquire DBS services from NRTC and DIRECTV after expiration of
NRTC Agreements,
- ability to manage growth effectively,
- absence of public market for the New Notes, and
- consequences of the Exchange Offer to non-tendering holders of the Old
Notes.
Holders of the Old Notes should consider carefully all of the information
contained in the Prospectus prior to tendering their Old Notes in the Exchange
Offer. In particular, holders of Old Notes should consider the factors set forth
under "Risk Factors" beginning on page 15 of this Prospectus.
OWNERSHIP AND MANAGEMENT
The Company was formed by management on June 25, 1996 ("Inception") and
completed its first Rural DIRECTV Market acquisition in November 1996. To date,
the Company, together with its parent, has raised an aggregate $87.4 million of
equity capital in financings led by investment funds affiliated with Burr, Egan,
Delcage & Co./Alta Communications, Spectrum Equity Investors, L.P., BancBoston
Ventures Inc., Norwest Equity Partners and HarbourVest Partners LLC, including
an aggregate $2.5 million investment by management. Substantially all the
proceeds of such financings have been contributed to the Company.
The Company has assembled an experienced management team to execute its
business strategy. Rodney A. Weary, the Company's Chief Executive Officer, has
over 27 years of experience in building, consolidating and expanding rural cable
television systems. Mr. Weary also helped found and take public Premiere Page
Inc., a regional paging company. William J. Gerski, the Company's Vice
President, Sales and Marketing, has 26 years of experience building and leading
sales forces in the communications industry, including multi-channel
subscription television services. The Company's management team also includes
executives with long-term affiliations with the NRTC and DIRECTV, as well as
others experienced in other aspects of the telecommunications industry.
The Company's principal executive officers are located at 605 West 47th
Street, Suite 300, Kansas City, Missouri 64112, and its telephone number is
(816) 753-5544.
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THE OFFERING OF THE OLD NOTES
Old Notes..................... The Old Notes were sold (the "Offering") by the
Company on July 31, 1998 to Merrill Lynch,
Pierce, Fenner & Smith Incorporated and
NationsBanc Montgomery Securities LLC (the
"Initial Purchasers") pursuant to a Purchase
Agreement, dated July 24, 1998 (the "Note
Purchase Agreement"). The Initial Purchasers
subsequently resold the Old 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 Note Purchase Agreement, the
Company and the Initial Purchasers entered into
a Registration Rights Agreement, dated July 31,
1998 (the "Registration Rights Agreement"),
which grants the holders of the Old Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
exchange rights, which terminate upon the
consummation of the Exchange Offer.
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering to exchange up to
$195,000,000 aggregate principal amount of its
12 3/8% Senior Subordinated Notes due 2006,
Series B, for a like amount of its 12 3/8%
Senior Subordinated Notes due 2006, Series A.
The terms of the New Notes are identical in all
material respects (including principal amount,
interest rate and maturity) to the terms of the
Old Notes, except for certain transfer
restrictions and registration rights relating
to the Old Notes. See "Description of the New
Notes." The issuance of the New Notes is
intended to satisfy obligations of the Company
contained in the Registration Rights Agreement
relating to the Old Notes.
Expiration Date; Withdrawal of
Tender...................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on April 23, 1999, or such
later date and time to which it is extended.
The tender of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time
prior to the Expiration Date.
Accrued Interest on the New
Notes and the Old Notes....... Each New Note will bear interest from the most
recent date to which interest has been paid or
duly provided for on the Old Note surrendered
in exchange for such New Note, or, if no
interest has been paid or duly provided for on
such Old Note, from July 31, 1998. Holders of
Old Notes whose Old Notes are accepted for
exchange will not receive accrued interest on
such Old Notes for any period from and after
the last date to which interest has been paid
or duly provided for on the Old Notes prior to
the original issue date of the New Notes, or,
if no such interest has been paid or duly
provided for, will not receive any accrued
interest on such Old Notes, and will be deemed
to have waived the right to receive any
interest on such Old Notes accrued from and
after the last date to which interest has been
paid or duly provided for on the Old Notes,
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or, if no such interest has been paid or duly
provided for, from and after July 31, 1998.
Procedures for Tendering...... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with any other required
documentation, to State Street Bank and Trust
Company of Missouri, N.A., as Exchange Agent,
at the address set forth herein and therein.
The Letter of Transmittal will contain a
representation by the tendering holder that,
among other things, (i) the New Notes to be
received pursuant to the Exchange Offer are
being acquired in the ordinary course of the
business of the person receiving such New
Notes, (ii) such holder has no arrangement with
another person to participate in the
distribution of such New Notes, (iii) such
holder is not an "affiliate" (as defined in
Rule 405 under the Securities Act) of the
Company, and (iv) if the tendering holder is a
broker or a dealer (as defined in the Exchange
Act), it acquired the Old Notes for its own
account as a result of market-making activities
or other trading activities, and that it has
not entered into any arrangement with the
Company or any "affiliate" of the Company to
distribute the New Notes to be received in the
Exchange Offer. In the case of a broker-dealer
that receives New Notes for its own account in
exchange for Old 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 New Notes received pursuant to the Exchange
Offer. See "Plan of Distribution."
Guaranteed Delivery
Procedures.................... Holders who wish to accept the Exchange Offer
and cannot complete the procedures for
tendering on a timely basis may effect a tender
according to the guaranteed delivery procedures
set forth in "The Exchange Offer -- Procedures
for Tendering."
Federal Income Tax
Consequences.................. The exchange pursuant to the Exchange Offer
will not result in any income, gain or loss to
the holders of the Notes or the Company for
Federal income tax purposes. See "Certain
Federal Income Tax Considerations."
Exchange Agent................ State Street Bank and Trust Company of
Missouri, N.A. is serving as Exchange Agent in
connection with the Exchange Offer. The address
and telephone number of the Exchange Agent are
set forth in "The Exchange Offer -- Exchange
Agent."
Consequences of Exchanging Old
Notes Pursuant to the
Exchange Offer.............. Generally, based on interpretations by the
staff of the Commission, the Company believes
that holders of Old Notes (other than any
holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) who exchange their Old Notes
for New Notes pursuant to the Exchange Offer
may offer such New Notes for resale, resell
such New Notes, and otherwise
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transfer such New Notes without compliance with
the registration and prospectus-delivery
provisions of the Securities Act; provided that
such New Notes are acquired in the ordinary
course of such holders' business and such
holders have no arrangement with any person to
participate in the distribution of such New
Notes. Each broker-dealer that receives New
Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such New Notes. 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. The Company does not currently intend to
register or qualify the sale of the New Notes
in any such jurisdictions.
Untendered Old Notes.......... Following the consummation of the Exchange
Offer, holders of Old Notes eligible to
participate but who do not tender their Old
Notes will not have any further exchange
rights, and such Old Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Consequences of Failure to
Exchange.................... If a holder of Old Notes does not exchange such
Old Notes for New Notes pursuant to the
Exchange Offer, such Old Notes will continue to
be subject to the restrictions on transfer
contained in the legend thereon. In general,
the Old Notes may not be offered or sold unless
registered under the Securities Act, except
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."
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SUMMARY DESCRIPTION OF THE NEW NOTES
The form and terms of the New Notes are identical in all material respects
to the Old Notes, except for certain transfer restrictions and registration
rights relating to the Old Notes. The Old Notes will evidence the same debt as
the New Notes, and both series of Notes will be entitled to the benefits of the
Indenture and treated as a single class of debt securities thereunder. See
"Description of the New Notes."
Securities Offered............ $195,000,000 aggregate principal amount of
12 3/8% Senior Subordinated Notes due 2006,
Series B.
Maturity Date................. August 1, 2006.
Interest Payment Dates........ Interest on the New Notes will accrue at the
rate of 12 3/8% per annum and will be payable
semi-annually on each February 1 and August 1,
commencing February 1, 1999.
Escrow Account................ The Company has purchased certain Government
Securities (as defined herein), representing an
amount (the "Escrow Account") sufficient to
pay, together with interest received from the
investment thereof in Government Securities,
the first four semi-annual interest payments on
the Notes (estimated to be $45.2 million), as
security for repayment of the first four
scheduled interest payments on the Notes. The
Notes will be secured by a security interest in
the Escrow Account to the extent set forth
herein. The Escrow Account will be held by the
Escrow Agent (as defined herein) under the
Escrow Agreement (as defined herein) pending
disbursement. See "Description of the New
Notes -- Escrow Account."
Optional Redemption........... The New Notes will be redeemable, in whole or
in part, at the option of the Company on or
after August 1, 2003, at the redemption prices
set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, on or prior to August 1, 2001, the
Company may, at its option, redeem up to 35% of
the originally issued aggregate principal
amount of 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 the
Company or Holdings yielding gross proceeds of
at least $40 million and any subsequent Public
Equity Offerings (provided that, in the case of
any such sale or sales by Holdings, all the net
proceeds thereof are contributed to the
Company); 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 New Notes. See
"Description of the New Notes -- Redemption."
Change of Control............. Upon the occurrence of a Change of Control,
each holder of the Notes may require the
Company to repurchase all or a portion of such
holder's New Notes at a price equal to 101% of
their principal amount plus accrued and unpaid
interest, if any, to the date of repurchase.
See "Description of the New Notes -- Change of
Control."
Ranking....................... The Notes will be unsecured (except as
described under "-- Escrow Account") senior
subordinated obligations of the Company and
will be subordinated in right of payment to all
existing and
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future Senior Indebtedness (as defined herein).
As of December 31, 1998, on a pro forma basis
after giving effect to the Completed
Acquisitions (as defined herein), the Company
would have had approximately $289.0 million of
outstanding indebtedness, of which
approximately $77.8 million was Senior
Indebtedness, and $16.2 million was
unsubordinated indebtedness that would not
constitute Senior Indebtedness.
Guarantees.................... The New Notes are unconditionally guaranteed,
on a senior subordinated basis, as to payment
of principal, premium, if any, and interest,
jointly and severally, by the Company's
wholly-owned subsidiaries Argos Support
Services Company and PrimeWatch, Inc., and may,
under certain circumstances, be guaranteed in
the future by other subsidiaries of the Company
(together with Argos Support Services Company
and PrimeWatch, Inc., the "Guarantors"). Each
guarantee will, to the extent set forth in the
Indenture, be subordinated in right of payment
to prior payment in full of all Guarantor
Senior Indebtedness (as defined in the
Indenture) of such Guarantor.
Certain Covenants............. The Indenture imposes certain limitations on
the ability of the Company to, among other
things, 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 Notes, incur
liens, permit restrictions on the ability of
subsidiaries to pay dividends or make certain
payments to the Company, merge or consolidate
with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the
Company. See "Description of the New
Notes -- Certain Covenants."
For additional information regarding the New Notes, see "Description of the
New Notes."
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The summary historical consolidated financial data for the periods ended
December 31, 1996, 1997 and 1998 were derived from the audited Consolidated
Financial Statements of the Company included elsewhere in this Prospectus. The
financial information for the Completed Acquisitions has been derived from the
respective historical financial statements of the acquired entities.
As used herein, the "Pro Forma" financial and operating data reflect (i)
the Company's 50 acquisitions completed since Inception excluding six
acquisitions that are immaterial individually and in the aggregate (the
"Completed Acquisitions"), (ii) the Offering, and (iii) the contribution to the
Company of the proceeds from the 13 1/2% Notes Offering. The Pro Forma financial
and operating data also excludes the effects of five Rural DIRECTV Markets the
acquisition of which are under negotiation but for which binding letters of
intent have not been executed. See "Summary of Prospectus -- Recent
Transactions." The Pro Forma information is presented as if each of these events
had occurred at the beginning of the period presented with respect to the
statement of operations data and as of December 31, 1998 with respect to the
balance sheet data. The summary Pro Forma data do not purport to be indicative
of the results of operations that would have been achieved had the Completed
Acquisitions and the borrowings under the Credit Facility been consummated as of
the assumed dates, nor are the results intended to be indicative of the
Company's future results of operations. The following information should be read
in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the Company's Consolidated Financial
Statements and notes thereto, the Pro Forma Financial Statements and notes
thereto, and the individual financial statements and notes thereto of certain
acquired businesses appearing elsewhere in this Prospectus.
YEAR ENDED
DECEMBER 31, 1998
INCEPTION TO ---------------------
DECEMBER 31, YEAR ENDED PRO
1996 DECEMBER 31, 1997 HISTORICAL FORMA
------------ ----------------- ---------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue:
DBS services................................. $ 219 $ 16,452 $ 74,910 $ 88,318
Lease and other.............................. 36 944 1,014 1,142
------- -------- -------- --------
Total revenue........................ 255 17,396 75,924 89,460
Costs and expenses:
Cost of DBS services......................... 130 9,304 45,291 53,835
System operations............................ 26 3,796 11,021 13,015
Sales and marketing.......................... 73 7,316 32,201 32,810
General and administrative................... 1,035 2,331 7,431 7,470
Depreciation and amortization................ 97 7,300 23,166 30,514
------- -------- -------- --------
Total costs and expenses............. 1,361 30,047 119,110 137,644
------- -------- -------- --------
Operating Loss................................. (1,106) (12,651) (43,186) (48,184)
Net interest expense........................... (61) (3,133) (18,964) (29,277)
------- -------- -------- --------
Net loss before extraordinary charge........... $(1,167) $(15,784) $(62,150) $(77,461)
======= ======== ======== ========
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DECEMBER 31, 1998
------------------------
PRO FORMA
DECEMBER 31, 1997 HISTORICAL AS ADJUSTED
----------------- ---------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 13,632 $ 4,460 $ 66,312
Restricted cash:
Current.............................................. -- 28,083 22,741
Long-term............................................ -- 23,534 23,534
Working capital........................................ 3,827 15,204 71,728
Total assets........................................... 156,236 328,071 393,307
Total debt............................................. 69,113 278,204 246,204
Stockholder's equity................................... 70,449 15,922 113,035
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)
OTHER FINANCIAL DATA:
EBITDA(1)..................................... $(1,009) $ (5,351) $ (20,020) $
Net cash provided by (used in) operating
activities.................................. (790) (3,099) (36,588)
Net cash provided by (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(2)(3)............. 21,800 1,134,700 1,727,400 1,767,400
Subscribers acquired in acquisitions(3)....... 2,975 65,706 55,291 61,041
Subscribers added in existing
territories(3).............................. 229 22,014 80,310 80,310
Subscribers at end of period(3)(4)............ 3,204 90,924 226,525 232,275
Subscriber acquisition costs, per net
subscriber added(3)(5)...................... $ 319 $ 332 $ 393 $ 393
Penetration at end of period.................. 14.7% 8.0% 13.1% 13.1%
Ratio of earnings to fixed charges(6)......... -- -- --
- ---------------
(1) EBITDA represents earnings before interest, taxes, depreciation and
amortization. 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, the
Company believes that EBITDA is a commonly recognized measure of performance
in the communications industry and is the basis for many of the Company's
financial covenants. Further, the Company believes 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 the Company's 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 the Company
in terms of operating performance, leverage and liquidity. EBITDA as
calculated by the Company is not necessarily comparable to similarly
captioned amounts of other companies.
(2) Household numbers are rounded to the nearest hundred. Pro Forma households
include households as of the later of December 31, 1998 or acquisition date
for Completed Acquisitions.
(3) Household and subscriber data reflect 100% of the households or subscribers
comprising the Company's Rural DIRECTV Markets, including two Rural DIRECTV
Markets in which the Company acquired less
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than 100% ownership. The Company receives 100% of the revenue generated by
all subscribers in its Rural DIRECTV Markets. Excludes approximately 4,000
commercial and MDU subscribers.
(4) For Completed Acquisitions, subscriber data are as of the later of December
31, 1998 or acquisition date.
(5) Represents subscriber acquisition costs ("SAC") incurred per net new
subscriber activation in Rural DIRECTV Markets. Excludes acquired,
commercial and MDU subscribers and related SAC.
(6) The ratio of earnings to fixed charges is determined by dividing the sum of
net loss before interest expense and extraordinary item 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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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors before tendering
their Old Notes in the Exchange Offer.
NET LOSSES AND NEGATIVE EBITDA
The Company has had a limited operating history, during which time it has
generated net losses and negative EBITDA. This is due primarily to the costs
incurred to acquire Rural DIRECTV Markets, to integrate acquired operations and
to expand the Company's sales and marketing activities, including the creation
of a direct sales force. The Company reported net losses of approximately $15.8
million and $64.7 million for the years ended December 31, 1997 and December 31,
1998, respectively, and EBITDA of approximately negative $5.4 million and
negative $20.0 million for the years ended December 31, 1997 and December 31,
1998, respectively. The extent to which the Company actually experiences
positive EBITDA in the future will depend upon a number of factors, including
the Company's ability to acquire new Rural DIRECTV Markets, the time and expense
required to integrate new operations and implement adequate systems and controls
and to train direct sales and other personnel, the Company's ability to generate
internal subscriber growth and introduce new products and services, the degree
of competition encountered by the Company, the cost of programming services, and
economic conditions generally. There can be no assurance when or whether the
Company will generate or sustain positive EBITDA or net income.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged and is expected to increase its leverage as
it pursues further acquisitions by borrowing additional funds and by issuing
additional seller notes. At December 31, 1998, on a pro forma basis, the
Company's total consolidated long-term indebtedness, including the current
portion, would have approximated $289.0 million, representing approximately 95%
of the Company's total capitalization, and the Company's earnings would have
been insufficient to cover its fixed charges by approximately $79.0 million. On
such pro forma basis, assuming satisfaction of the conditions to borrowing
(including satisfaction of the subscriber borrowing base requirements and
financial maintenance covenants), the Company would have had the ability to
borrow an additional $53.4 million under the Credit Facility and expects to do
so principally to fund additional acquisitions of Rural DIRECTV Markets.
The degree to which the Company is leveraged could have adverse
consequences to holders of the New Notes, including, but not limited to, the
following: (i) the Company's ability to fund internally or obtain additional
debt or equity financing in the future for acquisitions, working capital,
operating losses, capital expenditures and other purposes could be impaired;
(ii) the Company's flexibility in planning for, or reacting to, changes to its
business and market conditions may be limited; (iii) the Company may be
constrained from competing with less highly leveraged competitors; and (iv) the
Company may be financially vulnerable in the event of a downturn in its business
or the economy generally. In addition, borrowings under the Credit Facility bear
interest at variable rates, which could further increase the Company's debt
service obligations in the event of an increase in interest rates generally. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" and "Description of Other
Indebtedness -- Credit Facility."
ABILITY TO SERVICE INDEBTEDNESS
The ability of the Company to meet its debt service obligations, including
in respect of the New Notes, will be dependent upon the Company's future
operating performance. Such operating performance can be subject to many
factors, some of which will be beyond the Company's control, such as prevailing
economic conditions and relations with the NRTC. See "-- Reliance Upon the
NRTC." There can be no assurance that the Company will be able to generate
sufficient cash flow to service required interest and principal payments.
Borrowings under the revolving credit line established pursuant to the Credit
Facility will be available to the Company until September 30, 2005, but
commitments and borrowings are subject to quarterly reductions commencing March
31, 2001. Borrowings under the term loan facility established pursuant thereto
are
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required to be repaid in 16 consecutive quarterly installments commencing March
31, 2002, with the balance due December 31, 2005. If the Company does not have
sufficient available resources to repay indebtedness under the Credit Facility
at such time, the Company may find it necessary to refinance such indebtedness,
and there can be no assurance that such refinancing would be available, or
available on reasonable terms. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition -- Liquidity and Capital
Resources," "Description of Other Indebtedness -- Credit Facility" and
"Description of the New Notes."
SUBORDINATION OF THE NEW NOTES
The New Notes will be general unsecured (other than the first-priority
security interest in the Escrow Account) obligations of the Company and will be
subordinate in right of payment to all Senior Indebtedness, including
indebtedness under the Credit Facility. As of December 31, 1998, on a pro forma
basis, the Company would have had $77.8 million of Senior Indebtedness
outstanding and $53.4 million of availability under the Credit Facility. The
Company also had approximately $16.2 million of unsubordinated indebtedness,
representing the Seller Notes (as defined herein) and obligations under capital
leases, to which the New Notes will not be subordinated. The Indenture permits
the Company to incur additional indebtedness, which may take the form of Senior
Indebtedness, subject to certain limitations, and the Company expects from time
to time to incur additional Senior Indebtedness. By reason of the subordination
provisions of the Indenture, in the event of the insolvency, liquidation,
reorganization, dissolution or other winding-up of the Company, holders of
Senior Indebtedness must be paid in full before payment of amounts due on the
New Notes may be made. Accordingly, there may be insufficient assets remaining
after such payments of Senior Indebtedness to pay amounts due on the New Notes.
The guarantees of the Notes by the Guarantors are subordinated to Guarantor
Senior Indebtedness of each Guarantor to the same extent that the Notes are
subordinated to Senior Indebtedness of the Company, and the ability to collect
under such guarantees may therefore be similarly limited.
In addition, during the continuance of any default in payment in respect of
any Designated Senior Indebtedness (as defined herein), no payment (subject to
limited exceptions) may be made on account of the obligations with respect to
the Notes unless and until such default has been cured or waived or has ceased
to exist or such Designated Senior Indebtedness shall have been discharged or
paid in full in cash or cash equivalents. In addition, during the continuance of
any non-payment default with respect to any Designated Senior Indebtedness
pursuant to which the maturity thereof may immediately be accelerated and after
the receipt by the Trustee from the representatives of holders of such
Designated Senior Indebtedness of a written notice of such default, no payment
(subject to limited exceptions) may be made by the Company on account of the
Obligations (as defined herein) with respect to the Notes for a specified
period. If any Event of Default (as such term is defined in the Indenture)
occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the then outstanding Notes may declare all the Notes to be
due and payable immediately. However, such a continuing Event of Default also
would permit the acceleration of all outstanding obligations under the Credit
Facility. In such an event, the subordination provisions of the Indenture would
prohibit any payments to holders of the Notes unless and until such obligations
(and any other accelerated Designated Senior Indebtedness) have been repaid in
full in cash or Cash Equivalents (as defined herein). See "Description of the
New Notes -- Subordination."
ASSET ENCUMBRANCES
The New Notes will not be secured by any assets of the Company other than
the Escrow Account that secures the first four interest payments on the Notes.
The obligations of the Company under the Credit Facility will be secured by
substantially all of its assets and those of its subsidiaries, including the
NRTC Agreements referred to below. If the Company becomes insolvent or is
liquidated, or if payment under the Credit Facility is accelerated, the lenders
under the Credit Facility would be entitled to exercise the remedies available
to a secured lender under applicable law and pursuant to the terms of the Credit
Facility. Accordingly, any claims of such lenders with respect to such assets
will be prior to any claim of the holders of the Notes with respect to such
assets. See "Description of Other Indebtedness -- Credit Facility."
