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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-76413
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2
TO
FORM S-4
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GOLDEN SKY DBS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 4841 43-1839531
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(816) 753-5544
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrants' Principal Executive Offices)
JOHN R. HAGER
CHIEF FINANCIAL OFFICER
GOLDEN SKY DBS, INC.
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(816) 753-5544
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copy to:
KAREN A. DEWIS, ESQ.
MCDERMOTH WILL & EMERY
600 13TH STREET, N.W.
WASHINGTON, DC 20005
(202) 756-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JULY 9, 1999
PROSPECTUS
GOLDEN SKY DBS, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A
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- - Unless we extend it, this exchange offer expires at 5:00 p.m., New York City
time, on , 1999.
- - Outstanding notes that are tendered may be withdrawn any time prior to the
expiration of this exchange offer.
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We are not making this exchange offer to, nor will we accept tenders from,
or on behalf of, holders of outstanding notes in any jurisdiction in which the
making or acceptance of this exchange offer would violate applicable law.
SEE "RISK FACTORS" ON PAGE 10 FOR A DESCRIPTION OF SOME RISKS THAT YOU
SHOULD CONSIDER BEFORE YOU DECIDE TO TENDER YOUR OUTSTANDING NOTES FOR NEW NOTES
IN THIS EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
COMPLETENESS OR TRUTH OF THIS PROSPECTUS. ANY STATEMENT TO THE CONTRARY IS
AGAINST THE LAW.
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The date of this prospectus is , 1999.
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TABLE OF CONTENTS
PAGE
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Summary of the Prospectus................................... 2
Risk Factors................................................ 10
Additional Information...................................... 19
Use of Proceeds............................................. 20
The Exchange Offer.......................................... 20
Capitalization.............................................. 26
Pro Forma Financial Statements.............................. 27
Selected Consolidated Financial Data........................ 31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Business.................................................... 45
Management.................................................. 59
Principal Stockholders...................................... 64
Certain Relationships and Related Transactions.............. 68
Description of Other Indebtedness........................... 71
Description of the New Notes................................ 75
Book Entry; Delivery and Form............................... 106
Federal Income Tax Considerations........................... 109
Plan of Distribution........................................ 113
Legal Matters............................................... 113
Experts..................................................... 113
Index to Financial Statements............................... F-1
The following trademarks owned by third parties are used in this prospectus:
DIRECTV(R), USSB(R), Total Choice(R), NFL SUNDAY TICKET(TM), NHL(R) CENTER
ICE(R) and DirecPC(R).
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SUMMARY OF THE PROSPECTUS
This summary does not contain all the information that may be important to
you. We urge you to carefully read the entire prospectus, including the
financial data and related notes, and the other documents to which it refers to
fully understand the terms of the notes and the exchange offer.
OUR COMPANY
We are the second largest independent provider of DIRECTV satellite
television programming in rural markets in the United States. DIRECTV, a
division of Hughes Electronics Corporation, is the leading direct broadcast
satellite company serving the continental United States. Direct broadcast
satellite programming services deliver television programming to subscribers
from a satellite in digital format. To receive this programming, a subscriber
must install a satellite antenna or dish and a digital receiver and pay a
monthly fee. We market and provide DIRECTV programming on an exclusive basis to
residential customers in 55 rural markets in the United States. We also market
and provide DIRECTV programming on a non-exclusive basis to residents of
multiple dwelling units and commercial customers in urban areas adjacent to our
rural DIRECTV markets.
Prior to the launch of its DIRECTV programming service, Hughes Electronics
Corporation entered into an agreement with the National Rural Telecommunications
Cooperative, or the NRTC as it is commonly known, to offer members and
affiliates of the NRTC the opportunity to acquire exclusive rights to distribute
DIRECTV programming services in rural areas of the United States. We estimate
that there are approximately 9.0 million households, or approximately 9% of
total U.S. television households, in the rural DIRECTV markets served by NRTC
members and affiliates. We believe that these markets accounted for
approximately 1.2 million, or approximately 20%, of all DIRECTV customers as of
June 30, 1999.
We became a non-voting affiliate of the NRTC in 1996 and have since
acquired the exclusive right to provide DIRECTV programming in 55 of the 250
rural DIRECTV markets served by NRTC members and affiliates, including markets
we have acquired during 1999. Our rural DIRECTV markets, which are located in 23
states, contain approximately 1.9 million households. As of June 30, 1999, we
had approximately 292,400 subscribers.
You should carefully consider all of the information contained in this
prospectus before you tender your outstanding notes for new notes in the
exchange offer. In particular, you should carefully consider each of the factors
described under "Risk Factors" beginning on page 12 of this prospectus.
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Golden Sky DBS, Inc., the issuer of the notes, was formed on February 2,
1999. Immediately before the outstanding notes were issued, Golden Sky DBS
became an intermediate holding company for our operating subsidiary, Golden Sky
Systems, Inc.
Our principal executive offices are located at 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112. Our telephone number is (816) 753-5544.
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THE OFFERING OF THE OUTSTANDING NOTES
Outstanding Notes.......... $193,100,000 aggregate principal amount at maturity
of our 13 1/2% Senior Discount Notes due 2007,
Series A.
Registration Rights
Agreement.................. We are making this exchange offer to satisfy our
obligations under a registration rights agreement
we entered into when we sold the outstanding notes.
Upon completion of this exchange offer, your
exchange rights under the registration rights
agreement will terminate.
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer......... We are offering to exchange up to $193,100,000
aggregate principal amount at maturity of our
13 1/2% Senior Discount Notes due 2007, Series B,
for the same amount of our 13 1/2% Senior Discount
Notes due 2007, Series A. The terms of the new
notes are identical in all respects, including
principal amount, yield to maturity and maturity,
to the terms of the outstanding notes. The new
notes, however, do not contain the transfer
restrictions or the registration rights relating to
the outstanding notes. See "Description of the New
Notes."
Expiration Date; Withdrawal
of Tender.................. Unless we extend it, this exchange offer will
expire at 5:00 p.m. New York City time,
on , 1999. You may withdraw any tender of
outstanding notes under this exchange offer at any
time prior to expiration of the offer.
Accretion of the New Notes
and the Outstanding
Notes.................... The principal amount of the outstanding notes which
are validly tendered and accepted for exchange will
continue to increase at a rate of 13 1/2% per year
to, but excluding, the date of issuance of the new
notes. The principal amount of any outstanding
notes not tendered or accepted for exchange will
continue to increase at the rate of 13 1/2% per
year in accordance with their terms. The principal
amount of the new notes upon issuance will be the
same as the principal amount of the outstanding
notes accepted for exchange immediately prior to
the issuance of the new notes.
Procedures for Tendering... Each holder of outstanding notes wishing to accept
this exchange offer must:
- complete, sign and date the letter of transmittal
which accompanies this prospectus, or a facsimile
of the letter of transmittal, in accordance with
the instructions contained in the letter of
transmittal and this prospectus, and
- mail or otherwise deliver the letter of
transmittal, or a facsimile of the letter of
transmittal, together with any other required
documents, to United States Trust Company of New
York, as exchange agent, at the address contained
in the letter of transmittal and this prospectus.
If you sign and return the letter of transmittal,
you will be making the representations described in
"Plan of Distribution."
Guaranteed Delivery
Procedures................. Holders of outstanding notes who wish to accept
this exchange offer and cannot complete the
procedures for tendering on a timely basis
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may tender according to the guaranteed delivery
procedures described in "The Exchange
Offer -- Procedures for Tendering."
Federal Income Tax
Consequences............. The exchange of outstanding notes for new notes
will not result in any income, gain or loss to you
or us for Federal income tax purposes. See "Federal
Income Tax Considerations."
Exchange Agent............. The address and telephone number of the exchange
agent are shown in "The Exchange Offer -- Exchange
Agent."
Consequences of Exchanging
Outstanding Notes
Pursuant to the Exchange
Offer.................... Based on interpretations by the staff of the
Securities and Exchange Commission, we believe that
new notes issued in this exchange offer may, in
most circumstances, be offered for resale, resold
and otherwise transferred by you without compliance
with the registration and prospectus delivery
provisions of the Securities Act. You will not,
however, be free to resell or otherwise transfer
the new notes if
(1) you are an affiliate of Golden Sky DBS within
the meaning of Rule 405 under the Securities
Act, or
(2) you did not acquire the outstanding notes in
the ordinary course of your business, or
(3) you have an arrangement with any person to
participate in the distribution of the new
notes.
In addition, if you are a broker-dealer that
receives new notes for your own account under the
exchange offer, you must acknowledge that you will
deliver a prospectus in connection with any resale
of the new notes. The letter of transmittal which
accompanies this prospectus states that by making
this acknowledgement and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for
outstanding notes so long as the outstanding notes
were acquired by the broker-dealer as a result of
market-making or trading activities. See "Plan of
Distribution."
To comply with state securities laws, it may be
necessary to qualify for sale or register the new
notes prior to offering or selling the new notes.
We do not currently intend to register or qualify
the sale of the new notes in any state.
Consequences of Failure to
Exchange................. If you do not exchange your outstanding notes for
new notes under this exchange offer, your
outstanding notes will continue to be subject to
the restrictions on transfer contained in the
legend which appears on the outstanding notes and
you will not have any further exchange rights. In
general, the outstanding notes may not be offered
or sold unless they are registered under the
Securities Act. Offers or sales of the outstanding
notes will only be allowed pursuant to an exemption
from, or in a transaction not subject to, the
Securities Act and applicable state securities
laws.
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Delivery and Form.......... We expect that the new notes issued in this
exchange offer will be issued in the form of one or
more global notes, which will be deposited with, or
on behalf of, The Depository Trust Company, as
depository, and registered in its name or in the
name of Cede & Co., its nominee. Beneficial
interests in the global notes representing the new
notes will be shown on, and transfers of these
beneficial interests will be effected only through,
records maintained by the depository and its
participants. After the initial issuance of the
global notes, new notes in certificate form will be
issued in exchange for the global notes only upon
the terms described in the indenture governing the
notes. See "Book Entry; Delivery and Form."
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SUMMARY DESCRIPTION OF THE NEW NOTES
The new notes will be governed by the same indenture as the outstanding
notes. The new notes and the outstanding notes will be entitled to the same
benefits under the indenture, which will treat all of the notes as a single
class of debt securities. See "Description of the New Notes."
Issuer..................... Golden Sky DBS, Inc.
Notes Offered.............. $193,100,000 aggregate principal amount at maturity
of 13 1/2% Senior Discount Notes due 2007, Series
B.
Maturity Date.............. March 1, 2007.
Yield and Interest......... 13 1/2% per year calculated on a semi-annual bond
equivalent basis, from February 19, 1999. Cash
interest will not accrue on the notes prior to
March 1, 2004. Thereafter, cash interest on the
notes will accrue at a rate of 13 1/2% per year and
be payable on March 1 and September 1 of each year,
commencing September 1, 2004.
Ranking.................... The notes are neither guaranteed by our
subsidiaries nor secured by their assets, so they
will effectively rank below all liabilities of our
subsidiaries, including trade payables. As of March
31, 1999, our subsidiaries had $240.2 million of
debt outstanding. Our ability to pay interest on
the notes when it becomes due and to redeem the
notes at maturity will depend on whether our
subsidiaries can pay dividends and other
distributions to us under the terms of their debt
and applicable law.
Optional Redemption........ We may redeem the notes, in whole or in part, at
any time, on or after March 1, 2004, at the
redemption prices set forth in "Description of the
New Notes -- Optional Redemption."
Public Equity Offering
Optional Redemption........ On or prior to March 1, 2002, we may redeem up to
35% aggregate principal amount at maturity of the
notes with the net proceeds of one or more public
equity offerings that yield gross proceeds of at
least $40 million, if at least 65% of the
originally issued aggregate principal amount at
maturity of notes remain outstanding following
redemption. The redemption price would be equal to
113.5% of the then accreted value of the notes. See
"Description of the New Notes -- Optional
Redemption."
Change of Control.......... Upon a change of control we must make an offer to
repurchase all or a portion of the notes at a
purchase price equal to 101% of the accreted value
of the notes, plus accrued and unpaid interest, if
any, to the purchase date. See "Description of the
New Notes -- Change of Control."
Original Issue Discount.... The notes bear original issue discount for United
States federal income tax purposes. This means
that, although cash interest will not be payable on
the notes before September 1, 2004, all holders of
notes that are subject to U.S. federal income
taxation will be required to include original issue
discount in their income on a constant yield-to-
maturity method basis before they receive the cash
payments to which this income is attributable. See
"Federal Income Tax Considerations."
Covenants.................. The indenture governing the notes contains numerous
restrictive covenants that are described under
"Description of the New Notes -- Covenants" in this
prospectus.
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 following table presents our financial and operating information for
the periods indicated. This financial and operating information relates to
Golden Sky DBS, Inc. for periods after February 2, 1999, which was when Golden
Sky DBS was formed, and to its predecessor and wholly-owned subsidiary Golden
Sky Systems, Inc. for periods before February 2, 1999. The information presented
below as of and for the periods ended December 31, 1996, 1997 and 1998 was taken
from our audited consolidated financial statements. The financial and operating
information for the businesses we have acquired was taken from the historical
financial statements of the acquired entities. The information presented below
as of and for the three months ended March 31, 1998 and 1999 is unaudited, but
in the opinion of management reflects all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation. The results
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
The following pro forma statement of operations data for the year ended
December 31, 1998 present our results of operations adjusted for
(1) material acquisitions we completed during 1998 and related financings;
(2) Golden Sky Systems' offering of $195.0 million aggregate principal
amount of 12 3/8% senior subordinated notes due 2006;
(3) the offering of the outstanding notes and the application of the
offering proceeds; and
(4) the amendment of Golden Sky Systems' credit facility that became
effective at the same time as the closing of the offering of the
outstanding notes
as if each of these events had occurred at the beginning of 1998.
The following pro forma statement of operations data for the three months
ended March 31, 1999 present our results of operations adjusted for
(1) the offering of the outstanding notes and the application of the
offering proceeds; and
(2) the amendment of Golden Sky Systems' credit facility described above
as if each of these events had occurred at the beginning of 1998.
These summary pro forma data do not purport to represent what our actual
financial position or results of operations would have been had these events
actually occurred on the specified dates and are not intended to predict our
future results of operations or financial position.
Household and subscriber data presented below reflect 100% of the household
and subscribers comprising our rural DIRECTV markets, including two rural
DIRECTV markets in which we acquired less than 100% ownership. In one of these
markets, we acquired approximately 76% ownership and in the other market we
acquired approximately 10% ownership. We receive 100% of the revenue generated
by all subscribers in our rural DIRECTV markets. Pro forma households and
subscriber data include all households and subscribers that we have acquired in
acquisitions since our inception. Pro forma subscriber data is as of the later
of March 31, 1999 and the acquisition dates. Subscriber data excludes multiple
dwelling unit and commercial subscribers outside of our rural DIRECTV markets.
The following information should be read in conjunction with our
consolidated financial statements and notes thereto, "Pro Forma Financial
Statements" and notes thereto, "Management's Discussion and
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Analysis of Financial Condition and Results of Operations," and the individual
financial statements and notes thereto of our significant acquired businesses
appearing elsewhere in this prospectus.
YEAR ENDED THREE MONTHS
DECEMBER 31, 1998 ENDED MARCH 31,
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1999
INCEPTION TO YEAR ENDED PRO FORMA 1998 1999 PRO FORMA
DECEMBER 31, 1996 DECEMBER 31, 1997 HISTORICAL AS ADJUSTED HISTORICAL HISTORICAL AS ADJUSTED
----------------- ----------------- ---------- ----------- ---------- ---------- -----------
(IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA
Revenue:
DBS services........... $ 219 $ 16,452 $ 74,910 $ 86,786 $13,884 $ 30,502 $ 30,502
Lease and other........ 36 944 1,014 1,140 245 197 197
------- -------- -------- -------- ------- -------- --------
Total revenue............ 255 17,396 75,924 87,926 14,129 30,699 30,699
Costs and Expenses:
Cost of DBS services... 130 9,304 45,291 52,861 8,250 19,186 19,186
System operations...... 26 3,796 11,021 12,843 1,787 4,270 4,270
Sales and marketing.... 73 7,316 32,201 32,600 4,670 12,809 12,809
General and
administrative....... 1,035 2,331 7,431 7,470 1,108 2,948 2,948
Depreciation and
amortization......... 97 7,300 23,166 29,475 4,348 8,220 8,220
------- -------- -------- -------- ------- -------- --------
Total costs and
expenses............... 1,361 30,047 119,110 135,249 20,163 47,433 47,433
------- -------- -------- -------- ------- -------- --------
Operating loss........... (1,106) (12,651) (43,186) (47,323) (6,034) (16,734) (16,734)
Net interest expense..... (61) (3,133) (18,964) (43,197) (2,253) (9,138) (10,886)
------- -------- -------- -------- ------- -------- --------
Net loss before
extraordinary charge... $(1,167) $(15,784) $(62,150) $(90,520) $(8,287) $(25,872) $(27,620)
======= ======== ======== ======== ======= ======== ========
DECEMBER 31,
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1997 1998 MARCH 31, 1999
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(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 13,632 $ 4,460 $ 39,276
Restricted cash(1):
Current................................................. -- 28,083 22,892
Long-term............................................... -- 23,534 11,827
Working capital........................................... 3,827 15,204 52,178
Total assets.............................................. 156,236 328,071 358,712
Total debt................................................ 69,113 278,204 341,741
Stockholder's equity (deficit)............................ 70,449 15,922 (12,572)
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THREE MONTHS
ENDED MARCH 31,
YEAR ENDED ----------------------------------------
INCEPTION TO DECEMBER 31,
DECEMBER 31, ----------------------- 1998 1999 1999 PRO FORMA
1996 1997 1998 HISTORICAL HISTORICAL AS ADJUSTED
------------ ---------- ---------- ---------- ---------- --------------
(IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA)
OTHER FINANCIAL DATA
EBITDA(2)................................ $(1,009) $ (5,351) $ (20,020) $ (1,686) $ (8,514) $ (8,514)
Net cash used in operating activities.... (790) (3,099) (36,588) (2,377) (17,238) *
Net cash used in investing activities.... (3,231) (120,729) (159,921) (28,331) (4,628) *
Net cash provided by financing
activities............................. 4,500 136,981 187,337 20,694 56,682 *
Capital expenditures..................... 105 998 3,317 (684) (1,144) *
Aggregate purchase price of
acquisitions........................... 5,256 129,725 124,844 27,647 20,334 $ 31,989
OPERATING DATA
Households at end of period.............. 22,000 1,135,000 1,727,000 1,227,000 1,804,000 1,851,000
Subscribers acquired in acquisitions..... 3,000 65,700 55,300 16,200 10,700 17,200
Subscribers added in existing rural
DIRECTV markets........................ 200 22,000 80,300 15,300 21,700 21,700
Subscribers at end of period............. 3,200 90,900 226,500 121,900 258,900 265,400
SAC per gross subscriber added(3)........ $ 290 $ 280 $ 320 320 410 *
Penetration at end of period............. 14.7% 8.0% 13.1% 9.9% 14.4% 14.3%
Ratio of earnings to fixed charges(4).... -- -- -- -- -- *
- ---------------
* Not applicable.
(1) Represents the amount we placed in escrow to fund the first four scheduled
interest payments on Golden Sky Systems' 12 3/8% Senior subordinated notes
due 2006. Also includes $5.3 million as of December 31, 1998 that was
deposited with the administrative agent under Golden Sky Systems' credit
facility to fund a contingent reduction of availability under the term loan
facility. This contingent reduction did not occur under the terms of the
amended credit facility entered into coincident with the offering of the
outstanding notes.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges and extraordinary items and non-recurring
charges. EBITDA is not a measure of performance under generally accepted
accounting principles and should not be construed as a substitute for
consolidated net income or loss as a measure of performance, or as a
substitute for cash flow as a measure of liquidity. Nevertheless, we believe
that EBITDA is a commonly recognized measure of performance in the
communications industry and is the basis for many of our financial
covenants. As a result, investors may use this data to analyze and compare
other communications companies with our company in terms of operating
performance, leverage and liquidity. Further, we believe that EBITDA
provides useful information regarding an entity's ability to incur and
service debt. Changes in our EBITDA may indicate changes in our free cash
flows available to incur and service debt and cover fixed charges. However,
EBITDA is not intended to represent cash flows for the period and should not
be considered in isolation or as a substitute for measures of performance
determined in accordance with generally accepted accounting principles.
EBITDA, as we calculate it, is not necessarily comparable to similarly
captioned amounts of other companies.
(3) Represents subscriber acquisition costs on a per gross new subscriber
activation basis. This excludes acquired subscribers and does not net out
disconnected subscribers.
(4) The ratio of earnings to fixed charges is determined by dividing the sum of
operating loss and a portion of rent expense representative of interest by
the sum of interest expense and this portion of rent expense. The deficiency
of earnings to fixed charges was $1.2 million for the period ended December
31, 1996, $15.8 million for the year ended December 31, 1997, and $63.7
million for the year December 31, 1998. The deficiency of earnings to fixed
charges was $8.3 million for the three months ended March 31, 1998, and
$26.7 million for the three months ended March 31, 1999.
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RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to exchange outstanding notes for new notes
in the exchange offer.
OUR NET LOSSES AND NEGATIVE EBITDA MAY AFFECT OUR ABILITY TO RAISE ADDITIONAL
CAPITAL.
We have operated for only a limited period of time. During this time we
have generated both net losses and negative earnings before interest, taxes,
depreciation and amortization, non-cash charges and extraordinary items, which
we refer to in this prospectus as EBITDA. We had a net loss of approximately
$64.7 million for the year ended December 31, 1998 and a net loss of
approximately $28.8 million for the three months ended March 31, 1999. We also
reported negative EBITDA of approximately $20.0 million for the year ended
December 31, 1998 and approximately $8.5 million for the three months ended
March 31, 1999. The extent to which we generate net income or positive EBITDA in
the future will depend upon a number of factors, many of which are beyond our
control.
We cannot assure you that we will be able to generate or sustain net income
or positive EBITDA in the future, or if so, when. To the extent investors
measure our performance by net income or loss, rather than alternative measures
based upon cash flow, continuing losses could adversely affect our ability to
raise additional capital to finance our business plan.