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The Company's valuable assets are comprised primarily of its rights under
the agreements between the NRTC and its members, pursuant to which the members
acquired the right to distribute DIRECTV Programming in the Rural DIRECTV
Markets (collectively, the "NRTC Agreements") and the Company's interest in its
subscriber base. Because the NRTC Agreements are terminable upon a bankruptcy or
insolvency of the Company, and the nature of the Company's interest in its
subscriber base is the subject of uncertainty, there can be no assurance as to
the ability of creditors, including holders of Notes, to realize upon these
assets and to satisfy all or any part of their claims against the Company. See
"Reliance Upon the NRTC."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Credit Facility, the Indenture, and the indenture governing the 13 1/2%
Notes contain numerous restrictive covenants that limit the discretion of the
Company's management with respect to certain business matters. These covenants
place significant restrictions on, among other things, the ability of the
Company to incur additional indebtedness, to create liens or other encumbrances,
to pay dividends or make certain other payments, investments, loans and
guarantees and to sell or otherwise dispose of assets and merge or consolidate
with another entity. The Credit Facility also contains a number of financial
covenants that will require the Company to meet certain financial ratios and
financial condition tests, and availability under the revolving credit facility
of the Credit Facility depends upon satisfaction of these covenants as well as
minimum subscriber base requirements. See "Description of Other
Indebtedness -- Credit Facility" and "Description of the New Notes -- Certain
Covenants." The Company's ability to meet these covenants and requirements can
be affected by events beyond its control, and, in any event, there can be no
assurance that the Company will meet such covenants and requirements. A failure
to comply with the obligations in the Credit Facility or the Indenture could
result in an event of default under the Credit Facility or an Event of Default
under the Indenture that, if not cured or waived, could permit acceleration of
the relevant indebtedness and acceleration of indebtedness under other
instruments that may contain cross-acceleration or cross-default provisions. In
the event of an event of default under the Credit Facility or an Event of
Default under the Indenture, the lenders thereunder could elect to declare all
amounts outstanding thereunder, together with accrued and unpaid interest, to be
immediately due and payable. If the indebtedness under the Credit Facility were
to be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay in full that indebtedness and the other
indebtedness of the Company, including the Notes. Other indebtedness of the
Company and its subsidiaries that may be incurred in the future may contain
financial or other covenants more restrictive than those applicable to the
Notes.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company's operations have required and will continue to require
substantial capital to finance acquisitions of Rural DIRECTV Markets and the
costs associated with integrating acquired operations and expanding the
Company's sales and marketing activities in new markets, as well as general
working capital requirements and operating expenses. No assurance can be given
that actual cash requirements will not materially exceed the Company's estimated
capital requirements and available capital. Moreover, because the Company's
ability to access the total availability of the Credit Facility is dependent on
maintaining certain specified financial and operating covenants, there can be no
assurance that the Company will be able to draw funds under the Credit Facility
sufficient to finance its planned acquisitions and the continued development of
its operations. The amount of capital the Company requires will depend upon a
number of factors, including costs of future acquisitions, capital expenditures
and negative cash flow generally. No assurance can be given that, in the event
the Company were to require additional financing, such additional financing
would be available on terms satisfactory to the Company or at all. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources" and "Description of Other
Indebtedness -- Credit Facility."
In addition, the Company is not yet able to assess whether and to what
extent the acquisitions by Hughes of USSB or by DIRECTV of Primestar may affect
the Company's future capital requirements. See "Summary of the
Prospectus -- Recent Industry Developments" and "Business -- Competition."
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RISKS ATTENDANT TO ACQUISITION STRATEGY
An essential part of the Company's business strategy is to acquire
additional Rural DIRECTV Markets. Since Inception, the Company has acquired the
right to provide DIRECTV Programming in 50 Rural DIRECTV Markets, and the
Company is continually identifying additional potential acquisition targets. The
Company is aware of at least one other DIRECTV Programming provider that is
currently pursuing an acquisition strategy targeted on Rural DIRECTV Markets
that is similar to the Company's. The prices paid in acquisitions by the Company
are a function of numerous factors, including the demographics of the particular
Rural DIRECTV Market, the extent of penetration by the prior operator and of
other pay television operators in such market and the extent of competition for
the particular acquisition. Other acquirers of Rural DIRECTV Markets may have
greater financial resources than the Company.
Each of the Company's potential acquisitions is subject to the negotiation
of a definitive agreement and, among other conditions, the prior approval of
Hughes and the NRTC, which approval may be beyond the Company's control. See
"-- Reliance Upon the NRTC" for a discussion of the risks attendant to securing
NRTC approval of acquisitions. In addition, each acquisition is subject to
conditions typical in acquisitions of this nature, certain of which also may be
beyond the control of the Company. There can be no assurance that the
anticipated benefits of any of the acquisitions described herein or future
acquisitions will be realized. The process of integrating acquired operations
into the Company's operations may result in unforeseen operating difficulties,
could divert management attention and may require significant financial
resources that would otherwise be available for the ongoing development or
expansion of the Company's existing operations. There also can be no assurance
that the Company will be able to identify suitable acquisitions in the future
or, if identified, to arrive at favorable prices and terms. In addition,
possible future acquisitions by the Company could result in the incurrence of
additional debt and contingent liabilities which could materially adversely
affect the Company's financial condition and results of operations.
DEPENDENCE UPON DIRECTV
The Company obtains substantially all of its revenue through the
distribution of DIRECTV Programming. As a result, the Company 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 ("FCC") licenses to
transmit radio frequency signals from the orbital slots occupied by its
satellites, at least some of which licenses expire and are subject to renewal in
December 1999. The Company relies 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 the Company from continuing to provide DBS services and
could have a material adverse effect on the Company's financial condition and
results of operations. See "-- Reliance Upon the NRTC" and "-- Ability to
Acquire DBS Services from NRTC and DIRECTV after Expiration of NRTC Agreements."
RELIANCE UPON THE NRTC
The Company depends greatly upon the NRTC for (i) maintaining valuable
rights that it has with DIRECTV (because the Company's ability to offer DIRECTV
Programming derives from those rights), (ii) providing the Company with accurate
information concerning the NRTC's relationship with DIRECTV (because the Company
does not have direct access to that information), and (iii) providing the
Company with certain essential services on a timely and effective basis. The
interests of the Company and 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. The Company is not a
member of the NRTC, but it is a non-voting affiliate of the NRTC. The NRTC may
be expected to act solely in the interests of its members, whose interests may
diverge from those of the Company.
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Rights Based Solely Upon NRTC Agreements. Virtually all of the Company's
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
to the Company the exclusive right to market, sell and retain revenue from
DIRECTV Programming (other than Non-Select Services (as defined herein))
transmitted over Hughes' 27 frequencies from the 101 degrees W.L. orbital
location to identified residences or identified areas, as applicable. The
Company does not have a direct contractual arrangement with Hughes (except with
respect to its Systems Operator and commercial licenses, which have not
generated material revenue to date), and the NRTC has declined to make available
to the Company a copy of the Hughes Agreement. Accordingly, the Company relies
upon the NRTC to have accurately represented the scope and term 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, the Company would have the right
to acquire DIRECTV Programming directly from DIRECTV either, at Hughes' option,
(i) by the assumption by Hughes of the NRTC's obligations under the NRTC
Agreements or (ii) under a new agreement between the Company and Hughes on terms
no less favorable to the Company than those in the NRTC Agreements. There can be
no assurance as to the existence or scope of such right under the Hughes
Agreement (e.g., whether Hughes is obligated to exercise any such option) or as
to the Company's ability to timely and successfully exercise such right. There
can be no assurance that the NRTC will act or fail to act in a manner that will
preserve the Company's 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 the Company, the
Company is not entitled to enforce or preserve any rights that the NRTC may have
under its agreement with Hughes.
The Company would also be materially adversely affected by the termination
of the NRTC Agreements by the NRTC prior to the expiration of their respective
terms. Such agreements may be terminated by the NRTC (i) as a result of a
termination of the Hughes Agreement, with the NRTC remaining responsible for
paying to the Company its pro rata portion of any refunds that the NRTC receives
from Hughes under the Hughes Agreement, (ii) if the Company fails to make any
payment due to the NRTC or otherwise breaches a material obligation of the NRTC
Agreements and such failure or breach continues unremedied for more than 30 days
after written notice from the NRTC or (iii) if the Company fails 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. If the NRTC Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DIRECTV Programming in the Rural
DIRECTV Markets. There can be no assurance that the Company would be able to
obtain similar DBS services from other sources.
The NRTC Agreements also require the Company to comply with policies of the
NRTC adopted from time to time. The Company and other NRTC-affiliated DIRECTV
providers have disputed certain policies proposed by the NRTC in the past that
they believed did not comply with the NRTC Agreements and applicable law. For
example, in 1998, the NRTC proposed new conditions to securing its approval of
acquisitions that included changes to all of the NRTC Agreements which, if
adopted, could have had material adverse financial consequences to the Company.
The dispute was resolved without any modifications to the NRTC Agreements and
the Company's 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 the Company, have "substantial proprietary interests" in and rights to
the information and data with respect to their subscribers. The NRTC and its
affiliates, including the Company, have differed over the import of these rights
and interests, which may have consequences in the event that the Company's
rights to offer DIRECTV Programming through the NRTC are terminated or expire.
Certain Services and Information. The NRTC Agreements provide that the NRTC
supply the Company with certain support services, including subscriber
authorization and data reporting capability, retail billing services and central
office subscriber services. These services are critical to the operation and
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management of the Company's business. The cost of the services provided to the
Company by the NRTC may or may not be greater than that of alternatives. In
addition to the fees paid upon signing of the NRTC Agreements, the Company is
required to pay to 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 the Company. If the
NRTC is unable to provide these services for whatever reason, the Company would
be required to acquire the services from other sources or provide them for
themselves. There can be no assurance that the cost to the Company of acquiring
those services elsewhere or providing them internally would not exceed the
amounts payable to the NRTC under the NRTC Agreements or, alternatively, that
the Company would not be able to secure such services on a more economic basis
on its own but continue to be required to obtain such services from the NRTC
under the NRTC Agreements.
The NRTC Agreements do not provide for direct or complete access to or
control by the Company of the management information systems of the NRTC,
including certain management information systems data concerning individual
subscribers of the Company. Therefore, although the Company is entitled to
verify the accuracy of individual customer financial accounts, it must rely on
the NRTC to accurately provide detailed general demographic and other
information regarding its subscribers, which information is critical to the
growth and development of the Company's ongoing marketing and sales strategy.
The Company must also rely upon the NRTC and DIRECTV to be Year 2000 compliant
on a timely basis.
ABILITY TO ACQUIRE DBS SERVICES FROM NRTC AND DIRECTV AFTER EXPIRATION OF NRTC
AGREEMENTS
The DIRECTV Programming offered by the Company to its subscribers 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, there can be no
assurance as to the longevity of the satellites and thus no assurance as to how
long the Company will be able to obtain DBS services pursuant to the NRTC
Agreements. The Company is 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 the Company's ability to secure
additional financing, if necessary or desirable.
The Company believes 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. The NRTC is not obligated to exercise any right of first
refusal. There can be no assurance 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), the Company would continue to have access to DIRECTV
Programming or the exclusive right to control or dispose of its interest in its
subscriber base. See "-- Reliance Upon the NRTC -- Rights Based Solely Upon 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 the Company and other NRTC members and affiliates is
unknown,
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which may impact the economics of the Company's business and its ability to meet
its obligations, including in respect of the Notes. In the event the Company is
unable to acquire DIRECTV Programming through Hughes and the NRTC after the
expiration of the NRTC Agreements, the Company would be required to acquire such
DBS services from others, or to attempt to sell its subscriber base to one or
more other DBS providers (which it may be unable to do for contractual or other
reasons) and cease or fundamentally change its business operations.
ABILITY TO MANAGE GROWTH EFFECTIVELY
The Company has experienced a period of rapid growth, primarily as a result
of acquisitions. In order to achieve its business objectives, the Company
expects to continue to expand largely through acquisitions of additional Rural
DIRECTV Markets, which have placed and will continue to place a significant
strain on its management, operating systems and procedures, financial resources,
employees and other resources. This growth has affected the preparation of
financial and operating information, and the Company has hired additional
personnel and implemented additional accounting practices and procedures to
address this concern. The Company will need to continue to improve its
operational systems and procedures and to hire and retain additional qualified
personnel as the size of its operations grows. If the Company is unable to do
so, the Company's financial condition and results of operations could be
materially adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success may depend to a significant extent upon the
performance of a number of the Company's key personnel, including Rodney A.
Weary, who is the Company's Chief Executive Officer. The Company has employment
and non-competition agreements with Mr. Weary and seven other executives. See
"Management." Although the Company maintains "key-man" insurance on the life of
Mr. Weary, 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 the Company's financial condition and results of
operations.
COMPETITION AND TECHNOLOGICAL CHANGE
The industry in which the Company operates is highly competitive, and the
Company expects to face intense competition from existing and future
competitors. The Company's competitors include a broad range of companies
engaged in the provision of 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 the Company. The
Company expects to compete primarily against providers of subscription
programming, such as cable and satellite operators. The Company also expects to
encounter a number of challenges in competing with cable television providers.
Cable operators generally have large installed customer bases, and many cable
television operators have significant investments in, and access to,
programming. The Company anticipates 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. The
Company further believes that due to the expense of upgrading less densely
populated areas such as those within the Rural DIRECTV Markets, cable systems in
the Rural DIRECTV Markets in general will be upgraded more slowly (if at all)
than those in more densely populated areas. In order to substantially increase
its subscriber base, however, the Company may find it necessary to attract
customers who currently subscribe to cable.
The Company competes with companies offering DTH programming through
various satellite broadcasting systems, although DIRECTV, USSB and EchoStar are
the only current 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 there can be no assurance that either will be
consummated. The Company is not yet able to assess the effect of either
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acquisition on the Company's 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 would increase competition substantially and could have a material
adverse effect on the financial condition and results of operations of the
Company.
A variety of other technologies are under development that could result in
increased competition for the Company, including, among others, the expansion of
the Internet to include and use developing video and audio compression
technologies to develop the "information superhighway." There can be no
assurance that additional competitors will not enter the markets that the
Company serves or that the Company will be able to succeed against such
competition. Moreover, changes in technology could lower the cost of competitive
services to a level where the Company's services will become less competitive or
where the Company will need to reduce its service prices in order to remain
competitive. See "Business -- Competition."
REGULATION; SHVA LITIGATION
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 "superstation" and broadcast
network programming to subscribers for private home viewing. The SHVA is
currently 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. In the case of broadcast network programming, the compulsory
license established by the SHVA is applicable only 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 the
network signal.
Until recently, a number of satellite providers, including DIRECTV (and its
distributors, including NRTC members and affiliates such as the Company),
received ABC, CBS, NBC and Fox network programming from PrimeTime 24 Joint
Venture ("PrimeTime 24"). 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 in 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 retransmission 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
affiliate 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,
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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 within 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 change 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 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.
While the Company believes that it has complied to date with the SHVA in
providing network programming only to "unserved households" and does not believe
that the interpretation of the SHVA applied by the Florida and North Carolina
federal courts will have a material adverse effect on the Company's financial
results or the Company's ability to attract new subscribers, there can be no
assurance that the Company's 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 the Company elect to
continue to offer network services. The Company's inability, along with that of
DIRECTV, to provide network programming to subscribers in Rural DIRECTV Markets
could adversely affect the Company's average revenue per subscriber and
subscriber growth and churn. See "Business -- Regulation."
Legislation to extend the SHVA past the scheduled December 31, 1999
expiration date has been introduced in Congress. Such legislation also provides
for changes in the rules governing the retransmission of distant and local
broadcast television stations and for a reduction in the royalty rates payable
under the SHVA. There can be no assurance that any such legislation will be
passed.
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, the 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 (i) licensing of satellites,
(ii) avoidance of interference with other broadcasting signals and (iii)
compliance with rules that the FCC has established specifically for DBS
satellite licenses.
RELIANCE ON SATELLITE TRANSMISSION TECHNOLOGY
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 according to Hughes and USSB the DIRECTV
satellites used to provide the DBS services have estimated orbital lives of
approximately 15 years from their respective launches in Decem-
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ber 1993, August 1994 and June 1995, there can be no assurance as to the
longevity of the satellites or that loss, damage or changes in the satellites as
a result of acts of war, anti-satellite devices, electrostatic storms or
collisions with space debris will not occur. While the Company does not believe
that the loss of a single satellite would adversely affect its operations, the
loss of two or more satellites could have a material adverse effect on DIRECTV
and the Company. 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,
which modifications could be costly. Such costs would likely be passed through
by DIRECTV or the NRTC to the Company, and would be borne by the Company to the
extent it could not pass such costs through to its subscribers in the form of
higher fees.
RISK OF SIGNAL THEFT
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. There can be no assurance that
the encryption technology used in the DBS Equipment will remain totally
effective. If the DBS Equipment encryption technology is compromised in a manner
that is not promptly corrected, the Company's revenue could be adversely
affected.
Just as the Company has exclusive DIRECTV distribution rights in its
territories, the Company is not allowed to have customers outside its
territories. In addition, DIRECTV and the Company are prohibited by law from
providing DIRECTV Programming outside the United States. Despite subscribers'
assurance that they receive programming within one of the Company's Rural
DIRECTV Markets, a portion of the Company's subscribers may, in fact, be
receiving DIRECTV Programming outside the Company's markets. If the Company must
disconnect a significant portion of its subscribers because they receive
services outside the Company's Rural DIRECTV Markets, the Company's financial
condition and results of operations could be adversely affected.
DEPENDENCE ON THIRD PARTY PROGRAMMERS
DIRECTV, and therefore the Company, is 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. There can be no assurance that any such
agreements will be renewed or will not be canceled prior to expiration of their
original term. In the event any such agreements are not renewed or are canceled,
there is no assurance that DIRECTV would be able to obtain or develop substitute
programming, or that such substitute programming would be comparable in quality,
marketability or cost to the Company's existing programming. The ability of the
Company 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. The Company anticipates 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 the Company's ability, to
acquire programming or acquire programming on a cost-effective basis.
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LIMITED CONSUMER ADOPTION OF SATELLITE TELEVISION
The Company believes 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 and $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 the Company
believes 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, there can be no assurance that
such costs will continue to decrease. To the extent that the cost of the
equipment remains an obstacle to increased demand for satellite services offered
by the Company, the growth of the Company's subscriber base could be delayed,
which could have an adverse effect on the Company's 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 Programming. In order to
make such programming available to its subscribers, the Company 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 "-- Regulation; PrimeTime 24 Litigation."
CERTAIN CONSEQUENCES OF ESCROW ACCOUNT RELATED TO BANKRUPTCY
The right of the Trustee under the Indenture and the Escrow Agent under the
Escrow Agreement to foreclose upon and sell collateral upon the occurrence of an
Event of Default is likely to be impaired significantly by applicable bankruptcy
law if a bankruptcy or reorganization case were to be commenced by or against
the Company or one or more of its subsidiaries. Under applicable bankruptcy law,
secured creditors such as the holders of the Notes are prohibited from
foreclosing upon or disposing of a debtor's property without prior bankruptcy
court approval. The Escrow Account is only pledged to secure the first four
scheduled interest payments on the Notes, including amounts accruing following
the commencement of any bankruptcy or reorganization case. See "Description of
the New Notes -- Escrow Account."
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were sold to the Initial Purchasers on July 31, 1997 and then resold 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 and are eligible for trading in
the Private Offerings, Resale and Trading through Automated Linkages (PORTAL)
market. The New Notes are securities for which there currently is no market. If
the New Notes are traded, they may trade at a discount from their face value,
depending upon prevailing interest rates, the market for similar securities, and
other factors. The Company does not intend to apply for listing of the New Notes
on any securities exchange or the Nasdaq National Market. Accordingly, there can
be no assurance as to the development or liquidity of any trading market for the
New Notes.
CONSEQUENCES OF THE EXCHANGE OFFER TO NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, the New Notes would rank pari
passu with the Old Notes, and the holders of Old Notes seeking liquidity in
their investment would have to rely on exemptions from registration requirements
under the securities laws, including the Securities Act. A reduction of the
aggregate principal amount of the Old Notes outstanding as a result of the
consummation of the Exchange Offer may have an adverse effect on the ability of
holders of the Old Notes to transfer such Old Notes.
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YEAR 2000 COMPLIANCE
The Company is in the process of assessing the impact of the Year 2000
issue on its computer systems and operations. Many existing computer systems and
applications currently use two-digit character 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. The Company
has reviewed the Year 2000 compliance of its internal systems and believes that
such systems are Year 2000 compliant. However, there can be no assurance that
all of the software products currently used by the Company are in fact Year 2000
compliant. The Company has engaged the services of a consultant to assist in the
Company's assessment of the impact of the Year 2000 issue on its computerized
systems and operations. Additionally, the Company is in the process of
conducting surveys of all of its vendors and other pertinent relationships to
assess their readiness for Year 2000 processing.
The Company is significantly reliant on contracted data processing services
from the NRTC and DIRECTV for customer service, billing and remittance
processing pursuant to the Company's contractual relationship with the NRTC. The
NRTC has informed the Company that the computer systems that provide such
services are not currently Year 2000 compliant, but that such systems will be
compliant by April 1999. The Company is reliant on DIRECTV for distribution of
its DBS programming services. DIRECTV has informed the Company that it expects
to establish Year 2000 compliance for its satellite programming, subscriber
databases, and customer billing systems by the end of the first calendar quarter
of 1999. In addition to the NRTC and DIRECTV, the Company is significantly
reliant on other parties (such as its suppliers of DBS Equipment) for the
successful conduct of its business. As previously described, the Company is in
the process of ascertaining the Year 2000 readiness of these third parties.
Currently, the Company believes its costs to successfully mitigate the Year
2000 issue will approximate $200,000. If the Company's plan is not successful or
is not completed in a timely manner, the Year 2000 issue could significantly
disrupt the Company's ability to transact business with its customers and
suppliers, and could have a material impact on its operations. There can be no
assurance that the systems of the NRTC, DIRECTV and other companies with which
the Company's 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 the
Company's business or its operations. To date, the Company has 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, the Company will
continue to monitor the progress of third-party remediation efforts and
contingency plans. Substantial completion of the Company's 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 the Company's operations. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Year 2000 Compliance."
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29
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of New Notes
pursuant to the Exchange Offer. The 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 Offering were placed in escrow to fund
the first four semi-annual interest payments (through August 1, 2000) on the
Notes. As of December 31, 1998, the remaining net proceeds had been fully
utilized principally for the retirement of existing indebtedness and related
accrued interest, acquisitions, and for working capital purposes. See
"Management's Discussion and Analysis of Operations and Financial
Condition -- Liquidity and Capital Resources."
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
The holders of the Old Notes currently are entitled to certain registration
rights under the Registration Rights Agreement. Pursuant thereto, the Company
became obligated to file with the Commission a registration statement covering
the offer by the Company to the holders of the Old Notes to exchange all of the
Old Notes for the New Notes. The Exchange Offer being made hereby, if
consummated, will satisfy the Company's obligations under the Registration
Rights Agreement.
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal, the Company will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount of
New Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by the holders thereof
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holders'
business, and such holders have no arrangement with any person to participate in
the distribution of such 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 be participating in the Exchange Offer for the
purposes of distributing securities in a manner not permitted by the
Commission's interpretation, such person (i) could not rely on the position of
the staff of the Commission enunciated in Exxon Capital Holdings Corporation or
similar interpretive letters and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such 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 Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. See "Plan of Distribution."
As of the date of this Prospectus, there was $195,000,000 aggregate
principal amount of the Old Notes outstanding. This Prospectus, together with
the Letter of Transmittal, is being sent to all such registered holders as of
the date of this Prospectus.
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30
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of Old
Notes for the purposes of receiving the New Notes from the Company and
delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
If Old Notes are not tendered, they shall remain outstanding and shall
continue to accrue interest from their date of issue, July 31, 1998, at a rate
of 12 3/8% per annum.
In the event the Exchange Offer is consummated, the Company will not be
required to register the Old Notes. In such event, holders of Old Notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors -- Consequences of the Exchange Offer to Non-Tendering Holders of the
Old Notes."
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this Prospectus, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by written notice and will mail to the record
holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that the Company is extending the Exchange
Offer for a specified period of time.
In addition, the Company will issue notice of each such extension by press
release or other public announcement as contemplated by the provisions of Rule
14e-1 promulgated under the Exchange Act.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from July 31, 1998, payable semiannually
on February 1 and August 1 of each year, commencing February 1, 1999, at a rate
of 12 3/8% per annum.
PROCEDURES FOR TENDERING
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
A holder of Old Notes may tender the same by (i) properly completing and
signing the Letter of Transmittal or a facsimile thereof (all references in this
Prospectus to the Letter of Transmittal shall be deemed to include a facsimile
thereof) and delivering the same, together with the certificate or certificates
representing the Old Notes being tendered and any required signature guarantees,
to the Exchange Agent at its address set forth on the back cover of this
Prospectus on or prior to the Expiration Date (or complying with the procedure
for book-entry transfer described below) or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the New Notes to be issued in exchange therefor are to
be issued (and any untendered Old 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 (also referred to as a
book-entry transfer facility) whose name appears on a security listing as the
owner of Old Notes), the signature of such signer need not be guaranteed. In any
other case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed by
the registered holder, and the signature on the endorsement or instrument of
transfer must be guaranteed by 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
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31
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchanges Medallion Program (any of the
foregoing being hereinafter referred to as an "Eligible Institution"). If the
New Notes and/or Old Notes not exchanged are to be delivered to an address other
than that of the registered holder appearing on the note register for the Notes,
the signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
THE METHOD OF DELIVERY OF OLD 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 Old Notes at the book-entry
transfer facility for the purpose of facilitating the Exchange Offer, and
subject to the establishment thereof, any financial institution, that is a
participant in the book-entry transfer facility's system may make book-entry
delivery of Old Notes by causing such book-entry transfer facility to transfer
such Old Notes into the Exchange Agent's account with respect to the Old Notes
in accordance with the book-entry transfer facility's procedures for such
transfer. Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's accounts at the book-entry transfer facility,
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 at its address set forth on the back cover page
of this Prospectus on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
If a holder desires to accept the Exchange Offer, and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office listed on the back cover hereof on or prior to the Expiration Date 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 Old
Notes are registered and, if possible, the certificate numbers of the Old Notes
to be tendered, and stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange trading days after the
date of execution of such letter, telegram or facsimile transmission by the
Eligible Institution, the Old Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility), will be delivered by such Eligible
Institution together with a properly completed and duly executed Letter of
Transmittal (and any other required documents). Unless Old Notes being tendered
by the above-described method are deposited with the Exchange Agent within the
time period set forth above (accompanied or preceded by a properly completed
Letter of Transmittal and any other required documents), the Company may, at its
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 as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at the book-entry transfer facility)
is received by the Exchange Agent, or (ii) 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 Old 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
Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding.
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32
The Company reserves the absolute right to reject any or all tenders not in
proper form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Old Notes. None of the 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, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of such holder's business, (ii) such holder has
no arrangement with any person to participate in the distribution of such New
Notes, (iii) such holder is not an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company, and (iv) if such holder is a broker or a dealer
(as defined in the Exchange Act), that it acquired the Old Notes for its own
account as a result of market-making activities on other trading activities and
that it has not entered into any arrangement or understanding with the Company
or any "affiliate" of the Company to distribute the New Notes received in the
Exchange Offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, 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. Any such notice
of withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the Depositor 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) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the depositor
withdrawing the tender, and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
withdrawal notices will be determined by the Company, whose determination shall
be final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been 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. Any Old Notes that have been tendered but that are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
The Exchange Offer is not subject to any conditions other than that the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the Commission.
EXCHANGE AGENT
State Street Bank and Trust Company of Missouri, N.A. has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance and
requests for additional copies of this Prospectus or
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33
of the Letter of Transmittal and deliveries of completed Letters of Transmittal
with tendered Old Notes should be directed to the Exchange Agent addressed as
follows:
By Hand/Overnight Express: By Facsimile (for Eligible By Mail:
Institutions only): State Street Bank and
State Street Bank and Trust Company of Missouri,
Trust Company of Missouri, (617) 664-5290 N.A.
N.A. Attention: Corporate Trust Two International Place,
61 Broadway, 15th Floor Department 4th Floor
New York, NY 10016 Boston, MA 02110
Attention: Corporate Trust Confirm by telephone: Attention: Corporate Trust
Department Department
(617) 664-5587 Kellie Mullen
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and their affiliates in person, by
telegraph or telephone.
The Company will not make any payments to brokers, dealers, or other
persons soliciting acceptances of the Exchange Offer. The Company 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 therewith. The Company 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 Old Notes, and in handling
or forwarding tenders for exchange.
The expenses to be incurred in connection with the 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 Old Notes by a holder of the Old Notes, will be paid by the
Company, and are estimated in the aggregate to be $200,000.
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CAPITALIZATION
The following table sets forth the cash and the total capitalization of the
Company as of December 31, 1998 (i) on an historical basis, (ii) on a pro forma
basis to give effect to the Completed Acquisitions, and (iii) on a pro forma as
adjusted basis to give effect to the contribution to the Company of the proceeds
from the 13 1/2% Notes Offering, the application of the 13 1/2% Notes Offering
proceeds to repay amounts outstanding under our revolving Credit Facility, and
the amendment to our Credit Facility effected in connection with the 13 1/2%
Notes Offering. The information set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and notes related thereto,
the financial statements related to certain of the acquisitions and the Pro
Forma Financial Information included elsewhere in this Prospectus. See
"Description of Other Indebtedness -- Seller Notes," "Description of Other
Indebtedness -- Credit Facility," "Pro Forma Financial Statements," "Use of
Proceeds" and "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
AS OF DECEMBER 31, 1998
------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
Cash and cash equivalents................................... $ 4,460 $ 4,460 $ 66,312
======== ======== ========
Restricted cash(1).......................................... $ 51,617 $ 51,617 $ 46,275
======== ======== ========
Long-term debt (including current maturities):
Credit Facility........................................... $ 67,000 $ 77,789 $ 35,000
Seller Notes.............................................. 15,407 15,407 15,407
Other..................................................... 797 797 797
Notes..................................................... 195,000 195,000 195,000
-------- -------- --------
Total long-term debt.............................. 278,204 288,993 246,204
-------- -------- --------
Stockholder's equity:
Common stock, par value $.01; 1,000 shares authorized,
issued and outstanding................................. -- -- --
-------- -------- --------
Additional paid-in capital................................ 97,600 97,600 197,649
Accumulated deficit....................................... (81,678) (81,678) (84,614)
-------- -------- --------
Total stockholder's equity........................ 15,922 15,922 113,035
-------- -------- --------
Total capitalization.............................. $294,126 $304,915 $359,239
======== ======== ========
- ---------------
(1) Includes the amount placed in escrow in connection with the Offering to
fund, together with the interest received thereon, the first four scheduled
interest payments on the Notes. For the historical presentation, 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 will not occur under the terms of the Credit Facility, as
amended in connection with the 13 1/2% Notes Offering.
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PRO FORMA FINANCIAL STATEMENTS
GENERAL
The following pro forma statements of operations data reflect (i) the
Company's acquisitions completed since Inception excluding eight acquisitions
that are immaterial individually and in the aggregate, (ii) the Offering (iii)
the amendment to the Credit Facility effected in February 1999, and (iv) the
13 1/2% Notes Offering. The pro forma statements of operations data are
presented as if each of these events had occurred at the beginning of the period
presented.
The following pro forma balance sheet data reflect (i) the Company's
acquisitions completed since December 31, 1998 excluding three acquisitions that
are immaterial individually and in the aggregate, (ii) the amendment to the
Credit Facility effected in February 1999, and (iii) the 13 1/2% Notes Offering.
The pro forma balance sheet data is presented as if each of these events had
occurred as of December 31, 1998.
Historical information for the Company for the year ended December 31, 1998
was derived from audited Consolidated Financial Statements of the Company
included elsewhere in this Prospectus. The financial information for acquired
businesses was derived from the respective historical financial statements of
the acquired entities included elsewhere in this Prospectus.
The Pro Forma financial statements and notes thereto are provided for
informational purposes only and do not purport to be indicative of actual or
future results had such transactions been completed on the dates indicated.
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GOLDEN SKY SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
1998 1999 PRO FORMA
HISTORICAL ACQUISITIONS(1) ACQUISITIONS(2) ADJUSTMENTS PRO FORMA
---------- --------------- --------------- ----------- ---------
(IN THOUSANDS)
Revenue:
DBS services................................ $ 74,910 $11,876 $1,532 $ -- $ 88,318
Lease and other............................. 1,014 126 2 -- 1,142
Other....................................... -- 28 -- (28)(a) --
-------- ------- ------ -------- --------
Total revenue................................. 75,924 12,030 1,534 (28) 89,460
-------- ------- ------ -------- --------
Costs and expenses:
Cost of DBS services........................ 45,291 7,570 974 -- 53,835
Other cost of revenue....................... -- 21 -- (21)(a) --
System operations........................... 11,021 1,822 172 -- 13,015
Sales and marketing......................... 32,201 399 210 -- 32,810(3)
General and administrative.................. 7,431 39 -- -- 7,470
Depreciation and amortization............... 23,166 490 173 (663)(b) 30,514
7,348(c)
-------- ------- ------ -------- --------
Total costs and expenses...................... 119,110 10,341 1,529 6,664 137,644
-------- ------- ------ -------- --------
Operating profit (loss)....................... (43,186) 1,689 5 (6,692) (48,184)
Non-operating items:
Interest and investment income.............. 1,573 222 4 (226)(d) 1,573
Interest expense............................ (20,537) (139) -- 139(d) (30,850)
(14,592)(e)
4,279(g)
-------- ------- ------ -------- --------
Gain on sale of wireless TV rights.......... -- 1,956 -- (1,956)(a) --
Net profit on asset disposal................ -- 8,421 -- (8,421)(a) --
-------- ------- ------ -------- --------
Total non-operating items..................... (18,964) 10,460 4 (20,777) (29,277)
-------- ------- ------ -------- --------
Net profit (loss) before income taxes......... (62,150) 12,149 9 (27,469) (77,461)
-------- ------- ------ -------- --------
Income taxes................................ -- (3,074) -- 3,074(f) --
-------- ------- ------ -------- --------
Net profit (loss)............................. $(62,150) $ 9,075 $ 9 $(24,395) $(77,461)
======== ======= ====== ======== ========
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- ---------------
(1) Includes the operations of the 1998 acquisitions from January 1, 1998
through acquisition dates.
(2) Includes activity for the year ended December 31, 1998 for Completed
Acquisitions.
(3) 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).
(a) To give effect to the elimination of other revenue and expense related to
operations not acquired.
(b) To give effect to the elimination of historical amortization of intangible
assets.
(c) 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 (3 years), while customer lists are
amortized over 5 years. DIRECTV distribution rights are amortized over the
remaining useful life of the satellites (expiring in 2008), generally 10-12
years depending upon date of acquisition.
(d) To give effect to the elimination of interest income and expense related to
operations not acquired.
(e) To give effect to interest expense on borrowings under the Credit Facility
and the Offering assumed to be incurred in connection with the Completed
Acquisitions as if such borrowings had occurred at the beginning of the
period at their respective historical interest rates.
(f) To give effect to the elimination of historical income tax expense
(benefit).
(g) 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 13 1/2% Notes
Offering.
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GOLDEN SKY SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
POST- PRO FORMA
DECEMBER 31, ADJUSTMENTS
1998 FOR PRO DBS PRO FORMA
HISTORICAL ACQUISITIONS(1) ACQUISITIONS FORMA OFFERING AS ADJUSTED
---------- --------------- ------------- -------- -------- -----------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents................. $ 4,460 $ -- $ -- $ 4,460 $ 57,260(f) $ 66,312
(750)(g)
5,342(h)
Restricted cash, current portion.......... 28,083 -- -- 28,083 (5,342)(h) 22,741
Subscriber receivables.................... 8,632 103 34(a) 8,769 -- 8,769
Other receivables......................... 2,465 -- -- 2,465 -- 2,465
Inventory................................. 10,146 6 (6)(a) 10,146 -- 10,146
Prepaid expenses and other................ 1,859 -- -- 1,859 -- 1,859
-------- ---- ------- -------- -------- --------
Total current assets........................ 55,645 109 28 55,782 56,510 112,292
Restricted cash, net of current portion..... 23,534 -- -- 23,534 -- 23,534
Property and equipment, net................. 4,994 114 (74)(a) 5,034 -- 5,034
Intangible assets, net...................... 233,139 469 (469)(b) 243,874 -- 243,874
10,735(c)
Deferred financing costs, net............... 10,541 -- -- 10,541 (2,186)(g) 8,355
Other assets................................ 218 50 (50)(a) 218 -- 218
-------- ---- ------- -------- -------- --------
Total assets................................ $328,071 $742 $10,170 $338,983 $ 54,324 $393,307
======== ==== ======= ======== ======== ========
Current liabilities:
Trade accounts payable.................... $ 13,539 $ 95 $ (95)(d) $ 13,539 $ -- $ 13,539
Current maturities of other notes payable
and obligations under capital leases.... 8,916 -- -- 8,916 -- 8,916
Payable to Golden Sky Holdings, Inc....... 12 -- -- 12 -- 12
Unearned revenue.......................... 5,574 -- 104(d) 5,678 -- 5,678
Interest payable.......................... 11,009 -- -- 11,009 -- 11,009
Accrued payroll and other liabilities..... 1,391 56 (37)(d) 1,410 -- 1,410
-------- ---- ------- -------- -------- --------
Total current liabilities................... 40,441 151 (28) 40,564 -- 40,564
Long-term obligations, net of current
portion:
Senior Notes.............................. 195,000 -- -- 195,000 -- 195,000
Credit Facility........................... 67,000 -- 10,789(e) 77,789 (42,789)(f) 35,000
Other notes payable and obligation under
capital leases, net of current
maturities.............................. 7,288 -- -- 7,288 -- 7,288
Minority interest in consolidated
partnerships............................ 2,420 -- -- 2,420 -- 2,420
-------- ---- ------- -------- -------- --------
Total long-term obligations, net of current
maturities................................ 271,708 -- 10,789 282,497 (42,789) 239,708
-------- ---- ------- -------- -------- --------
Total liabilities........................... 312,149 151 10,761 323,061 (42,789) 280,272
-------- ---- ------- -------- -------- --------
Total stockholders' equity.................. 15,922 591 (591)(d) 15,922 100,049(f) 113,035
(2,936)(g)
-------- ---- ------- -------- -------- --------
Total liabilities and stockholders'
equity.................................... $328,071 $742 $10,170 $338,983 $ 54,324 $393,307
======== ==== ======= ======== ======== ========
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- ---------------
(1) Includes acquisitions completed after December 31, 1998.
(a) To give effect to assets not purchased.
(b) To give effect to the elimination of historical intangible assets.
(c) To give effect to intangible assets resulting from acquisitions completed
subsequent to December 31, 1998.
(d) To give effect to the elimination of liabilities not assumed and historical
equity.
(e) To give effect to new debt issued in connection with acquisitions completed
subsequent to December 31, 1998.
(f) To give effect to the 13 1/2% Notes Offering.
(g) To write off the unamortized balance of deferred financing costs of $2,936
associated with the Credit Facility prior to its amendment, net of deferred
financing costs of $750 associated with the amendment itself.
(h) To reflect the release, upon effectiveness of the amendment of our credit
facility, of amounts deposited with the administrative agent to fund a
contingent reduction of availability under the term loan facility that is
not required under the terms of the amendment.
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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 derived
from the audited consolidated financial statements of the Company included
elsewhere in this Prospectus. The following information should be read in
conjunction with and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.
YEARS ENDED
INCEPTION TO DECEMBER 31,
DECEMBER 31, -------------------
1996 1997 1998
------------ -------- --------
(IN THOUSANDS)
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)
======= ======== ========
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 13,632 $ 4,460
Restricted cash:
Current................................................... -- 28,083
Long-term................................................. -- 23,534
Working capital............................................. 3,827 15,204
Total assets................................................ 156,236 328,071
Total debt.................................................. 69,113 278,204
Stockholder's equity........................................ 70,449 15,922
Ratio of earnings to fixed charges(1)....................... -- --
- ---------------
(1) The ratio of earnings to fixed charges is determined by dividing the sum of
net loss before interest expense and extraordinary item and a portion of
rent expense representative of interest by the sum of interest expense and
such portion of rent expense. For the years ended December 31, 1997 and
1998, the deficiency of earnings to fixed charges was $15.8 million and
$63.7 million, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a discussion of the historical consolidated results of
operations, liquidity and capital resources of the Company. This discussion
should be read in conjunction with the consolidated financial statements of the
Company and the notes related thereto appearing elsewhere in this Prospectus.
OVERVIEW
The Company was formed in June 1996 to acquire rights to distribute DIRECTV
programming services in Rural DIRECTV Markets. The Company is a non-voting
affiliate of the NRTC. The Company acquired its first Rural DIRECTV Market in
November 1996. As of December 31, 1998 the Company had acquired the rights to
serve 48 Rural DIRECTV Markets serving approximately 1.7 million households. The
aggregate purchase price for these acquisitions totaled approximately $259.8
million, or approximately $144 per household. The Company has created a strong
local presence in its Rural DIRECTV Markets through the opening and operation of
63 offices in its territories. Additionally, the Company has established dealer
relationships with over 350 local retailers of DBS Equipment.
Subsequent to December 31, 1998, the Company acquired four Rural DIRECTV
Markets, which territories include approximately 54,000 households and 10,600
subscribers, for an aggregate purchase price of approximately $19.9 million. The
Company is continually evaluating acquisition prospects and expects to continue
to enter into acquisition agreements to purchase additional Rural DIRECTV
Markets consistent with its growth strategy.
In addition to growth by acquisitions, the Company has increased its
subscriber base through increased penetration of its Rural DIRECTV Markets.
Management believes that there is a substantial opportunity to increase
penetration through local marketing. Most of the NRTC members from which the
Company acquires 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.
The Company has experienced net losses as well as negative EBITDA and
operating cash flows from operations since its inception. These operating
shortfalls are primarily the result of the Company's rapid subscriber growth and
acquisitions of Rural DIRECTV Markets. In particular, the Company has incurred
significant sales and marketing expense in its effort to rapidly build its
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 same. The impact of this lag generally
increases with the rate at which the Company adds subscribers. The Company's
rapid subscriber growth and related subscriber acquisition costs have been
significant contributors to the Company's net losses and negative EBITDA
experienced to date. The Company believes that its subscriber acquisition costs
will continue to negatively affect operating results for at least the next year
as the Company continues to add new subscribers. However, as long as a
subscriber continues service, future operating results benefit from a recurring
monthly revenue stream with minimal additional sales and marketing expense.
Because the Company has experienced a relatively low rate of churn (its 1998
annual churn rate was approximately 8.8%), the Company believes that its
investment in building its subscriber base rapidly will enhance EBITDA and
operating results in the longer term.
EBITDA represents earnings before interest, taxes, depreciation and
amortization. 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, the Company believes that
EBITDA is a commonly recognized measure of performance in the communications
industry and is the basis for many of the Company's financial covenants.
Further, the Company believes 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 the Company's
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
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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 the Company
in terms of operating performance, leverage and liquidity. EBITDA as calculated
by the Company is not necessarily comparable to similarly captioned amounts of
other companies. During the year ended December 31, 1997, the Company 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, the Company 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 the Company's historical and anticipated significant growth
rate, the historical operating results of the Company may not be comparable from
period to period.
RECENT DEVELOPMENTS
On February 19, 1999, Golden Sky DBS, the holder of all of the Company's
outstanding capital stock, consummated its offering of $193.1 million in
principal amount at maturity of 13 1/2% Senior Discount Notes due 2007. The
13 1/2% Notes Offering resulted in net proceeds to Golden Sky DBS of
approximately $96.8 million (after payment of underwriting discounts and other
issuance costs aggregating approximately $3.3 million). Cash 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 will 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. Golden Sky DBS
contributed the net proceeds of the 13 1/2% Notes Offering to the Company, which
utilized such contributed proceeds to repay approximately $53.0 million of
existing senior bank indebtedness. The Company intends to utilize the remaining
amount to fund future acquisitions of Rural DIRECTV Markets, provide working
capital and for general corporate purposes -- see "-- Liquidity and Capital
Resources".
RESULTS OF OPERATIONS
The following table presents certain items from the Company's consolidated
statements of operations as a percentage of total revenue for the periods noted.
YEARS ENDED
INCEPTION TO DECEMBER 31,
DECEMBER 31, ---------------
1996 1997 1998
------------ ----- -----
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
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
Net interest expense...................................... 23.9 18.0 25.0
Other..................................................... 0.0 0.0 3.4
------ ----- -----
Total costs and expenses.................................... 557.6 190.7 185.3
------ ----- -----
Net loss.................................................... (457.6)% (90.7)% (85.3)%
====== ===== =====
Revenue. The Company earns revenue by providing DIRECTV programming
services to subscribers within its Rural DIRECTV Markets. DBS services revenue
includes any combination of various monthly program service plans, additional
monthly premium channel program upgrades, seasonal sports programming
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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. The Company's largest cost of providing service to
its 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 the
Company's national call center operations, field office operations and other
subscriber service expenses. The Company expects that these expenses will
increase as the Company continues to make acquisitions and open additional field
offices. However, many of these costs are fixed in nature, and the Company does
not expect that these expenses will increase in direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses include such costs as
advertising, promotional expenses, marketing personnel expenses, commission
expenses to Company employees and outside sales agents, net equipment and
installation costs, and other marketing overhead costs. The Company subsidizes
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 the Company's statement of
operations. The Company invests significantly to develop its 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 the Company anticipates continuing to incur such costs as
it builds its 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 the
Company's Kansas City corporate office. The Company expects that these expenses
will increase as the Company grows and continues to expand its 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. The Company elected Subchapter "S" Corporation status in
1996. As an S Corporation, the Company was generally not directly subject to
income taxation and recognized no income tax expense or benefit as an S
corporation. On February 12, 1997, the Company terminated its Subchapter S
Corporation status, and became subject to income taxation as a C Corporation
under Subchapter "C" of the Internal Revenue Code. The Company has recognized no
income tax benefits in any of the periods presented because it has 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.