WE MAY NOT BE ABLE TO MAKE INTEREST OR PRINCIPAL PAYMENTS ON OUR SUBSTANTIAL
DEBT.
As of March 31, 1999, we had total consolidated long-term debt, including
current portions, of $341.7 million, which represented 104% of our total
capitalization. We expect to increase our outstanding debt as we pursue further
acquisitions. We may not have sufficient resources to make interest payments on
our substantial debt. For example, assuming we had completed our offering of the
outstanding notes and applied the resulting proceeds as of January 1, 1998, our
earnings would have been insufficient to cover our fixed charges by
approximately $93.4 million for the year ended December 31, 1998 and
approximately $28.4 million for the three months ended March 31, 1999. It is
also possible that we will not be able to make principal payments on our debt
when it becomes due. In addition, borrowings under Golden Sky Systems' credit
facility bear interest at variable rates. This makes us vulnerable to increases
in interest rates generally. See "Description of Other Indebtedness."
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE OUR BUSINESS
STRATEGY.
Our substantial debt could:
- limit our ability to internally fund or obtain financing for future
acquisitions, working capital, operating losses, capital expenditures and
other general corporate purposes,
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate,
- place us at a disadvantage compared to our competitors that have less
debt,
- increase our vulnerability to general adverse economic and industry
conditions, and
- reduce the cash flow available from our subsidiaries to service interest
payments on the notes.
Any of these consequences could adversely affect our ability to execute our
business strategy.
YOUR CLAIMS FOR PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES WILL EFFECTIVELY
RANK BELOW ALL OF THE DEBT OF OUR SUBSIDIARIES.
As a holding company, we derive all of our operating income from our
operating subsidiaries, including Golden Sky Systems. The notes will be our
obligation alone and will not be guaranteed by our parent company or our
operating subsidiaries. You will have no direct claim against any of our
subsidiaries and, under the indenture, you have waived your right to assert a
substantive consolidation claim in a
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bankruptcy proceeding involving us or Golden Sky Systems. Your recourse to the
assets of our subsidiaries derives solely from our equity interest in these
companies. In the event that any of our subsidiaries becomes insolvent,
liquidates, reorganizes, dissolves or otherwise winds up, the assets of that
subsidiary will be used first to satisfy the claims of its creditors, including
its trade creditors. We have pledged our equity interests in Golden Sky Systems
to secure our guarantee obligations to the lenders under Golden Sky Systems'
credit facility. Consequently, to the extent that any funds are available to us
following any reorganization, bankruptcy or insolvency proceeding involving
Golden Sky Systems and all amounts under the credit facility have not been
repaid, any amounts received in respect of these equity interests will first
satisfy the remaining obligations under the credit facility. This means that
your claims will effectively rank below all of the debt of our subsidiaries.
WE MAY NOT HAVE ADEQUATE CASH TO MAKE INTEREST OR PRINCIPAL PAYMENTS ON THE
NOTES.
We may not be able to generate sufficient cash flow to make required
interest and principal payments on the notes. Our ability to generate cash flow
will depend, to some extent, on general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control, including
future relations with the NRTC.
As a holding company, we must rely on dividends and other payments from our
subsidiaries to meet our obligations, including our obligations on the notes.
The ability of our subsidiaries to pay dividends and make other distributions
and advances to us will depend on, among other things, the terms of their debt
instruments and applicable law. Golden Sky Systems' credit facility contains
numerous financial and other restrictive covenants, including a maximum leverage
ratio, minimum interest coverage ratio and minimum subscriber levels, that
Golden Sky Systems must comply with in order to pay a dividend. The indenture
governing Golden Sky Systems' 12 3/8% senior subordinated notes due 2006 also
limits its ability to pay dividends to us. We currently expect that it may be
difficult for Golden Sky Systems to generate the requisite dividend capacity to
enable us to make the required cash interest payments on the notes when they
become due. Our ability to generate sufficient dividend capacity will depend on
the extent to which we complete additional acquisitions, incur additional
indebtedness, incur operating expenses, make capital expenditures and generate
adequate subscriber revenues, among other things. Any significant adverse
developments would likely preclude us from being able to access Golden Sky
Systems' cash flow in order to make interest payments on the notes.
IF WE ARE NOT ABLE TO MAKE INTEREST PAYMENTS ON OUR DEBT WE WILL BE REQUIRED TO
REFINANCE THIS DEBT. WE MAY NOT BE ABLE TO REFINANCE OUR DEBT ON SATISFACTORY
TERMS.
If Golden Sky Systems does not have sufficient available resources to repay
outstanding debt under its credit facility or its 12 3/8% Senior subordinated
notes due 2006 when required, we may find it necessary to refinance this debt.
Our ability to refinance this debt will be subject to factors beyond our control
and may be unduly expensive. We cannot assure you that we will be successful.
Among the factors that will affect our ability to refinance our debt are
financial market conditions and the value of our company and our performance at
the time of refinancing, which in turn may be affected by many factors,
including economic and industry cycles. If we cannot successfully refinance our
debt, we would be required to consider alternative financing options, including
renegotiating the covenants under the terms of our subsidiaries' existing
indebtedness or selling assets. We cannot assure you that any of these
transactions could be arranged on a timely basis or on satisfactory terms.
THE RESTRICTIVE TERMS OF OUR DEBT INSTRUMENTS MAY LIMIT OUR ABILITY TO PURSUE
OUR BUSINESS STRATEGY.
Our debt instruments contain numerous restrictive covenants that limit our
discretion with respect to the operation of our business. Among other things,
these covenants limit our ability, and the ability of our subsidiaries, to incur
substantial indebtedness, make investments, loans or advances, make capital
expenditures or consolidate, merge or transfer all or substantially all of our
or their assets. We may be unable to pursue attractive business opportunities
due to these restrictive covenants. Moreover, our financial flexibility will be
impaired by these requirements.
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IF WE FAIL TO COMPLY WITH THE RESTRICTIVE TERMS OF OUR DEBT INSTRUMENTS, OUR
DEBT COULD BE ACCELERATED AND THERE MAY BE INSUFFICIENT ASSETS TO MEET OUR
OBLIGATIONS.
Golden Sky Systems' credit facility requires us to meet specified financial
ratios and financial conditions. Events beyond our control may affect our
ability to meet these covenants and conditions. We may incur future debt that
contains financial or other covenants more restrictive than those currently
applicable to us. If we fail to comply with our obligations under these
instruments, the holders of this debt could elect to declare all amounts
outstanding under the relevant instruments to be immediately due and payable.
Our assets may not be sufficient to repay this debt, including the notes, if the
holders elect to accelerate the debt.
IF WE ARE UNABLE TO MEET OUR CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO EXECUTE
OUR BUSINESS STRATEGY.
Our operations require and will continue to require substantial capital.
Our actual cash requirements may materially exceed our estimated capital
requirements and available capital. The amount of capital we will require will
depend upon a number of factors, including the cost of future acquisitions, the
necessity of future capital expenditures, and the extent of our future negative
cash flow. If we do not comply with the financial and operating covenants under
Golden Sky Systems' credit facility described above, we may be unable to borrow
funds under the credit facility. In this event we will be required to obtain
additional financing to fund acquisitions and to continue to develop our
operations. We might not be able to secure this additional financing on
satisfactory terms, or at all.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON US.
Acquiring additional rural DIRECTV markets is an essential part of our
business strategy. We may not be able to realize the expected benefits of past
or future acquisitions or identify suitable acquisition candidates. Our ability
to complete future acquisitions will depend on a number of factors, some of
which are beyond our control, including the attractiveness of acquisition
prices, the negotiation of acceptable definitive acquisition agreements and our
ability to obtain the necessary approvals, including the approval of Hughes and
the NRTC. We are aware of one other company that is currently pursuing an
acquisition strategy in rural DIRECTV markets. We may not have the financial
resources to compete with this competitor in making additional acquisitions.
Even if we complete future acquisitions, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties, divert managerial attention, or require significant
financial resources that could otherwise be used for the ongoing development or
expansion of our existing operations.
WE DEPEND ON DIRECTV AND HUGHES FOR DIRECTV PROGRAMMING.
We obtain substantially all of our revenue through the distribution of
DIRECTV programming. As a result, we may be affected by any material adverse
change in the assets, financial condition, programming, technological
capabilities or services of DIRECTV or Hughes. These changes could result from,
among other things, possible electronic, computer or other technical problems
experienced by DIRECTV or from DIRECTV's failure to retain or renew its Federal
Communications Commission licenses to transmit radio frequency signals from the
orbital slots occupied by its satellites. DIRECTV's FCC licenses for its current
satellites expire beginning in 2004.
We rely on DIRECTV to continue to provide programming services on a basis
consistent with its past practice. Any change in DIRECTV's practice due to, for
example, changes in its programming supply arrangements, regulatory or legal
developments or the expiration of the useful orbital life of its current
satellites, may prevent us from continuing to provide direct broadcast satellite
services and could have a material adverse effect on our business, financial
condition and results of operations.
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ANY CHANGE IN OUR RELATIONSHIP WITH THE NRTC OR THE NRTC'S RELATIONSHIP WITH
DIRECTV COULD ADVERSELY AFFECT US.
We depend greatly upon the NRTC to:
- maintain the valuable rights it has with DIRECTV because our ability to
offer DIRECTV programming derives from those rights,
- provide us with accurate information concerning its relationship with
DIRECTV because we do not have direct access to that information
ourselves, and
- provide us with services that are essential to our business on a timely
and effective basis.
The NRTC is a cooperative whose members are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. Because we are not a cooperative, we can only be a non-voting affiliate
of the NRTC, not a member. From time to time, the NRTC may act solely in the
interests of its members, whose interests may conflict with our interests.
Our rights to offer DIRECTV programming depend upon our agreements with the
NRTC and the NRTC's agreement with Hughes. Virtually all of our business
consists of the distribution of DIRECTV programming in rural markets under
exclusive agreements that we have with the NRTC. The NRTC obtained the right to
distribute, through its members and affiliates, DIRECTV programming in rural
markets in the United States under an agreement it has with Hughes. We do not
have a direct contractual relationship with Hughes with respect to the
distribution of DIRECTV programming in our rural markets. The NRTC is permitted
to terminate its agreements with us under specified circumstances, including a
termination of the NRTC's agreement with Hughes. Any termination of our
agreements with the NRTC or the NRTC's agreement with Hughes prior to their
expiration would adversely affect our ability to execute our business strategy.
We rely upon the NRTC to diligently perform all of its obligations under its
agreement with Hughes, as well as to pursue any rights and remedies, including
cure rights, that it may have against Hughes. We cannot assure you that the NRTC
will act in a manner that will preserve our ability to offer DIRECTV programming
on a basis consistent with past practice. For a discussion of recent issues
relating to our relationship with the NRTC and DIRECTV, see "-- Recent
consolidation among direct broadcast satellite operators and related litigation
could adversely affect us" and "Business -- Our relationship with the NRTC and
DIRECTV."
Changes in NRTC policies may adversely affect our ability to provide
DIRECTV programming in our markets. We must comply with the policies of the NRTC
adopted from time to time. In the past, we and other NRTC-affiliated DIRECTV
providers have disputed policies proposed by the NRTC that we believed did not
comply with our agreements with the NRTC and applicable law. For example, the
NRTC has adopted a policy regarding its interests in the subscriber information
of affiliated DIRECTV providers. Our agreements with the NRTC provide that
affiliates, including Golden Sky, have "substantial proprietary interests" in
and rights to the information and data regarding their subscribers. We have
differed with the NRTC, as have other affiliates, over the import of these
rights and interests. In the event that our rights to offer DIRECTV programming
through the NRTC are terminated or expire, our rights to subscriber information
will be critical to our ability to execute our business strategy.
Our operations could be adversely affected if the NRTC is unable to provide
us with essential support services and accurate subscriber information. Our
agreements with the NRTC require that we use the NRTC for support services,
including subscriber information and data reporting, retail billing services and
central office subscriber services. These services are critical to the operation
and management of our business. We are required to pay the NRTC monthly
operating fees, monthly security fees, monthly programming fees and a
"reasonable margin" on the cost of providing direct broadcast satellite services
to us. If the NRTC is unable to provide us with support services for whatever
reason, we would be required to acquire these services from other sources or
provide them for ourselves. Our cost of acquiring these services elsewhere or
providing them internally could exceed amounts payable under our agreements with
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the NRTC. Moreover, it is possible that we would be able to secure these
services on a more economic basis from other persons while we remain obligated
to secure them from the NRTC.
We do not have direct or complete access to or control over the management
information systems of the NRTC, including management information systems data
concerning our individual subscribers. As a result, while we are entitled to
verify the accuracy of individual customer financial accounts, we must rely upon
the NRTC to accurately provide detailed general demographic and other
information regarding our subscribers. This information is critical to the
growth and development of our ongoing sales and marketing strategy and any
inadequacy or inaccuracy in this information could have a material adverse
effect on our business, financial condition and results of operations.
WE MAY NOT BE ABLE TO MAINTAIN OUR RIGHTS TO DISTRIBUTE DIRECTV PROGRAMMING DUE
TO FACTORS BEYOND OUR CONTROL.
Our agreements with the NRTC and the NRTC's agreement with Hughes expire
when the satellite or satellites that broadcast the DIRECTV programming covered
by the agreements are removed from their assigned orbital locations. It is
unclear whether the NRTC is entitled to programming services from all three
DIRECTV satellites currently in orbit or merely the first satellite, DBS-1,
which was launched in December 1993. It is possible that the NRTC's agreement
with Hughes will be interpreted so as to limit the NRTC's right to programming
to the useful life of DBS-1. Although, according to Hughes, DBS-1 has an
estimated life of 15 years from its launch date, there are numerous risks
associated with satellite transmission technology in general and DIRECTV's
delivery of direct broadcast services in particular. Satellite transmission of
video, audio and other data is highly complex and requires the manufacture and
integration of diverse and advanced components that may not function as
expected. The useful life of a direct broadcast satellite also may be adversely
affected by acts of war, electrostatic storms or collisions with space debris.
We cannot assure you as to the longevity of the satellites that are required to
broadcast our DIRECTV programming or that we will continue to have access to any
or all of our DIRECTV programming upon the expiration of the useful life of
DBS-1 or any other Hughes' satellite.
The NRTC's agreement with Hughes provides the NRTC with a right of first
refusal, under most circumstances, to obtain direct broadcast satellite
services, other than programming services, in substantially the same form as
these direct broadcast satellite services are currently provided in the event
that Hughes elects to launch one or more successor satellites. Our agreements
with the NRTC do not expressly provide an equivalent right of first refusal for
the NRTC members to acquire direct broadcast satellite services through the NRTC
should the NRTC exercise a right of first refusal under its agreement with
Hughes. The NRTC is not obligated to exercise any right of first refusal.
There is a risk that the NRTC will not exercise its right of first refusal
or that the terms and conditions of any continuing relationship between the NRTC
and Hughes will not be satisfactory to the NRTC. Moreover, if we are offered
continuing rights to distribute DIRECTV programming following an exercise by the
NRTC of its right of first refusal, the terms and conditions of these rights may
not be satisfactory to us. In the event we are unable to acquire either direct
broadcast services or DIRECTV programming through Hughes and the NRTC after the
expiration of our agreements with the NRTC, we would be required to acquire
these services from others, or to attempt to sell our subscriber base to one or
more other direct broadcast satellite providers. If we are unable to do this for
contractual or other reasons, we may be forced to cease or fundamentally change
our business operations.
IF WE ARE UNABLE TO CONTINUE TO IMPROVE OUR OPERATIONAL PROCEDURES AND HIRE
PERSONNEL CAPABLE OF MANAGING OUR RAPID GROWTH, WE MAY NOT BE ABLE TO EXECUTE
OUR BUSINESS STRATEGY.
As the size of our operations grows, we will need to continue to improve
our operational systems and procedures and to hire and retain additional
qualified personnel. We have experienced a period of rapid growth, primarily as
a result of acquisitions. In order to achieve our business objectives, we expect
to continue to expand through acquisitions of additional rural DIRECTV markets.
These acquisitions have placed, and will continue to place, a significant strain
on our management, operating systems and
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procedures, financial resources, employees and other resources. If we are unable
to manage our growth, our business, financial condition and results of
operations could be adversely affected.
WE MAY BE FORCED TO BEAR THE COSTS OF CHANGES IN DIGITAL COMPRESSION TECHNOLOGY.
The digital compression technology used by direct broadcast satellite
providers is not standardized and is undergoing rapid change. These changes or
other technological changes or innovations may require modifications to ground
station programming uplink facilities, satellites and subscriber equipment,
which could be costly. These costs would likely be passed through by DIRECTV or
the NRTC to us and would be borne by us to the extent we could not pass the
increased costs through to our subscribers in the form of higher fees. This
could affect our ability to generate profits from the sale of DIRECTV
programming in our rural markets.
WE COULD LOSE MONEY BECAUSE OF SIGNAL THEFT.
The delivery of subscription programming requires the use of encryption
technology. Signal theft or "piracy" in the C-band direct-to-home, cable
television and European direct broadcast satellite industries has been widely
reported. The encryption technology used by the direct broadcast satellite
equipment we utilize may not remain totally effective. If DIRECTV's signal
encryption technology were compromised and could not be promptly corrected, our
revenues could decrease.
SIGNIFICANT COMPETITION COULD ADVERSELY AFFECT OUR REVENUES.
We operate in a highly competitive industry and we expect intense
competition in the future. Our competitors include a broad range of companies
engaged in providing communications and entertainment services, including cable
operators, other direct-to-home programming providers, wireless cable operators,
broadcast television networks and home video products companies, as well as
companies developing new technologies. Several regional telephone operators have
also expressed an interest in becoming subscription television service
providers. The entry of these competitors into the subscription television
market could increase competition substantially and may have a material adverse
effect on our business, financial condition and results of operations. Many of
our competitors and potential competitors are well established companies and
have significantly greater financial and marketing resources than we do. Also,
we may suffer a competitive disadvantage relative to cable operators because the
upfront cost to the subscriber for equipment and installation is higher for
direct broadcast satellite service than it is for cable service. See
"Business -- Competition."
CHANGES IN TECHNOLOGY COULD ADVERSELY AFFECT OUR REVENUES.
Changes in technology, including, among others, the expansion of the
Internet to include and use developing video and audio compression technologies,
may force us to make significant changes in our business strategy. For example,
these technological changes could lower the cost of competitive services to a
level where our services will become less competitive or force us to reduce our
service prices in order to remain competitive.
RECENT CONSOLIDATION AMONG DIRECT BROADCAST SATELLITE OPERATORS AND RELATED
LITIGATION COULD ADVERSELY AFFECT US.
Until recently, DIRECTV, United States Satellite Broadcasting Company,
Primestar and EchoStar Communications Corporation were the primary domestic
satellite television operators. Hughes, which owns DIRECTV, recently acquired
both Primestar and USSB. Prior to its acquisition by Hughes, USSB provided
premium programming packages consisting of HBO, Showtime, Cinemax and the Movie
Channel to subscribers throughout the United States, including those located
within the NRTC's rural DIRECTV markets. After completing its acquisition of
USSB, Hughes announced that it intends to combine its DIRECTV business with
USSB's assets to expand its programming lineup through the addition of premium
multi-channel services like HBO, Showtime, Cinemax and The Movie Channel.
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The NRTC and Hughes have so far been unable to resolve a number of issues
related to the impact of the Primestar and USSB acquisitions on the NRTC and its
members and affiliates. On June 3, 1999, the NRTC filed suit against DIRECTV and
Hughes seeking a court order requiring DIRECTV to provide NRTC members and
affiliates with HBO, Showtime, Cinemax and The Move Channel programming for
exclusive distribution in the NRTC's rural markets and a temporary restraining
order and preliminary injunction preventing DIRECTV and Hughes from providing,
marketing, selling or billing for this programming in the NRTC's rural DIRECTV
markets. On June 17, 1999, the court denied the NRTC's request for a temporary
restraining order and preliminary injunction. The court will proceed to decide
the merits of the contractual dispute between DIRECTV and the NRTC to determine
if the NRTC and its members and affiliates have the exclusive right to sell the
premium programming in the NRTC's rural markets. A trial date has not been set
on the merits of the NRTC's complaint.
It is possible that these acquisitions and the related litigation will
adversely impact the relationship between the NRTC and DIRECTV. It is also
possible that these events will increase our costs of providing services or that
we will need additional capital to purchase any rights or other benefits that
may become available as a result of Hughes' acquisitions of Primestar and USSB.
This industry consolidation also could encourage EchoStar to respond by lowering
prices or increasing its marketing activities. Any of these events could
adversely affect our ability to execute our business strategy. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Future Capital Requirements."
RECENT LITIGATION COULD AFFECT DIRECTV'S ABILITY TO CONTINUE TO PROVIDE US WITH
NETWORK PROGRAMMING AND, THEREFORE, THE ATTRACTIVENESS OF OUR PROGRAMMING
PACKAGES.
The Satellite Home Viewer Act of 1994 establishes the terms and conditions
under which a direct-to-home operator, for a statutorily-mandated fee, may claim
a "compulsory" copyright license to retransmit "superstations" and broadcast
network programming to subscribers for private home viewing. In the case of
broadcast network programming, the compulsory license established by this
satellite legislation is applicable only to direct-to-home retransmission to
persons in households that cannot receive network programming with an acceptable
signal quality over-the-air and do not subscribe to cable. A number of
television broadcast networks and their affiliates have begun litigation in
several courts alleging that satellite programming providers have retransmitted
network programming in violation of the "unserved households" limitation of the
satellite legislation. By bringing these lawsuits, the networks are seeking to
prohibit satellite programming providers like DIRECTV from providing specified
broadcast network programming to subscribers in designated geographic areas.
If any of these lawsuits are determined adversely to DIRECTV, we and
DIRECTV may be unable to provide network programming to subscribers in rural
markets or we may experience a substantial increase in the cost of providing
this programming to our customers.
DIRECTV IS SUBJECT TO REGULATIONS THAT COULD RESULT IN A MATERIAL INCREASE IN
THE FEES THAT WE PAY IN ORDER TO PROVIDE SERVICES TO OUR CUSTOMERS.