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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 the Company's 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. While there can be no
assurance, during 1999 the Company expects that its 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 (i)
competition for new subscribers intensifies and the Company decides to increase
its subscription acquisition costs as a result thereof, (ii) the Company
participates in DIRECTV national promotions that result in higher subscriber
acquisition costs than those typically experienced by the Company, and (iii) the
Company opts to increase its 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 the Company's 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 the
Company's 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, the Company 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, the Company 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 the Company's acquisitions 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 the Company operating for all of 1997 as
opposed to only a portion of 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.
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Costs of DBS Services. Costs of DBS services totaled $9.3 million for the
year ended December 31, 1997, compared to $130,000 for the 1996 Period. The
increase in the costs of DBS services resulted from the Company operating for
all of 1997 as opposed to only a portion of 1996 and corresponds to the large
increase in subscribers added by the Company 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 the Company being operational during all of 1997 and from
the increase in the number of field offices and related activity during 1997.
The Company opened its 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 the Company
operating for all of 1997 and from the increase in the size and scope of the
Company's 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 the Company operating for all of 1997 and from the
Company's 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 the Company 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, the Company 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, the Company
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 the Company's acquisition activity during 1997, as well as the Company
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 the Company 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 the Company's
growth during the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require substantial capital for (i) acquisitions
of Rural DIRECTV Markets, (ii) financing subscriber growth (including DBS
Equipment and installation subsidies and marketing and selling expenses), (iii)
investments in, and maintenance of, field offices in its Rural DIRECTV Markets,
(iv) financing infrastructure development costs necessary to support the growth
of the Company's business, and (v) the funding of start-up losses and other
working capital requirements. The Company's 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. During those same periods, net cash flows used
in operations totaled $36.6 millions $3.1 million, and $790,000, respectively.
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To date, the Company's acquisitions, subscriber growth and operations have
been financed from borrowings under its bank credit facilities, proceeds of the
Offering, proceeds from the issuance of capital stock, contributions by the
Company's parent, 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 and net borrowings of $7.0
million under the Company's bank credit facilities, less deferred financing
costs of $5.2 million and $3.7 million of repayments on the Company's other
indebtedness. In 1997, net cash flows from financing activities totaled $137.0
million, comprised of $81.1 million from the issuance of capital stock and $59.2
million of net borrowings under the Company's bank credit facilities and other
indebtedness, less deferred financing costs of $3.3 million.
Credit Facility
In May 1998, the Company entered into the Credit Facility (as defined),
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 the 13 1/2% Notes Offering, the Company entered into an
amendment to such credit agreement (as so amended, the "Credit Facility"). As of
February 28, 1999, the Company had fully utilized the entire $35.0 million of
term loan availability, had no outstanding borrowings under the revolving credit
line, and had utilized approximately $12.9 million of the letter of credit
sub-facility. 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 the 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."
The Credit Facility contains a number of significant covenants that, among
other things, limit the ability of the Company and its 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 its 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.
The Credit Facility also contains a number of financial covenants that will
require the Company 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 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 its covenants under the Credit Facility. For additional information
regarding the Credit Facility, see "Description of Other Indebtedness."
The Offering
On July 31, 1998, the Company consummated the Offering of the Notes.
Interest on the 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 Notes mature on August 1, 2006. The 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 Offering were placed in escrow to fund
the first four semi-annual interest payments (through August 1, 2000) on the
Notes.
The Notes are unsecured senior subordinated obligations of the Company and
are subordinated in right of payment to all existing and future senior
indebtedness. The Notes rank pari passu in right of payment with all
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other existing and future senior subordinated indebtedness, if any, of the
Company and senior in right of payment to all existing and future subordinated
indebtedness, if any, of the Company. The 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.
The Notes are redeemable, in whole or in part, at the option of the Company
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, the Company may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the 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 the Company 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 the Company); provided, further, that
immediately after any such redemption the aggregate principal amount of the
Notes outstanding must equal at least 65% of the originally issued aggregate
principal amount of the Notes.
The Indenture contains restrictive covenants that, among other things,
impose limitations on the ability of the Company 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 Notes, incur liens, permit
restrictions on the ability of subsidiaries to pay dividends or make certain
payments to the Company, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of the Company. In the event of a change of control, as defined in
the Indenture, each holder of the Notes will have the right to require the
Company to purchase all or a portion of such holder's 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 the New Notes."
Future Capital Requirements
The Company's future capital requirements will depend upon a number of
factors, including the extent of the Company's acquisition activities, the rate
of subscriber growth, and the working capital needs necessary to accommodate the
Company's anticipated growth. The Company expects that increased investments in
its administrative and computer systems will be necessary to support the
Company's increased size and continued growth. The Company currently subsidizes
a portion of the cost of DBS equipment and subscriber installations. The extent
of such future subsidies may materially affect the Company's liquidity and
capital requirements. In addition, the Company's favorable working capital
position relies, in part, upon the existing terms of its agreements with the
NRTC and the timing for making required payments thereto. Excluding costs
associated with the acquisition of additional Rural DIRECTV Markets, the Company
anticipates that its total capital expenditures, primarily related to expanding
facilities and information systems for its corporate office, customer service
operations and field offices, will approximate $5.0 million during the year
ending December 31, 1999. During 1999, the Company expects to continue its
acquisitions of Rural DIRECTV Markets and to expand its marketing efforts in its
existing markets in order to increase its subscriber penetration.
The Company continually evaluates acquisition prospects and expects to
enter into additional acquisition agreements and complete further acquisitions
of Rural DIRECTV Markets consistent with its growth strategy. There can be no
assurance that any such acquisitions will be consummated.
The Company is not yet able to assess whether and to what extent the
acquisition by Hughes of USSB or by DIRECTV of Primestar may affect the
Company's 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 the Company increased its marketing efforts with respect to Primestar
subscribers.
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The Company's increased Primestar conversion efforts include, among other
things, discounted equipment and installation prices and higher sales
commissions. The Company estimates that its subscriber acquisition costs
relative to converted Primestar subscribers may approximate as much as $400 on a
per converted subscriber basis. The Company is unable to reasonably estimate the
number of Primestar subscribers it will be able to successfully convert to its
DIRECTV service.
The Company is highly leveraged and expects to increase its leverage as it
pursues further acquisitions of Rural DIRECTV Markets by borrowing additional
funds under the Credit Facility or otherwise, and by the issuance of other
acquisition-related notes payable. The approximately $15.4 million of Seller
Notes 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." Additional financing
may be required to meet the Company's debt service requirements and, depending
upon the timing of the Company's acquisitions, additional sources of capital may
need to be secured to pursue acquisitions. There can be no assurance that such
additional financing would be available on terms acceptable to the Company, or
at all, and if available, that the proceeds of such financing would be
sufficient to enable the Company to meet its debt service requirements or
completely execute its business plan.
There may be a number of factors, some of which may be beyond the Company's
control or ability to predict, that could require the Company 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 the Company's
debt-service requirements. There can be no assurance that additional debt,
equity or other financing will be available on terms acceptable to the Company,
or at all, and if available, that the proceeds of such financing would be
sufficient to enable the Company to meet its debt-service requirements or
completely execute its business plan.
YEAR 2000
The Company continues to assess the impact of the Year 2000 issue on its
computer systems and operations. The Year 2000 issue is a general term used to
describe the various problems that may result from the improper processing of
dates and date-sensitive calculations by computers and other equipment as the
year 2000 approaches and is reached. 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.
The Company has reviewed the Year 2000 readiness of its internal systems
and believes that such systems are Year 2000 compliant. However, there can be no
assurance that all of the software products currently used by the Company are in
fact Year 2000 compliant. The Company has engaged the services of a consultant
to assist in its assessment of the impact of the Year 2000 issue on its
computerized systems and operations. Additionally, the Company is in the process
of conducting surveys of all of its significant vendors and other pertinent
relationships to assess their readiness for Year 2000 processing.
The Company is significantly reliant on contracted data processing services
from the NRTC and DIRECTV for customer service, billing and remittance
processing pursuant to the Company's contractual relationship with the NRTC. The
NRTC has informed the Company that the computer systems that provide such
services are not currently Year 2000 compliant, but that such systems will be
compliant by April 1999. The Company is reliant on DIRECTV for distribution of
its DBS programming services. DIRECTV has informed the Company that it expects
to establish Year 2000 compliance for its satellite programming, subscriber
databases, and customer billing systems by the end of the first calendar quarter
of 1999. In addition to the NRTC and DIRECTV, the Company is significantly
reliant on other parties (such as its suppliers of
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DBS Equipment) for the successful conduct of its business. As previously
described, the Company is in the process of ascertaining the Year 2000 readiness
of these third parties.
Currently, the Company believes its costs to successfully mitigate the Year
2000 issue will approximate $200,000. If the Company's plan is not successful or
is not completed in a timely manner, the Year 2000 issue could significantly
disrupt the Company's ability to transact business with its customers and
suppliers, and could have a material impact on its operations. There can be no
assurance that the systems of the NRTC, DIRECTV and other companies with which
the Company's 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 the
Company's business or its operations.
To date, the Company has 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, the Company will continue to monitor the progress
of third party remediation efforts and contingency plans. Substantial completion
of the Company's 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 the Company's 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, the Company has no derivative instruments or hedging
arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a
material effect on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, defines costs related to start-up activities
and requires that such costs be expensed as incurred. As the Company previously
has expensed all such costs, the adoption of SOP 98-5 is not expected to effect
the Company's results of operations or financial position.
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BUSINESS
GENERAL
The Company is the second largest independent provider of programming by
DIRECTV, the leading DBS company serving the continental United States. The
Company markets and provides DIRECTV Programming on an exclusive basis to
residential customers in certain Rural DIRECTV Markets and on a non-exclusive
basis to residents of MDUs and commercial customers. The Company has obtained
the exclusive right to provide DIRECTV Programming to homes in its Rural DIRECTV
Markets under agreements between the Company and the NRTC. The NRTC and its DBS
members and affiliates (including the Company) provide DIRECTV Programming in
Rural DIRECTV Markets pursuant to an agreement between the NRTC and Hughes
Communications Galaxy, Inc., DIRECTV's predecessor-in-interest. The Company
estimates 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 its formation by management in June 1996 through January 31, 1999,
the Company has:
- acquired 50 Rural DIRECTV Markets in 23 states with approximately 1.8
million households and 129,800 subscribers at the dates of acquisition;
- increased its subscriber base in these markets by approximately 83.3% in
the aggregate, to approximately 238,000, achieving a subscriber
penetration rate of approximately 13.5% through aggressive marketing and
a local, service-driven approach to the 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, the Company, together with Holdings, has 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 management. The Company
has also secured $150.0 million of senior bank financing and $195.0 million
gross proceeds from the Offering. See "Management's Discussion of Results of
Operations and Financial Condition -- Liquidity and Capital Resources" and
"Certain Relationships and Related Transactions."
Since inception, the Company's recurring revenue has increased rapidly due
to internal subscriber growth and a low average annual churn rate (approximately
8.8% for the twelve months ended December 31, 1998). The Company's net internal
subscriber growth in its Rural DIRECTV Markets during 1998 totaled approximately
80,300. This represented approximately 6.9% of DIRECTV's net new subscribers
nationwide for the period, although total households in the Company's Rural
DIRECTV Markets approximated just 1.5% of all television households in the
continental United States. Although the Company incurs substantial costs to add
subscribers, it has relatively low recurring costs to service them. The Company
believes these factors provide an opportunity to increase operating leverage and
provide strong growth in EBITDA. The Company had EBITDA of negative $5.4 million
and negative $20.0 million for the years ended December 31, 1997 and 1998,
respectively.
The Company believes that its exclusive right to provide DIRECTV
Programming in its Rural DIRECTV Markets is attractive for the following
reasons:
- DIRECTV Programming. The Company believes that marketing DIRECTV, the
country's leading DBS provider, gives it 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. The
Company capitalizes on the recognition of DIRECTV's brand name and on
DIRECTV's programming advantages to broaden the Company's
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subscriber base in its Rural DIRECTV Markets. DIRECTV currently has over
50% of all DBS subscribers nationwide.
- 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. The Company believes 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 the 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. Management believes 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 the Company to
grow through acquisitions, rationalize operations and create operating
leverage. Because most of the operators from whom the Company has
acquired or may acquire Rural DIRECTV Markets have not engaged in
significant marketing efforts, the Company believes it has the potential
to increase subscriber penetration significantly following such
acquisitions.
Pursuant to its agreements with the NRTC, the Company has the exclusive right to
provide DIRECTV Programming in its Rural DIRECTV Markets, and receives the
monthly service revenue from all DIRECTV subscribers in such markets regardless
of the subscribers' original point of purchase.
In addition to its business in Rural DIRECTV Markets under agreements with
the NRTC, the Company has developed other business relationships with DIRECTV
and its affiliated companies. For example, the Company was 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, the Company began marketing and providing DIRECTV Programming to
residents of MDUs and commercial establishments in five major metropolitan areas
near its rural territories. The Company intends to focus its MDU and commercial
activities on high-growth urban areas near its Rural DIRECTV Markets to create a
larger universe of potential subscribers while maintaining its fixed cost base.
STRATEGY
The Company intends to leverage its competitive strengths by pursuing the
following strategies:
- Emphasize Direct Sales and Local Customer Service. The Company believes a
commitment to a strong local presence generates rapid subscriber growth,
higher customer satisfaction and lower churn, and ultimately greater
revenue and EBITDA. The Company has created a highly decentralized
operating structure that permits managers to respond quickly and flexibly
to local needs. Management believes that local presence differentiates
the Company from other major DIRECTV and DBS providers and is a key
element in the Company's strategy for attracting and retaining
subscribers. Since inception, the Company has opened 63 offices in its
Rural DIRECTV Markets. The Company provides sales, installation and
customer service directly through these offices and in conjunction with
more than
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350 local dealers. The Company believes that focused local marketing
significantly enhances the existing national marketing efforts of DIRECTV
and its national distribution partners, and that local customer service
increases customer satisfaction and is a major contributor to the
Company's low churn rate. The Company complements its local presence from
its headquarters in Kansas City, Missouri with centralized sales,
marketing, operational and administrative support, including overflow and
after-hours customer support from a national call center that operates 24
hours a day, seven days a week.
- Acquire Additional Rural DIRECTV Markets. The Company is 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. The Company is continually evaluating acquisition
prospects and expects to continue to enter into acquisition agreements
and complete acquisitions of additional Rural DIRECTV Markets consistent
with its growth strategy. The Company is one of two companies actively
consolidating Rural DIRECTV Markets. The Company estimates that
approximately 100 Rural DIRECTV Markets, comprised of approximately 2.0
million households, are still owned by original NRTC members.
- Develop Related Business Opportunities. The Company plans to leverage its
local sales and support infrastructure by expanding its base of potential
customers and product offerings. The Company has commenced marketing to
MDUs and commercial establishments in five cities near its Rural DIRECTV
Markets, including Dallas/Ft. Worth, Texas; Denver, Colorado; Ft. Myers,
Florida; Kansas City, Missouri; and Las Vegas, Nevada. As of January 31,
1999, the Company had access to approximately 32,000 MDUs via "right of
entry" agreements, with approximately 4,400 active subscribers. In
addition, the Company is evaluating other telecommunications products and
services that could be offered to customers using the Company's existing
marketing and distribution infrastructure. In May 1998, the Company
commenced test marketing of DirecPC, a satellite-based Internet access
service provided by a corporate affiliate of Hughes.
SALES AND DISTRIBUTION
The Company offers DIRECTV Programming to consumer and business segments in
its Rural DIRECTV Markets through two separate but complementary sales and
distribution channels.
Direct Sales Force
The Company has established direct sales forces in all but one of its Rural
DIRECTV Markets, and has Company-owned full service retail stores located in
substantially all its Rural DIRECTV Markets. The Company currently has
approximately 250 direct salespeople and supports its direct sales staff and its
local offices with an advertising campaign that the Company believes is both
creative and consistent. The Company also seeks to develop close relationships
with independent dealers of DBS equipment and provides marketing, subscriber
authorization, installation and customer service support to enhance subscriber
additions from such dealers. Wherever possible, the Company's arrangements with
dealers are exclusive. In connection with the sale of a DBS unit and a
subscription to DIRECTV Programming offered by the Company, a dealer retains the
proceeds from the sale of the equipment and earns a one-time commission paid by
the Company. The Company retains the ongoing monthly subscription revenue from
the subscriber. For certain equipment sold through the indirect dealer network,
the Company provides a subsidy, thus lowering the price of the equipment for the
consumer. The Company believes that it can increase penetration more rapidly
through its direct sales approach instead of relying, as some DTH providers
have, upon the consumer to take the initiative to purchase the product and
services.
Other Distribution Channels
In addition to the Company's direct sales force, the Company utilizes other
distribution channels to offer DIRECTV Programming to potential subscribers in
the Company's Rural DIRECTV Markets by (i) national
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retailers selected by DIRECTV, (ii) consumer electronics dealers authorized by
DIRECTV to sell DIRECTV Programming and (iii) satellite dealers and consumer
electronics dealers authorized by five regional sales management agents selected
by DIRECTV. Similar to the Company's indirect dealer network, the Company pays a
one-time commission to these distribution channels for the sale of DIRECTV
Programming to a subscriber located in the Company's Rural DIRECTV Markets and
the Company receives all monthly programming revenue associated therewith,
regardless of what outlet originally sold DIRECTV Programming to the subscriber.
MARKETING
Management believes that direct broadcast satellite 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. The Company complements 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. The Company believes
that, to date, there has been no significant local presence to drive such local
marketing and sales efforts.
The Company also implements support advertising programs for its indirect
distribution channels. The Company's marketing efforts emphasize the value of
premium subscription plan offerings in order to maximize revenue per customer.
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 the Company has incentive-based sales compensation for both the
direct and dealer sales forces to promote and sell premium subscription plans.
A key element of the Company's marketing strategy is to offer value-priced
DBS Equipment and installation through the use of subsidies on direct sales of
equipment and installations. The Company offers various types of DBS equipment
and accessories through its direct sales force and retail locations. The Company
is 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 the Company's
volume-based commission structure.
CUSTOMER SERVICE
The Company provides customer service from each of its local offices.
Generally 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.
The Company believes it can sustain its historical average 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 the
Company's national call center located in Kansas City, Missouri. The Company
also provides professional installation services and technical assistance in
each of its 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."
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A DBS system consists of an uplink center, one or more orbiting satellites
and the subscribers' receiving equipment. The uplink center collects programming
from on-site video equipment and from the direct feeds of programmers. Through
antennae located at the uplink center, the operator transmits, or uplinks, the
programming to transponders located on its geostationary satellite. The
transponders receive and amplify the digital signal and transmit it to receiving
dishes within the area covered by the satellite. The digital signal is then
transmitted via coaxial cable to the subscribers' receiver, where it is
converted into an analog signal which allows it to be received by the
subscribers' 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 December 31, 1998, there were approximately 4.5 million DIRECTV
subscribers.
The Company believes 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, the Company believes that DIRECTV's
national marketing campaign provides the Company 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 January 31, 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, the Company expects 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 (a DBS unit)
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 DBS 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 DBS 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.
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DBS units also enable 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 generally complementary to DIRECTV Programming. As of December 31, 1998,
approximately 50% of DIRECTV's 4.5 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. The Company is not yet able to assess the effect of
Hughes' acquisition of USSB on its 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 (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription fee,
(ii) premium services available a la carte or in tiers for a monthly
subscription fee, (iii) 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 (iv) 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 currently available from the Company:
Total Choice(TM): Package of 60 video channels, including two Disney
channels and in-market regional sports network, 31 CD audio channels and
access to up to 55 channels of pay per view movies and events, which
retails for $29.99 per month. Total Choice(TM) is DIRECTV's most popular
offering. Total Choice(TM) 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, which
retails for $14.99 per month. 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.
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.
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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. The Company
acquired from the NRTC the exclusive right to provide DIRECTV Programming in
each of its Rural DIRECTV Markets pursuant to an NRTC Agreement, which is
assigned to the Company with the consent of the NRTC and DIRECTV when the
Company acquires such Rural DIRECTV Market.
Pursuant to the NRTC Agreements, the Company is 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. The Company also
purchases 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 (i) as a result of termination
of the Hughes Agreement, with the NRTC remaining responsible for paying to the
Company its pro rata portion of any refunds that the NRTC receives from Hughes
under the Hughes Agreement, (ii) if the Company fails 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 (iii) if the Company fails 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 the Company to comply with policies of the NRTC
promulgated from time to time. The Company and other NRTC-affiliated DIRECTV
providers have disputed certain policies proposed by the NRTC in the past that
they believed did not comply with the NRTC Agreements and applicable law. For
example, in 1998, the NRTC proposed new conditions to securing its approval of
acquisitions that included changes to all of the NRTC Agreements which, if
adopted, could have had material adverse financial consequences to the Company.
The dispute was resolved without any modifications to the NRTC Agreements and
the Company's 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 the Company, have "substantial proprietary interests" in
and rights to the information and data with respect to their subscribers. The
NRTC and its affiliates, including the Company, have differed over the import of
these rights and interests, which may have consequences in the event that the
Company's rights to offer DIRECTV Programming through the NRTC are terminated or
expire.
Pursuant to the NRTC Agreements, the Company has obtained from the NRTC the
exclusive right in its 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.
The Company pays 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.
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"Non-Select Services" are services not generally included in the DIRECTV
Programming provided by the Company, because providers of such programming
require minimum subscriber guarantees, advance payments or other similar
commitments, which the NRTC declines to give. The Company retains 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. The Company believes 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. The Company is an affiliate of the NRTC. See "Risk
Factors -- Ability to Acquire DBS Services from NRTC and DIRECTV after
Expiration of NRTC Agreements."
COMPETITION
The Company faces competition both for acquisitions of Rural DIRECTV
Markets from one other company, and within its 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 the Company's competitors have greater financial and
marketing resources than the Company, and the business of providing subscription
and pay television programming is highly competitive. The Company believes 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
The Company is aware that at least one other company, Pegasus
Communications Corporation ("Pegasus") is currently pursuing the same goal as
the Company of consolidating Rural DIRECTV Markets. Pegasus is currently the
largest independent provider of DIRECTV services and has substantially greater
financial resources than the Company. There can be no assurance that the
marketing and sales efforts or competing acquisition strategies of Pegasus or
other competitors will not have an adverse effect on the Company's ability to
execute its acquisition strategy.
Competing Subscription Television Providers
Cable Television Providers
Cable operators in the United States serve approximately 64 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, the
Company believes 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, the Company
believes 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. The Company believes that such
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upgrades will require substantial investments of capital and time to complete
industry-wide. As a result, the Company believes 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.
The Company expects to encounter a number of challenges in competing with
cable television providers. First, cable operators have an entrenched position
in the marketplace. The Company believes that its current strategy of targeting
for acquisition 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 the Company believes 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.
The Company believes 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 over 120 video channels and
30 audio channels. 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 2.0 million subscribers as of January 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 the Company. The Company believes that it can successfully compete with
EchoStar in the DBS market because of DIRECTV's brand name and its 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 January 31, 1999, Primestar had
approximately 2.3 million subscribers. On January 22, 1999, DIRECTV announced
that it had reached an agreement with Primestar to acquire Primestar's 2.3
million subscribers and related high-power satellite assets from Primestar and
one of its affiliates in two transactions valued at approximately $1.8 billion.
The Company is not yet able to assess the effect of DIRECTV's acquisition of
Primestar on its future business, financial position, or results of operations.
Low power C-band operators reported approximately 1.9 million subscribers
as of January 31, 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. The Company believes that DBS services have 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.
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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 U.S. 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.
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 the 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 (i) the licensing of individual satellites (i.e., the
requirement that DIRECTV meet minimum financial, legal and technical standards),
(ii) avoidance of interference with radio stations and (iii) 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
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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 the 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 the 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 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 established 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 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 such as the
Company) received ABC, CBS, NBC and Fox network programming from PrimeTime 24.
Certain television broadcast networks and their affiliates have commenced
litigation against PrimeTime 24 alleging that the network programming
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offered by PrimeTime 24 has been retransmitted in violation of the "unserved
households" limitation in 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 retransmission 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-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 NRTC and other satellite providers. Although the FCC
declined to change 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 also asks the court to clarify the particular means
(e.g., antenna height and orientation) for measuring signal strength.
While the Company believes that it has complied to date with the SHVA in
providing network programming only to "unserved households" and the Company does
not believe that the interpretations of the SHVA applied by the Florida and
North Carolina federal courts will materially adversely affect the Company's
financial results or its ability to attract new subscribers, there can be no
assurance that the Company's inability to provide network services to certain
subscribers will not have such effects. In addition, should the Company elect to
continue to offer network services, there can be no assurance that the costs of
compliance with those interpretations will not be material. The inability of
DIRECTV and the Company to
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provide network programming to subscribers in Rural DIRECTV Markets could
adversely affect the Company's average programming revenue per subscriber and
subscriber growth.
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, the Company may
expect to have this cost passed along to it, 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. The Company has reviewed the Year 2000 compliance of its internal
systems and believes that such systems are Year 2000 compliant. However, there
can be no assurance that all of the software products currently used by the
Company are in fact Year 2000 compliant. The Company has engaged the services of
a consultant to assist in its assessment of the impact of the Year 2000 issue on
the Company's computerized systems and operations. Currently, the Company
believes its costs to successfully mitigate the impact of the Year 2000 issue
will approximate $200,000. Additionally, the Company is currently conducting
surveys of all of its vendors and other pertinent relationships to assess their
readiness for Year 2000 processing. The Company is significantly reliant on
contracted data processing services from the NRTC and DIRECTV for customer
service, billing and remittance processing pursuant to the Company's contractual
relationship with the NRTC. The NRTC has informed the Company that the computer
systems that provide such services are not currently Year 2000 compliant, but
that such systems will be compliant by April 1999. The Company is reliant on
DIRECTV for distribution of its DBS programming services. DIRECTV has informed
the Company that it expects to establish Year 2000 compliance for its satellite
programming, subscriber databases, and customer billing systems by the end of
the first calendar quarter of 1999. In addition to the NRTC and DIRECTV, the
Company is significantly reliant on other parties (such as its suppliers of DSS
Equipment) for the successful conduct of its business. As previously described,
the Company is in the process of ascertaining the Year 2000 readiness of these
third-parties. If the Company's plan is not successful or is not completed in a
timely manner, the Year 2000 issue could significantly disrupt the Company's
ability to transact business with its customers and suppliers, and could have a
material impact on its operations. There can be no assurance that the systems of
the NRTC, DIRECTV and other companies with which the Company's 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 the Company's business or its
operations. Any adverse impact on subscribers in the Company's Rural DIRECTV
Markets could also have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Year 2000
Compliance."
FACILITIES
The Company is currently headquartered in leased space in Kansas City,
Missouri. On January 27, 1999, the Company entered into a new lease with respect
to approximately 35,000 square feet of office space in Kansas City, Missouri.
Annual rent under this new lease will approximate $570,000 and the lease will
terminate in August 2002. The Company expects to move its principal executive
offices to this location in the second quarter of 1999. The Company also has 63
offices and operations in 23 states. The Company expects
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these facilities to be adequate for its needs in the foreseeable future.
Management believes that the Company will be able to lease office and retail
space in its Rural DIRECTV Markets as needed on acceptable terms.
MANAGEMENT AND EMPLOYEES
The Company has assembled an experienced management team to execute its
business strategy. Certain members of the senior management team have
significant experience working together. The Company's executive team brings to
the Company 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 December 31, 1998,
the Company had approximately 800 employees. The Company is not a party to any
collective bargaining agreement and considers its relations with its employees
to be good.
LEGAL PROCEEDINGS
The Company is not currently party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of February 26, 1999.
NAME AGE POSITION
---- --- --------
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
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
- ---------------
(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 the Company in June 1996 and has been
its Chief Executive Officer since 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 Chief Financial Officer of the Company
since October, 1998. Mr. Hager joined the Company 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 Vice President, Sales and Marketing
of the Company 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.
Jo Ellen Linn. Ms. Linn has been Secretary and General Counsel of the
Company since Inception. From 1993 to 1996, Ms. Linn was General Counsel to
Cable Video Management, Inc., a communications management company and the former
Cable Video Enterprises, Inc., which owned and operated domestic cable
television systems. Ms. Linn 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.
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BACKGROUND OF DIRECTORS
Robert F. Benbow. Mr. Benbow has been a Director of the Company 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 a Director of the Company 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 a Director of the Company 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 a Director of the Company 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 a Director of the Company since
Inception. Mr. Liepold has been President and Chief Executive Officer of
KCWE-TV, an independent commercial television station operating in Kansas City,
Missouri, since 1994. Since 1983, Mr. Liepold also has been a consultant to the
telecommunications industry. 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 a Director of the Company since
November 1997. He is an Investment Manager 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.
Each Director of the Company has been elected pursuant to the terms of the
Stockholders' Agreement. See "Certain Relationships and Related
Transactions -- Stockholders' Agreement."
All directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, the Company reimburses non-management directors for expenses
incurred in attending meetings of the Board of Directors.
During 1998, the Board of Directors of the Company 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 the Company's management and independent public accountants on
financial matters, including the Company's 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 the Company's
executive officers and administers the Company's Stock Option Plan. The
Compensation Committee was formed in February 1997.
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EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal years ended December 31, 1997 and 1998 as to the Chief Executive Officer
and the two other highest paid executive officers of the Company whose total
annual salary and bonus exceeded $100,000 for such year:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ---------------
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 Counsel 1997 80,926 25,000 2,501 --
- ---------------
(1) Represents compensation attributable to Mr. Weary's use of a Company-owned
vehicle.
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
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL
PERCENT OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS/ RATES OF STOCK PRICE
SECURITIES SARS GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OF OPTION TERM
OPTION/SARS IN FISCAL BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
- ---- ----------- ------------ ----------- ---------- --------- --------
Rodney A. Weary............. -- -- -- -- -- --
William J. Gerski........... 2,818 15.1 $1.00 10/8/07 $ 1,772 $4,491
Jo Ellen Linn............... -- -- -- -- -- --
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OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE YEAR-END(#) AT FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
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 -- --
- ---------------
(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, the Company 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 the Company during their
respective periods of employment and for two years thereafter in any market in
North America in which the Company operates or intends to operate.
In February 1997, the Company and Mr. Weary entered into an agreement
pursuant to which Mr. Weary agreed to serve as the President and Chief Executive
Officer of the Company 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 the
Stock Option Plan.
Also during 1997, the Company entered into substantially similar employment
agreements with Ms. Linn and Mr. Gerski, pursuant to which each of them agreed
to serve the Company in their present capacity through February and November
2000, respectively. Such agreements may be extended according to their terms.
Under the agreements, Ms. Linn is paid compensation in an amount not less than
$82,500 per year, and Mr. Gerski is paid compensation in an amount not less than
$100,000 per year. Each is also eligible to participate in the Stock Option
Plan.
In August 1998, the Company entered into an employment agreement with Mr.
Hager. Pursuant to the employment agreement, Mr. Hager agreed to serve the
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 eligible to participate in the Stock Option Plan. The 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 the Company during the term of
his employment and for one year thereafter in any market in the United States in
which the Company operates or intends to operate. The confidentiality and
proprietary rights agreement requires Mr. Hager to maintain the confidentiality
of the Company's proprietary information during the period of his employment and
thereafter.
STOCK OPTION PLAN
In July 1997, the Board of Directors of the Company adopted the Stock
Option Plan pursuant to which the Company may, at the direction of the
Compensation Committee of the Company's Board of Directors, grant incentive
stock options, non-qualified stock options or restricted stock options to
officers, directors and employees of the Company. The Stock Option Plan was
approved by the stockholders of the Company on July 24, 1997. The Stock Option
Plan was assumed by Holdings and approved by its stockholders effective
September 9, 1997.
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401(K) PLAN
The Company maintains a 401(k) Savings Plan for its full-time employees
which permits employee contributions up to 15% of annual compensation to the
plan on a pre-tax basis. In addition, the Company may make contributions on a
discretionary basis as a percentage of each participating employee's annual
compensation. The Company may also make additional discretionary contributions
to the Plan in any plan year up to the annual 401(k) plan contribution limits as
defined in the Internal Revenue Code. The Plan is administered by the
Compensation Committee of the Board of Directors of the Company.
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PRINCIPAL STOCKHOLDERS
All of the issued and outstanding capital stock of the Company is owned by
Golden Sky DBS. The following table sets forth certain information as of March
5, 1999, regarding the ownership of Holdings' 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 the Company. 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.
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(%)
- ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- --------
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 * -- -- 19,768.22 37.0 19,768.22 44.1 2.6
Jack S. Ramirez and Carol H.
Ramirez(12)................. -- -- -- -- 8,357.52 15.7 8,357.52 25.1 1.1
Joyce Travis, Trustee of the
Travis Living Trust Dated
the 5th day of March,
1998(13).................... -- -- -- -- 4,919.54 9.3 4,919.54 16.5 *
James and Constance R.
Hertz(14)................... -- -- -- -- 5,014.52 9.4 5,014.52 16.7 *
Maxon R. and Kristina
Davis(15)................... -- -- -- -- 3,377.70 6.4 3,377.70 11.9 *
Louise A. Davis(16)........... -- -- -- -- 3,300.68 6.2 3,300.68 11.7 *
Jay and Maria Downen(17)...... -- -- -- -- 2,846.05 5.4 2,846.05 10.2 *
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)............... -- -- -- -- 2,843.50 5.3 2,843.50 10.2 *
Chris J. Downen(19)........... -- -- -- -- 2,843.50 5.3 2,843.50 10.2 *
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SHARES BENEFICIALLY OWNED
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
------------------ ------------------ ----------------- --------------------- DILUTED
% OF % OF % OF % OF VOTING
NAME(1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES(2) CLASS(3) POWER(%)
- ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- --------
EXECUTIVE OFFICERS AND
DIRECTORS:
Rodney A. Weary(20)(21)....... 16,030.00 3.8 -- -- -- -- 12,769.00 45.7 3.9
John R. Hager(21)(22)......... -- -- -- -- -- -- 2,222.00 8.2 *
William J. Gerski(21)(23)..... -- -- -- -- -- -- 8,750.00 31.0 1.2
Jo Ellen Linn(21)(24)......... 430.00 * -- -- -- -- 1,458.00 5.8 *
Robert F. Benbow(25).......... 150,000.00 35.9 30,051.46 13.2 -- -- 5,719.00 20.5 25.0
William O. Charman(26)........ 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.8
William P. Collatos(27)....... 150,000.00 35.9 -- -- -- -- 37.00 * 20.1
William A. Johnston(28)....... -- -- 75,125.62 32.9 -- -- -- -- 10.1
Robert B. Liepold(21)(29)..... 1,000.00 * -- -- -- -- 2,008.00 7.9 *
Erik M. Torgerson(30)......... -- -- 50,083.75 21.9 -- -- -- -- 6.7
All Executive Officers and
Directors as a group (10
persons).................... 392,460.00 93.5 167,782.27 73.4 -- -- 32,982.00 100.0 79.8
- ---------------
* 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 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
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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 3,039 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.
(21) The address is c/o Golden Sky Systems, Inc., 605 West 47th Street, Suite
300, Kansas City, Missouri 64112.
(22) Through the Stock Option Plan, Mr. Hager beneficially owns 2,222 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 8,750 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.
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72
(24) 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 347 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.
(25) 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.
(26) 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.
(27) 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.
(28) 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.
(29) 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 583 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.
(30) 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 the Company, Rodney A. Weary, and the investors named
therein, the Company 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, the Company issued 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 the Company of
approximately $40.6 million in the aggregate. The Company 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 the Company of approximately $35.6 million,
in addition to 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 the Company, GSS Mergersub Inc., a wholly-owned subsidiary of
Holdings, and Holdings, GSS Mergersub Inc. merged with and into the Company,
with the Company being the surviving corporation. Upon the consummation of such
merger, each share of Series A Preferred Stock of the Company was converted into
a share of Series A Preferred Stock of Holdings, each share of Common Stock of
the Company 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 the Company, thereby causing the Company to be a wholly-owned
subsidiary of Holdings. Pursuant to a letter agreement dated as of September 9,
1997 by and between Holdings and the Company, the Company assigned and Holdings
assumed all of the rights and obligations of the Company under the Series A
Stock Purchase Agreement.
Pursuant to a Note Purchase Agreement dated as of November 6, 1997 by and
among Holdings, the Company 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, the Company, 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 the Holdings' Board of Directors.
Subject to certain exceptions, Holdings and its subsidiaries (including the
Company) 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 the Company to service its indebtedness.
On October 2, 1998, pursuant to an Agreement and Plan of Merger, dated as
of September 1, 1998, among Holdings, the Company, 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
Preferred Stock to such stockholders.
On February 19, 1999, Holdings transferred all the outstanding capital
stock of the Company (together with $100 in cash) to Golden Sky DBS in exchange
for 100 shares of common stock, $.01 par value, 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 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 reasonably determined by Holdings).
FORMER CABLE-VIDEO MANAGEMENT, INC. ARRANGEMENT
On July 1, 1996, the Company entered into a management agreement with
Cable-Video Management, Inc. ("CVM"), which is owned by Rodney A. Weary, the
Company's Chief Executive Officer, to administer the Company's 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 the Company reimbursed CVM for salaries and other miscellaneous
expenses totaling approximately $343,000. Upon termination of the management
agreement, the Company purchased the assets of CVM for $44,000.
CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD
The Company has an oral consulting agreement with Robert B. Liepold, a vice
president and director of the Company, 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. The Company paid an aggregate $77,000 and $84,000 to Mr. Liepold
in 1997 and 1998, respectively, in connection with such services. In addition,
the Company paid Mr. Liepold a commission of $75,000 in October 1998 in
connection with a recent acquisition.
PAYMENTS TO AFFILIATES OF RODNEY A. WEARY
The Company utilizes the air transportation services of a company owned by
Rodney A. Weary, the Company's Chief Executive Officer. The Company paid
$506,000 in 1998, $109,000 in 1997 and $31,000 in 1996 in connection with such
services. In October 1997, the Company 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 the Company 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 the Company at an annual interest rate of 10%. All such amounts
were repaid by the Company prior to December 31, 1997.
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Also in 1997, the Company paid $66,000 to a company affiliated with Mr.
Weary, which payment was reimbursement relating to consulting services rendered
to the Company.
In 1997, F.G. Weary, the father of Rodney A. Weary, loaned $215,000 to the
Company at an interest rate of 10% per annum. Such loan, together with accrued
interest, was repaid by the Company 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, the Company, 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 governs the Company's credit facility. On February 10, 1999,
the Company agreed to an amendment of the Credit Facility effective upon the
closing of the 13 1/2% Notes Offering (the "Credit Facility"). As amended, the
Credit Facility provides for a $35.0 million term loan facility and a $115.0
million revolving credit facility, with a $40.0 million sublimit for letters of
credit. The Company has fully used its 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 repay existing indebtedness and for working capital purposes. The
remaining proceeds of 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 the Company 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 the Company and in Rural DIRECTV
Markets to be acquired by the Company. In addition, the Credit Facility provides
that the Company 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 the Company or any of its 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 the Company under the Credit Facility, as amended, are
unconditionally and irrevocably guaranteed by Holdings, Golden Sky DBS and each
of the Company's 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 the
Company, (iii) an equal and ratable pledge of all of the capital stock of the
Company's subsidiaries, (iv) a first priority security interest in all of such
subsidiaries' assets, and (v) a collateral assignment of the Company's NRTC
Agreements.
The Credit Facility provides that the Company 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 the Company's 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
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quotation offered to the Administrative Agent in the New York interbank
Eurodollar market for U.S. dollar deposits of amounts in immediately available
funds comparable to the outstanding principal amount of the loan of the
Administrative Agent for which an interest rate is then being 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 the ability of the Company and its 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 its 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. 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.
The Company 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, the 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 the request of the Company
pursuant to the Credit Facility is equal to three times the Company's single
largest monthly invoice from the NRTC, and must be increased as the Company
makes additional acquisitions of Rural DIRECTV Markets and when the Company's
obligations to the NRTC exceed the amount of the original letter of credit by
67%.
SELLER NOTES
In connection with the acquisition of the Company's Rural DIRECTV Market in
Clark County, Nevada, the Company issued a promissory note (the "TEG-DBS Note")
in favor of TEG-DBS Services, Inc. Pursuant to the TEG-DBS Note, the Company is
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. The obligations of the Company pursuant to the TEG-DBS
Note are secured by assets of TEG-DBS acquired by the Company, as described in
the Security Agreement, dated June 12, 1997 between the Company and TEG-DBS. As
of December 31, 1998, the entire principal amount of the TEG-DBS Note was
outstanding. A failure by the Company 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 the Company of all
amounts due pursuant to the TEG-DBS Note.
In connection with the acquisition of the Company's Rural DIRECTV Market in
Missoula, Montana, the Company 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"). 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 the Company's Rural DIRECTV Market in
Enfield, North Carolina, the Company issued a note payable in favor of Halifax
Electric Membership Corporation in the
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principal amount of $5.0 million, dated May 8, 1998 (the "Halifax Note"). 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 the Company at the end of
December 1998. The Halifax Note is secured by a letter of credit.
In connection with the acquisition of the Company's Rural DIRECTV Market in
Summerdale, Alabama, the Company 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"). 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.
The TEG-DBS Note, the Western Montana Note, the Halifax Note and the
Alabama Note are collectively referred to herein as the "Seller Notes."
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DESCRIPTION OF THE NEW NOTES
The New Notes will be issued under the Indenture, a copy of which will be
made available to holders of Old Notes upon request. The terms of the New Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The New Notes are subject to all such terms, and prospective holders of
New Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the Indenture
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act, and to all of the provisions
of the Indenture, including the definitions of certain 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 "Company"
refers to Golden Sky Systems, Inc. only. The definitions of certain capitalized
terms used in the following summary are set forth below under "-- Certain
Definitions."
GENERAL
The New Notes will be general senior subordinated obligations of the
Company secured to the limited extent described under "-- Escrow Account." The
New Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of, premium, if any, and interest on the New Notes are payable, and
the New Notes are exchangeable and transferable, at the office or agency of the
Company in the City of New York maintained for such purposes (which initially
will be the corporate trust office of the Trustee). No service charge will be
made for any registration of transfer, exchange or redemption of the New Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The New Notes are limited to $195,000,000 aggregate principal amount and
will mature on August 1, 2006. Interest on the New Notes will accrue at a rate
of 12 3/8% per annum and will be payable in cash semi-annually in arrears on
each February 1 and August 1 (each, an "Interest Payment Date"), commencing
February 1, 1999, to registered holders of New Notes on the January 15 or July
15, as the case may be, immediately preceding such Interest Payment Date.
Interest on the New Notes will accrue from the most recent Interest Payment Date
to which interest has been paid or duly provided for on the Old Note surrendered
in exchange for such New Note, or, if no interest has been paid or duly provided
for on such Old Note, from July 31, 1998. Interest will be computed on the basis
of a 360-day year of twelve 30-day months. If the Company defaults on any
payment in respect of the New Notes (whether upon redemption or otherwise),
interest on overdue principal and premium and, to the extent permitted by law,
on overdue installments of interest will accrue on the amount in default at the
rate of interest borne by the New Notes.
REDEMPTION
Optional Redemption. The New Notes will be redeemable, at the option of the
Company, in whole or in part, on or after August 1, 2003 upon not less than 30
nor more than 60 days' written notice at the redemption prices (expressed as
percentages of principal amount) 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 August 1 of each of the years indicated
below:
YEAR PERCENTAGE
- ---- ----------
2003........................................................ 112%
2004........................................................ 110%
2005 and thereafter......................................... 108%
Optional Redemption upon Public Equity Offerings. On or prior to August 1,
2001, the Company may, at its option, redeem up to 35% of the originally issued
aggregate principal amount of the New Notes, at a redemption price in cash equal
to 112.375% of the principal amount thereof, plus accrued and unpaid interest
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thereon, if any, to 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 that, in
the case of any such Public Equity Offering or Public Equity Offerings by
Holdings, all the net proceeds thereof are contributed to the Company);
provided, further, that not less than 65% of the originally issued aggregate
principal amount of Notes 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.
Mandatory Redemption. The Company will not be required to make any
mandatory sinking fund payments in respect of the New Notes. However, (i)
following the occurrence of a Change of Control, the Company will be required to
make an offer to purchase all outstanding New Notes at a price equal to 101% of
the principal amount thereof (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 New Notes at a price equal to 100% of the
principal amount thereof (determined at the date of purchase), plus accrued and
unpaid interest, if any, to the date of purchase. See "-- Change of Control" and
"-- Certain Covenants -- Disposition of Proceeds of Asset Sales."
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the New Notes for redemption will be made pro rata, by
lot or such 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 DTC procedures). No New Notes of a
principal amount 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 New Notes to be redeemed at
its registered address. If any New Note is to be redeemed in part only, the
notice of redemption that relates to such New Note shall state the portion of
the principal amount thereof to be redeemed. A new New Note in a principal
amount equal to the unredeemed portion thereof will be issued in the name of the
holder thereof upon surrender for cancellation of the original New Note. Upon
giving of a redemption notice, interest on New Notes 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 New Notes will
cease to be outstanding.