The Satellite Home Viewer Act of 1994 currently is scheduled to expire on
December 31, 1999. When the act expires, direct-to-home operators will be
required to negotiate in the marketplace to obtain the necessary copyright
clearances to retransmit superstations and broadcast network programming. The
bills to revise the Satellite Home Viewer Act that passed the House and Senate
both would extend the legislation. However, we cannot assure you that this or
any similar legislation will be passed.
There are laws and regulations that affect DIRECTV and, therefore, us. As
an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to
- licensing of satellites,
- avoidance of interference with other broadcasting signals, and
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- compliance with rules that the FCC has established specifically for
direct broadcast satellite licenses.
Any expiration of, or adverse change to or interpretation of, these
regulations could have a material adverse effect on our business, financial
condition and results of operations.
WE COULD LOSE REVENUES IF WE ARE FOUND TO HAVE CUSTOMERS OUTSIDE OUR
TERRITORIES.
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. In addition,
DIRECTV and its distributors are prohibited by law from providing DIRECTV
programming outside the United States. Despite assurances from our subscribers
that they receive programming within one of our rural DIRECTV markets, a portion
of our subscribers may, in fact, be receiving DIRECTV programming outside our
markets. If we must disconnect a significant portion of our subscribers because
they are receiving services outside our rural DIRECTV markets, our revenues
could decrease.
ANY FAILURE BY THIRD PARTY PROGRAMMERS TO PROVIDE DIRECTV WITH PROGRAMMING THAT
APPEALS TO MASS AUDIENCES COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.
We depend heavily on DIRECTV's ability to obtain programming from third
parties that appeals to mass audiences. DIRECTV's programming agreements with
third party programmers have terms that expire on various dates with different
renewal and cancellation provisions. It is possible that these agreements will
not be renewed or that they will be canceled prior to expiration of their
original term. In the event that any of these agreements are not renewed or are
canceled, DIRECTV may not be able to obtain or develop substitute programming
that is comparable in quality, marketability or cost to our existing
programming. Our ability to compete successfully will depend on DIRECTV's
ability to continue to obtain desirable programming and attractively package it
to its customers at competitive prices. See "Business -- DIRECTV."
Under the Cable Television Consumer Protection and Competition Act of 1992
and the FCC's rules, programming developed by vertically integrated
cable-affiliated programmers generally must be offered to all multi-channel
video programming distributors on nondiscriminatory terms and conditions. These
laws also prohibit some exclusive programming contracts. We anticipate that
DIRECTV will continue to purchase a substantial percentage of its programming
from cable-affiliated programmers. Some of the restrictions on cable-affiliated
programmers will expire in 2002 unless extended by the FCC or Congress. Any
expiration of, amendment to, or interpretation of, these laws that permit the
cable industry or programmers to discriminate in the sale of programming against
competing businesses, like DIRECTV, could adversely affect DIRECTV's ability,
and therefore our ability, to acquire programming on a cost-effective basis or
at all.
THE HOLDERS OF THE NEW NOTES MAY SUFFER ADVERSE TAX CONSEQUENCES BECAUSE THE
OUTSTANDING NOTES WERE ISSUED AT A DISCOUNT FROM THEIR PRINCIPAL AMOUNT AT
MATURITY.
The outstanding notes were issued at a substantial discount from their
principal amount at maturity. The principal amount of the new notes will
increase at an identical rate to the outstanding notes. Consequently, the
holders of new notes generally will be required to include amounts in gross
income for federal income tax purposes before receiving the cash payments to
which this income is attributable. See "Federal Income Tax Considerations" for a
more detailed discussion of the U.S. federal income tax consequences to the
holders of the new notes of the ownership and disposition of the notes.
If a bankruptcy case is commenced by or against us under the U.S.
Bankruptcy Code after the issuance of the notes, the claim of a holder of the
notes with respect to the principal amount at maturity of the notes may be
limited to an amount equal to the sum of the initial offering price of the
outstanding notes and that portion of the original issue discount that is not
deemed to constitute "unmatured interest" for purposes of the U.S. Bankruptcy
Code. Any original issue discount that was not amortized as of the
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date of any bankruptcy filing would constitute "unmatured interest." To the
extent that the U.S. Bankruptcy Code differs from the Internal Revenue Code in
determining the method of amortization of original issue discount, a holder of
notes may realize taxable gain or loss upon payment of the holder's claim in
bankruptcy.
THE YEAR 2000 PROBLEM COULD ADVERSELY AFFECT US.
We are in the process of assessing the impact of the year 2000 issue on our
computer systems and operations. Many existing computer systems and applications
currently use two-digit date fields to designate a year. Date sensitive systems
and applications may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the year 2000 issue may cause computer
systems and applications to fail to process critical financial and operational
information correctly. This issue affects virtually all organizations and can be
very costly and time consuming to correct.
We have reviewed the year 2000 compliance of our internal systems and
believe that these systems are year 2000 compliant. However, we cannot assure
you that all of the software products that we currently use are in fact year
2000 compliant. We have engaged the services of a consultant to assist in our
assessment of the impact of the year 2000 issue on our computerized systems and
operations. Currently, we believe our costs to successfully mitigate the year
2000 issue will be approximately $200,000.
We rely heavily on contracted data processing services from the NRTC and
DIRECTV for customer service, billing, remittance processing and distribution of
our direct broadcast satellite programming services under our contractual
relationship with the NRTC. The NRTC has informed us that the majority of the
computer systems that provide these services are currently year 2000 compliant,
and that the remainder of these systems will be compliant by September 1999. The
NRTC has further informed us that DIRECTV has achieved year 2000 compliance for
its billing and authorization systems. In addition to the NRTC and DIRECTV, we
rely heavily on other parties, like suppliers of direct broadcast satellite
equipment, for the successful conduct of our business. We are in the process of
conducting surveys of all of our significant vendors and other pertinent
relationships to assess their readiness for year 2000 processing.
If our year 2000 readiness efforts are not successful or are not completed
in a timely manner, the year 2000 issue could significantly disrupt our ability
to transact business with our customers and suppliers, and could have a material
adverse effect on our business, financial condition and results of operations.
Any failure by the NRTC, DIRECTV or other companies on which we depend, to
achieve year 2000 compliance by the end of 1999 could have a material adverse
effect on our business, financial condition and results of operations.
To date, we have not implemented a year 2000 contingency plan. Contingency
plans for mission critical systems primarily involve development and testing of
manual procedures or the use of alternate systems. Viable contingency plans are
difficult to develop for third party failures, especially in high-technology
industries like the direct broadcast satellite industry, due to the lack of
alternate suppliers. There can be no assurance that any contingency plans we
develop will successfully mitigate any adverse effects that the year 2000 issue
may have on our business, financial condition or results of operations.
THERE IS NO ACTIVE MARKET FOR THE OUTSTANDING NOTES AND WE CANNOT ASSURE YOU
THAT ONE WILL DEVELOP FOR THE NEW NOTES.
The new notes are being offered in exchange for the outstanding notes. The
new notes are securities for which there is currently no trading market. If the
new notes were to trade, they may trade at prices that may be lower than their
principal amount depending on many factors, including prevailing interest rates
and the markets for similar securities, general economic conditions and our
financial condition, performance and prospects. We do not intend to apply for
listing of the new notes on any securities exchange or the Nasdaq Stock Market.
We cannot assure you that a liquid trading market will develop for the new
notes. This may affect your ability to sell your notes and the price at which
you may do so.
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COMPLETION OF THE EXCHANGE OFFER MAY HAVE AN ADVERSE EFFECT ON YOUR ABILITY TO
TRANSFER YOUR OUTSTANDING NOTES IF YOU DO NOT TENDER YOUR NOTES IN THE EXCHANGE
OFFER.
When we issued the outstanding notes, we entered into a registration rights
agreement under which we agreed to register the outstanding notes under the
Securities Act. If this exchange offer is completed, we will have fulfilled our
obligations under the registration rights agreement and we will no longer be
required to register any remaining outstanding notes. To the extent that you are
a holder of outstanding notes that are not tendered in the exchange offer, you
will have to rely on exemptions from the registration requirements of applicable
securities laws to resell your outstanding notes. After the exchange offer, the
new notes and the outstanding notes will contain identical terms, except that
the new notes will have been registered under the Securities Act and the
outstanding notes will continue to be subject to the existing transfer
restrictions.
OUR FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE.
This prospectus contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. The words "may," "expect," "believe," "could," "anticipate,"
"project," "estimate," their opposites and similar expressions are intended to
identify forward-looking statements. We caution readers that these statements
are not guarantees of future performance or events and are subject to a number
of risks, uncertainties and assumptions that may influence the accuracy of the
statements and the projections on which they are based, including the risks and
uncertainties discussed above. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or
otherwise.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 for the new notes. This prospectus does not contain all
the information described in the registration statement and its exhibits and
schedules. The registration statement and its exhibits and schedules may be
inspected and copied at prescribed rates at
(1) the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
(2) the regional offices of the Commission located at 7 World Trade Center,
New York, New York 10048,
(3) the regional offices of the Commission located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
or
(4) the Public Reference Section of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549.
The Commission also maintains a web site that contains reports, proxy
statements and other information regarding companies, including ours, that
electronically file required information with the Commission. The address of the
Commission's web site is http://www.sec.gov.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934. The Securities Exchange Act requires that we file periodic reports and
other information with the Commission. Our obligation to file this information
with the Commission may be suspended if the new notes are owned in the name of
less than 300 holders at the beginning of any of our fiscal years, other than
the fiscal year in which the registration statement for the notes becomes
effective. However, the indenture governing the notes requires that we file with
the Commission and provide you with copies of annual reports and the other
information, documents and reports specified in Sections 13 and 15(d) of the
Exchange Act as long as any of the outstanding notes or new notes remain
outstanding.
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USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes. We
did, however, receive proceeds of $95.7 million from the February 19, 1999
issuance of the outstanding notes, after deducting the initial purchasers'
discount and fees and expenses of the offering. Approximately $53.0 million of
these net proceeds were used on February 19, 1999 to repay outstanding debt
under Golden Sky Systems' revolving credit facility. Borrowings under the credit
facility were used to finance our working capital needs, including acquisitions.
The remainder of the net proceeds from the offering of the outstanding notes
will be used:
- to finance the acquisition of additional rural DIRECTV markets and
related costs and expenses, and
- for our general corporate purposes and working capital needs.
Pending these uses, the offering proceeds have been invested in short-term
money market instruments and other similar investments.
Borrowings under the revolving credit facility bore variable rates of
interest at the lenders' base rate or the LIBOR rate, plus an applicable margin,
which was % as of the date of repayment. The revolving credit facility
expires in September 2005.
THE EXCHANGE OFFER
THE OFFERING OF THE OUTSTANDING NOTES
We sold the outstanding notes on February 19, 1999 to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC,
Donaldson, Lufkin & Jenrette Securities Corporation and Fleet Securities, Inc.
as contemplated by a purchase agreement dated February 11, 1999. These initial
purchasers subsequently resold the outstanding notes to qualified institutional
buyers under Rule 144A under the Securities Act and outside the United States
under Regulation S under the Securities Act.
REGISTRATION RIGHTS AGREEMENT
Under the February 11, 1999 purchase agreement, we and the initial
purchasers of the outstanding notes entered into a registration rights
agreement, dated February 19, 1999. The registration rights agreement grants
exchange and registration rights to the holders of the outstanding notes. We are
making this exchange offer to satisfy our obligations under the registration
rights agreement. Upon the completion of this exchange offer, your exchange
rights under the registration rights agreement will terminate.
TERMS OF THE EXCHANGE OFFER
Upon the terms and conditions described in this prospectus and in the
accompanying letter of transmittal, we will accept all outstanding notes
properly tendered for exchange and not withdrawn prior to 5:00 p.m., New York
City time, on , 1999, or a later date to which we extend our offer.
We will issue $1,000 principal amount at maturity of new notes in exchange for
each $1,000 principal amount at maturity of outstanding notes accepted in this
exchange offer. Holders may tender some or all of their outstanding notes under
this exchange offer.
Based on an interpretation by the staff of the Securities and Exchange
Commission that is set forth in no-action letters issued by the staff to third
parties, we believe that the new notes may, in most circumstances, be offered
for resale, resold and otherwise transferred by their holders without compliance
with the registration and prospectus delivery provisions of the Securities Act.
A holder of new notes must,
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however, comply with the registration and prospectus delivery provisions of the
Securities Act in order to offer for resale, resell or otherwise transfer its
new notes if
(1) that holder is an affiliate of Golden Sky DBS within the meaning of
Rule 405 under the Securities Act;
(2) that holder's new notes are acquired outside the ordinary course of
its business; or
(3) that holder has any arrangement with any person to participate in the
distribution of its new notes. See Morgan Stanley & Co., Inc., SEC
No-Action Letter available June 5, 1991, Exxon Capital Holdings
Corporation, SEC No-Action Letter available May 13, 1988, and Shearman
& Sterling, SEC No-Action Letter available July 2, 1993.
If any person were to participate in this exchange offer for the purpose of
distributing securities in a manner not permitted by the Securities and Exchange
Commission's interpretation, that person
- could not rely on the position of the staff of the Commission enunciated
in Exxon Capital Holdings Corporation or similar interpretive letters;
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a resale transaction.
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of new notes received
in exchange for outstanding notes where the outstanding notes were acquired by a
broker-dealer as a result of market-making activities or other trading
activities. See "Plan of Distribution."
On the date of this prospectus, $193,100,000 aggregate principal amount at
maturity of notes were outstanding. This prospectus, together with the letter of
transmittal, is being sent to all registered holders of outstanding notes on the
date of this prospectus.
We shall be deemed to have accepted validly tendered outstanding notes
when, as and if we have given written notice of acceptance to the exchange agent
under the indenture. The exchange agent will act as agent for the tendering
holders of outstanding notes for the purposes of receiving the new notes from us
and delivering those new notes to the exchanging holders.
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, certificates for any unaccepted outstanding notes will be
returned, without expense, to the tendering holder as promptly as practicable
after the expiration date of this exchange offer.
If outstanding notes are not tendered, they will remain outstanding and
will continue to accrete in value from their date of issue, February 19, 1999,
at a rate of 13 1/2% per year.
If the exchange offer is completed, we will no longer be required to
register the outstanding notes. If so, holders of outstanding notes seeking to
sell them would have to rely on exemptions from the registration requirements of
the securities laws, including the Securities Act. See "Risk Factors --
Completion of the exchange offer may have an adverse effect on your ability to
transfer your outstanding notes if you did not tender your notes in the exchange
offer.
To extend the expiration date of this exchange offer, we will notify the
exchange agent of any extension by written notice and will mail to the record
holders of outstanding notes an announcement, prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
That announcement would state that we are extending the exchange offer for a
specified period of time. We also will issue notice of each extension by press
release or other public announcement.
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ACCRETION OF THE NEW NOTES
Cash interest will not accrue or be payable on the new notes until March 1,
2004. Prior to March 1, 2004, the new notes will accrete in value at a rate of
13 1/2% per year. Thereafter, cash interest on the new notes will be payable
semiannually on March 1 and September 1 of each year, commencing September 1,
2004, at a rate of 13 1/2% per year. Outstanding notes which are validly
tendered and accepted for exchange will continue to accrete in principal amount
at a rate of 13 1/2% per year to, but excluding, the date of issuance of the new
notes. Any outstanding notes not tendered or accepted for exchange will continue
to accrete in principal amount at the rate of 13 1/2% per year in accordance
with their terms. The accreted value of the new notes upon issuance will be the
accreted value of the outstanding notes accepted for exchange immediately prior
to issuance of the new notes.
PROCEDURES FOR TENDERING
Your tender to us of outstanding notes under one of the procedures
described below will constitute an agreement between you and us for the exchange
of outstanding notes for new notes on the terms and conditions set forth in this
prospectus and in the letter of transmittal which accompanies this prospectus.
You may tender your outstanding notes by
(1) properly completing and signing the letter of transmittal or a
facsimile of it and delivering one of the two, together with the
certificate or certificates representing the outstanding notes being
tendered and any required signature guarantees, to the exchange agent
at its address shown on the back cover of this prospectus on or before
the expiration date for this offer, or complying with the procedure for
book-entry transfer described below; or
(2) complying with the guaranteed delivery procedures described below.
If tendered outstanding notes are registered in the name of the signer of
the letter of transmittal and the new notes to be issued in exchange for them
are to be issued, and any untendered outstanding notes are to be reissued, in
the name of the registered holder, the signature of the signer need not be
guaranteed. For this purpose, the term registered holder includes any
participant in DTC whose name appears in the security listing as the owner of
outstanding notes. In any other case, the tendered outstanding notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to us and duly executed by the registered holder. In addition, the signature on
the endorsement or instrument of transfer must be guaranteed by one of the
following, each of which is referred to as an "Eligible Institution":
- a commercial bank or trust company located or having an office or
correspondent in the United States, or
- by a member firm of a national securities exchange or of the National
Association of Securities Dealers, Inc., which firm must also be a member
of or participant in the Securities Transfer Agents Medallion Program,
the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program.
If the new notes and/or outstanding notes not exchanged are to be delivered
to an address other than that of the registered holder appearing on the note
register for the outstanding notes, the signature in the letter of transmittal
must be guaranteed by an Eligible Institution.
The method of delivery of outstanding notes and all other documents is at
the election and risk of the holder. If sent by mail, it is recommended that
registered mail, return receipt requested, be used, proper insurance be
obtained, and the mailing be made sufficiently far in advance of the expiration
date to permit delivery to the exchange agent on or before the expiration date.
The exchange agent will make a request promptly after the date of this
prospectus to establish accounts with respect to the outstanding notes at DTC
for the purpose of facilitating the exchange offer. Subject to the establishment
of those accounts, any financial institution that is a participant in DTC may
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make book-entry delivery of outstanding notes by causing that book-entry
transfer facility to transfer outstanding notes into the exchange agent's
account with respect to the outstanding notes in accordance with DTC's
procedures for transfer. Although delivery of outstanding notes may be effected
through book-entry transfer into the exchange agent's accounts at DTC, an
appropriate letter of transmittal with any required signature guarantee and all
other required documents must in each case be transmitted to and received or
confirmed by the exchange agent. These documents should be sent to the exchange
agent at its address set forth on the back cover page of this prospectus on or
before the expiration date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided for those procedures.
If a holder desires to accept the exchange offer, and time will not permit
a letter of transmittal or outstanding notes to reach the exchange agent before
the expiration of the exchange offer, or the procedure for book-entry transfer
cannot be completed on a timely basis, a tender may be effected if the exchange
agent has received at its office shown on the back cover of this prospectus on
or before expiration, a letter, telegram or facsimile transmission from an
Eligible Institution setting forth:
- the name and address of the tendering holder,
- the names in which the outstanding notes are registered, and
- if possible, the certificate numbers of the outstanding notes to be
tendered.
This letter, telegram or facsimile must state that the tender is being made
by this means. In addition, the letter, telegram or facsimile must guarantee
that within five New York Stock Exchange trading days after its transmission by
the Eligible Institution, the outstanding notes, in proper form for transfer, or
a confirmation of book-entry transfer of the outstanding notes into the exchange
agent's account at the book-entry transfer facility, will be delivered by the
Eligible Institution together with a properly completed and duly executed letter
of transmittal, and any other required documents. Unless outstanding notes being
tendered by the above-described method are deposited with the exchange agent
within the time period described above and are accompanied or preceded by a
properly completed letter of transmittal and any other required documents, we
may, at our option, reject the tender. Copies of a notice of guaranteed delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the exchange agent.
A tender will be deemed to have been received on the date that
(1) the tendering holder's properly completed and duly signed letter of
transmittal accompanied by the outstanding notes, or a confirmation of
book-entry transfer of the outstanding notes into the exchange agent's
account at the book-entry transfer facility, is received by the
exchange agent, or
(2) A notice of guaranteed delivery or letter, telegram or facsimile
transmission to similar effect, as provided above, from an Eligible
Institution is received by the exchange agent. Issuances of new notes
in exchange for outstanding notes tendered pursuant to a notice of
guaranteed delivery or letter, telegram or facsimile transmission to
similar effect, as provided above, by an Eligible Institution will be
made only against deposit of the letter of transmittal and any other
required documents and the tendered outstanding notes.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance for exchange of any tender of outstanding notes will be
determined by us. Our determination will be final and binding. We reserve the
absolute right to reject any or all tenders not in proper form or the acceptance
for exchange of which may, in our counsel's opinion, be unlawful. We also
reserve the absolute right to waive any of the conditions of this exchange offer
or any defect or irregularity in the tender of any outstanding notes. None of
Golden Sky DBS, 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 this notification.
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By tendering, you will represent to us that, among other things,
(1) the new notes acquired in the exchange offer are being obtained in the
ordinary course of your business,
(2) you have no arrangement with any person to participate in the
distribution of the new notes,
(3) you are not an "affiliate" of Golden Sky DBS, as defined in Rule 405
under the Securities Act, and
(4) if you are a broker or a dealer, as defined in the Securities Exchange
Act, that you acquired the outstanding notes for your own account as a
result of market-making on other trading activities and that you have
not entered into any arrangement or understanding with us or any
affiliate of ours to distribute the new notes received in the exchange
offer.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration
date of this exchange offer.
To withdraw a tender of outstanding notes, a written transmission notice of
withdrawal via telegram, telex, facsimile transmission or letter must be
received by the exchange agent at its address set forth in this prospectus prior
to 5:00 p.m., New York City time, on the expiration date of the exchange offer.
Any notice of withdrawal must
- specify the name of the person having deposited the outstanding notes to
be withdrawn,
- identify the outstanding notes to be withdrawn, including the certificate
number or numbers and principal amount at maturity of the outstanding
notes,
- be signed by the person having deposited the outstanding notes to be
withdrawn in the same manner as the original signature on the letter of
transmittal by which those outstanding notes were tendered, including any
required signature guarantees, or be accompanied by documents of transfer
sufficient to have the trustee with respect to those outstanding notes
register the transfer into the name of the depositor withdrawing the
tender, and
- specify the name in which those outstanding 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 withdrawal notices will be determined by us. Our determination will
be final and binding on all parties. Any outstanding notes properly withdrawn
will be deemed not to have been validly tendered for purposes of the exchange
offer. No new notes will be issued with respect to outstanding notes which are
withdrawn unless the outstanding notes so withdrawn are validly retendered. Any
outstanding notes that have been tendered but that are not accepted for exchange
will be returned to the holder without cost to the holder as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn outstanding notes may be retendered by following one of the
procedures described above under "-- Procedures for Tendering" at any time prior
to the expiration of the exchange offer.