ESCROW ACCOUNT
The New Notes will be collateralized, pending disbursement pursuant to the
Escrow Agreement, by a pledge of the Escrow Account (funds and investments held
from time to time in the Escrow Account are referred to as the "Escrow
Collateral"). The Escrow Account represents funds that, together with the
proceeds from the investment thereof, will be sufficient to pay interest on the
outstanding Notes for the first four scheduled interest payments (but not any
Additional Interest that may arise under the Registration Rights Agreement).
The Escrow Agreement provides for the grant by the Company to the Trustee,
for the benefit of the holders, of security interests in the Escrow Collateral.
All such security interests will collateralize the payment and performance when
due of the Company's secured obligations under the Indenture and the Notes, as
provided in the Escrow Agreement. The Liens created by the Escrow Agreement are
intended to be first priority security interests in the Escrow Collateral. The
ability of holders to realize upon any such funds or securities may be subject
to certain bankruptcy law limitations in the event of the bankruptcy of the
Company.
Pursuant to the Escrow Agreement, funds may be disbursed from the Escrow
Account only to pay interest on the Notes (or, if a portion of the Notes has
been retired by the Company, funds representing the lesser of (i) the excess of
the amount sufficient to pay interest through and including August 1, 2000 on
the Notes not so retired and (ii) the interest payments that have not previously
been made on such retired Notes for each Interest Payment Date through the
Interest Payment Date to occur on August 1, 2000 shall be paid to the Company if
no Default then exists under the Indenture).
The Escrow Agreement provides that Escrow Collateral contained in the
Escrow Account be held by the Escrow Agent, as directed by the Company, in the
form of cash and certain other permitted investments in
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which it will maintain a perfected security interest. Funds contained in the
Escrow Account have been invested in Government Securities, and interest earned
on Government Securities will be placed in the Escrow Account. Upon the
acceleration of the maturity of the Notes, the Escrow Agreement provides for the
foreclosure by the Trustee upon the net proceeds of the Escrow Account. Under
the terms of the Indenture, the proceeds of the Escrow Account shall be applied,
first, to amounts owing to the Trustee in respect of fees and expenses of the
Trustee and, second, to the secured obligations under the Notes and the
Indenture. Under the Escrow Agreement, assuming that the Company makes the first
four scheduled interest payments on the Notes in a timely manner with funds or
Government Securities held in the Escrow Account, all of the Government
Securities will be released from the Escrow Account.
CHANGE OF CONTROL
The Indenture provides that, following the occurrence 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 Notes at a purchase price
(the "Change of Control Purchase Price") in cash equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the Change
of Control Payment Date. The Company will be required to purchase all Notes
properly tendered and not withdrawn pursuant to the Change of Control Offer.
The Indenture provides that, 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 and all other Senior
Indebtedness the terms of which require repayment upon a Change of Control or
offer to repay in full and terminate all commitments under all Indebtedness
under the Credit Facility and all other such Senior Indebtedness and to repay
the Indebtedness owed to each lender which has accepted such offer or (ii)
obtain the requisite consents under the Credit Facility and all other Senior
Debt to permit the repurchase of the Notes as provided below. The Company shall
first comply with the covenant in the immediately preceding sentence before it
shall be required to repurchase Notes 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 "-- Events of Default."
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 Notes 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.
If a Change of Control Offer is made, there can be no assurance that the
Company 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 Company 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 Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act, and any other applicable 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, and any violation of the provisions of the
Indenture relating to such Change of Control Offer occurring as a result of such
compliance shall not be deemed a Default or an Event of Default under the
Indenture.
SUBORDINATION
The payment of all Obligations on the New Notes will be subordinated in
right of payment, as described below, to the prior payment in full in cash or
Cash Equivalents of all Obligations with respect to Senior
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Indebtedness. To the extent holders of Notes realize upon Escrow Collateral
prior to the Release Date following an exercise of remedies under the Indenture,
the following subordination provisions will not apply.
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company, or
any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary, or any assignment for the benefit of creditors or
other marshalling of assets or liabilities of the Company, all Obligations with
respect to Senior Indebtedness must be paid in cash or cash equivalents in full
before any payment or distribution (excluding any payment or distribution of
Permitted Junior Securities, payments from the Escrow Account and any payment
from the trust described under "-- Defeasance or Covenant Defeasance of
Indenture") is made on account of the Obligations with respect to the Notes or
for the acquisition, redemption or other purchase of any Obligations with
respect to the Notes for cash, property or otherwise.
During the continuance of any default in the payment of any Designated
Senior Indebtedness pursuant to which the maturity thereof may immediately be
accelerated beyond any applicable grace period and after receipt by the Trustee
from representatives of holders of such Designated Senior Indebtedness of
written notice of such default, no payment or distribution of any assets of any
kind or character shall be made by or on behalf of the Company or any other
Person on its behalf (excluding any payment or distribution of Permitted Junior
Securities, payments from the Escrow Account and any payment from the trust
described under "-- Defeasance or Covenant Defeasance of Indenture") shall be
made on account of the Obligations with respect to, or the purchase, redemption
or other acquisition of, the Notes unless and until such default has been cured
or waived or has ceased to exist or such Designated Senior Indebtedness shall
have been discharged or paid in full in cash or Cash Equivalents.
During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and after the receipt by
the Trustee and the Company from the representatives of holders of such
Designated Senior Indebtedness of a written notice of such Non-payment Default,
neither the Company nor any other Person on its behalf shall make any payment or
distribution of any kind or character (excluding any payment or distribution of
Permitted Junior Securities, payments from the Escrow Account and any payment
from the trust described under "-- Defeasance or Covenant Defeasance of
Indenture") may be made by the Company on account of the Obligations with
respect to, or the purchase, redemption or other acquisition of, the Notes for
the period specified below (the "Payment Blockage Period").
The Payment Blockage Period will commence upon the receipt of notice of a
Non-payment Default by the Trustee from the representatives of holders of
Designated Senior Indebtedness and will end on the earliest to occur of the
following events: (i) 179 days shall have elapsed since the receipt of such
notice of a Non-payment Default (provided such Designated Senior Indebtedness
shall not theretofore have been accelerated), (ii) such default is cured or
waived or ceases to exist or such Designated Senior Indebtedness is discharged
or (iii) such Payment Blockage Period shall have been terminated by written
notice to the Company or the Trustee from the representatives of holders of
Designated Senior Indebtedness initiating such Payment Blockage Period. After
the end of any Payment Blockage Period the Company shall promptly resume making
any and all required payments in respect of the Notes, including any missed
payments. Notwithstanding anything in the subordination provisions of the
Indenture or the Notes to the contrary, (x) in no event shall a Payment Blockage
Period extend beyond 179 days from the date of the receipt by the Trustee of the
notice initiating such Payment Blockage Period, (y) there shall be a period of
at least 181 consecutive days in each 360-day period when no Payment Blockage
Period is in effect and (z) not more than one Payment Blockage Period with
respect to the Notes may be commenced within any period of 360 consecutive days.
No Non-payment Event of Default with respect to Designated Senior Indebtedness
that existed or was continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period may be, or be made, the basis for the commencement
of a second Payment Blockage Period, whether or not within a period of 360
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days (it being acknowledged that any subsequent
action, or any breach of any financial covenants for a period commencing
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after the date of commencement of such Blockage Period based upon any new events
that, in either case, would give rise to an event of default pursuant to any
provisions under which an event of default previously existed or was continuing
shall constitute a new event of default for this purpose).
In the event that, notwithstanding the foregoing, the Company makes any
payment or distribution to the Trustee or any holder of any Note prohibited by
the subordination provision of the Indenture, then such payment or distribution
will be required to be paid over and delivered to the holders (or their
representative) of Designated Senior Indebtedness.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the subordination
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes, and funds that would be otherwise
payable to the holders of the Notes will be paid to the holders of Senior
Indebtedness to the extent necessary to pay the Senior Indebtedness in full, and
the Company may be unable to meet its obligations fully with respect to the
Notes.
As of December 31, 1998, on a pro forma basis, the Company would have had
outstanding $77.8 million of Senior Indebtedness and $53.4 million of
availability under the Credit Facility. The Indenture limits, but does not
prohibit, the incurrence by the Company of additional Indebtedness that is
senior to the Notes, but prohibits the incurrence of any Indebtedness
contractually subordinated in right of payment to any other Indebtedness of the
Company and senior in right of payment to the Notes. See "Risk Factors --
Subordination of the Notes" and "Risk Factors -- Asset Encumbrances."
Each guarantee of the Notes by the Guarantors is, to the extent set forth
in the Indenture, subordinated in right of payment to the prior payment in full
of all Guarantor Senior Indebtedness (as defined in the Indenture) of such
Guarantor.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Company will not, and 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
Company will be permitted to Incur Indebtedness, and any Restricted Subsidiary
will be able to Incur 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.
Limitation on Restricted Payments. The Indenture provides that 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, the
Company 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"; 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
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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, 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 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 "-- 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 Company 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 (d) of the definition of Permitted Indebtedness at
the time of such Restricted Payment. 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 covenant 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 the 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 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 to
Holdings for bona fide costs and operating expenses of Holdings directly related
to the operations of the Company and its Subsidiaries; and (vi) the payment of
any dividend or distribution to Holdings to enable it to purchase, redeem, or
otherwise
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acquire or retire for value Equity Interests of Holdings held by employees or
former employees of Holdings, the Company or any Subsidiary of Holdings or 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, Holdings 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 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.
Limitation on Other Senior Subordinated Debt. The Indenture provides that
the Company will not, directly or indirectly, Incur, contingently or otherwise,
any Indebtedness that is both (i) subordinate in right of payment to any other
Indebtedness of the Company and (ii) senior in right of payment to the Notes.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Liens of any kind against or upon any property or assets of the
Company or any Restricted Subsidiary, whether now owned or hereafter acquired,
or any proceeds therefrom to secure any Indebtedness unless (i) in the case of
Liens securing Subordinated Indebtedness, the Notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to such Liens and
(ii) in all other cases, contemporaneously therewith effective provision is made
to secure the Notes equally and ratably with such Indebtedness with a Lien on
the same properties and assets securing Indebtedness for as long as such
Indebtedness is secured by such Lien except for (i) Liens on property or assets
of the Company (other than the Escrow Account) securing any Senior Indebtedness
or on property or assets of Restricted Subsidiaries securing guarantees of
Senior Indebtedness or on any property or assets of the Company or any
Restricted Subsidiary securing any unsubordinated Indebtedness of any Restricted
Subsidiary, (ii) Permitted Liens on property or assets (other than the Escrow
Account) or (iii) Liens on the Escrow Account to secure the Notes.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that 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 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) the Credit Facility or any other agreement of
the Company or the Restricted Subsidiaries outstanding on the Issue Date, in
each case as in effect on the Issue Date, and amendments, restatements,
renewals, replacements or refinancings thereof; provided, however, that any such
amendment, restatement, renewal, replacement or refinancing is no more
restrictive in the aggregate with respect to such encumbrances or restrictions
than those contained in the Credit Facility or such other agreement on the Issue
Date; (ii) applicable law; (iii) 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
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Restricted Subsidiary, other than the Acquired Person; (iv) 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
or any Restricted Subsidiary and the NRTC with respect to DBS services); (v)
Purchase Money Indebtedness for property acquired in the ordinary course of
business that only imposes encumbrances and restrictions on the property so
acquired; (vi) 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 (vi) 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; or (vii) refinancing Indebtedness
permitted under clause (h) of the definition of Permitted Indebtedness;
provided, however, that the encumbrances and restrictions contained in the
agreements governing such Indebtedness are no more restrictive in the aggregate
than those contained in the agreements governing the Indebtedness being
refinanced immediately prior to such refinancing.
Disposition of Proceeds of Asset Sales. The Indenture provides that 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 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 Notes, the Company and the
Restricted Subsidiaries may engage in Asset Sales involving $10.0 million or
more 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 Senior Indebtedness and permanently reduce
any related commitment, (ii) apply such Net Cash Proceeds to repay Specified
Indebtedness and, by written notice to the Trustee and the holders (the
"Permitted Debt Reduction"), elect to permanently reduce the amount of Specified
Indebtedness that may be incurred as Permitted Indebtedness under the covenant
"Limitation on Additional Indebtedness" by an amount equal to the amount of such
Net Cash Proceeds; or (iii) apply such Net 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 (iv) any combination of the foregoing.
To the extent that all or part of the Net Cash Proceeds of any Asset Sale
are not applied within 365 days of such Asset Sale as described in clause (i),
(ii) or (iii) 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
Notes up to a maximum principal amount of Notes equal to the Note Pro Rata
Share, at a purchase price in cash equal to 100% of the principal
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amount of Notes, 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.
In the event that the terms of any Other Pari Passu Indebtedness requires
that an offer to purchase be made to repurchase such Indebtedness upon the
consummation of any Asset Sale (the "Other Indebtedness"), the Company may use
the Unutilized Net Cash Proceeds otherwise required to be used to make an Offer
to Purchase to make an offer to purchase or to retire such Other Pari Passu
Indebtedness and to make an Offer to Purchase so long as the amount of such
Unutilized Net Cash Proceeds available to be applied to purchase the Notes is
not less than the Note Pro Rata Share. With respect to any Unutilized Net Cash
Proceeds, the Company shall make the Offer to Purchase in respect thereof at the
same time as the analogous offer to purchase is made under any Other
Indebtedness and the Purchase Date in respect thereof shall be the same under
the Indenture as the Purchase Date in respect thereof pursuant to any Other
Indebtedness.
With respect to any Offer to Purchase effected pursuant to this covenant,
to the extent that the principal amount of the Notes tendered pursuant to such
Offer to Purchase exceeds the Note Pro Rata Share to be applied to the purchase
thereof, such Notes shall be purchased pro rata based on the principal amount of
such Notes tendered by each holder.
In the event that the Company makes an Offer to Purchase the Notes, 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 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 face amount 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 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.
Limitations on Conduct of Business of the Company. The Company will not,
and 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
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 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.
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Notwithstanding the foregoing, the restrictions set forth in this covenant
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
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 "-- Limitation on Restricted Payments" above; (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; and (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 the Company of Qualified Equity Interests.
Limitation on Guarantees by and Certain Indebtedness of Restricted
Subsidiaries. The Company will not permit any Restricted Subsidiary, directly or
indirectly, by way of the pledge of any intercompany note or otherwise, to
assume, guarantee or in any other manner become liable with respect to (x) any
Indebtedness of the Company or (y) any Indebtedness of any such Restricted
Subsidiary that is expressly subordinated in right of payment to any other
Indebtedness of such Restricted Subsidiary, except for Indebtedness incurred
under clause (f), (g) or (j) of the definition of "Permitted Indebtedness,"
unless, in either such case, (a) such Restricted Subsidiary executes and
delivers, or has executed and delivered, a supplemental indenture to the
Indenture providing a guarantee of payment of the Notes by such Restricted
Subsidiary in the form required by the Indenture (the "Guarantee") and (b) if
such assumption, guarantee or other liability of such Restricted Subsidiary is
provided in respect of Indebtedness that is expressly subordinated to the Notes,
the guarantee or other instrument provided by such Restricted Subsidiary in
respect of such subordinated Indebtedness shall be subordinated to the Guarantee
pursuant to subordination provisions not less favorable to the holders of the
Notes than those contained in the indenture or similar document governing such
subordinated Indebtedness. Any Restricted Subsidiary that has provided a
Guarantee is herein referred to as a "Guarantor." The Company may elect to cause
any Restricted Subsidiary to become a Guarantor. Any Guarantee shall contain
subordination provisions and definitions that are substantively the same as
those applicable to the Notes.
Notwithstanding the foregoing, any such Guarantee by a Restricted
Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged, without any further
action required on the part of the Trustee or any such Restricted Subsidiary,
upon: (i) the unconditional release of such Restricted Subsidiary from its
liability in respect of the Indebtedness in connection with which such Guarantee
was executed and delivered pursuant to the preceding paragraph or otherwise; or
(ii) any sale or other disposition (by merger or otherwise) to any Person which
is not a Restricted Subsidiary of the Company, of all of the Company's Equity
Interests in, or all or substantially all of the assets of, such Restricted
Subsidiary; provided, however, that (a) such sale or disposition of such Equity
Interests or assets is otherwise in compliance with the terms of the Indenture
and (b) such assumption, guarantee or other liability of such Restricted
Subsidiary has been released by the holders of the other Indebtedness so
guaranteed.
The Notes are fully and unconditionally guaranteed, on a joint and several
basis, by GSS's subsidiaries Argos Support Services Company and PrimeWatch, Inc.
Each guarantee is, to the extent set forth in the Indenture, subordinated in
right of payment to prior payment in full of all Guarantor Senior Indebtedness
(as defined in the Indenture) of such Guarantor.
Reports. The Indenture provides that, whether or not the Company has a
class of securities registered under the Exchange Act, the Company 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 (i) within the applicable time period
required under the Exchange Act, after the
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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.
Designation of Unrestricted Subsidiaries. (a) The Company may designate
after the Issue Date any Subsidiary of the Company as an "Unrestricted
Subsidiary" under the Indenture (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, the
Company could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the proviso in "-- Limitation on Additional
Indebtedness" above; 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 of or
subclause (iv) of the second paragraph "-- Limitation on Restricted
Payments" above in an amount (the "Designation Amount") equal 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
the Indenture, including, without limitation, pursuant to "-- Limitation on
Restricted Payments" above and "-- Disposition of Proceeds of Asset Sales"
above.
(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 the
Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
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
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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 Notes and the performance
and observance of every covenant of the Indenture, the Escrow Agreement 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
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 Surviving Person 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 "-- Limitation on Additional Indebtedness"
above; and (iv) the Company 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.
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.
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 Notes, the Indenture, the Escrow Agreement 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 shall be discharged from
its Obligations under the Indenture, the Escrow Agreement, the Registration
Rights Agreement 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 Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) 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 (provided such 30 day grace period shall be
inapplicable for the first four interest payments due on the Notes); or
(ii) default in the payment of the principal of or 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); or
(iii) 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."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above) or the Escrow Agreement, 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
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Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes (in each case, when such notice
is deemed received in accordance with the 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 maturity of such Indebtedness (which
acceleration has not been rescinded or amended prior to any declaration of
acceleration of the Notes); or
(vi) the Company shall assert or acknowledge in writing that the
Escrow Agreement is invalid or unenforceable or any Guarantor shall assert
or acknowledge in writing the invalidity of its Guarantee.
(vii) 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
(viii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Company, any
Guarantor or any of the Company'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 Company described in clause (viii) of the preceding
paragraph) occurs and is continuing, the Trustee or the holders of at least 25%
in aggregate principal amount of the outstanding Notes by notice in writing to
the Company may declare the unpaid principal of (and premium, if any) and
accrued interest to the date of acceleration on all the outstanding Notes to be
due and payable immediately and, upon any such declaration, such principal
amount (and premium, if any) and accrued interest, notwithstanding anything
contained in the Indenture or the Notes to the contrary, but subject to the
provisions limiting payment described above under "-- Subordination," will
become immediately due and payable; provided, however, that if there are any
amounts or commitments outstanding under the Credit Facility if an Event of
Default shall have occurred and be continuing (other than an Event of Default
with respect to the Company described in clause (viii) of the preceding
paragraph), the Notes shall not become due and payable until the earlier to
occur of (x) five business days following delivery of written notice of such
acceleration of the Notes to the agent under the Credit Facility, but only if
such Event of Default is then continuing and (viii) the acceleration (ipso facto
or otherwise) of any Indebtedness under the Credit Facility. If an Event of
Default specified in clause (viii) of the preceding paragraph with respect to
the Company 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 (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 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.
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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; provided, however, that, 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.
No holder of any Note will have any right to institute any proceeding with
respect to the 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 Notes under the 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 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 principal of
and premium, if any, or interest on such Note on or after the respective due
dates expressed in such Note.
The Company is 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 Company 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 Company may at any time terminate its obligations under certain
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 Company
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 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 (a) 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 Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b) (i) all such Notes 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 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, premium, if any, and accrued interest to the
date of such deposit; (ii) the Company has paid all sums payable by it under the
Indenture; and (iii) the Company 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. In addition, the Company must
deliver an officers' certificate and an opinion of counsel stating that all
conditions precedent to satisfaction and discharge have been complied with.
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AMENDMENT AND WAIVERS
From time to time, the Company, when authorized by resolutions of the
Company'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 Company and the Trustee by
supplemental indenture with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided
that no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount of,
change the fixed maturity of, or alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or amounts owing thereon are
payable, (iii) reduce the percentage of the aggregate principal amount
outstanding of Notes which must consent to an amendment, supplement or waiver or
consent to take any action under the Indenture or the Notes, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
the Notes, (v) waive a default in payment with respect to the Notes, (vi) reduce
the rate or extend the time for payment of interest on the Notes, (vii)
following the occurrence of a Change of Control or an Asset Sale, alter the
Company's obligation to purchase the Notes in accordance with the Indenture or
waive any default in the performance thereof, (viii) affect the ranking of the
Notes in a manner adverse to the holder of the Notes, (ix) release any Guarantee
except in compliance with the terms of the Indenture or (x) release any Liens
created by the Escrow Agreement except in accordance with the terms of the
Escrow Agreement.
REGARDING THE TRUSTEE AND ESCROW AGENT
State Street Bank and Trust Company of Missouri, N.A. serves as Trustee
under the Indenture and Escrow Agent under the Escrow Agreement.
GOVERNING LAW
The Indenture and the Escrow Agreement provides that the Indenture and the
Notes and the Escrow Agreement, respectively, are 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 certain defined terms used in the Indenture
or the Escrow Agreement. 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.
"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 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 (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 "-- 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 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 "-- Certain Covenants -- Limitation on Restricted Payments"
above.
"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.
"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 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; (ii)
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; (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
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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 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 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 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.
"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 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
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(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 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.
"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.
"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, the
Company, 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
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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 (a) an amount equal
to the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") minus the amount of funds on deposit in the Escrow Account
as of 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 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.
"Designated Senior Indebtedness" means (a) any Indebtedness of the Company
outstanding under the Credit Facility (including guarantees) and (b) any other
Senior Indebtedness that, at the time of determination, has an aggregate
principal amount outstanding, together with any commitments to lend additional
amounts, of at least $50.0 million, if (in the case of Senior Indebtedness
described in this clause (b)) the instrument governing such Senior Indebtedness
expressly states that such Indebtedness is "Designated Senior Indebtedness" for
purposes of the Indenture, a Board Resolution setting forth such designation by
the Company has been filed with the Trustee and such designation is not
prohibited by the Credit Facility.
"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 Company's Board of Directors 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
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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, 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 $500.0 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.
"Escrow Account" shall mean the account established in the name of the
Escrow Agent and funded by the Company on the Closing Date pursuant to the
Indenture.
"Escrow Agent" means the Trustee (or any duly appointed successor thereto).
"Escrow Agreement" means the Escrow Agreement dated as of July 31, 1998
between the Company and the Trustee, as trustee and as escrow agent.
"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 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
of Directors of the Company acting in good faith, and shall be evidenced by
resolutions of the Board of Directors of the Company 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.
"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, (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
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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 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) 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 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; (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 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 Company's Board of Directors,
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
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and (ii) that, in the judgment of the Board of Directors of the Company, 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" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest on the Notes.
"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.
"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 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: (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
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 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
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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 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.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to immediately
accelerate the maturity of any Designated Senior Indebtedness.
"Note Pro Rata Share" means the amount of the applicable Unutilized Net
Cash Proceeds obtained by multiplying the amount of such Unutilized Net Cash
Proceeds by a fraction, (i) the numerator of which is the aggregate principal
amount of Notes outstanding at the time of the applicable Asset Sale with
respect to which the Company is required to use Unutilized Net Cash Proceeds to
repay or make an Offer to Purchase or repay and (ii) the denominator of which is
the sum of (a) the aggregate accreted value and/or principal amount, as the case
may be, of all Other Pari Passu Debt outstanding at the time of the applicable
Asset Sale and (b) the aggregate principal amount of all Notes outstanding at
the time of the applicable Offer to Purchase with respect to which the Company
is required to use the applicable Unutilized Net Cash Proceeds to offer to repay
or make an Offer to Purchase or repay.
"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."
"Other Pari Passu Debt" means Indebtedness of the Company or any Guarantor
that neither constitutes Senior Indebtedness nor Subordinated Indebtedness.
"Payment Default" means any default, after any requirement for the giving
of notice, the lapse of time or both, or any other condition to such default
becoming an event of default has occurred, in the payment of principal of (or
premium, if any) or interest on or any other amount payable in connection with
Designated Senior Indebtedness.
"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 under the Notes and the Indenture and other
Indebtedness of the Company, and any guarantee thereof by a Guarantor, so
long as the aggregate principal amount of such Indebtedness and of the
Notes does not exceed $195.0 million;
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(b) Indebtedness of the Company and/or any Restricted Subsidiary
outstanding on the Issue Date;
(c) (1) Indebtedness under the Credit Facility of the Company, and,
without duplication, any guarantee thereof by a Guarantor, 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
the Company, and, without duplication, any guarantee thereof by a
Guarantor, incurred to fund Asset Acquisitions of Permitted Businesses,
Capital Lease Obligations, Investments permitted under the 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;
(d) Indebtedness of the Company 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 (d) 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;
(e) (x) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or any Restricted Subsidiary and (y) Indebtedness of the
Company owed to and held by any Restricted Subsidiary that is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the Indenture and the
Notes (or pledged to secure any Senior Indebtedness); provided, however,
that an Incurrence of Indebtedness that is not permitted by this clause (e)
shall be deemed to have occurred upon (i) any sale or other disposition of
any Indebtedness of the Company or any Restricted Subsidiary referred to in
this clause (e) to a Person (other than the Company or any Restricted
Subsidiary) or (ii) the designation of a Restricted Subsidiary that holds
Indebtedness of the Company or any other Restricted Subsidiary as an
Unrestricted Subsidiary;
(f) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary relating to Indebtedness of the Company or such
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 the Company or any Restricted Subsidiary of
such Interest Rate Protection Obligations; 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;
(g) indemnification obligations of the Company or 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 Company and the
Restricted Subsidiaries for such disposition;
(h) 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" or clause
(a), (b), (c)(2), (i) or (k) 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 (other than Senior Indebtedness
and Guarantor Senior 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, (iii) Indebtedness that is pari passu
with the Notes or a Guarantee may only be refinanced with Indebtedness that
is made pari
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passu with or subordinate in right of payment to the Notes (and supported
by a guarantee that is pari passu or subordinate in right of payment with
such Guarantee), and Subordinated Indebtedness may only be refinanced with
Subordinated Indebtedness, (iv) with respect to any refinancing of
Indebtedness Incurred pursuant to subparagraph (i) or (k) of this
definition, such refinancing pursuant to this clause (h) shall also be
deemed to be Incurred pursuant to clause (i) or (k), 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) and (v) Indebtedness of the Company Incurred under clause (b) of
this definition may only be refinanced with Indebtedness of the Company;
(i) Indebtedness of the Company or 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
(i) 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
(c) of this definition;
(j) Indebtedness in the form of Liens permitted under clause (b) of
the definition of Permitted Liens; and
(k) in addition to the items referred to in subparagraphs (a) through
(j) above, Indebtedness of the Company or any of the Restricted
Subsidiaries (including any Indebtedness under the Credit Facility that
utilizes this clause (k)) having an aggregate principal amount for the
Company and 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 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 "-- 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"); (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; (j) Investments in
Marketable Securities by the Escrow Agent and held in the Escrow Account; and
(k) Permitted Acquisition Deposits.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or (ii)
subordinated in right of payment to all Senior Indebtedness that may at the time
be outstanding, to the same extent as, or to a greater extent than, the Notes
are subordinated as provided in the Indenture, in any event pursuant to a court
order so providing and as to
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which (a) the rate of interest on such securities shall not exceed the effective
rate of interest on the Notes on the date of the Indenture, (b) such securities
shall not be entitled to the benefits of covenants or defaults materially more
beneficial to the holders of such securities than those in effect with respect
to the Notes on the date of the Indenture, (c) such securities shall not provide
for amortization (including sinking fund and mandatory prepayment provisions)
commencing prior to the date six months following the final scheduled maturity
date of the Senior Indebtedness (as modified by the plan of reorganization or
readjustment pursuant to which such securities are issued) and (d) the principal
amount thereof shall not exceed the principal amount and accrued and unpaid
interest of the Notes in respect of which such securities are issued.
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary; provided, however, that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets subject to the Liens prior to such merger or consolidation;
(b) Liens imposed by law such as carriers', warehousemen's and mechanics' Liens
and other similar Liens arising in the ordinary course of business that secure
payment of obligations not more than 60 days past due or that are being
contested in good faith and by appropriate proceedings; (c) Liens existing on
the Issue Date; (d) Liens securing only the Notes; (e) Liens in favor of the
Company or any Restricted Subsidiary so long as held by the Company or any
Restricted Subsidiary; (f) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted;
provided, however, that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (g) easements,
reservation of rights of way, restrictions and other similar easements,
licenses, restrictions on the use of properties, or minor imperfections of title
that in the aggregate are not material in amount and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary conduct of the business of the Company and the Restricted Subsidiaries;
(h) Liens resulting front the deposit of cash or notes in connection with
contracts, Permitted Acquisition Deposits, tenders or expropriation proceedings,
or to secure workers' compensation, surety or appeal bonds, costs of litigation
when required by law and public and statutory obligations or obligations under
franchise arrangements and agreements with the NRTC entered into in the ordinary
course of business; (i) Liens securing Indebtedness consisting of Capital Lease
Obligations, Purchase Money Indebtedness, mortgage financings, industrial
revenue bonds or other monetary obligations, in each case incurred solely for
the purpose of financing all or any part of the purchase price or cost of
construction or installation of assets used in the business of the Company or
the Restricted Subsidiaries, or repairs, additions or improvements to such
assets; provided, however, that (I) such Liens secure Indebtedness in an amount
not in excess of the original purchase price or the original cost of any such
assets or repair, addition or improvement thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness), (II) such Liens do not extend to any other assets of the Company
or the Restricted Subsidiaries (and, in the case of repairs, additions or
improvements to any such assets, such Lien extends only to the assets (and
improvements thereto or thereon) repaired, added to or improved), (III) the
Incurrence of such Indebtedness is permitted by "-- Certain
Covenants -- Limitation on Additional Indebtedness" above, and (IV) such Liens
attach within 90 days of such purchase, construction, installation, repair,
addition or improvement; (j) Liens to secure any refinancings, renewals,
extensions, modifications or replacements (collectively, "refinancing") (or
successive refinancings), in whole or in part, of any Indebtedness secured by
Liens referred to in the clauses above so long as such Lien does not extend to
any other property (other than improvements thereto); (k) Liens securing letters
of credit entered into in the ordinary course of business; (1) Liens on and
pledges of the Equity Interests of any Unrestricted Subsidiary securing any
Indebtedness of such Unrestricted Subsidiary; and (m) any calls or rights of
first refusal with respect to any partnership interests; and (n) Liens on the
proceeds of Indebtedness that are pledged (or any Investment made therewith are
pledged) to secure payments in respect of such Indebtedness.
"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.
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"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding with respect to such
Person in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing such Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
as a claim in such Insolvency or Liquidation Proceeding.
"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" of a debt security means the principal of the security, plus,
when appropriate, the premium, if any, on the security.
"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 Commission in accordance with the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of the Company or 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.
"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, 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 Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company 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 Company 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 the Company to any
Person selling any assets or properties to the Company or any Restricted
Subsidiary in an Asset Acquisition, including those outstanding on the Issue
Date.
"Senior Indebtedness" means, at any date, (a) all Obligations of the
Company under the Credit Facility; (b) all Interest Rate Protection Obligations
of the Company; (c) all Obligations of the Company under standby letters of
credit; and (d) all other Obligations relating to Indebtedness of the Company
for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such
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Indebtedness, unless the instrument under which such Indebtedness of the Company
for money borrowed is Incurred expressly provides that such Indebtedness for
money borrowed is not senior or superior in right of payment to the Notes, and
all renewals, extensions, modifications, amendments or refinancings thereof.
Notwithstanding the foregoing, Senior Indebtedness shall not include (a) to the
extent that it may constitute Indebtedness, any Obligation for federal, state,
local or other taxes; (b) any Indebtedness among or between the Company and any
Subsidiary of the Company; (c) to the extent that it may constitute
Indebtedness, any Obligation in respect of any trade payable Incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business; (d) that portion of any Indebtedness that is Incurred in violation
of the Indenture; provided, however, that such Indebtedness shall be deemed not
to have been Incurred in violation of the Indenture for purposes of this clause
(d) if (I) the holder(s) of such Indebtedness or their representative or the
Company shall have furnished to the Trustee an opinion of independent legal
counsel, unqualified in all material respects, addressed to the Trustee (which
legal counsel may, as to matters of fact, rely upon an officers' certificate of
the Company) to the effect that the Incurrence of such Indebtedness does not
violate the provisions of the Indenture or (II) in the case of any Obligations
under the Credit Facility, the holder(s) of such Obligations or their agent or
representative shall have received a representation from the Company to the
effect that the Incurrence of such Indebtedness does not violate the provisions
of the Indenture; (e) Indebtedness evidenced by the Notes; (f) Indebtedness of
the Company that is expressly subordinate or junior in right of payment to any
other Indebtedness of the Company; (g) Indebtedness represented by the Seller
Notes; (h) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capital Lease Obligations) or management
agreements; and (i) any obligation that by operation of law is subordinate to
any general unsecured obligations of the Company.
"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 clause (v), (vii) or (viii)
of "-- Events of Default" above has occurred, would constitute a Significant
Restricted Subsidiary under clause (a) of this definition.
"Specified Indebtedness" means (i) any Senior Indebtedness, (ii) any
Guarantor Senior Indebtedness and (iii) any Indebtedness of any Restricted
Subsidiary (other than a Guarantor) that is not subordinated to any other
Indebtedness of such Restricted Subsidiary; provided that, to the extent such
Indebtedness has been guaranteed, it must have been guaranteed by a Guarantor on
a senior basis.
"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 any Indebtedness of the Company or any
Guarantor that is expressly subordinated in right of payment to the Notes or any
Guarantees of such Guarantor, as applicable.
"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.
"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.
"Total Incremental Invested Equity" means, at any date of determination,
the sum of, without duplication, (a) the aggregate net cash proceeds received by
the Company either (x) as capital contributions
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to the Company after the Issue Date or (y) from the issue and sale (other than
to a Subsidiary of the Company by the Company) of its Qualified Equity interests
after the Issue Date, plus (b) the aggregate net proceeds received by the
Company or any Restricted Subsidiary after the Issue Date from the issuance
(other than to a Subsidiary of the Company) 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 the Company, 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 the "Limitation on Restricted Payments"
covenant, 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 the Company and the Restricted Subsidiaries in such
Subsidiary at the time of Revocation.
"Unrestricted Subsidiary" means any Subsidiary of the Company 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 Company 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 (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.
BOOK ENTRY; DELIVERY AND FORM
The Old Notes were initially issued in the form of a single, permanent
global certificate in definitive, fully registered form (the "Global Note"). The
Global Note was deposited on the date of the closing of the Old Notes Offering
with, or on behalf of, the DTC and registered in the name of Cede & Co., as
nominee of the DTC.
The Global Note. Pursuant to procedures established by DTC, (i) upon the
issuance of the Global Note, DTC or its custodian credited, on its internal
system, the principal amount of Old Notes of the individual beneficial interests
represented by such global securities to the respective accounts of persons who
have accounts with such depositary, and (ii) ownership of beneficial interests
in the Global Note is shown on, and the transfer of such ownership is effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Such accounts initially were
designated by or on behalf of the Initial Purchasers and ownership of beneficial
interests in the Global Note were limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. QIBs may
hold their interests in the Global Note directly through DTC if they are
participants in such system, or directly through organizations which are
participants in such system.
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So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in any of the Global
Notes will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on, the Global Note are made to DTC or its nominee, as the
case may be, as the registered owner thereof. None of the Company, the Trustee
or any Paying Agent has any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
DTC or its nominee, upon receipt of any payment of principal, premium, if
any, or interest (including Additional Interest) in respect of the Global Note,
credits participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. Payments by participants to owners
of beneficial interests in the Global Note held through such 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 such customers. Such payments are the responsibility of such
participants.
Transfers between participants in DTC are effected in the ordinary way in
accordance with DTC rules and are settled in clearinghouse funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of the Notes,
or to pledge such securities, such holder must transfer its interest in the
Global Note, in accordance with the normal procedures of DTC and with the
procedures set forth in the Indenture.
DTC has advised the Company 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 participants to whose
account the DTC interests in the Global Note are credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such 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 the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. 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 such as
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 interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company 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 the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the 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 such settlement arrangements on trading
activity in the New Notes.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the New Notes in accordance with the
Indenture. The Registrar 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.
GOVERNING LAW
The Indenture and the New Notes are governed by and construed in accordance
with the laws of the State of New York.
THE TRUSTEE
The Trustee acts as trustee under the Indenture and may, from time to time,
act as depositary for funds of, make loans to, arid perform other services for,
the Company in the ordinary course of business.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of the exchange of Old Notes for New Notes as of the date hereof.
The discussion below is based upon the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in federal income tax consequences
different from those discussed below. Persons considering the exchange of Old
Notes for New Notes should consult their own tax advisors concerning the federal
income tax consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the 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 Old Notes. Rather, the New Notes received by a holder of Old Notes
should be treated as a continuation of the Old Notes in the hands of such
holder. As a result, there will be no federal income tax consequences to a
holder exchanging Old Notes for New Notes pursuant to the Exchange Offer.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such 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 Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 90 days after the Expiration Date, it 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.
The Company 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 the 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 a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such 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 such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the 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, and any profit on any such resale of New Notes and any
commissions or concessions received by any such person may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver 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. The Company has no
arrangement or understanding with any broker or dealer to distribute the New
Notes received in the Exchange Offer.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New York.
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EXPERTS
The (i) consolidated financial statements of the Company for the year ended
December 31, 1997 and for the period from Inception (June 25, 1996) to December
31, 1996, (ii) financial statements of Thunderbolt Systems, Inc. for the years
ended December 31, 1996, 1995 and 1994, (iii) financial statements of TEG DBS
Systems, Inc. for the years ended December 31, 1996 and 1995, (iv) financial
statements of Direct Vision for the years ended December 31, 1996, 1995, and
1994, (v) financial statements of Satellite Entertainment, Inc. for the years
ended December 31, 1996, 1995 and 1994, (vi) financial statements of GVEC Rural
TV, Inc. for the years ended December 31, 1996, 1995 and 1994, (vii) financial
statements of JECTV for the years ended December 31, 1996, 1995, and 1994,
(viii) financial statements of Argos Support Services Company for the years
ended December 31, 1996 and 1995, (ix) financial statements of Direct Broadcast
Satellite (a segment of CTS Communication Corporation) for the years ended
December 31, 1996, 1995, and 1994, (x) financial statements of DBS LC for the
period from January 1, 1997 to November 17, 1997, (xi) 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, (xii) 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 (xiii) 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 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.
The financial statements of Triangle Communication System, Inc. for each of
the years in the three-year period ended December 31, 1997 and the financial
statements of Souris River Television, Inc. for the years ended December 31,
1996 and 1995 have been audited by Eide Helmeke PLLP, independent auditors, as
stated in their reports, and are included herein in reliance upon the reports of
such firm.
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 reports, and are included herein
in reliance upon the reports 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 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 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.
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 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 of such firm.
The financial statements of Western Montana Entertainment Television, Inc.
for the year ended December 31, 1996 and for the 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.
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INDEX TO FINANCIAL STATEMENTS
PAGE
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GOLDEN SKY SYSTEMS, INC.
THE PERIOD FROM INCEPTION (JUNE 25, 1996) THROUGH DECEMBER
31, 1996 AND FISCAL YEARS 1997 AND 1998
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-3
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-4
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-5
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-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENTS OF COMPLETED ACQUISITIONS
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-27
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-35
TEG DBS Systems, Inc. .................................... F-42
TEG DBS Systems, Inc. (unaudited)......................... F-47
Direct Vision (a segment of Mankato Citizens Telephone
Company)............................................... F-50
Direct Vision (a segment of Mankato Citizens Telephone
Company) (unaudited)................................... F-58
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association).......................... F-62
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association) (unaudited).............. F-71
GVEC Rural TV, Inc. ...................................... F-75
GVEC Rural TV, Inc. (unaudited)........................... F-85
JECTV (a segment of Jackson Electric Cooperative)......... F-89
JECTV (a segment of Jackson Electric Cooperative)
(unaudited)............................................ F-98
Argos Support Services Company............................ F-103
Argos Support Services Company (unaudited)................ F-112
Gardonville Systems, Inc. ................................ F-116
Direct Broadcast Satellite (a segment of CTS
Communications Corporation)............................ F-123
Direct Broadcast Satellite (a segment of CTS
Communications Corporation) (unaudited)................ F-131
Souris River Television, Inc. ............................ F-135
Souris River Television, Inc. (unaudited)................. F-144
DBS LC.................................................... F-149
Western Montana Entertainment Television, Inc. ........... F-154
South Plains DBS Limited Partnership...................... F-163
Cal-Ore Digital TV, Inc. ................................. F-183
NRTC System No. 0093 (a segment of Cable and
Communications Corporation)............................ F-198
NRTC System No. 0093 (a segment of Cable and
Communications Corporation) (unaudited)................ F-207
Lakeland DBS.............................................. F-211
Triangle Communications System, Inc. ..................... F-217
Direct Broadcast Satellite (a segment of Nemont
Communications, Inc.).................................. F-227
DBS Segment of Cumby Cellular, Inc. ...................... F-236
DBS Segment of Cumby Cellular, Inc. (unaudited)........... F-244
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.).................................................. F-250
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.) (unaudited)...................................... F-259
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-266
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-275
F-1
113
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
Kansas City, Missouri
F-2
114
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------
1997 1998
-------- --------
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
======== ========
See accompanying notes to consolidated financial statements.
F-3
115
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1996 1997 1998
------------ ---------- ----------
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)
======= ======== ========
See accompanying notes to consolidated financial statements.
F-4
116
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- -------
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
==== ======= ======== =======
See accompanying notes to consolidated financial statements.
F-5
117
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1996 1997 1998
------------ ----------- -----------
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
See accompanying notes to consolidated financial statements.
F-6
118
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-7
119
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-8
120
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-9
121
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-10
122
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):
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------ -------- --------
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
====== ======== ========
F-11
123
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):
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
------ ------------------ ------------------ -------------
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
========
F-12
124
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
------ ------------------ ------------------ -------------
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
========
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).
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
Total revenue............................................... $ 39,937 $ 87,857
Net loss before extraordinary charge........................ (26,654) (79,813)
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-13
125
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):
DECEMBER 31,
------------------- ESTIMATED
1997 1998 USEFUL LIFE
-------- -------- -----------
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
======== ========
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
DECEMBER 31,
------------------
1997 1998
------- --------
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
======= ========
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 16).
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-14
126
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). The SEC has
not yet declared the registration statement effective and Systems is engaged in
discussions with the SEC's staff regarding the registration statement. Systems'
registration statement presently does not include all of the financial
statements of acquired businesses required by the SEC's rules and staff
interpretations, particularly unaudited interim financial statements for three
companies acquired during 1997 and audited financial statements for the two
companies acquired during 1996. 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, since December 29, 1998,
Systems has been required to pay liquidated damages of $18,750 per week to
holders of the 12 3/8% Notes and will continue to do so until the registration
statement is declared effective. The SEC continues to review Systems'
registration statement and there can be no assurance that the SEC will not raise
additional issues concerning Systems' financial presentation or other matters
that would necessitate revision of the information in the registration
statement.
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
F-15
127
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
F-16
128
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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):
12 3/8% SELLER NOTES
NOTES BANK DEBT PAYABLE OTHER TOTAL
-------- --------- ------------ ----- --------
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
======== ======= ======= ==== ========
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-17
129
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of incentive stock option activity during 1997 and 1998 is as
follows:
1997 1998
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
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
====== ===== ======= =====
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:
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
---------- ----------
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
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-18
130
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):
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
--------- ----------
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)................................... $ -- $ --
======= ========
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-19
131
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):
DECEMBER 31,
------------------
1997 1998
------- --------
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........................... $ -- $ --
======= ========
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:
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1998
--------------- ----------------
TAX RATE TAX RATE
------- ----- -------- -----
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..................................... $ -- --% $ -- --%
======= ===== ======== =====
F-20
132
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):
1999........................................................ $1,522
2000........................................................ 1,186
2001........................................................ 733
2002........................................................ 443
2003........................................................ 121
------
Total............................................. $4,005
======
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-21
133
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):
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ------ --------
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
==== ===== =======
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
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- --------------- ------------
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
======== ======= ====== ======== ========
F-22
134
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Statement of Operations -- Year Ended December 31, 1997
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- --------------- ------------
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)
======== ====== ==== ===== ========
Consolidated Statement of Cash Flows -- Year Ended December 31, 1997
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ ------------- --------------- ------------
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
========= ====== ==== ===== =========
F-23
135
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Balance Sheet -- December 31, 1998
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- --------------- ------------
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
======== ======= ====== ======== ========
F-24
136
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidated Statement of Operations -- Year Ended December 31, 1998
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- --------------- ------------
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)
======== ======= ======= ======= ========
Consolidated Statement of Cash Flows -- Year Ended December 31, 1998
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------- ------------ ------------- --------------- ------------
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
========= ======= ======= ======= =========
F-25
137
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):
THREE MONTHS ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
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)
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-26
138
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-27
139
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-28
140
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
The accompanying notes are an integral part of these financial statements.