CONDITIONS
This exchange offer is not dependent upon the occurrence or non-occurrence
of any events or conditions other than that the exchange offer does not violate
applicable law or any applicable interpretation of the staff of the Securities
and Exchange Commission.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as exchange
agent for this exchange offer. Questions and requests for assistance and
requests for additional copies of this prospectus or of the
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letter of transmittal and deliveries of completed letters of transmittal with
tendered outstanding notes should be directed to the exchange agent addressed as
follows:
By Overnight Courier and by Hand By Registered or Certified
Delivery after 4:30 PM on Expiration Date: By Hand Delivery to 4:30 PM: Mail:
United States Trust Company
United States Trust Company United States Trust Company of New York
of New York of New York P.O. Box 844, Cooper Station
770 Broadway, 13th Floor 111 Broadway, Lower Level Attn: Corporate Trust
Attn: Corporate Trust Services Attn: Corporate Trust Window Services
New York, New York 10003 New York, New York 10006 New York, New York 10276-0844
FEES AND EXPENSES
The expenses of soliciting tenders in this exchange offer will be borne by
us. The principal solicitation for tenders contemplated by this exchange offer
is being made by mail. Additional solicitations may be made by our officers and
regular employees and affiliates in person, by telegraph or telephone.
We will not make any payments to brokers, dealers, or other persons
soliciting acceptances of this exchange offer. We will, however, pay the
exchange agent reasonable and customary fees for its services and will reimburse
the exchange agent for its reasonable out-of-pocket expenses in connection with
this exchange offer. We may also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding copies of this prospectus, letters of transmittal and related
documents to the beneficial owners of the outstanding notes, and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting and
legal fees, but not including transfer taxes, if any, relating to the sale or
disposition of the outstanding notes by a holder of the outstanding notes, will
be paid by us, and are estimated to be $200,000 in the aggregate.
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CAPITALIZATION
The following table presents our cash and total capitalization, in
thousands of dollars, as of March 31, 1999. This information should be read in
conjunction with our consolidated financial statements and related notes and the
financial statements related to our significant acquisitions included elsewhere
in this prospectus. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Description of Other
Indebtedness."
Cash and cash equivalents................................... $ 39,276
=========
Restricted cash............................................. $ 34,719
=========
Long-term debt (including current maturities):
Bank debt................................................. $ 35,000
Seller notes payable...................................... 9,414
Other..................................................... 758
12 3/8% Notes............................................. 195,000
13 1/2% Notes............................................. 101,569
---------
Total long-term debt.............................. $ 341,741
Stockholder's Equity (Deficit):
Common Stock, par value $.01; 1,000 shares authorized, 100
shares issued and outstanding..........................
Additional paid-in capital................................ 97,913
Accumulated deficit....................................... (110,485)
---------
Total stockholder's equity (deficit).............. (12,572)
---------
Total capitalization.............................. $ 329,169
=========
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PRO FORMA FINANCIAL STATEMENTS
GENERAL
Golden Sky DBS was formed on February 2, 1999 for the purpose of issuing
the outstanding notes. Upon formation, Golden Sky DBS issued 100 shares of its
common stock to Golden Sky Holdings in exchange for $100 and all of the capital
stock of Golden Sky Systems, which was then a wholly-owned operating subsidiary
of Golden Sky Holdings. The pro forma financial statements relate to Golden Sky
DBS, Inc. for periods after February 2, 1999, which was when Golden Sky DBS was
formed, and to its predecessor and wholly-owned subsidiary, Golden Sky Systems,
Inc. for periods before February 2, 1999.
The following pro forma statement of operations data for the year ended
December 31, 1998 present our results of operations adjusted for
- material acquisitions we completed during 1998 and related financings,
- Golden Sky Systems' offering of $195.0 million aggregate principal amount
of 12 3/8% senior subordinated notes due 2006,
- the offering of the outstanding notes and the application of the offering
proceeds, and
- the amendment of Golden Sky Systems' credit facility that became
effective at the same time as the closing of the offering of the
outstanding notes
as if each of these events had occurred at the beginning of 1998.
The following pro forma statement of operations data for the three months
ended March 31, 1999 present our results of operations adjusted for
- the offering of the outstanding notes and the application of the offering
proceeds, and
- the amendment of Golden Sky Systems' credit facility described above
as if each of these events had occurred at the beginning of 1998.
These pro forma data do not purport to represent what our actual financial
position or results of operations would have been had these events actually
occurred on the specified dates and do not purport to predict our future results
of operations or financial position.
Our historical information for the year ended December 31, 1998 was taken
from our audited consolidated financial statements included elsewhere in this
prospectus. Our historical information for the three months ended March 31, 1999
was taken from our unaudited consolidated financial statements included
elsewhere in this prospectus. The financial information for the businesses we
have acquired was taken from the historical financial statements of those
acquired businesses.
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GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
PRO FORMA 13 1/2% NOTES PRO FORMA
HISTORICAL ACQUISITIONS(A) ADJUSTMENTS OFFERING(B) AS ADJUSTED
---------- --------------- ----------- ------------- -----------
Revenue:
DBS services.................. $ 74,910 $11,876 $ -- $ -- $ 86,786
Lease and other............... 1,014 126 -- -- 1,140
Other......................... -- 28 (28)(c) -- --
-------- ------- -------- -------- --------
Total revenue................... 75,924 12,030 (28) -- 87,926
Costs and Expenses:............. -- --
Costs of DBS services......... 45,291 7,570 (21)(c) -- 52,861
Other costs of revenue........ -- 21 -- -- --
System operations............. 11,021 1,822 -- -- 12,843
Sales and marketing........... 32,201 399 -- -- 32,600
General and administrative.... 7,431 39 -- -- 7,470
Depreciation and
amortization............... 23,166 490 (490)(d) -- 29,475
6,309(e)
-------- ------- -------- -------- --------
Total costs and expenses........ 119,110 10,341 5,798 -- 135,249
-------- ------- -------- -------- --------
Operating income (loss)......... (43,186) 1,689 (5,826) -- (47,323)
Non-operating Items:
Interest and investment
income..................... 1,573 222 (222)(f) -- 1,573
Interest expense.............. (20,537) (139) 139(f) (14,007)(i) (46,078)
(14,734)(g) 3,200(j)
Gain on sale of wireless TV
rights..................... -- 1,956 (1,956)(c) -- --
Net profit on asset
disposal................... -- 8,421 (8,421)(c) -- --
-------- ------- -------- -------- --------
Total non-operating items....... (18,964) 10,460 (25,194) (10,807) (44,505)
-------- ------- -------- -------- --------
Net income (loss) before income
taxes......................... (62,150) 12,149 (31,020) (10,807) (91,828)
Income taxes.................. -- (3,074) 3,074(h) -- --
-------- ------- -------- -------- --------
Net income (loss) before
extraordinary charge.......... $(62,150) $ 9,075 $(27,946) $(10,807) $(91,828)
======== ======= ======== ======== ========
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GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS)
13 1/2% NOTES PRO FORMA
HISTORICAL OFFERING(B) AS ADJUSTED
---------- ------------- -----------
Revenue:
DBS services............................................ $ 30,502 $ -- $ 30,502
Lease and other......................................... 197 -- 197
-------- ------- --------
Total revenue............................................. 30,699 -- 30,699
Costs and Expenses:....................................... --
Costs of DBS services................................... 19,186 -- 19,186
System operations....................................... 4,270 -- 4,270
Sales and marketing..................................... 12,809 -- 12,809
General and administrative.............................. 2,948 -- 2,948
Depreciation and amortization........................... 8,220 -- 8,220
-------- ------- --------
Total costs and expenses.................................. 47,433 -- 47,433
-------- ------- --------
Operating income (loss)................................... (16,734) -- (16,734)
Non-operating Items:
Interest and investment income.......................... 823 -- 823
Interest expense........................................ (9,961) (2,347)(i) (11,709)
599(j)
-------- ------- --------
Total non-operating items................................. (9,138) (1,748) (10,886)
-------- ------- --------
Net income (loss) before income taxes..................... (25,872) (1,748) (27,620)
Income taxes.............................................. -- -- --
-------- ------- --------
Net income (loss) before extraordinary charge............. $(25,872) $(1,748) $(27,620)
======== ======= ========
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NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) Includes the operations of material businesses we acquired during 1998 from
January 1, 1998 through their respective acquisition dates.
(b) Reflects the impact of the issuance of the outstanding notes as if it had
occurred as of January 1, 1998.
(c) To eliminate the results of operations not acquired.
(d) To give effect to the elimination of historical amortization of intangible
assets.
(e) 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. Non-compete agreements are
amortized over the contract period, which is generally three years, while
customer lists are amortized over five years. DIRECTV distribution rights
are amortized over the remaining useful life of the satellites, which is
generally 10 to 12 years depending upon the date of our acquisition of the
distribution rights.
(f) To give effect to the elimination of interest income and expense related to
operations not acquired.
(g) To give effect to interest expense on borrowings under Golden Sky Systems'
12 3/8% senior subordinated notes due 2006, seller notes payable and Golden
Sky Systems' credit facility assumed to be incurred to finance acquisitions
as if these borrowings had occurred at the beginning of the period at their
respective historical interest rates.
(h) To give effect to the elimination of historical income tax expense
(benefit) of acquired entities.
(i) Reflects aggregate interest expense and amortization of deferred financing
costs associated with the offering of the outstanding notes.
(j) To give effect to the reduction of interest expense as a result of the
paydown of debt from the contribution of the proceeds from the offering of
the outstanding notes.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data relates to Golden Sky
DBS, Inc. for periods after February 2, 1999, which was when Golden Sky DBS was
formed, and to its predecessor and wholly-owned subsidiary, Golden Sky Systems,
Inc. for periods before February 2, 1999. The selected historical consolidated
financial data as of December 31, 1996, 1997 and 1998 and for the periods then
ended presented below were taken from our audited consolidated financial
statements included elsewhere in this prospectus. The information presented
below as of and for the three months ended March 31, 1998 and 1999 is unaudited,
but in the opinion of management reflects all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation. The results
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. Household
and subscriber data reflect 100% of the households or subscribers comprising our
rural DIRECTV markets, including two rural DIRECTV markets in which we acquired
less than 100% ownership. In one of these markets we acquired approximately 76%
ownership and in the other market we acquired approximately 10% ownership. We
receive 100% of the revenue generated by all subscribers in our rural DIRECTV
markets. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus.
YEARS ENDED THREE MONTHS ENDED
INCEPTION TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- ------------------
1996 1997 1998 1998 1999
------------ -------- -------- ------- --------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services............................ $ 219 $ 16,452 $ 74,910 $13,884 $ 30,502
Lease and other......................... 36 944 1,014 245 197
------- -------- -------- ------- --------
Total revenue........................... 255 17,396 75,924 14,129 30,699
Costs and Expenses:
Cost of DBS services.................... 130 9,304 45,291 8,250 19,186
System operations....................... 26 3,796 11,021 1,787 4,270
Sales and marketing..................... 73 7,316 32,201 4,670 12,809
General and administrative.............. 1,035 2,331 7,431 1,108 2,948
Depreciation and amortization........... 97 7,300 23,166 4,348 8,220
------- -------- -------- ------- --------
Total costs and expenses.................. 1,361 30,047 119,110 20,163 47,433
------- -------- -------- ------- --------
Operating loss............................ (1,106) (12,651) (43,186) (6,034) (16,734)
Net interest expense...................... (61) (3,133) (18,964) (2,253) (9,138)
------- -------- -------- ------- --------
Net loss before extraordinary charge...... $(1,167) $(15,784) $(62,150) $(8,287) $(25,872)
======= ======== ======== ======= ========
DECEMBER 31,
----------------------------- MARCH 31,
1996 1997 1998 1999
------- -------- -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents........................... $ 479 $ 13,632 $ 4,460 $ 39,276
Restricted cash(1):
Current........................................... -- -- 28,083 22,892
Long-term......................................... -- -- 23,534 11,827
Working capital (deficit)........................... (1,948) 3,827 15,204 52,178
Total assets........................................ 6,383 156,236 328,071 358,712
Total debt.......................................... 4,450 69,113 278,204 341,741
Stockholder's equity (deficit)...................... (1,166) 70,449 15,922 (12,572)
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THREE MONTHS ENDED
INCEPTION TO YEARS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA)
OTHER FINANCIAL DATA
EBITDA(2).......................... $(1,009) $ (5,351) $ (20,020) $ (1,686) $ (8,514)
Net cash used in operating
activities....................... (790) (3,099) (36,588) (2,377) (17,238)
Net cash used in investing
activities....................... (3,231) (120,729) (159,921) (28,331) (4,628)
Net cash provided by financing
activities....................... 4,500 136,981 187,337 20,694 56,682
Capital expenditures............... 105 998 3,317 (684) (1,144)
Aggregate purchase price of
acquisitions..................... 5,256 129,725 124,844 27,647 20,334
OPERATING DATA
Households at end of period........ 22,000 1,135,000 1,727,000 1,227,000 1,804,000
Subscribers acquired in
acquisitions..................... 3,000 65,700 55,300 16,200 10,700
Subscribers added in existing rural
DIRECTV markets.................. 200 22,000 80,300 15,300 21,700
Subscribers at end of period(3).... 3,200 90,900 226,500 121,900 258,900
SAC per gross subscriber
added(4)......................... $ 290 $ 280 $ 320 $ 320 $ 410
Penetration at end of period....... 14.7% 8.0% 13.1% 9.9% 14.4%
Ratio of earnings to fixed
charges(5)....................... -- -- -- -- --
- ---------------
(1) Represents the amount we placed in escrow to fund first four scheduled
interest payments on Golden Sky Systems' 12 3/8% senior subordinated notes
due 2006. Also includes $5.3 million as of December 31, 1998 that was
deposited with the administrative agent under Golden Sky Systems' credit
facility to fund a contingent reduction of availability under the term loan
facility. This contingent reduction did not occur under the terms of the
amended credit facility entered into coincident with the offering of the
outstanding notes.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges and extraordinary items. EBITDA is not a
measure of performance under generally accepted accounting principles and
should not be construed as a substitute for consolidated net income or loss
as a measure of performance, or as a substitute for cash flow as a measure
of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized
measure of performance in the communications industry and is the basis for
many of our financial covenants. As a result, investors may use this data to
analyze and compare other communications companies with our company in terms
of operating performance, leverage and liquidity. Further, we believe that
EBITDA provides useful information regarding an entity's ability to incur
and service debt. Changes in our EBITDA may indicate changes in our free
cash flows available to incur and service debt and cover fixed charges.
However, EBITDA is not intended to represent cash flows for the period and
should not be considered in isolation or as a substitute for measures of
performance determined in accordance with generally accepted accounting
principles. EBITDA, as we calculate it, is not necessarily comparable to
similarly captioned amounts of other companies.
(3) Subscriber data excludes multiple dwelling unit and commercial subscribers
outside of our rural DIRECTV markets.
(4) Represents subscriber acquisition costs on a per gross new subscriber
activation basis. This excludes acquired subscribers and does not net out
disconnected subscribers.
(5) The ratio of earnings to fixed charges is determined by dividing the sum of
operating loss and a portion of rent expense representative of interest by
the sum of interest expense and this portion of rent expense. The deficiency
of earnings to fixed charges was $1.2 million for the period ended December
31, 1996, $15.8 million for the year ended December 31, 1997, and $63.7
million for the year ended December 31, 1998. The deficiency of earnings to
fixed charged was $8.3 million for the three months ended March 31, 1998 and
$26.7 million for the three months ended March 31, 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our historical consolidated results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with our consolidated financial statements and the related notes
appearing elsewhere in this prospectus.
OVERVIEW
We were formed in June 1996 to acquire rights to distribute DIRECTV
programming services in rural markets in the United States. We are a non-voting
affiliate of the NRTC, which is a cooperative organization whose members are
engaged in the distribution of telecommunications and other services in rural
America. We acquired our first rural DIRECTV market in November 1996. From our
inception through June 30, 1999, we have acquired 55 rural DIRECTV markets
serving approximately 1.9 million households. The aggregate purchase price for
these acquisitions totaled approximately $297.1 million, or about $160 per
household. Following each acquisition, we have sought to create a strong local
presence in each of our markets. We have established over 70 offices in our
territories and have established dealer relationships with approximately 450
local retailers of direct broadcast satellite ("DBS") equipment. We are
continually evaluating acquisition prospects and we expect to continue to enter
into acquisition agreements to purchase additional rural DIRECTV markets
consistent with our growth strategy.
In addition to growth by acquisitions, we have increased our subscriber
base through increased penetration of our rural DIRECTV markets. We believe that
there is a substantial opportunity to increase penetration through local
marketing. Most of the NRTC members from which we acquire rural DIRECTV markets
generally have not engaged in significant marketing efforts, but rather have
relied primarily on the consumer to take the initiative to acquire service.
We have experienced net losses as well as negative EBITDA and cash flows
from operations since our inception. For a description of EBITDA, see note 2 to
"Selected Consolidated Financial Data." These operating shortfalls are primarily
the result of our rapid subscriber growth and acquisitions of rural DIRECTV
markets. In particular, we have incurred significant sales and marketing expense
in our effort to rapidly build our subscriber base. Many of these expenses,
which are expensed as incurred and include advertising and promotional expenses,
sales commissions and DBS equipment and installation subsidies, are incurred at
or before the time a new subscriber is activated. As a result, revenue
attributable to new subscribers lags behind the expense incurred in acquiring
them. The impact of this lag generally increases with the rate at which we add
subscribers. Our rapid subscriber growth and related subscriber acquisition
costs have been significant contributors to our net losses and negative EBITDA
experienced to date. We believe that our subscriber acquisition costs will
continue to negatively affect our operating results for at least the next year
as we continue to add new subscribers. However, as long as a subscriber remains
in service, future operating results benefit from a recurring monthly revenue
stream with minimal additional sales and marketing expense. Because we have
experienced a relatively low rate of customer disconnects ("churn"), we believe
that our investment in building our subscriber base rapidly will enhance our
cash flow and operating results in the longer term. During the twelve-month
period ended March 31, 1999, our annual churn rate approximated 10.6%.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
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RESULTS OF OPERATIONS
The following table presents some of the items from our consolidated
statements of operations as a percentage of total revenue for the periods noted.
YEARS ENDED THREE MONTHS
INCEPTION TO DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, -------------- ----------------
1996 1997 1998 1998 1999
------------ ----- ----- ------ ------
Revenue:
DBS services................................ 85.9% 94.6% 98.7% 98.3% 99.3%
Lease and other............................. 14.1 5.4 1.3 1.7 .7
------ ----- ----- ----- -----
Total revenue................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Costs of direct broadcast satellite
services................................. 51.0% 53.5% 59.7% 58.4% 62.5%
System operations........................... 10.2 21.8 14.5 12.6 13.9
Sales and marketing......................... 28.6 42.0 42.4 33.1 41.7
General and administrative.................. 405.9 13.4 9.8 7.8 9.6
Depreciation and amortization............... 38.0 42.0 30.5 30.8 26.8
------ ----- ----- ----- -----
Total costs and expenses...................... 533.7 172.7 156.9 142.7 154.5
------ ----- ----- ----- -----
Operating loss................................ (433.7) (72.7) (56.9) (42.7) (54.5)
Net interest expense.......................... (23.9) (18.0) (25.0) (15.9) (29.8)
------ ----- ----- ----- -----
Loss before extraordinary charge.............. (457.6)% (90.7)% (81.9)% (58.6)% (84.3)%
====== ===== ===== ===== =====
Revenue. We earn revenue by providing DIRECTV programming services to
subscribers within our rural DIRECTV markets. DBS services revenue includes any
combination of various monthly program service plans, additional monthly premium
channel program upgrades, seasonal sports programming packages, one-time event
programming on a pay-per-view basis, and miscellaneous fee revenue related to
providing programming to subscribers. Lease and other revenue principally is
comprised of revenue from the rental of DBS equipment to subscribers.
Costs of DBS Services. Our largest cost of providing service to our
subscribers is the wholesale cost of DIRECTV programming and related services.
The principal components of programming costs include miscellaneous service fees
and programming costs paid to the NRTC, and a 5% royalty based on programming
revenue paid to DIRECTV.
System Operations. System operations expenses include costs of our national
call center operations, field office operations and other subscriber service
expenses. We expect that these expenses will increase as we continue to make
acquisitions and open additional field offices. However, many of these costs are
fixed in nature, and we do not expect that these expenses will increase in
direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses include costs like
advertising, promotional expenses, marketing personnel expenses, commission
expenses to our employees and outside sales agents, net equipment and
installation costs, and other marketing overhead costs. We subsidize the cost to
the consumer of DBS equipment, as well as the cost of installation of DBS
equipment. Equipment and installation revenues, and related expenses, are
recognized upon delivery and installation of DBS equipment. Net transaction
costs associated with the sale and installation of DBS equipment are reported as
a component of sales and marketing expenses in our statement of operations. We
invest significantly to develop our sales and distribution systems and to
acquire new subscribers. A large part of sales and marketing expense is
comprised of costs related to the addition of new subscribers. Although we
anticipate continuing to incur these costs as we build our subscriber base,
these costs are not expected to increase in direct proportion to revenue.
General and Administrative. General and administrative expenses include
corporate general office and administration expenses incurred primarily at our
Kansas City corporate office. We expect that these
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37
expenses will increase as we grow and continue to expand our infrastructure.
However, since many of these expenses are fixed in nature, general and
administrative expenses are not expected to increase in direct proportion to
increases in subscribers and revenue.
Depreciation and Amortization. Depreciation and amortization includes
amortization of intangible assets associated with acquisitions and depreciation
of property and equipment.