F-29
141
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- ---------
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)
========== ========== =========
The accompanying notes are an integral part of these financial statements.
F-30
142
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF ACCUMULATED DEFICIT
AS OF DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
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)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-31
143
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- -----------
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
========= ========= ===========
The accompanying notes are an integral part of these financial statements.
F-32
144
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-33
145
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-34
146
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
F-35
147
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF MARCH 31, 1997 AND 1996
(UNAUDITED)
ASSETS
1997 1996
---------- ----------
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
========== ==========
See Selected Information
F-36
148
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
---------- --------
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
========== ========
See Selected Information
F-37
149
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
--------- ---------
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)
========= =========
See Selected Information
F-38
150
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
--------- ---------
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
========= =========
See Selected Information
F-39
151
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-40
152
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-41
153
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-42
154
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-43
155
TEG DBS SERVICES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
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)
========= =========
See accompanying notes to financial statements.
F-44
156
TEG DBS SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
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
See accompanying notes to financial statements.
F-45
157
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-46
158
TEG DBS SYSTEMS, INC.
(UNAUDITED)
SPECIAL PURPOSE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
F-47
159
TEG DBS SERVICES, INC.
SPECIAL PURPOSE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- -------
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
======== =======
F-48
160
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-49
161
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-50
162
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-51
163
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-52
164
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
1996 1995 1994
--------- --------- ---------
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)
========= ========= =========
See accompanying notes to financial statements.
F-53
165
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
SEGMENT
EQUITY
----------
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
==========
See accompanying notes to financial statements.
F-54
166
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
1996 1995 1994
--------- --------- -----------
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.................................... $ -- $ -- $ --
========= ========= ===========
See accompanying notes to financial statements.
F-55
167
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-56
168
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:
1996 1995
-------- --------
Intercompany payables for:
Cash operating losses..................................... $269,702 $190,847
Inventory purchases....................................... 59,336 138,396
Other..................................................... (9,429) (757)
-------- --------
$319,609 $328,486
======== ========
(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:
1996 1995
-------- -------
Accounts receivable -- programming.......................... $115,113 $27,881
Accounts receivable -- financed equipment sales............. 7,747 6,083
-------- -------
$122,860 $33,964
======== =======
(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-57
169
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-58
170
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- ---------
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)
======== =========
See accompanying notes.
F-59
171
DIRECT VISION
A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- ---------
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..................... $ -- $ --
======== =========
See accompanying notes.
F-60
172
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-61
173
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-62
174
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-63
175
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-64
176
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
1996 1995 1994
---------- ---------- --------
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)
========== ========== ========
See accompanying notes to financial statements.
F-65
177
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
ADDITIONAL
COMMON PAID-IN RETAINED TOTAL
STOCK CAPITAL EARNINGS EQUITY
------- ---------- --------- ----------
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
======= ========== ========= ==========
See accompanying notes to financial statements.
F-66
178
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
1996 1995 1994
--------- --------- -----------
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 $ --
========= ========= ===========
See accompanying notes to financial statements.
F-67
179
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-68
180
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:
1996 1995
-------- --------
Accounts receivable:
Programming............................................... $121,727 $ 65,884
Financed equipment sales.................................. 133,913 195,454
Other..................................................... 2,355 1,860
-------- --------
$257,995 $263,198
======== ========
(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:
1996 1995 1994
------- ------- ------
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
======= ======= ======
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:
1996 1995 1994
- ------- -------- -------
$88,545 $190,050 $20,806
======= ======== =======
F-69
181
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:
1996 1995
-------- --------
Cost........................................................ $299,744 $286,104
Accumulated depreciation.................................... (92,261) (28,935)
-------- --------
Net carrying cost......................................... $207,483 $257,169
======== ========
(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-70
182
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-71
183
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)
1997 1996
---------- --------
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)
========== ========
See accompanying notes.
F-72
184
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)
1997 1996
--------- --------
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
========= ========
See accompanying notes.
F-73
185
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-74
186
GVEC RURAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-75
187
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-76
188
GVEC RURAL TV, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-77
189
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- --------
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)
========== ========== ========
See accompanying notes to financial statements.
F-78
190
GVEC RURAL TV, INC.
STATEMENTS OF INVESTORS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED SEGMENT TOTAL
STOCK STOCK CAPITAL EARNINGS EQUITY EQUITY
------- ------- ---------- -------- ----------- ----------
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
====== ====== ========== ======== =========== ==========
See accompanying notes to financial statements.
F-79
191
GVEC RURAL TV, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------- --------- ---------
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 $ -- $ --
======== ========= =========
See accompanying notes to financial statements.
F-80
192
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-81
193
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:
1996 1995
-------- --------
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
======== ========
F-82
194
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:
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........................... $ --
=======
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-83
195
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:
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
========
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-84
196
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-85
197
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
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)
======== ========
See accompanying notes.
F-86
198
GVEC RURAL TV, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
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
======== ========
See accompanying notes.
F-87
199
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-88
200
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-89
201
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-90
202
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-91
203
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- ---------
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)
========== ========== =========
See accompanying notes to financial statements.
F-92
204
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF SEGMENT EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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
==========
See accompanying notes to financial statements.
F-93
205
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- ---------- ---------
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
========= ========== =========
See accompanying notes to the financial statements.
F-94
206
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-95
207
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:
1996 1995
-------- --------
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
======== ========
(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:
1996 1995
-------- ---------
Notes receivable............................................ $447,711 $ 561,788
Less allowance.............................................. (158,611) (120,613)
-------- ---------
Notes receivable, net............................. $289,100 $ 441,175
======== =========
(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-96
208
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:
1996 1995
-------- --------
Cost........................................................ $936,701 $549,507
Accumulated depreciation.................................... (202,871) (30,845)
-------- --------
Net carrying cost................................. $733,830 $518,662
======== ========
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:
1996 1995
---------- ----------
Accounts payable............................................ $ 34,494 $ --
Long-term debt.............................................. $1,451,796 $1,340,630
Accrued interest............................................ $ 155,807 $ 50,526
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-97
209
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-98
210
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---------- ----------
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)
========== ==========
See accompanying notes to financial statements.
F-99
211
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
--------- ---------
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
========= =========
See accompanying notes to financial statements.
F-100
212
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-101
213
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-102
214
ARGOS SUPPORT SERVICES COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORTS THEREON)
F-103
215
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-104
216
ARGOS SUPPORT SERVICES COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- ----------
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
=========== ==========
See accompanying notes to financial statements.
F-105
217
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
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)
========== ==========
See accompanying notes to financial statements.
F-106
218
ARGOS SUPPORT SERVICE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ --------------- ----------- ----------
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
====== ========== =========== ==========
See accompanying notes to financial statements.
F-107
219
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ---------
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
========== =========
See accompanying notes to financial statements.
F-108
220
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-109
221
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:
1997........................................................ $ 21,085
1998........................................................ 3,543
1999........................................................ 278,856
2000........................................................ 3,484
--------
$306,968
========
(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-110
222
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-111
223
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-112
224
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---------- ----------
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)
========== ==========
See accompanying notes to financial statements.
F-113
225
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- ---------
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
=========== =========
See accompanying notes to financial statements.
F-114
226
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-115
227
GARDONVILLE SYSTEMS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-116
228
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-117
229
GARDONVILLE SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
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
========
The accompanying notes are an integral part of the financial statements.
F-118
230
GARDONVILLE SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
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
==========
The accompanying notes are an integral part of the financial statements.
F-119
231
GARDONVILLE SYSTEMS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1997
RETAINED
EARNINGS
COMMON (ACCUMULATED PAID IN
STOCK DEFICIT) CAPITAL
-------- ------------ -------
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
======== ========= ======
The accompanying notes are an integral part of the financial statements.
F-120
232
GARDONVILLE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
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
===========
The accompanying notes are an integral part of the financial statements.
F-121
233
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:
Vehicles, Office and Work Equipment, and Computer
Equipment................................................. 5-10 Years
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-122
234
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-123
235
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-124
236
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
-------- --------
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
======== ========
See accompanying notes to financial statements.
F-125
237
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
1996 1995 1994
--------- --------- ---------
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)
========= ========= =========
See accompanying notes to financial statements.
F-126
238
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
SEGMENT
EQUITY
---------
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
=========
See accompanying notes to financial statements.
F-127
239
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
1996 1995 1994
--------- --------- ---------
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
========= ========= =========
See accompanying notes to financial statements.
F-128
240
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-129
241
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-130
242
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
F-131
243
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
-------- --------
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)
======== ========
See accompanying notes.
F-132
244
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-133
245
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-134
246
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
F-135
247
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-136
248
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
BALANCE SHEETS
DECEMBER 31, 1996, AND 1995
ASSETS
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements.
F-137
249
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
1996 1995
---------- ----------
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)
========== ==========
See accompanying notes to financial statements.
F-138
250
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
COMMON ACCUMULATED
STOCK DEFICITS TOTAL
---------- ----------- ----------
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
========== ========= ==========
See accompanying notes to financial statements.
F-139
251
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
1996 1995
--------- -----------
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
========= ===========
See accompanying notes to the financial statements.
F-140
252
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-141
253
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:
1996 1995
------- -------
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
======= =======
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:
1996 1995
-------- --------
Notes receivable, net of allowance.......................... $282,101 $445,937
Less amount due in one year............................... 105,98 172,166
-------- --------
$176,117 $273,771
======== ========
NOTE 4 -- PROPERTY AND EQUIPMENT
1996 1995
------------------------- -------------------------
PLANT DEPRECIATION PLANT DEPRECIATION
BALANCE RATE BALANCE RATE
---------- ------------ ---------- ------------
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
========== ==========
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-142
254
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:
1996 1995
-------- --------
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
======== ========
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.
1996 1995
--------- -------
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
========= =======
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-143
255
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
F-144
256
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
1997 1996
---------- ----------
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
========== ==========
See accompanying notes to the financial statements.
F-145
257
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
---------- ----------
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)
========== ==========
See accompanying notes to financial statements.
F-146
258
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ---------
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
========= =========
See accompanying notes to the financial statements.
F-147
259
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-148
260
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-149
261
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-150
262
DBS LC
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 17, 1997
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
========
See accompanying notes to financial statements.
F-151
263
DBS LC
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 17, 1997
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
===========
See accompanying notes to financial statements.
F-152
264
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-153
265
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
AUDITED FINANCIAL STATEMENTS
AS OF
DECEMBER 22, 1997 AND DECEMBER 31, 1996
F-154
266
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-155
267
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
BALANCE SHEETS
DECEMBER 22, 1997 AND DECEMBER 31, 1996
ASSETS
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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
========= ==========
The accompanying notes are an integral part of these financial statements.
F-156
268
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
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-157
269
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
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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
========= =========
The accompanying notes are an integral part of these financial statements.
F-158
270
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-159
271
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:
1994....................................................... $13,641
1995....................................................... 20,155
-------
33,796
1996....................................................... 13,545
-------
Total...................................................... $47,341
=======
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-160
272
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.
F-161
273
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
==========
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-162
274
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-163
275
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-164
276
SOUTH PLAINS DBS LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
ASSETS
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
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
========== ==========
See accompanying notes to financial statements
F-165
277
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
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)
========== ==========
See accompanying notes to financial statements
F-166
278
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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
------------ ----------- ---------- ------------ ----------- ---------
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)
========= ========= ========= ========= ======== =========
See accompanying notes to financial statements
F-167
279
SOUTH PLAINS DBS, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
DECEMBER 31,
----------------------
1996 1995
--------- ----------
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
========= ==========
See accompanying notes to financial statements
F-168
280
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:
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%
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-169
281
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:
DECEMBER 31,
-------------------
1996 1995
-------- --------
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
======== ========
Provision for the depreciation of fixed assets is computed using
straight-line rates as follows:
Office Furniture and Fixtures............................... 7.50%
Office Equipment............................................ 14.30%
Leased Equipment............................................ 14.30%
F-170
282
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:
1997........................................................ $32,280
1998........................................................ $19,040
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-171
283
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-172
284
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-173
285
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-174
286
SOUTH PLAINS DBS LIMITED PARTNERSHIP
BALANCE SHEET
DECEMBER 22, 1997 AND DECEMBER 31, 1996
ASSETS
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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
========== ==========
See accompanying notes to financial statements
F-175
287
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF INCOME (LOSS)
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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)
========== ==========
See accompanying notes to financial statements
F-176
288
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
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
------------- ------------ ------------ ------------ ---------- ----------- ----------
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
======== ========= ========== ========= ========= ======== ==========
See accompanying notes to financial statements
F-177
289
SOUTH PLAINS DBS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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.............................................. $ -- $ --
=========== =========
See accompanying notes to financial statements
F-178
290
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:
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%
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-179
291
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:
DECEMBER 22, DECEMBER 31,
1997 1996
------------ ------------
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
======== ========
F-180
292
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:
Office Furniture and Fixtures............................... 7.50%
Office Equipment............................................ 14.30%
Leased Equipment............................................ 14.30%
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:
1998........................................................ $19,040
F-181
293
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-182
294
CAL-ORE DIGITAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-183
295
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-184
296
CAL-ORE DIGITAL TV, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
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
=========
See accompanying notes to financial statements.
F-185
297
CAL-ORE DIGITAL TV, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
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)
========
See accompanying notes to financial statements.
F-186
298
CAL-ORE DIGITAL TV, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
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
====== ======== ========= ========
See accompanying notes to financial statements.
F-187
299
CAL-ORE DIGITAL TV, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
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
=========
See accompanying notes to financial statements.
F-188
300
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-189
301
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:
1996
--------
Cost........................................................ $ 77,051
Accumulated Depreciation.................................... (52,560)
--------
Net carrying value................................ $ 25,491
========
Lease income under the above agreements is recognized billed to the
customer and totaled $25,464 in 1996.
F-190
302
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-191
303
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-192
304
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-193
305
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
1997 1996
---------- --------
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)
========== ========
See accompanying notes to financial statements.
F-194
306
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
1997 1996
-------- --------
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
======== ========
See accompanying notes to financial statements.
F-195
307
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-196
308
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-197
309
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-198
310
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-199
311
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
-------- --------
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
======== ========
See accompanying notes to financial statements.
F-200
312
NRTC SYSTEM NO. 0093
A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------- -------- --------
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
======== ======== ========
See accompanying notes to financial statements.
F-201
313
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
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
========
See accompanying notes to financial statements.
F-202
314
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
1996 1995 1994
-------- --------- --------
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
======== ========= ========
See accompanying notes to financial statements.
F-203
315
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-204
316
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:
1996 1995
-------- --------
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
======== ========
(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-205
317
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-206
318
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-207
319
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)
1997 1996
-------- --------
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
======== ========
See accompanying notes.
F-208
320
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)
1997 1996
--------- --------
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
========= ========
See accompanying notes.
F-209
321
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-210
322
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-211
323
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-212
324
LAKELAND DBS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996
---------- --------
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)
========== ========
See accompanying notes to financial statements.
F-213
325
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
1997 1996
--------- --------
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
========= ========
See accompanying notes to financial statements.
F-214
326
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 a 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-215
327
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-216
328
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
F-217
329
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-218
330
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
BALANCE SHEETS
DECEMBER 31, 1997, 1996, AND 1995
ASSETS
1997 1996 1995
---------- ---------- ----------
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
========== ========== ==========
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-219
331
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
---------- ---------- ----------
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)
========== ========== ==========
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-220
332
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
UNREALIZED
COMMON ADDITIONAL GAIN (LOSS)
STOCK $100 PAID-IN ON SECURITIES ACCUMULATED
PAR VALUE CAPITAL AVAILABLE FOR SALE DEFICIT TOTAL
---------- ---------- ------------------ ----------- ----------
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
========== ======== ========== ========= ==========
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-221
333
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
--------- --------- ---------
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
========= ========= =========
The accompanying notes to the financial statements are an integral part of these
financial statements.
F-222
334
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:
1997 1996 1995
---- ---- ----
CATV plant.................................................. 6.2% 6.2% 6.2%
Franchise................................................... 6.6% 6.6% 6.6%
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-223
335
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:
UNREALIZED 1997 1996 1995
COST GAIN FAIR VALUE FAIR VALUE FAIR VALUE
------- ---------- ---------- ---------- ----------
Commnet Cellular, Inc. --
stock.................... $85,838 $1,765,750 $1,851,588 $1,433,695 $1,485,128
======= ========== ========== ========== ==========
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
1997 1996 1995
-------- -------- --------
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
======== ======== ========
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.
FRANCHISE ACCUMULATED
COST AMORTIZATION NET 1997 NET 1996 NET 1995
--------- ------------ -------- -------- --------
Direct Broadcast System (DBS)...... $427,280 $105,354 $321,926 $349,920 $377,913
======== ======== ======== ======== ========
F-224
336
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
1997 1996 1995
-------- -------- --------
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
======== ======== ========
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:
1997 1996 1995
-------- -------- --------
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
======== ======== ========
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-225
337
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-226
338
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-227
339
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-228
340
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
1997
--------
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
========
See accompanying notes to financial statements.
F-229
341
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
1997
----------
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)
==========
See accompanying notes to financial statements.
F-230
342
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF SEGMENT EQUITY
YEAR ENDED DECEMBER 31, 1997
1997
---------
BALANCE AT JANUARY 1, 1997.................................. $ 280,411
Company contribution to Segment........................... 109,342
Net Loss.................................................. (358,144)
---------
BALANCE AT DECEMBER 31, 1997................................ $ 31,609
=========
See accompanying notes to financial statements.
F-231
343
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
1997
---------
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
=========
See accompanying notes to financial statements.
F-232
344
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-233
345
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
NRTC -- DBS Franchise Fee................................... $ 383,648
less accumulated amortization............................. (143,868)
---------
$ 239,780
=========
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-234
346
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:
Northern Electric Cooperative............................... $ 6,000
Yellowstone Valley Electric Cooperative................... 7,200
Sheridan Electric Cooperative............................. 10,025
-------
$23,225
=======
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-235
347
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY, TEXAS
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
AS OF DECEMBER 31, 1997
WITH INDEPENDENT AUDITOR'S REPORT
F-236
348
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-237
349
DBS SEGMENT OF CUMBY CELLULAR, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
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
==========
(The accompanying notes are an integral part of these financial statements.)
F-238
350
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENT OF INCOME AND SEGMENT EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
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
==========
(The accompanying notes are an integral part of these financial statements.)
F-239
351
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
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
========
(The accompanying notes are an integral part of these financial statements.)
F-240
352
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-241
353
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:
Accounts receivable:
Programming............................................... $88,196
Equipment sales........................................... 9,972
-------
$98,168
=======
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:
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
========
NOTE 7 -- ADDITIONAL CASH FLOW INFORMATION:
Cash paid during 1997 for:
Interest.................................................. $61,284
Income tax................................................ --
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-242
354
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:
Accounts receivable......................................... $71,775
Accounts payable............................................ 12,476
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-243
355
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY TEXAS
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
(UNAUDITED)
F-244
356
DBS SEGMENT OF CUMBY CELLULAR, INC.
BALANCE SHEETS
JUNE 30
(UNAUDITED)
ASSETS
1998 1997
---------- ----------
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
========== ==========
(See Selected Information.)
F-245
357
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENTS OF INCOME AND SEGMENT EQUITY
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
1998 1997
-------- --------
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
======== ========
(See Selected Information.)
F-246
358
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENTS OF INCOME AND SEGMENT EQUITY
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
1998 1997
-------- --------
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
======== ========
(See Selected Information.)
F-247
359
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-248
360
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-249
361
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
PINE GROVE, CALIFORNIA
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-250
362
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-251
363
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
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
==========
See accompanying notes.
F-252
364
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
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
==========
See accompanying notes.
F-253
365
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF SEGMENT DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
SEGMENT
DEFICIT
---------
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)
=========
See accompanying notes.
F-254
366
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
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............................ $ --
=========
See accompanying notes.
F-255
367
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-256
368
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:
1997
---------
Cost........................................................ $ 295,364
Accumulated depreciation.................................... (137,805)
---------
$ 157,559
=========
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-257
369
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:
1997
----------
Accounts payable............................................ $ 117,294
Accrued interest............................................ 313,056
Long-term debt.............................................. 1,490,743
----------
$1,921,093
==========
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-258
370
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-259
371
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
1998
----------
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
==========
See accompanying notes.
F-260
372
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------- ----------
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
========== ==========
See accompanying notes.
F-261
373
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
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)
========= =========
See accompanying notes.
F-262
374
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
--------- ---------
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.................................... $ -- $ --
========= =========
See accompanying notes.
F-263
375
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-264
376
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-265
377
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-266
378
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-267
379
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
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
==========
The accompanying notes are an integral part of these financial statements.
F-268
380
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
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
==========
The accompanying notes are an integral part of these financial statements.
F-269
381
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENT OF RETAINED EARNINGS
AS OF DECEMBER 31, 1997
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
===========
The accompanying notes are an integral part of these financial statements.
F-270
382
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
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
===========
The accompanying notes are an integral part of these financial statements.
F-271
383
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-272
384
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-273
385
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-274
386
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-275
387
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
ASSETS
1998 1997
---------- ----------
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
========== ==========
See Selected Information.
F-276
388
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------- ----------
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
========== ==========
See Selected Information.
F-277
389
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
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
=========== ===========
See Selected Information.
F-278
390
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
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
=========== ===========
See Selected Information.
F-279
391
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-280
392
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-281
393
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DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL JULY 22, 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 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 ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. 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 HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER MAY BE CONTACTED AS FOLLOWS:
BY HAND/OVERNIGHT EXPRESS:
STATE STREET BANK AND TRUST COMPANY OF
MISSOURI, N.A.
61 BROADWAY, 15TH FLOOR
NEW YORK, NY 10016
ATTENTION: CORPORATE TRUST DEPARTMENT
BY MAIL:
STATE STREET BANK AND TRUST COMPANY OF
MISSOURI, N.A.
TWO INTERNATIONAL PLACE, 4TH FLOOR
BOSTON, MA 02110
ATTENTION: CORPORATE TRUST DEPARTMENT
BY FACSIMILE (FOR ELIGIBLE INSTITUTIONS ONLY):
(617) 664-5290
ATTENTION: CORPORATE TRUST DEPARTMENT
CONFIRM BY TELEPHONE: (617) 664-5587
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[GSS LOGO]
GOLDEN SKY SYSTEMS, INC.
OFFER TO EXCHANGE ITS
12 3/8% SENIOR SUBORDINATED NOTES
DUE 2006, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
12 3/8% SENIOR SUBORDINATED NOTES
DUE 2006, SERIES A
---------------------------
PROSPECTUS
---------------------------
March 22, 1999
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