Income Taxes. Golden Sky Systems elected to be treated as a Subchapter S
corporation in 1996. As an S Corporation, it generally was not directly subject
to income taxation and recognized no income tax expense or benefit at the
corporate level. On February 12, 1997, Golden Sky Systems terminated its
Subchapter S Corporation status, and became subject to income taxation as a C
Corporation under Subchapter "C" of the Internal Revenue Code. We have
recognized no income tax benefits in any of the periods presented because we
have incurred operating losses in all periods, and realization of future tax
benefits is uncertain.
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998.
Revenue. DBS services revenue for the three months ended March 31, 1999
totaled $30.5 million, which represented a 120% increase as compared to the same
period during the prior year. This increase was principally attributable to the
increase in the number of subscribers. The average number of subscribers during
the three months ended March 31, 1999 increased to approximately 248,000,
compared to approximately 109,700 during the comparable 1998 period. Average
monthly programming revenue per subscriber approximated $41 and $43 during those
same periods. This decrease resulted primarily from a change in sales mix toward
lower priced services.
Costs of DBS Services. Costs of DBS services increased $10.9 million, or
133%, during the three months ended March 31, 1999, to $19.2 million. This
increase was consistent with the increase in the average number of subscribers.
As a percentage of DBS services revenue, the costs of DBS services increased to
62.9% during the three months ended March 31, 1999, compared to 59.4% during the
same period of 1998. This increase resulted largely from a change in sales mix
toward lower margin services and increased charges by DIRECTV for satellite and
ground service operations.
System Operations. System operations costs totaled $4.3 million for the
three months ended March 31, 1999, a $2.5 million increase, or 139%, over the
comparable 1998 period. These costs rose as a result of the increased number of
field offices and related activity resulting from our continued acquisition of
rural DIRECTV markets, as well as from subscriber growth. As a percentage of
total revenue, system operations expenses increased to 13.9% during the three
months ended March 31, 1999, from 12.6% during the same 1998 period. The
increase in system operations expenses as a percentage of total revenues
resulted primarily from the expansion of our national customer service center in
Kansas City. We expect that these expenses will increase as we continue to make
acquisitions and open additional field offices. However, many of these costs are
fixed in nature, and we do not expect that these expenses will increase in
direct proposition to revenue.
Sales and Marketing. Sales and marketing expenses totaled $12.8 million
during the three months ended March 31, 1999, an increase of $8.1 million
compared to the same 1998 period. Sales and marketing costs per new subscriber
activation approximated $410 during the three months ended March 31, 1999 and
$300 during the three months ended March 31, 1998. The increase in sales and
marketing expenses resulted from:
- A 93% increase in the number of new subscriber activations during the
three months ended March 31, 1999, as compared to the same period of
1998;
- Increased costs associated with free programming provided to new
subscribers under DIRECTV national sales promotions;
- Costs we experienced from our marketing efforts to convert Primestar
subscribers to our DIRECTV service, as discussed below in "-- Liquidity
and Capital Resources"; and
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- Increased equipment and installation subsidies we provided to our
subscribers.
General and Administrative. During the three months ended March 31, 1999,
general and administrative expenses totaled $2.9 million, compared to $1.1
million during the comparable 1998 period. The increase in general and
administrative expenses resulted from the addition of administrative resources
necessary to support our growth. As a percentage of revenue, general and
administrative expenses increased to 9.6% during the three months ended March
31, 1999, from 7.8% during 1998. While there can be no assurance, we expect that
our general and administrative expenses will decrease as a percentage of revenue
over time as these costs, which are partially fixed in nature, are leveraged
over increased subscribers and revenue.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the three months ended March 31,
1999 totaled negative $8.5 million, compared to EBITDA of negative $1.7 million
during the three months ended March 31, 1998. This increase in negative EBITDA
principally resulted from the increases in sales and marketing activities and
related new subscriber activations previously described. For a description of
EBITDA, see note 2 to "Selected Consolidated Financial Data."
During the three months ended March 31, 1999, we:
- used net cash of $17.2 million in operating activities;
- used net cash of $4.6 million in investing activities; and
- provided net cash of $56.7 million from financing activities.
During the three months ended March 31, 1998, we:
- used net cash of $2.4 million in operating activities;
- used net cash of $28.3 million in investing activities; and
- provided net cash of $20.7 million from financing activities.
Depreciation and Amortization. Depreciation and amortization expenses
increased $3.9 million to $8.2 million during the three months ended March 31,
1999, compared to $4.3 million during the three months ended March 31, 1998.
This increase primarily reflects the increased amortization of higher intangible
asset balances resulting from our acquisitions of additional rural DIRECTV
markets.
Interest Expense. Interest expense totaled $10.0 million during the three
months ended March 31, 1999 and $2.3 million during the same 1998 period. This
increase of $7.7 million primarily resulted from higher outstanding debt
balances and an increase in our weighted-average interest rate resulting from
the issuance of Golden Sky Systems' 12 3/8% Senior subordinated notes due 2006
(the "12 3/8% Notes") in July 1998 and the notes in February 1999.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997.
Revenue. DBS services revenue for the year ended December 31, 1998 totaled
$74.9 million, which represented a 355% increase as compared to the prior year.
This increase was principally attributable to the increase in the number of
subscribers. The average number of subscribers during 1998 increased to
approximately 155,200, compared to approximately 33,600 during 1997. Average
monthly programming revenue per subscriber approximated $40 and $41 during these
same periods.
Costs of DBS Services. Costs of DBS services increased $36.0 million, or
387%, during 1998, to $45.3 million. This increase is consistent with the
increase in the average number of subscribers. As a percentage of DBS services
revenue, the costs of DBS services increased to 60% during 1998, compared to 57%
in 1997. This increase resulted largely from increased programming costs.
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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 our continued acquisition of rural DIRECTV markets, as
well as from subscriber growth. As a percentage of total revenue, system
operations expenses declined to 14.5% for the year ended December 31, 1998, from
21.8% during the year ended December 31, 1997. The decrease in system operations
expenses as a percentage of total revenues resulted from the increases in
subscribers and revenues as previously described.
Sales and Marketing. Sales and marketing expenses totaled $32.2 million
during the year ended December 31, 1998, an increase of $24.9 million compared
to the previous year. This increase principally resulted from the 265% increase
in new subscriber activations during 1998, as compared to 1997. Sales and
marketing costs per new subscriber activation approximated $320 during the year
ended December 31, 1998 and $280 during the year ended December 31, 1997.
General and Administrative. During the year ended December 31, 1998,
general and administrative expenses totaled $7.4 million, compared to $2.3
million during 1997. The increase in general and administrative expenses
resulted from the addition of administrative resources necessary to support our
growth. As a percentage of total revenue, general and administrative expenses
decreased to 9.8% during the year ended December 31, 1998, from 13.4% during
1997. This decrease reflects the continued leveraging of these costs, which are
partially fixed in nature, over increased subscribers and revenues.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the year ended December 31, 1998
totaled negative $20.0 million, compared to EBITDA of negative $5.4 million
during the same period in 1997. This increase in negative EBITDA principally
resulted from the increases in sales and marketing activities and related new
subscriber activations previously described. For a description of EBITDA, see
Note 2 to "Selected Consolidated Financial Data."
During the year ended December 31, 1998 we:
- used net cash of $36.6 million in operating activities;
- used net cash of $159.9 million in investing activities; and
- provided net cash of $187.3 million from financing activities.
During the year ended December 31, 1997 we:
- used net cash of $3.1 million in operating activities;
- used net cash of $120.7 million in investing activities; and
- provided net cash of $137.0 million from financing activities.
Depreciation and Amortization. Depreciation and amortization expenses
increased $15.9 million to $23.2 million during the year ended December 31,
1998, compared to $7.3 million during the year ended December 31, 1997. This
increase resulted from higher intangible assets balances, which resulted from
our acquisition of additional rural DIRECTV markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998, as compared to $3.2 million during 1997. This increase
of $17.3 million primarily resulted from higher outstanding debt balances and,
to a lesser degree, from an increase in weighted-average interest costs.
Year Ended December 31, 1997 Compared to Period from Inception to December 31,
1996
Revenue. DBS services revenue for the year ended December 31, 1997
increased to $16.5 million from $219,000 for the period from inception to
December 31, 1996 (the "1996 Period"). Equipment lease revenue was $944,000 for
the year ended December 31, 1997, compared to $36,000 for the 1996 Period. These
increases principally resulted from the fact that we conducted operations for
all of 1997 as opposed
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to only a portion of 1996, and from an increase in subscribers. The average
number of subscribers during 1997 increased to approximately 33,600, compared to
approximately 3,000 during the 1996 Period.
Costs of DBS Services. Costs of DBS services totaled $9.3 million for the
year ended December 31, 1997, compared to $130,000 for the 1996 Period. The
increase in the costs of DBS services resulted from the fact that we conducted
operations for all of 1997 as opposed to only a portion of 1996 and corresponds
to the large number of subscribers we added in 1997. As a percentage of DBS
services revenue, the costs of DBS services decreased to 57% for the year ended
December 31, 1997, compared to 59% for the 1996 Period. This decrease was
primarily due to a change in subscriber revenue mix toward packages with higher
margins.
System Operations. System operations expenses totaled $3.8 million for the
year ended December 31, 1997, as compared to $26,000 for the 1996 Period. These
expenses rose as a result of the fact that we conducted operations for all of
1997 as opposed to only a portion of 1996 and from the increase in the number of
field offices and related activity during 1997. We opened our first two field
offices in November 1996 and had a total of 36 field offices as of December 31,
1997.
Sales and Marketing. Sales and marketing expenses totaled $7.3 million for
the year ended December 31, 1997, as compared to $73,000 for the 1996 Period.
The increase of $7.2 million in sales and marketing expenses resulted from the
fact that we conducted operations for all of 1997 as opposed to only a portion
of 1996 and from the increase in the size and scope of our operations.
Advertising expenses were $1.4 million for the year ended December 31, 1997,
compared to $33,000 during the 1996 Period.
General and Administrative. General and administrative expenses
approximated $2.3 million for the year ended December 31, 1997, as compared to
$1.0 million for the 1996 Period. The increase of $1.3 million in general and
administrative expenses resulted from the fact that we conducted operations for
all of 1997 as opposed to only a portion of 1996 and from our growth.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the year ended December 31, 1997
totaled negative $5.4 million, compared to EBITDA of negative $1.0 million for
the 1996 Period. This increase in negative EBITDA principally resulted from the
fact that we conducted operations for all of 1997 as opposed to only a portion
of 1996 and from the increases in sales and marketing activities and related new
subscriber activations previously described.
During the year ended December 31, 1997 we:
- used net cash of $3.1 million in operating activities;
- used net cash of $120.7 million in investing activities; and
- provided net cash of $137.0 million from financing activities.
During the 1996 Period we:
- used net cash of $790,000 in operating activities;
- used net cash of $3.2 million in investing activities; and
- provided net cash of $4.5 million from financing activities.
Depreciation and Amortization. Depreciation and amortization totaled $7.3
million for the year ended December 31, 1997, compared to $97,000 during the
1996 Period. The increase in depreciation and amortization expense of $7.2
million primarily reflects increased amortization of intangible assets resulting
from our acquisition activity during 1997, as well as the fact that we conducted
operations for all of 1997 as opposed to only a portion of 1996.
Interest Expense. Interest expense amounted to $3.2 million for the year
ended December 31, 1997, compared to $62,000 for the 1996 Period. The increase
in interest expense of $3.1 million resulted primarily from the fact that we
conducted operations for all of 1997 as opposed to only a portion of 1996
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41
and from increased borrowings. Bank borrowings at December 31, 1997 totaled
approximately $60.0 million and were incurred to fund acquisitions and, to a
lesser extent, working capital needs resulting from our growth during the year.
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial amounts of capital for
- acquisitions of rural DIRECTV markets,
- the financing of subscriber growth, including subsidizing DBS equipment
and installation and marketing and selling expenses,
- investments in, and maintenance of, field offices in our rural DIRECTV
markets,
- the financing of infrastructure development costs necessary to support
the growth of our business, and
- the funding of start-up losses and other working capital requirements.
Our capital expenditures, inclusive of acquisitions of rural DIRECTV
markets, totaled $21.5 million during the three months ended March 31, 1999 and
$28.3 million during the three months ended March 31, 1998. Our net cash used in
operations totaled $17.2 million during the three months ended March 31, 1999
and $2.4 million during the three months ended March 31, 1998.
Our capital expenditures, inclusive of acquisitions of rural DIRECTV
markets, totaled $128.2 million during 1998, $130.7 million during 1997, and
$5.4 million during the 1996 Period. Net cash used in operations totaled $36.6
million in 1998, $3.1 million in 1997, and $790,000 in the 1996 Period.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under Golden Sky Systems' bank credit facility,
proceeds from Golden Sky Systems' offering of its 12 3/8% Notes, proceeds from
the offering of the outstanding notes, proceeds from the issuance of capital
stock, and, to a lesser extent, the issuance of promissory notes to sellers of
rural DIRECTV markets.
During the three months ended March 31, 1999, our net cash from financing
activities of $56.7 million was comprised of:
- gross proceeds of $100.0 million from our offering of the notes, which we
completed in February 1999;
- net repayments of $32.0 million under Golden Sky Systems' bank credit
facility;
- increased deferred financing costs of $5.3 million resulting from the
amendment of Golden Sky Systems' bank credit facility and the offering of
the notes; and
- repayments totaling $6.0 million on other debt.
In 1998, our net cash from financing activities of $187.3 million was
comprised of:
- net proceeds of $189.2 million from the offering of Golden Sky Systems'
12 3/8% Notes;
- net borrowings of $7.0 million under Golden Sky Systems' bank credit
facility;
- deferred financing costs of $5.2 million; and
- $3.7 million of repayments on other debt.
In 1997, our net cash flows from financing activities of $137.0 million was
comprised of:
- $81.1 million from the issuance of preferred stock;
- deferred financing costs of $3.3 million; and
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- $59.2 million of net borrowings under Golden Sky Systems' bank credit
facility and other indebtedness.
Credit Facility
In May 1998, Golden Sky Systems entered into a credit facility that
provides for a $150.0 million line of credit to fund acquisitions and working
capital requirements. Of this amount, $35.0 million is in the form of a term
loan facility and $115.0 million is in the form of a revolving credit facility,
including a letter of credit sub-limit of $40.0 million. In connection with our
offering of the outstanding notes, this credit facility was amended. After
completion of our offering of the outstanding notes, Golden Sky Systems had (1)
fully utilized the entire $35.0 million of term loan availability, (2) utilized
approximately $13.1 million of the letter of credit sub-facility, and (3) had no
outstanding borrowings under the revolving credit line.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings decreases by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under the credit facility
bear interest at variable rates calculated on a base rate, which is either the
prime rate or LIBOR, plus an applicable margin, with reductions under some
circumstances, based on leverage.
The credit facility contains a number of significant covenants that, among
other things, limit Golden Sky Systems' ability to incur additional debt and
guaranty obligations, create liens and other encumbrances, make restricted
payments, investments, loans and advances, pay dividends or make other
distributions in respect of 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
require Golden Sky Systems to meet specified financial ratios and financial
condition tests. These financial covenants become effective at different points
in time and vary over time. The covenants include limitations on debt per
subscriber, limitations on subscriber acquisition costs, maintenance of a
minimum fixed charge coverage ratio, maintenance of minimum interest coverage
ratios, and limitations on debt to pro forma EBITDA ratios. Availability under
the revolving credit line depends upon satisfaction of the various covenants as
well as minimum subscriber base requirements.
For the three months ended March 31, 1999, Golden Sky Systems exceeded the
limitation on subscriber acquisition costs prescribed by the credit facility.
Excluding the effects of DIRECTV's national sales promotions that offered free
programming to new subscribers, and higher incremental subscriber acquisition
costs associated with the conversion of Primestar subscribers to our DIRECTV
service, Golden Sky Systems would have been in compliance with the credit
facility's limitation on subscriber acquisition costs. In June 1999, Golden Sky
Systems received a waiver from its lenders of this technical violation and
entered into an amendment to the credit facility raising the limitation on
subscriber acquisition costs to accommodate the market conditions described
above.
For additional information regarding the credit facility, see "Description
of Other Indebtedness."
12 3/8% Notes
On July 31, 1998, Golden Sky Systems completed an offering of its 12 3/8%
Notes, which mature on August 1, 2006. Interest on these notes is payable in
cash semi-annually on February 1 and August 1 of each year. The offering of
these 12 3/8% Notes resulted in net proceeds of approximately $189.2 million,
after payment of underwriting discounts and other issuance costs aggregating
approximately $5.8 million. Approximately $45.2 million of the net proceeds of
the offering of these notes was placed in an interest reserve account to fund
the first four semi-annual interest payments through August 1, 2000 on the
12 3/8% Notes.
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The 12 3/8% Notes are unsecured senior subordinated obligations of Golden
Sky Systems and are subordinated in right of payment to all of its existing and
future senior indebtedness. The 12 3/8% Notes rank equally in right of payment
with all other existing and future senior subordinated indebtedness, if any, of
Golden Sky Systems and senior in right of payment to all existing and future
subordinated indebtedness, if any, of Golden Sky Systems. The 12 3/8% Notes are
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by Golden Sky
Systems' wholly-owned subsidiaries, Argos Support Services Company and
PrimeWatch, Inc., and may, under some circumstances, be guaranteed in the future
by other subsidiaries of Golden Sky Systems.
The 12 3/8% Notes are redeemable, in whole or in part, at Golden Sky
Systems' option on or after August 1, 2003, at redemption prices decreasing from
112% during the year commencing August 1, 2003 to 108% on or after August 1,
2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to August 1, 2001, Golden Sky Systems may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 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 Golden Sky Holdings
or Golden Sky Systems yielding gross proceeds of at least $40.0 million and any
subsequent public equity offerings; provided that, in the case of any offering
or offerings by Golden Sky Holdings, all the net proceeds thereof are
contributed to Golden Sky Systems; and provided, further, that immediately after
any redemption, the aggregate principal amount of 12 3/8% Notes outstanding must
equal at least 65% of the originally issued aggregate principal amount of
12 3/8% Notes.
The indenture governing the 12 3/8% Notes contains restrictive covenants
that, among other things, impose limitations on Golden Sky Systems' ability to
incur additional indebtedness, pay dividends or make restricted payments, enter
into 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 its
subsidiaries to pay dividends or make payments to it, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of its assets. In the event of a change of control,
as defined in the indenture governing the 12 3/8% Notes, each holder of 12 3/8%
Notes will have the right to require Golden Sky Systems to purchase all or a
portion of the holder's 12 3/8% Notes at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase. See "Description of Other Indebtedness -- The 12 3/8% Notes."
13 1/2% Notes
On February 19, 1999, we completed our offering of the outstanding 13 1/2%
Senior Discount Notes due 2007, Series A (the "Outstanding Notes"). This
offering resulted in net proceeds of approximately $95.7 million. Approximately
$53.0 million of these net proceeds were used to repay outstanding debt under
Golden Sky Systems' credit facility. The remainder of these net proceeds will be
used to finance the acquisition of additional rural DIRECTV markets and for our
general corporate purposes and working capital needs. See "Description of the
New Notes."
Future Capital Requirements
Our future capital requirements will depend upon a number of factors,
including the extent of our acquisition activities, the rate of our subscriber
growth, and the working capital needs necessary to accommodate our anticipated
growth. We expect that increased investments in our administrative and computer
systems will be necessary to support our increased size and continued growth. We
currently subsidize a portion of the cost of DBS equipment and subscriber
installations. The extent of our future subsidies of DBS equipment may
materially affect our liquidity and capital requirements. In addition, our
favorable working capital position relies, in part, upon the existing terms of
our agreements with the NRTC and the timing of required payments to the NRTC.
Excluding costs associated with the acquisition of additional rural DIRECTV
markets, we anticipate that our total capital expenditures, primarily related to
expanding facilities and information systems for our corporate office, customer
service operations and
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field offices, will approximate $5.0 million during the year ended December 31,
1999. During 1999, we expect to continue our acquisitions of rural DIRECTV
markets and to expand our marketing efforts in our existing markets in order to
increase our subscriber penetration.
Since December 31, 1998, we have acquired eight rural DIRECTV markets.
These markets include approximately 116,000 households and 17,200 subscribers.
The aggregate purchase price for these recent acquisitions, excluding direct
acquisition costs, was approximately $31.4 million. We are continually
evaluating acquisition prospects and expect to enter into additional acquisition
agreements and complete further acquisitions of rural DIRECTV markets consistent
with our growth strategy. We currently have non-binding letters of intent to
acquire two additional rural DIRECTV markets for aggregate consideration of
approximately $28.3 million in cash. These markets include approximately 137,000
households and approximately 9,000 subscribers. Completion of these acquisitions
is contingent upon negotiation of satisfactory definitive agreements and other
customary conditions to closing. We cannot assure you that we will complete
these or any other future acquisitions.
In April 1999, Hughes Electronics Corporation ("Hughes"), the parent
company of DIRECTV, acquired Primestar's medium-power broadcast satellite
business. In May 1999, Hughes acquired United States Satellite Broadcasting
("USSB"). Prior to its acquisition by Hughes, USSB operated a DBS service
providing 28 channels of video programming consisting of multiple channels of
Home Box Office, Showtime and other premium movie channels. The video
programming provided by USSB was complementary to DIRECTV's DBS service. While
we are not yet able to predict the impact of these acquisitions on our business,
financial condition or results of operations, this industry consolidation may
affect our future capital requirements. See "Risk Factors -- Recent
consolidation among direct broadcast satellite operators and related litigation
could adversely affect us."
Recently, we have experienced increased subscriber acquisition costs due to
the increased competition for subscribers. Subsequent to Hughes' announcement of
its proposed acquisition of Primestar, EchoStar Communications Corporation began
to offer increased promotional and other incentives to Primestar customers, as
well as to EchoStar retailers, to entice the conversion of Primestar subscribers
to EchoStar's competing DBS service, the DISH Network. EchoStar is the second
largest provider of DBS service in the United States. Consequently, we have
increased our marketing efforts with respect to Primestar subscribers. Our
increased Primestar conversion efforts include, among other things, discounted
equipment and installation prices and higher sales commissions. We are unable to
estimate the number of Primestar subscribers we may be able to convert to our
DIRECTV service. Our subscriber acquisition costs also have increased during
1999 as a result of recent national DIRECTV promotions that offer new
subscribers two to three months of free programming services. We expect that our
subscriber acquisition costs will continue to approximate as much as $400 or
more on a per new subscriber basis, including the incremental costs associated
with converting existing Primestar subscribers, during the remainder of 1999.
While there can be no assurance, we believe that we have sufficient cash and
availability under Golden Sky Systems' credit facility to finance our expected
continued internal growth during the remainder of 1999. However, we may need
additional financing to fund our growth.
We are highly leveraged and expect to increase our leverage as we pursue
further acquisitions of rural DIRECTV markets by borrowing additional funds
under the credit facility or otherwise, and by the issuance of additional
acquisition-related notes payable. The approximately $9.4 million of seller
notes payable outstanding at March 31, 1999 mature as follows: $2.5 million in
1999, $1.9 million in 2000, $2.0 million in 2001, $2.0 million in 2002, and $1.0
million in 2003. There are a number of factors, some of which may be beyond our
control or ability to predict, that could require us to raise additional
capital. Among other things, we may require additional capital as a result of
the pursuit of our acquisition strategy and increased costs associated
therewith, unexpected increases in our operating costs and expenses, subscriber
growth in excess of that currently expected, the acquisitions by Hughes of USSB
and Primestar, and to meet our debt service requirements. Additional debt,
equity or other financing may not be available on terms acceptable to us, or at
all, and if available, the proceeds of this financing may not be sufficient to
enable us to meet our debt service requirements or completely execute our
business plan.
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As a holding company, we must rely on dividends and other distributions
from our subsidiaries to meet our obligations. The ability of our subsidiaries
to pay dividends and make other distributions and advances to us is subject to,
among other things, the terms of their debt instruments and applicable law.
Golden Sky Systems' credit facility and the indenture governing Golden Sky
Systems' 12 3/8% Notes contain restrictive covenants that limit its ability to
pay dividends or make distributions to us. We cannot assure you that we will be
in compliance with these covenants at the time of a required interest payment on
our debt instruments, including the notes. We currently expect that it may be
difficult for Golden Sky Systems to generate the requisite dividend capacity to
enable us to make the initial cash interest payments on the notes. Our ability
to generate sufficient dividend capacity under the indenture governing the
12 3/8% Notes to service the notes and to comply with the financial and other
covenants in Golden Sky Systems' credit facility will depend upon the extent to
which we pursue acquisitions, incur additional indebtedness, incur operating
expenses, make capital expenditures and generate adequate subscriber revenue,
among other things. To the extent these vary significantly from our current
expectations, it is likely that we will not be able to make our initial interest
payments absent consents from our lenders and existing bondholders. Moreover,
any significant adverse developments would likely preclude us from being able to
access Golden Sky Systems' cash flow for these initial interest payments. See
"Risk Factors -- We may not have adequate cash to make interest or principal
payments on the notes," and "-- We may not be able to make interest or principal
payments on our substantial debt." for a discussion of this and other factors
affecting our ability to do so.
There may be a number of factors, some of which may be beyond our control
or ability to predict, that could require us to raise additional capital. These
factors include possible acquisitions of additional rural DIRECTV markets,
increased costs associated with potential future acquisitions of rural DIRECTV
markets, unexpected increases in operating costs and expenses, subscriber growth
in excess of that currently expected, or an increase in the cost of acquiring
subscribers due to increased DBS equipment and subscriber installation
subsidies, the acquisitions by Hughes of USSB and Primestar or additional
competition, among other things. Additional financing also may be required to
meet our debt service requirements. There can be no assurance that additional
financing will be available on terms acceptable to us, or at all, and if
available, that the proceeds of this financing would be sufficient to enable us
to meet our debt service requirements or completely execute our business plan.
YEAR 2000 COMPLIANCE
We are in the process of assessing the impact of the Year 2000 issue on our
computer systems and operations. Many existing computer systems and applications
currently use two-digit date fields to designate a year. Date sensitive systems
and applications may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the Year 2000 issue may cause computer
systems and applications to fail to process critical financial and operational
information correctly. This issue affects virtually all organizations and can be
very costly and time consuming to correct.
We have reviewed the Year 2000 compliance of our internal systems and
believe that these systems are Year 2000 compliant. However, we cannot assure
you that all of the software products that we currently use are in fact Year
2000 compliant. We have engaged the services of a consultant to assist in our
assessment of the impact of the Year 2000 issue on our computerized systems and
operations. Currently, we believe our costs to successfully mitigate the Year
2000 issue will approximate $200,000.
We rely heavily on contracted data processing services from the NRTC and
DIRECTV for customer service, billing, remittance processing and distribution of
our DBS programming services under our contractual relationship with the NRTC.
The NRTC has informed us that the majority of the computer systems that provide
these services are currently Year 2000 compliant and that the remainder of these
systems will be compliant by September 1999. The NRTC has further informed us
that DIRECTV has achieved Year 2000 compliance for its billing and authorization
systems. In addition to the NRTC and DIRECTV, we rely heavily on other parties,
like suppliers of DBS equipment, for the successful conduct of our business. We
are in the process of conducting surveys of all of our significant vendors and
other pertinent relationships to assess their readiness for Year 2000
processing.
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If our plan is not successful or is not completed in a timely manner, the
Year 2000 issue could significantly disrupt our ability to transact business
with our customers and suppliers, and could have a material adverse effect on
our business, financial condition and results of operations. Any failure by the
NRTC, DIRECTV or other companies on which we depend to achieve Year 2000
compliance by the end of 1999, could have a material adverse effect on our
business, financial condition and results of operations.
To date, we have not implemented a Year 2000 contingency plan. Contingency
plans for mission critical systems primarily involve development and testing of
manual procedures or the use of alternate systems. Viable contingency plans are
difficult to develop for some third party failures, especially in high-
technology industries like the DBS industry, due to the lack of alternate
suppliers. We will continue to monitor the progress of third party remediation
efforts and contingency plans. Substantial completion of our Year 2000
contingency plan is expected in mid-1999. There can be no assurance that any
contingency plans we may develop will successfully mitigate any adverse effects
that the Year 2000 issue may have on our business, financial condition and
results of operations.
The foregoing constitutes a year 2000 statement and readiness disclosure
subject to the protections afforded it by the Year 2000 Information and
Readiness Disclosure Act of 1998.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). As a result of the
subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, we have no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on our business, financial position or results of operations.
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 these costs be expensed as incurred. As we have previously
expensed all of these costs, the adoption of SOP 98-5 is not expected to have a
material effect on our business, financial position and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market sensitive financial instruments is provided
below and constitutes a "forward-looking statement." Our major market risk
exposure is changing interest rates. Our policy is to manage interest rates
through the use of floating rate debt. Our objective in managing our exposure to
interest rate changes is to limit the impact of interest rate changes on
earnings and cash flow and to lower our overall borrowing costs. The table below
provides information about our outstanding financial instruments that are
sensitive to interest rate changes. The table presents principal cash flows by
expected maturity dates for our variable rate term loan under Golden Sky
Systems' credit facility as of December 31, 1998 and March 31, 1999. See
"-- Liquidity and Capital Resources -- Credit Facility."
EXPECTED MATURITY DATE
-------------------------------------- FAIR
2002 2003 2004 2005 TOTAL VALUE
---- ---- ---- ------- ------- -------
(IN THOUSANDS)
BANK DEBT
Variable rate term loan.................. $350 $350 $350 $33,950 $35,000 $35,000
Interest on the term loan is calculated on a base rate, which is either the
lenders' prime rate or LIBOR, plus an applicable margin.
At December 31, 1998, Golden Sky Systems also had $32.0 million of
borrowings outstanding under the $115.0 million revolving loan commitment of its
bank credit facility. All outstanding borrowings under
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this revolving loan commitment were repaid in February 1999 from the proceeds of
the offering of the outstanding notes. As of June 30, 1999, no borrowings were
outstanding under the credit facility's revolving loan commitment. Availability
of revolving loan borrowings under the credit facility reduces by specified
amounts quarterly from March 31, 2001 through maturity on September 30, 2005.
Interest on revolving loan borrowings are calculated on a base rate, which is
either the lenders' prime rate or LIBOR, plus an applicable margin.
BUSINESS
This prospectus contains information obtained from sources other than us
concerning, among other things,
- our industry and markets,
- our principal direct and indirect suppliers of services,
- DIRECTV, Inc.,
- the NRTC,
- rural DIRECTV markets, and
- the NRTC's relationship with DIRECTV.
This information is material to understanding our business and prospects.
Specifically, while our sole business is the offering of DIRECTV services, we
have no direct contractual relationship with DIRECTV relating to our principal
markets and obtain those services through the NRTC. The NRTC receives DIRECTV
services pursuant to arrangements with DIRECTV, the terms of which have been
kept confidential by the NRTC. We rely upon the NRTC to have accurately
represented the scope and term of its arrangements with Hughes and DIRECTV.
Under our arrangements with the NRTC, the NRTC provides substantial services to
us, including billing and customer authorization, and we rely upon the NRTC to
provide us with accurate and complete information concerning our customers.
Information concerning the NRTC and its arrangements with DIRECTV is based upon
information that has been made available to us by the NRTC or is otherwise
publicly available. Except where otherwise indicated, information regarding
numbers of households in rural DIRECTV markets is based upon information
compiled by Claritas, Inc. Other industry-related information has been derived
from Sky Report. While we believe these and other third-party sources of
information to be reliable, we have not independently verified the information
and are not in a position to do so. See "Risk Factors -- Any change in our
relationship with the NRTC or the NRTC's relationship with Hughes could
adversely affect us."
GENERAL
We are the second largest independent provider of DIRECTV satellite
television programming. DIRECTV, a division of Hughes Electronics Corporation,
is the leading DBS company serving the continental United States. DBS
programming services deliver television programming to the subscribers from a
satellite in digital format. To receive this programming, a subscriber must
install a satellite antenna or dish and a digital receiver and pay a monthly
fee. We market and provide DIRECTV programming on an exclusive basis to
residential customers in 55 rural markets in the United States. We also market
and provide DIRECTV programming on a non-exclusive basis to residents of
apartment buildings and condominium complexes, referred to as multiple dwelling
units ("MDUs"), and commercial customers in urban areas adjacent to our rural
DIRECTV markets.
Prior to the launch of its DIRECTV programming services, Hughes entered
into an agreement with the NRTC to offer members and affiliates of the NRTC the
opportunity to acquire exclusive rights to distribute DIRECTV programming
services in rural areas of the United States. We are a non-voting affiliate of
the NRTC and have obtained the right to provide DIRECTV programming to the homes
in our markets under agreements with the NRTC. We estimate that there are
approximately 9.0 million
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households, or approximately 9% of total U.S. television households in the 250
rural DIRECTV markets served by NRTC members and affiliates. We believe that
these markets account for approximately 1.2 million, or approximately 20%, of
all DIRECTV customers as of June 30, 1999.
From our inception in June 1996 through May 31, 1999, we have
- acquired rights to provide DIRECTV programming in 55 rural DIRECTV
markets in 23 states with approximately 1.9 million households and
140,900 subscribers, and
- increased our subscriber base in these markets by approximately 100% in
the aggregate, to approximately 292,400 achieving a subscriber
penetration rate of approximately 15% through aggressive marketing and a
local, service-driven approach to our customers.
Under our agreements with the NRTC, we have the exclusive right to provide
DIRECTV programming in the following rural DIRECTV markets, and receive the
monthly service revenue from all DIRECTV subscribers in these markets regardless
of the subscribers' original point of purchase.
NUMBER OF RURAL
DIRECTV
GEOGRAPHICAL AREA MARKETS TOTAL HOUSEHOLDS STATES REPRESENTED
- ----------------- --------------- ---------------- ------------------
Southeast...................... 5 210,000 AL, FL, GA, NC, TN
Southwest...................... 14 520,000 AR, OK, TX
Midwest........................ 20 546,000 IA, KS, MI, MN, MO, ND, WI
Rocky Mountain................. 9 226,000 CO, ID, MT, UT, WY
Pacific........................ 7 357,000 CA, NV, OR
-- ---------
Total................ 55 1,859,000
== =========
Total households are based on estimates of primary residences by Claritas,
Inc.
Our subscriber base has increased rapidly due to acquisitions, internal
growth and a low churn rate. Our annual churn rate approximated 10.6% during the
twelve-month period ended March 31, 1999. Net internal subscriber growth in our
rural DIRECTV markets during 1998 totaled approximately 80,300. This represented
approximately 7% of DIRECTV's net new subscribers nationwide for the period,
although total households in our rural DIRECTV markets approximated just 1.5% of
all television households in the continental United States. Although we incur
substantial costs to add subscribers, we have relatively low recurring costs to
service them. We believe these factors provide an opportunity to increase
operating leverage and provide strong growth in cash flow.
We believe that our exclusive right to provide DIRECTV programming in our
rural DIRECTV markets is attractive for the following reasons:
- DIRECTV programming. We believe that marketing DIRECTV, the country's
leading DBS provider, gives us a competitive advantage over providers of
other subscription television services. DIRECTV offers a wide variety of
programming, exclusive sports packages, like NFL SUNDAY TICKET, and a
large selection of pay-per-view movies and events. We capitalize on the
recognition of DIRECTV's brand name and on DIRECTV's programming
advantages to broaden our subscriber base in our rural DIRECTV markets.
DIRECTV currently has approximately 67% of all DBS subscribers
nationwide.
- Limited Competition in Rural Markets. Competition from cable television
providers in our markets is often limited. Many households in rural
markets are not passed by traditional cable systems or are served by
analog systems with less than 40 channels and inferior signal quality
compared to DBS service. Given the relatively low housing density in
these markets, the build-out of new cable systems or upgrade of existing
cable systems may not be cost-effective. Other entertainment options,
like theaters, movies and sporting events, may also be limited. We
believe that this market
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environment contributes to a subscriber penetration rate within 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, like us, with a national marketing campaign,
including television and print advertising, and through alliances with
strategic partners like Bell Atlantic and GTE. DIRECTV also supports its
local providers with an extensive retail distribution network, offering
more channels of distribution and more retail distribution points than
competing services. Three major consumer electronics manufacturers
currently compete to provide customers with DBS equipment. We believe
that competition among DBS equipment providers results in greater
availability, continued product innovation and lower equipment costs
compared to single-source DBS equipment required for some competing
services.
In addition to our business in rural DIRECTV markets, we have developed
other business relationships with DIRECTV and its affiliated companies. For
example, we were chosen in January 1998 by DIRECTV to market and provide DIRECTV
programming nationally to residents of MDUs and commercial establishments as a
master system operator. In February 1998, we began marketing and providing
DIRECTV programming to residents of MDU and commercial establishments in five
major metropolitan areas near our rural territories.
STRATEGY
We intend to leverage our competitive strengths by pursuing the following
strategies:
- Emphasize Direct Sales and Local Customer Service. We believe our strong
local presence generates rapid subscriber growth, higher customer
satisfaction and lower churn, and ultimately greater revenue and cash
flow. We have created a highly decentralized operating structure that
permits managers to respond quickly and flexibly to local needs. We
believe that local presence differentiates us from other major DIRECTV
and DBS providers and is a key element in our strategy for attracting and
retaining subscribers. Since inception, we have opened over 70 offices in
our rural DIRECTV markets. We provide sales, installation and customer
service directly through these offices and in conjunction with
approximately 450 local dealers. We believe that focused local marketing
significantly enhances the existing national marketing efforts of DIRECTV
and our national distribution partners, and that local customer service
increases customer satisfaction and is a major contributor to our low
churn rate. We complement our local presence from our headquarters in
Kansas City, Missouri with centralized sales, marketing, operational and
administrative support, including overflow and after-hours customer
support from a national call center that operates 24 hours a day, seven
days a week.
- Acquire Additional Rural DIRECTV Markets. We are aggressively pursuing
the acquisition of additional rural DIRECTV markets held by original NRTC
licensees, a majority of which are owned by rural electric and telephone
cooperatives for whom offering DIRECTV programming is an ancillary
business. We are continually evaluating acquisition prospects and expect
to continue to enter into acquisition agreements and complete
acquisitions of additional rural DIRECTV markets consistent with our
growth strategy. We are one of two companies actively consolidating rural
DIRECTV markets. We estimate that, as of the date of this prospectus,
there are approximately 110 unconsolidated rural DIRECTV markets,
representing approximately 2.2 million households and 300,000
subscribers.
- Develop Related Business Opportunities. We plan to expand our base of
potential customers and product offerings by leveraging our local sales
and support infrastructure. We also are evaluating other
telecommunications products and services that could be offered to
customers using our existing marketing and distribution infrastructure.
For example, during 1998 we began marketing of DirecPC, a satellite-based
high-speed Internet access service provided by a corporate affiliate of
Hughes.
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SALES AND DISTRIBUTION
We offer DIRECTV programming to consumer and business segments in our rural
DIRECTV markets through two separate but complementary sales and distribution
channels.
Direct Sales Force
We have established direct sales forces in all of our rural DIRECTV
markets, and we own full service retail stores located in substantially all of
our rural DIRECTV markets. We currently have approximately 250 direct
salespeople and support our direct sales staff and local offices with an
advertising campaign that we believe is both creative and consistent. We also
seek to develop close relationships with independent dealers of DBS equipment
and provide marketing, subscriber authorization, installation and customer
service support to enhance subscriber additions from these dealers. Wherever
possible, our arrangements with dealers are exclusive. In connection with the
sale of a DBS unit and a subscription to DIRECTV programming offered by us, a
dealer retains the proceeds from the sale of the equipment and earns a one-time
commission paid by us. We retain the ongoing monthly subscription revenue from
the subscriber. For equipment sold through the indirect dealer network, we
generally provide a subsidy, thus lowering the price of the equipment for the
consumer. We believe that we can increase penetration more rapidly through our
direct sales approach instead of relying, as have other satellite television
providers, upon the consumer to take the initiative to purchase our product and
services.
Other Distribution Channels
In addition to our direct sales force, we utilize other distribution
channels to offer DIRECTV programming to potential subscribers in our rural
DIRECTV markets. These other distribution channels include
- national retailers selected by DIRECTV,
- consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming, and
- satellite dealers and consumer electronics dealers authorized by five
regional sales management agents selected by DIRECTV.
In a similar fashion to our indirect dealer network, we pay a one-time
commission to these distribution channels for the sale of DIRECTV programming to
a subscriber located in our rural DIRECTV markets and we receive all monthly
programming revenue associated therewith, regardless of what outlet originally
sold DIRECTV programming to the subscriber.
MARKETING
We believe that DBS services can compete favorably with medium and low
power direct-to-home, cable and other subscription television services on the
basis of superior signal quality, channel capacity, programming choice and
price. We complement the extensive existing marketing effort of DIRECTV and its
other national distribution partners through focused local marketing and sales,
including local print and radio advertising to promote general market acceptance
of DIRECTV programming. We believe that, to date, there has been no significant
local presence to drive these local marketing and sales efforts.
We also implement support advertising programs for our indirect
distribution channels. Our marketing efforts emphasize the value of premium
subscription plan offerings in order to maximize revenue per customer. We have
implemented specific promotions, like offering new subscribers an initial
month's service at no charge, to motivate customers to purchase these plans. We
also have incentive-based sales compensation for both our direct and dealer
sales forces to promote and sell premium subscription plans.
A key element of our marketing strategy is to offer value-priced DBS
equipment and installation through the use of subsidies on direct sales of DBS
equipment and installations. We offer various types of DBS equipment and
accessories through our direct sales force and retail locations. We are able to
take
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advantage of volume discounts in purchasing this equipment from the NRTC and
other vendors. In addition, dealers are motivated to lower the prices at which
they offer DBS equipment and installation by our volume-based commission
structure.
CUSTOMER SERVICE
We provide customer service from each of our local offices. Generally, our
offices are staffed from 9 a.m. to 7 p.m., six days a week. Local managers are
responsible for managing customer accounts receivable and churn. We believe we
can control our churn rate by providing local customer service and aggressively
managing collections. Overflow and after hours assistance is provided 24 hours a
day, seven days a week, by our national call center located in Kansas City,
Missouri. We also provide professional installation services and technical
assistance in each of our offices.
OVERVIEW OF THE DIRECT-TO-HOME TELEVISION INDUSTRY
Direct-to-home ("DTH") television services encompass all types of
television transmission from satellites directly to the home. The FCC has
authorized two types of satellite services for transmission of television
programming: direct broadcast satellite services, commonly referred to as "DBS",
and fixed satellite service, commonly referred to as low power and medium power
satellite services. DBS services operate at high power, or 120 to 240 watts per
frequency channel, in the Ku-band. Fixed satellite services include low power
services transmitting in the C-band, as well as medium power, services
transmitting in the Ku-band at 20 to 100 watts per frequency channel. Both DBS
and medium power DTH satellites are used for digital satellite television
services. DBS provides high quality video and audio signals and can be received
by an 18-inch dish. Medium and low power DTH signals require home satellite
dishes of 27 inches to six feet in diameter, depending on the geographical
location of the dish and wattage per frequency channel. See "-- DIRECTV."
DIRECTV and EchoStar are the only current domestic providers of DBS services.
All other DTH domestic satellite television providers currently provide medium
or low power DTH services. See "-- Competition."
A DBS system consists of an uplink center, one or more orbiting satellites
and the subscriber's reception equipment. The uplink center collects programming
from on-site video equipment and from the direct feeds of programmers. Through
antennae located at the uplink center, the operator transmits, or uplinks, the
programming to transponders located on its geostationary satellite. The
transponders receive and amplify the digital signal and transmit it to receiving
dishes within the service area covered by the satellite. The digital signal is
then transmitted via coaxial cable to the subscriber's receiver, where it is
converted into an analog signal which allows it to be received by the
subscriber's televisions. System security is maintained through the use of
reprogrammable access cards that must be inserted into each subscriber's decoder
box to unscramble programming signals.
DBS providers are afforded technological and regulatory advantages over
medium and low power DTH services. The FCC requires the satellites used to
provide DBS services to be spaced at greater intervals than medium and low power
DTH satellites. The greater orbital spacing is intended to ensure that the
signals transmitted by DBS providers can be received by a small dish, free of
interference from adjacent satellites. In addition, DBS satellites are allowed
to broadcast with much higher power levels than medium and low power DTH
satellites. The combination of greater orbital spacing and higher power enables
providers of DBS services to obtain a superior balance of small dish size,
signal quality in adverse weather conditions and increased channel capacity.
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 220
channels of digital quality video and audio programming, and transmits via three
high-power Ku band satellites, each containing 16 transponders. Only two Ku-band
satellites are actually needed to support transmission of DIRECTV programming.
As of
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May 31, 1999, DIRECTV had over 7.0 million subscribers, including those acquired
as a result of Hughes' acquisition of Primestar.
We believe that DIRECTV services are superior to those provided by other
DTH service providers and that DIRECTV's extensive programming, including up to
55 channels of pay-per-view movies and events, various sports packages and the
exclusive NFL SUNDAY TICKET(TM), will continue to contribute to the growth of
DIRECTV's subscriber base and DIRECTV's market share for DTH services in the
future. In addition, we believe that DIRECTV's national marketing campaign
provides us with significant marketing advantages over other DTH competitors. As
of May 31, 1999, DIRECTV's subscribers represented approximately 75% of the DBS
and medium-power DTH market. DIRECTV added approximately 1.2 million new
subscribers, net of churn, during the year ended December 31, 1998, which was a
greater increase than any other DBS or medium power DTH provider and accounted
for approximately 48.1% of all new DBS and medium power DTH subscribers during
the period.
DBS equipment is produced by major manufacturers under brand names
including RCA, Sony, Hughes, and others. DBS equipment is currently sold at
retail outlets throughout the U.S. for prices typically ranging from $79 to
$199, depending upon the generation of the equipment, the features offered and
the retail outlet. Prices for DBS equipment have declined consistently since
introduction, further stimulating demand for DIRECTV services.
Programming
DIRECTV programming includes
- cable networks, broadcast networks and audio services available for
purchase in tiers for a monthly subscription fee,
- premium services available a la carte or in tiers for a monthly
subscription fee,
- sports programming, including major professional league sports packages
like the exclusive NFL SUNDAY TICKET, regional sports networks and
seasonal college sports packages, which is available for a yearly,
seasonal or monthly subscription fee, and
- movies from all major Hollywood studios and special events available for
purchase on a pay-per-view basis.
Satellite and premium services available a la carte or for a monthly
subscription are priced comparably to cable. Pay-per-view movies are available
for viewing on multiple channels at staggered starting times so that a viewer
does not have to wait more than 30 minutes to view a particular pay-per-view
movie.
DIRECTV periodically adjusts its programming packages to provide the best
channel mix possible at various price points. The following is a summary of some
of the more popular DIRECTV programming packages we currently offer:
- Total Choice: Package of 60 video channels, including two Disney channels
and an in-market regional sports network, 31 CD audio channels, and
access to up to 55 channels of pay per view movies and events. Total
Choice is DIRECTV's most popular offering. Total Choice Platinum, Gold,
Silver and Plus Encore offer additional programming at higher retail
prices.
- Select Choice: Package of 40 video channels, 31 CD audio channels and
access to up to 55 channels of pay-per-view movies and events.
- NFL SUNDAY TICKET: All out-of-market NFL Sunday games. NFL SUNDAY TICKET
is exclusive to DIRECTV with respect to small dish providers through at
least the end of the 1999-2000 football season.
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Other sports programming packages include:
- NHL CENTER ICE: Approximately 500 out-of-market NHL games.
- MLB Extra Innings: Approximately 800 out-of-market major league baseball
games.
- ESPN Full Court: Hundreds of college basketball games.
- ESPN Game Plan: Up to ten college football games every Saturday.
DIRECTV generally does not provide local broadcast programming via
satellite. However, seamless switching between satellite and broadcast
programming provided by other sources is possible with all DBS units. In
addition, DIRECTV provides programming from affiliates of the national broadcast
networks to subscribers who are unable to receive networks over the air and do
not subscribe to cable.
RELATIONSHIP WITH THE NRTC AND DIRECTV
The NRTC is a cooperative whose members are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The NRTC acquired the right to provide DIRECTV programming to
residential households in rural markets in 1992 and commercial establishments
located in rural DIRECTV markets in 1994 under an agreement with Hughes (the
"Hughes Agreement"). The NRTC subdivided its rights to provide these services
into approximately 250 geographically based rural DIRECTV markets, and then sold
a portion of its rights to the individual rural DIRECTV markets to NRTC members
under agreements between the NRTC and its individual members (the "NRTC
Agreements"). We have acquired the exclusive rights to provide DIRECTV
programming in each of our rural DIRECTV markets from various NRTC members
through assignment of their NRTC Agreements. Each NRTC Agreement was assigned to
us with the consent of the NRTC and DIRECTV. Because we are not a cooperative,
we are not eligible to be a member of the NRTC. However, we are a non-voting
affiliate of the NRTC.
Under the NRTC Agreements, we are obligated to promote, market and sell
DIRECTV programming in accordance with NRTC procedures and to take all
reasonable steps to ensure that DIRECTV programming is not received at any
unauthorized locations or in any unauthorized manner. We also purchase customer
authorization, billing services and centralized remittance processing services
from the NRTC under the NRTC Agreements. The NRTC Agreements also contain
customary provisions regarding payment terms, compliance with laws and
indemnification and provide that both the NRTC and DIRECTV must consent prior to
any assignment or transfer of our rights or obligations under the NRTC
Agreement, which consent shall not be unreasonably withheld. The NRTC Agreements
also contain termination provisions which allow the NRTC to terminate the
agreements
- as a result of termination of the Hughes Agreement, with the NRTC
remaining responsible for paying to us its pro rata portion of any
refunds that the NRTC receives from Hughes under the Hughes Agreement,
- if we fail to make any payment due to the NRTC or otherwise breach a
material obligation of the NRTC Agreement and this failure or breach
continues for more than 30 days after written notice from the NRTC, or
- if we fail to keep and maintain any letter of credit required to be
provided to the NRTC in full force and effect or to adjust the amount of
the letter of credit as required by the NRTC Agreements.
The NRTC Agreements also require us to comply with policies of the NRTC
promulgated from time to time. We, along with other NRTC-affiliated DIRECTV
providers, have disputed some of the policies proposed by the NRTC in the past
that we believed did not comply with the NRTC Agreements and applicable law. For
example, in 1998, the NRTC proposed new conditions to securing its approval of
acquisitions that included changes to all of the NRTC Agreements which, if
adopted, could have had
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material adverse financial consequences to us. The dispute was resolved without
any modifications to the NRTC Agreements and our then pending acquisitions were
approved. In addition, the NRTC has adopted a policy regarding its own interests
in the subscriber information of NRTC members and affiliates. The NRTC
Agreements provide that NRTC members and affiliates, including us, have
"substantial proprietary interests" in and rights to the information and data
with respect to their subscribers. The NRTC and its affiliates, including us,
have differed over the import of these rights and interests, which may have
consequences in the event that our rights to offer DIRECTV programming through
the NRTC are terminated or expire.
Under the NRTC Agreements, we have the exclusive right in our rural DIRECTV
markets to market and sell most programming transmitted by the DIRECTV
satellites over the 27 frequencies owned by Hughes and to retain all of the
revenue from subscribers derived from these sales and marketing activities. We
pay the NRTC for the wholesale cost of this programming. We also pay a fee to
DIRECTV based upon 5% of the programming revenue. The NRTC has the right to
choose to provide some non-select services, like NFL SUNDAY TICKET, as DIRECTV
and the content providers enter into new agreements. "Non-select services" are
services not generally included in the DIRECTV programming we provide, because
providers of the programming require minimum subscriber guarantees, advance
payments or other similar commitments, which the NRTC declines to give. We
retain 5% of the revenue from non-select services purchased by our subscribers
and remit the balance to DIRECTV.
The NRTC Agreements and the Hughes Agreement expire when the satellite or
satellites that broadcast the DIRECTV programming covered by the agreements are
removed from their assigned orbital locations. According to Hughes, the DIRECTV
satellites have estimated orbital lives of at least 15 years from their
respective launches in December 1993, August 1994 and June 1995. It is unclear
whether the NRTC is entitled to services from all three DIRECTV satellites or
merely the first satellite, DBS-1, which was launched in December 1993. It is
possible that the Hughes Agreement will be interpreted so as to limit the NRTC's
right to programming to the useful life of DBS-1. There are numerous risks
associated with satellite transmission technology in general and DIRECTV's
delivery of direct broadcast services in particular. Satellite transmission of
video, audio and other data is highly complex and requires the manufacture and
integration of diverse and advanced components that may not function as
expected. The useful life of a direct broadcast satellite also may be adversely
affected by acts of war, electrostatic storms or collisions with space debris.
We cannot assure you as to the longevity of the satellites that are required to
broadcast our DIRECTV programming or that we will continue to have access to any
or all of our DIRECTV programming upon the expiration of the useful life of
DBS-1 or any other Hughes' satellite.
The Hughes Agreement provides the NRTC with a right of first refusal to
obtain DBS services, other than programming services, in substantially the same
form as these 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. Any material
adverse change in our relationship with the NRTC could have a material adverse
effect on our business, financial condition and results of operations. See "Risk
Factors -- We may not be able to maintain our rights to distribute DIRECTV
programming due to factors beyond our control."
Until recently, DIRECTV, USSB, Primestar and EchoStar were the primary
domestic satellite television operators. In April 1999, Hughes acquired
Primestar's medium-power DTH business for approximately $1.8 billion. In May
1999, Hughes acquired USSB for approximately $1.6 billion. Prior to its
acquisition by Hughes, Primestar offered a full range of satellite television
programming to approximately 2.3 million subscribers nationwide, approximately
100,000 of which we believe were located within our rural DIRECTV markets.
Former Primestar subscribers that choose to receive DIRECTV programming in our
rural markets will become our subscribers.
Prior to its acquisition by Hughes, USSB offered premium programming
packages consisting of HBO, Showtime, Cinemax and The Movie Channel to
subscribers throughout the United States, including those
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in the NRTC's rural DIRECTV markets. After completing its acquisition of USSB,
Hughes announced that it intends to combine its DIRECTV business with USSB's
assets to expand its programming lineup through the addition of premium
multi-channel movie services like HBO, Showtime, Cinemax and The Movie Channel.
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes in the
United States District Court for the Central District of California. The suit
seeks a court order requiring DIRECTV to provide NRTC members and affiliates
with HBO, Showtime, Cinemax and The Movie Channel programming for exclusive
distribution in the NRTC's rural markets. The suit further seeks a temporary
restraining order and preliminary injunction preventing DIRECTV and Hughes from
providing, marketing, selling or billing for this programming in the NRTC's
rural DIRECTV markets. A preliminary hearing on this matter was held on June 14,
1999. On June 17, 1999, the court denied the NRTC's request for a temporary
restraining order and preliminary injunction. The court will proceed to decide
the merits of the contractual dispute between DIRECTV and the NRTC to determine
if the NRTC is entitled to a finding that it and its members and affiliates have
the exclusive right to sell the premium programming in the NRTC's rural markets.
A trial date has not been set on the merits of the NRTC's complaint. We are
unable to predict the outcome of this matter, how it will impact the business
relationship between the NRTC and DIRECTV, whether it will increase our costs of
providing services, or the effect of the USSB acquisition on our business. It is
possible that we will need additional capital to purchase any rights or other
benefits that may become available as a result of Hughes' acquisitions of
Primestar and USSB. This industry consolidation also could encourage EchoStar to
respond by lowering prices or increasing its marketing activities.
COMPETITION
We face competition for acquisitions of rural DIRECTV markets from one
other company. We also face competition for subscribers within our exclusive
rural DIRECTV markets from a broad range of companies offering communications
and entertainment services, including cable operators, other satellite service
providers, wireless cable operators, telephone companies, television networks
and home video product companies. Many of our competitors have greater financial
and marketing resources than we do, and the business of providing subscription
and pay television programming is highly competitive. We believe that quality
and variety of programming, signal quality and service and cost will be the key
bases of competition. See "Risk Factors -- Significant competition could
adversely affect our revenues" and "-- Our acquisition strategy may not be
successful, which could have a material adverse effect on us."
Competition for Acquisition of Rural DIRECTV Markets
Pegasus Communications Corporation is currently pursuing the same goal as
we are of consolidating rural DIRECTV markets. Pegasus is currently the largest
independent provider of DIRECTV services and has substantially greater financial
resources than we do. Including pending acquisitions, Pegasus had approximately
539,000 subscribers and 4.9 million households in 81 rural DIRECTV markets as of
May 31, 1999. Pegasus' competing acquisition strategy could have a material
adverse effect on our ability to execute our acquisition strategy.
Competing Subscription Television Providers
CABLE TELEVISION PROVIDERS
Cable operators in the United States serve approximately 65 million
subscribers, representing over 65% penetration of television households passed
by cable systems. Cable operators typically offer 30 to 80 channels of
programming at an average monthly subscription price of approximately $36. While
cable companies currently serve a majority of the U.S. television market, we
believe many may not be able to provide the quality and variety of programming
offered by DIRECTV until they significantly upgrade their coaxial systems. Many
cable television providers are in the process of upgrading their systems, and
other cable operators have announced their intentions to make significant
upgrades. Many proposed upgrades, like conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel
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capacity, thereby increasing programming alternatives, and to deliver a better
quality signal. Although cable systems with adequate channel capacity may offer
digital service without major rebuilds, we believe that other cable systems that
have limited channel capacity, like those in most of the rural DIRECTV markets,
will have to be upgraded to add bandwidth in order to provide digital service.
We believe that these upgrades will require substantial investments of capital
and time to complete industry-wide. As a result, we believe that there will be a
substantial delay before cable systems in the rural DIRECTV markets can offer
programming services equivalent to DBS satellite providers and that some cable
systems in those markets may never be upgraded, subject to advances in digital
compression technology currently under development.
We expect to encounter a number of challenges in competing with cable
television providers. First, cable operators have an entrenched position in the
marketplace. We believe that our current strategy of targeting the acquisition
of rural DIRECTV markets which are not served by cable or are underserved by
cable partially offsets the cable industry's position in the consumer
marketplace. Second, the up-front costs to the consumer associated with
purchasing and installing DBS equipment are higher than the up-front costs for
installation of cable television. However, prices for DBS equipment have
declined consistently since introduction, and we believe that competition among
DBS equipment vendors and technological improvements will create continuing
downward pressure on prices. Third, current DBS systems, unlike cable, do not
currently provide local broadcast programming via satellite, although both
DIRECTV and EchoStar have indicated an intention to provide local broadcast
service in some areas of the country. Seamless switching between satellite and
broadcast programming from other sources is possible with all DBS units. In
addition, DIRECTV provides programming from affiliates of the national broadcast
networks to subscribers who are unable to receive networks over the air and do
not subscribe to cable. We believe that the significant capital costs of
upgrading cable systems to provide similar services, combined with the marketing
strength of DBS providers like DIRECTV, presents DBS providers with an
opportunity to take substantial market share for pay television services from
cable in the rural DIRECTV markets.
OTHER DIRECT-TO-HOME TELEVISION PROVIDERS
EchoStar, the only other remaining DBS provider in the United States, began
national broadcasting of programming in March 1996 and currently broadcasts over
300 channels of digital television programming and CD quality audio programming
services to the entire continental United States. EchoStar has 21 licensed
channel frequencies at the 119 degrees W.L. orbital position. The 119 degrees
W.L. orbital position is one of the three DBS orbital locations that can serve
the entire continental United States. These three orbital locations are
sometimes referred to as full "CONUS." EchoStar also has 69 frequencies in other
partial CONUS orbital locations. EchoStar reported approximately 2.5 million
subscribers as of May 31, 1999. In June 1999, EchoStar acquired a license for 28
DBS frequencies at 110 degrees W.L., which is a full CONUS orbital location, two
satellites to be delivered in orbit, and a direct broadcast operations facility
from The News Corporation Limited and MCI Worldcom Inc. EchoStar expects to
significantly expand its DBS and other programming offerings as a result of this
acquisition, which will potentially strengthen its competitive strength relative
to DIRECTV and us. We believe that we can successfully compete with EchoStar in
the DBS market because of our local strategy and because of DIRECTV's brand name
and its significantly larger distribution networks.
Primestar, a medium-power DTH provider, launched the first digital DTH
satellite television service in 1994. On April 28, 1999, Hughes acquired
Primestar's medium-power DTH business, which consisted of its approximately 2.3
million subscribers and related high-power satellite assets, for approximately
$1.8 billion. Prior to its acquisition by Hughes, Primestar offered a full range
of programming to approximately 2.3 million subscribers nationwide,
approximately 100,000 of which we believe were located within our rural DIRECTV
markets. Former Primestar subscribers that choose to receive DIRECTV programming
in our rural markets will become our subscribers.
Low power C-band DTH operators reported approximately 1.8 million
subscribers as of June 30, 1999. C-band operators provide subscription
television services primarily to subscribers who live in markets not served by
cable television. C-band equipment, including the six-to-eight-foot dish
necessary to receive the low power signal, currently costs approximately $2,000
and is distributed by local TVRO satellite
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dealers. We believe that DBS has significant advantages over low power C-band
service in equipment cost, dish size and range of programming packages. The
number of C-band subscribers declined by approximately 164,000 during 1998.
OTHER COMPETITORS
Regional telephone companies and other long distance companies could become
significant competitors in the future, as they have expressed an interest in
becoming subscription multichannel video programming distributors. Furthermore,
the Telecommunications Act of 1996 (the "1996 Act") removes barriers to entry
which previously inhibited local telephone companies from competing, or made it
more difficult for telephone companies to compete, in the provision of video
programming and information services. Several telephone companies have received
authorization to test market video and other services in specified geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of this multi-channel
video service vary, as several telephone companies have pushed back or cancelled
originally announced deployment schedules. In addition, mergers, joint ventures
and alliances among franchise, wireless or private cable television operators
and regional telephone companies may result in competitors capable of offering
bundled cable television and telecommunications services. For example, the
recent merger of AT&T and Tele-Communications, Inc. has resulted in a large,
integrated communications provider with significantly greater technical,
financial and marketing resources than we have.
As more telephone companies begin to provide multichannel video programming
and other information and 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. Further telephone companies may be able to subsidize
the delivery of programming through their position as the sole source of local
wireline telephone service to the home.
Most areas of the United States are covered by traditional terrestrial
over-the-air VHF/UHF television broadcasters. Consumers can receive from three
to ten channels of over-the-air programming in most markets. These stations
provide local, network and syndicated programming free of charge, but each major
market is generally limited in the number of programming channels. On August 5,
1997, Congress approved the release of additional digital spectra for use by
VHF/UHF broadcasters.
REGULATION
Unlike a cable operator, DBS operators like DIRECTV are free to set prices
and serve customers according to their business judgment, without rate of return
or other regulation or the obligation not to discriminate among customers.
However, there are laws and regulations that affect DIRECTV and, therefore, us.
As an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to
- the licensing of individual satellites, including a requirement that
DIRECTV meet minimum financial, legal and technical standards,
- avoidance of interference with radio stations, and
- compliance with rules that the FCC has established specifically for DBS
licenses.
As a distributor of television programming, DIRECTV 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'
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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 the restriction impairs the installation, maintenance or use of a DBS
receiving antenna that is one meter or less in diameter or diagonal measurement,
except where the restriction is necessary to accomplish a clearly defined safety
objective or to preserve a recognized historic district. Local governments and
associations may apply to the FCC for a waiver of this rule based on local
concerns of a highly specialized or unusual nature. In November 1998, the FCC
amended its rules to extend these protections to rental property in those areas
under the exclusive use or control of the renter. The 1996 Act also preempted
local, but not state, governments from imposing taxes or fees on DTH services,
including DBS. Finally, the 1996 Act required that multi-channel video
programming distributors, including DTH operators, fully scramble or block
channels providing indecent or sexually explicit adult programming. If a
multi-channel video programming distributor cannot fully scramble or block this
programming, it must restrict transmission to those hours of the day when
children are unlikely to view the programming, as determined by the FCC. On
December 30, 1998, a three-judge federal court in Delaware held that this
provision was unconstitutional. The United States Supreme Court has agreed to
review the judgment of the Delaware court.
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Television Consumer Protection
and Competition Act of 1992 (the "Cable Act") was intended to establish and
support existing and new multi-channel video services, including wireless cable
and DTH, to provide subscription television services. We and DIRECTV have
benefited from the programming access provisions of the Cable Act and
implementing rules in that DIRECTV has been able to gain access to previously
unavailable programming services and, in some circumstances, has obtained
programming services at reduced cost. Any amendment to, or interpretation of,
the Cable Act or the FCC's rules that would permit cable companies or entities
affiliated with cable companies to discriminate against competitors like DIRECTV
in making programming available, or to discriminate in the terms and conditions
of its programming, could adversely affect DIRECTV's ability to acquire
programming on a cost-effective basis, which would have an adverse impact on us.
Some of the restrictions on cable-affiliated programmers will expire in 2002
unless the FCC or Congress extends these restrictions.
The Cable Act also required the FCC to conduct a rule-making proceeding to
impose public interest requirements for providing video programming on DTH
licensees. In November 1998, the FCC adopted rules requiring DTH licensees to
provide reasonable and non-discriminatory access by qualified candidates for
elective office. These rules also require DTH licensees to set aside four
percent of the licensee's channel capacity for non-commercial programming of an
educational or informational nature. Petitions for reconsideration seeking the
imposition of additional regulatory obligations on DTH licensees are pending at
the FCC.
The Satellite Home Viewer Act of 1994, or "SHVA", establishes the terms and
conditions under which a DTH operator, for a statutorily-mandated fee, may claim
a "compulsory" copyright license to retransmit "superstations" and broadcast
network programming to subscribers for private home viewing. The SHVA currently
is scheduled to expire on December 31, 1999, in which case DTH operators would
be required to negotiate in the marketplace to obtain the necessary copyright
clearances to retransmit superstations and broadcast network programming.
Separate pieces of legislation to extend and revise the SHVA have been passed by
the House of Representatives and the Senate and a conference committee has been
convened to attempt to resolve the differences in the bills. In general, both
the Senate and House bills would establish a new expiration date for the SHVA,
create new rules regarding the retransmission of local and distant broadcast
television stations by satellite carriers, reduce the royalty rates payable
under the SHVA, and establish a new compulsory license for the retransmission by
DTH operators of a national public broadcasting channel.
In the case of retransmissions of broadcast network programming, the
compulsory license established by the SHVA is limited to DTH retransmissions to
persons in unserved households. In general, an "unserved household" is one that
cannot receive, through the use of a conventional outdoor rooftop
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antenna, a sufficient over-the-air network signal and has not, within 90 days
prior to subscribing to the DTH service, subscribed to a cable service that
provides that network signal.
A number of television broadcast networks and their affiliates have
commenced litigation against DTH operators, including DIRECTV, for allegedly
violating the unserved household limitation in the SHVA. The litigation resulted
in the issuance of a permanent injunction by a court in North Carolina
restraining DIRECTV and its distributors from providing retransmissions of any
television station affiliated with ABC to any household located within 75 miles
of the transmission tower of WTVD, the ABC affiliate serving the Raleigh-Durham
market. In Florida, a federal district court issued a temporary restraining
order, preliminary injunction, and contempt finding requiring DIRECTV and its
agents and those who act in active concert or participate with DIRECTV to cease
retransmission of CBS and Fox programming to subscribers nationwide who are able
to receive an off-air signal of at least Grade B intensity, measured using the
Individual Location Longley Rice signal propagation model approved by the FCC in
a recently completed rulemaking proceeding.
On March 12, 1999, DIRECTV and the broadcast networks announced that a
settlement of this litigation had been reached whereby DIRECTV agreed to
terminate its retransmission of NBC, CBS, ABC and Fox programming to ineligible
subscribers that are located within a local network affiliate's "Grade A" signal
strength contour as of June 30, 1999, which was later extended to July 31, 1999,
and to terminate retransmission of this network programming to ineligible
subscribers in the "Grade B" signal strength contour as of December 31, 1999. In
addition, DIRECTV agreed to provide discounted antennas to subscribers whose
network programming service is terminated.
Other pending lawsuits relating to the SHVA's unserved household limitation
include an action brought in Texas by an NBC affiliate against PrimeTime 24, and
an action brought by EchoStar in the United States District Court of Colorado.
PrimeTime 24 is a satellite carrier that, until recently, provided DTH operators
including DIRECTV with a package of network-affiliated broadcast television
stations for retransmission to subscribers. The EchoStar action, which has been
transferred to the same Florida court that issued the orders against DIRECTV
described above, seeks declaratory ruling regarding the appropriate predictive
model for determining whether a household is unserved for purposes of the SHVA
and a clarification of the particular means for measuring signal intensity.
EchoStar also has filed a petition asking the FCC to reconsider its recent
rulemaking order adopting the Longley Rice signal propagation methodology for
use in determining the eligibility of a subscriber to receive network-affiliated
broadcast television stations pursuant to the SHVA.
While we believe that we have complied to date with the SHVA in providing
network programming only to "unserved households" and we do not believe that the
interpretations of the SHVA applied by the Florida and North Carolina federal
courts will have a material adverse effect on our business, financial condition
or results of operations or our ability to attract new subscribers, it is
possible that our inability to provide network services to our subscribers will
have these negative effects. In addition, should we elect to continue to offer
network services, the costs of compliance with those interpretations could be
material. The inability of DIRECTV, and therefore our company, to provide
network programming to subscribers in rural DIRECTV markets could adversely
affect our average programming revenue per subscriber and subscriber growth and
churn.
In addition, the impact of the lawsuits regarding the unserved household
limitation could be affected by the pending legislation to extend and revise the
SHVA. Both the House and Senate versions of that legislation propose to
eliminate the 90-day waiting period provision in the SHVA and to revise the way
in which a subscriber's eligibility to receive a network-affiliated broadcast
television station is determined. It also is possible that the legislation may
grandfather, either on a temporary or permanent basis, the continued
retransmission of network programming to some or all existing subscribers who
live within the predicted Grade B signal strength contour of a local network
affiliate. The legislation also may establish additional rules governing the
retransmission by DTH operators of network-affiliated broadcast television
stations.
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FACILITIES
On January 27, 1999, we entered into a lease with respect to approximately
35,000 square feet of office space in Kansas City, Missouri. Annual rent under
this lease approximates $570,000 and the lease will terminate in August 2002. We
moved our principal executive offices to this location in April 1999. We also
have more than 70 offices and operations in 23 states. We expect these
facilities to be adequate for our needs in the foreseeable future. We believe
that we will be able to lease office and retail space in our rural DIRECTV
markets as needed on acceptable terms.
MANAGEMENT AND EMPLOYEES
As of June 30, 1999, we had approximately 700 full-time employees and 200
part-time employees. We are not a party to any collective bargaining agreement
and consider our relations with our employees to be good.
LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings, although we
do have an interest in the legal proceedings described in "-- Our Relationship
with the NRTC and DIRECTV" and "-- Regulation."
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MANAGEMENT
The information contained in this section relates to our management for the
period from our formation in February 1999 to date, and to the management of our
predecessor entity, Golden Sky Systems, for periods prior to our formation.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding the executive officers
and directors of our company as of May 31, 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
Scott R. Brown............................ 33 Vice President, Operations
Gordon G. Smith........................... 56 Vice President, Human Resources
Jo Ellen Linn............................. 37 Secretary and General Counsel
Robert F. Benbow(1)....................... 62 Director
William O. Charman........................ 35 Director
William P. Collatos(1).................... 44 Director
William A. Johnston(1)(2)................. 46 Director
Robert B. Liepold(2)...................... 72 Director
Erik M. Torgerson(2)...................... 33 Director
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
BACKGROUND OF EXECUTIVE OFFICERS
Rodney A. Weary. Mr. Weary founded our company in June 1996 and has been
its Chief Executive Officer since our inception. Until 1995, he was President of
Cable Video Enterprises Inc., which Mr. Weary formed in 1986 by acquiring
traditional cable systems located in three states. From 1988 to December 1994,
Mr. Weary was a co-founder, officer and director of Premiere Page, a paging
company. From 1986 to 1992, he was a principal shareholder in W.K. Cellular,
Inc., which owned and operated cellular license R.S.A. 5 in Indiana. Mr. Weary
was involved in the formation of the Missouri Cable Television Association in
the 1970s, and has served in many capacities for both it and the four-state Mid-
America Cable Television Association.
John R. Hager. Mr. Hager has been our Chief Financial Officer since October
1998. Mr. Hager joined us in August 1998 as Vice President, Finance and
Controller. From February 1997 until August 1998, Mr. Hager was Vice
President -- Controller of EchoStar Communications Corporation. He was the
Controller of American Telecasting, Inc. from August 1993 until February 1997.
Prior to joining American Telecasting in 1993, Mr. Hager was with Ernst & Young,
where he was an Audit Senior Manager.
William J. Gerski. Mr. Gerski has been our Vice President, Sales and
Marketing since May 1997. From May 1996 1996 to April 1997, Mr. Gerski was
Regional Director of Marketing and Sales at American Telecasting Incorporated.
From December 1995 to May 1996, Mr. Gerski was Vice President of Marketing and
Sales of Bell Atlantic Video Services. From April 1990 through November 1995,
Mr. Gerski was Corporate Director of Sales at Adelphia Cable Communications. He
has served on the Executive Board of Directors of the Southern California Cable
Association and the Los Angeles, Chicago, and Cleveland Cable Co-ops.
Scott R. Brown. Mr. Brown has been our Vice President of Operations since
February 1999. Mr. Brown held the position of Vice President of Fulfillment
Operations with Primestar, Inc. from April
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1998 to February 1999 and was the Vice President of Operations with TCI
Satellite Entertainment, Inc. from November 1995 to March 1998. From May 1989 to
November 1995 Mr. Brown held several positions with Tele-Communications, Inc.,
including General Manager of TCI Cable at Westchester, General Manager of TCI
Cablevision of Pinellas County, Business Manager of TCI Cablevision at
Dade/Broward County, and Internal Auditor of TCI North Central Division.
Gordon G. Smith. Mr. Smith has been our Vice President of Human Resources
since May 1999. From 1998 to 1999, Mr. Smith was a Principal of Somerset
Partners. From 1990 to 1998, Mr. Smith was Vice President of Human Resources,
Health Care Services at Olsten Corporation.
Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since
our inception. From 1993 to 1996, Ms. Linn was General Counsel to Cable Video
Management, Inc., a communications management company and the former Cable Video
Enterprises, Inc., which owned and operated domestic cable television systems.
Ms. Linn was a contract negotiator in the network real estate department of
Sprint Communications from 1990 to 1992. From 1988 to 1990, Ms. Linn was Vice
President and General Counsel of the cable brokerage firm Hardesty, Puckett,
which is now known as HPC Puckett & Company. Ms. Linn is licensed to practice
law in Kansas and Texas.
BACKGROUND OF DIRECTORS
Robert F. Benbow. Mr. Benbow has been one of our Directors since February
1997. He is a Vice President of Burr, Egan, Deleage & Co. and a General Partner
of Alta Communications VI, L.P. Prior to joining Burr, Egan Deleage & Co. in
1990, Mr. Benbow spent 22 years with the Bank of New England N.A., where he was
Senior Vice President responsible for special industries lending in the areas of
media, project finance and energy. He serves as a Director of Teletrac, Inc., a
major metropolitan wireless provider of location and two way messaging services
for fleets of commercial vehicles, and Preferred Networks, Inc.
William O. Charman. Mr. Charman has been one of our Directors since March
1997. He has served as a Vice President of BancBoston Capital since 1995. From
1993 to 1995, Mr. Charman was a Director and team leader for Bank of Boston's
Media & Communications Group in London. Mr. Charman was a Director in Bank of
Boston's Media & Communications Group in Boston from 1987 to 1993. Mr. Charman
is a Director of Cambridge Communications, MultiTechnology Services and Prime
Communications.
William P. Collatos. Mr. Collatos has been one of our Directors since March
1997. He is a Managing General Partner of Spectrum Equity Investors, which he
founded in 1993. Prior to the founding of Spectrum, he was an independent
consultant from 1991 to 1993. Mr. Collatos was an Associate and then General
Partner of funds managed by TA Associates from 1980 to 1990 and a founding
General Partner of Media/Communications Partners. Prior to joining TA
Associates, Mr. Collatos was in charge of the media lending group at Fleet
National Bank in Providence, Rhode Island. He is a Director of Galaxy Telecom
Systems, Inc., TSR Paging, Inc., Internet Network Services, Ltd. and ITXC, Inc.
William A. Johnston. Mr. Johnston has been one of our Directors since
November 1997. He is a Managing Director of HarbourVest Partners, LLC and has
served in a variety of capacities for HarbourVest Partners, LLC and its
predecessor, Hancock Venture Partners, Inc., since 1983. Prior to joining
Hancock Venture Partners, Inc., Mr. Johnston was an assistant vice president at
State Street Bank in Boston, Massachusetts. He is a Director of Adesemi
Communications International, Inc., Epoch Internet, Inc., Formus Communications,
Inc., The Marks Group, Inc. and V-I-A Internet, Inc.
Robert B. Liepold. Mr. Liepold has been one of our Directors since our
inception. Mr. Liepold has been President and Chief Executive Officer of
KCWE-TV, an independent commercial television station operating in Kansas City,
Missouri, since 1994. Since 1983, Mr. Liepold also has been a consultant to the
telecommunications industry. From 1978 through 1983, he was Executive Vice
President of Sprint/United Telecom. He is a Director of KCWE-TV, Com-21 and W.K.
Communications.
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Erik M. Torgerson. Mr. Torgerson has been one of our Directors since
November 1997. He is a Partner at Norwest Equity Partners. Prior to joining
Norwest Equity Partners in 1993, Mr. Torgerson was with Arthur Anderson & Co.'s
financial consulting and audit practice. Mr. Torgerson serves as a director of
Command Tooling Systems, LLC, Seasonal Specialties, LLC, TelcoPlus
Communications, Inc., InSTEP, LLC and Norwesco, Inc.
Each director of our company has been elected pursuant to the terms of
Golden Sky Systems' Stockholders' Agreement. See "Certain Relationships and
Related Transactions -- Stockholders' Agreement."
All of our directors are elected annually and hold office until the next
annual meeting of our stockholders and until their successors are duly elected
and qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, we do reimburse non-management directors for expenses incurred in
attending meetings of the Board of Directors.
During 1998, our Board of Directors held eight meetings. The only standing
committees of the Board of Directors are the Audit Committee and the
Compensation Committee. The current members of the Audit Committee are Messrs.
Liepold, Johnston and Torgerson. The Audit Committee periodically consults with
our management and independent public accountants on financial matters,
including our internal financial controls and procedures. The Audit Committee
was formed in February 1997. The current members of the Compensation Committee
are Messrs. Benbow, Collatos and Johnston. The Compensation Committee approves
compensation arrangements for our executive officers and administers our Stock
Option Plan. The Compensation Committee was formed in February 1997.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal
years ended December 31, 1997 and 1998 for our Chief Executive Officer and the
two other highest paid executive officers of our company whose total annual
salary and bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS
---------------------------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- --------------- ---------------
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
Marketing 1997 60,259 50,000 12,182 --
Jo Ellen Linn....................... 1998 $ 93,061 $32,500 2,501 $ --
Secretary and General Counsel 1997 80,926 25,000 2,501 --
- ---------------
(1) Represents compensation attributable to Mr. Weary's use of a company-owned
car.
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OPTION GRANTS
The following table sets forth information concerning grants of stock
options to the named executive officers during the fiscal year ended December
31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS/ PRICE APPRECIATION
UNDERLYING SARS GRANTED EXERCISE OF FOR OPTION TERM
OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION ------------------
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ----------- -------------- ----------- ---------- ------- -------
Rodney A. Weary............ -- -- $ -- -- $ -- $ --
William J. Gerski.......... 2,818(1) 15.1 1.00 10/08/07 1,772 4,491
Jo Ellen Linn.............. -- -- -- -- -- --
- ---------------
(1) Approximately 1,092 of these options were exercisable as of the date of
grant. The remaining 1,726 options vest in increments of approximately 78
shares per month on the 24th day of each month beginning on November 24,
1998.
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 was the fair value of the Common
Stock as of December 31, 1998, as determined by the board of directors of
Golden Sky Holdings for purposes of option grants. On this basis, the
unexercised options were not in the money.
EMPLOYMENT AGREEMENTS
In January 1997, we entered into substantially similar non-competition
agreements with Rodney A. Weary and Jo Ellen Linn, the terms of which preclude
each of them from competing with us during their respective periods of
employment and for two years thereafter in any market in North America in which
we operate or intend to operate.
In February 1997, our company and Mr. Weary entered into an agreement
pursuant to which Mr. Weary agreed to serve as our President and Chief Executive
Officer through February 2000. This agreement may be extended according to its
terms. Under the agreement, Mr. Weary is paid compensation in an amount not less
than $200,000 per year and is eligible to participate in our Stock Option Plan.
Also during 1997, we entered into substantially similar employment
agreements with Ms. Linn and Mr. Gerski, pursuant to which each of them agreed
to serve our company in their present capacity through February and November
2000, respectively. These agreements may be extended according to their terms.
Under these agreements, Ms. Linn is paid compensation in an amount not less than
$82,500 per year. Mr. Gerski is paid compensation in an amount not less than
$100,000 per year. Each is also eligible to participate in our Stock Option
Plan.
In August 1998, we entered into an employment agreement with Mr. Hager.
Pursuant to the employment agreement, Mr. Hager agreed to serve our company in
his current capacity through August
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2001. The employment agreement may be extended in accordance with its terms. Mr.
Hager is paid compensation under the employment agreement in an amount not less
than $120,000 per year and is eligible to participate in our Stock Option Plan.
Our company and Mr. Hager also entered into a non-competition agreement and a
confidentiality and proprietary rights agreement in August 1998. The terms of
the non-competition agreement preclude Mr. Hager from competing with us during
the term of his employment and for one year thereafter in any market in the
United States in which we operate or intend to operate. The confidentiality and
proprietary rights agreement requires Mr. Hager to maintain the confidentiality
of our proprietary information during the period of his employment and
thereafter.
In May 1999, we entered into an employment agreement with Mr. Smith under
which he agreed to serve us in his current capacity through August 2001. The
employment agreement may be extended in accordance with its terms. Mr. Smith is
paid compensation under the employment agreement in an amount not less than
$115,000 per year and is eligible to participate in our stock option plan. Mr.
Smith also entered into a non-competition agreement and a confidentiality and
proprietary rights agreement with us in May 1999. The terms of the
non-competition agreement preclude Mr. Smith from competing with us during the
term of his employment and for one year thereafter in any market in the United
States in which we operate or intend to operate. The confidentiality and
proprietary rights agreement requires Mr. Smith to maintain the confidentiality
of our proprietary information during the period of his employment and
thereafter.
STOCK OPTION PLAN
In July 1997, our Board of Directors adopted our Stock Option Plan pursuant
to which we may, at the direction of the Compensation Committee of our Board of
Directors, grant incentive stock options, non-qualified stock options or
restricted stock options to officers, directors and employees. Our Stock Option
Plan was approved by our stockholders on July 24, 1997. Our Stock Option Plan
was assumed by Golden Sky Holdings and approved by its stockholders effective
September 9, 1997.
The plan permits our board of directors to grant incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, non-qualified stock options within the meaning of Treasury Regulations
Section 1.83-7 and restricted stock awards to our officers, directors and
employees. The maximum number of shares of our common stock that may be subject
to options or awards granted under the plan may not exceed, in the aggregate,
85,218 shares. Shares of our common stock that are attributable to grants or
awards that have expired or been terminated, cancelled or forfeited are
available for issuance in connection with future grants or awards. The
Compensation Committee of our board of directors administers the plan, makes
grants and awards under the plan and establishes the terms and conditions of the
grants and awards.
401(k) PLAN
We maintain a 401(k) Savings Plan for our full-time employees which permits
employee contributions up to 15% of annual compensation to the plan on a pre-tax
basis. In addition, we may make contributions on a discretionary basis as a
percentage of each participating employee's annual compensation. We may also
make additional discretionary contributions to this Plan in any plan year up to
the annual 401(k) plan contribution limits as defined in the Internal Revenue
Code. This Plan is administered by the Compensation Committee of our Board of
Directors.
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PRINCIPAL STOCKHOLDERS
All of the issued and outstanding capital stock of Golden Sky DBS is owned
by Golden Sky Holdings. The following table sets forth information as of May 31,
1999, regarding the ownership of Golden Sky Holdings' Common Stock ("Common
Stock"), Series A Convertible Participating Preferred Stock, $.01 par value
("Series A Preferred Stock"), Series B Convertible Participating Preferred
Stock, $.01 par value ("Series B Preferred Stock"), and Series C Senior
Convertible Preferred Stock, $.01 par value ("Series C Preferred Stock"), by (i)
stockholders or groups of related stockholders who, individually or as a group,
are the beneficial owners of 5% or more of any class of Golden Sky Holdings'
capital stock and (ii) the executive officers and directors of Golden Sky
Holdings. Beneficial ownership percentages of the Common Stock presented below
are significantly affected by the securities convertible into or exercisable for
Common Stock held by each stockholder. Except as required by law, holders of the
Common Stock do not vote as a separate class on matters presented for
stockholder approval.
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 12.3 15.2
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 * 13.3
BancBoston Ventures Inc.(6)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.7
Norwest Equity Partners VI,
LP(7)....................... -- -- 50,083.75 21.9 -- -- -- -- 6.7
Norwest Venture Partners VI,
LP(7)....................... -- -- 25,041.87 11.0 -- -- -- -- 3.3
HarbourVest Partners V-Direct
Fund L.P.(8)................ -- -- 75,125.62 32.9 -- -- -- -- 10.0
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 * -- -- 20,134.27 37.0 20,134.27 44.5 2.7
Jack S. Ramirez and Carol H.
Ramirez(12)................. -- -- -- -- 8,551.21 15.7 8,551.21 25.4 1.1
Joyce Travis, Trustee of the
Travis Living Trust Dated
the 5th day of March,
1998(13).................... -- -- -- -- 5,033.56 9.3 5,033.56 16.7 *
James and Constance R.
Hertz(14)................... -- -- -- -- 5,130.73 9.4 5,130.73 16.9 *
Maxon R. and Kristina
Davis(15)................... -- -- -- -- 3,455.98 6.4 3,455.98 12.1 *
Louise A. Davis(16)........... -- -- -- -- 3,377.18 6.2 3,377.18 11.8 *
Jay and Maria Downen(17)...... -- -- -- -- 2,912.01 5.4 2,912.01 10.4 *
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)............... -- -- -- -- 2,909.40 5.3 2,909.40 10.4 *
Chris J. Downen(19)........... -- -- -- -- 2,909.40 5.3 2,909.40 10.4 *
EXECUTIVE OFFICERS AND
DIRECTORS:
Rodney A. Weary(20)(21)....... 16,030.00 3.8 -- -- -- -- 14,593.00 48.6 4.1
John R. Hager(21)(22)......... -- -- -- -- -- -- 3,055.00 10.8 *
William J. Gerski(21)(23)..... -- -- -- -- -- -- 10,000.00 33.6 1.3
Scott R. Brown(21)(24)........ -- -- -- -- -- -- 555.00 1.3 *
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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(%)
- ------- ---------- ----- ---------- ----- --------- ----- --------- -------- --------
Jo Ellen Linn(21)(25)......... 430.00 * -- -- -- -- 1,667.00 6.5 *
Robert F. Benbow(26).......... 150,000.00 35.9 30,051.46 13.2 -- -- 5,719.00 20.5 24.7
William O. Charman(27)........ 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.7
William P. Collatos(28)....... 150,000.00 35.9 -- -- -- -- 37.00 * 20.0
William A. Johnston(29)....... -- -- 75,125.62 32.9 -- -- -- -- 10.0
Robert B. Liepold(21)(30)..... 1,000.00 * -- -- -- -- 2,322.00 8.9 *
Erik M. Torgerson(31)......... -- -- 50,083.75 21.9 -- -- -- -- 6.7
All Executive Officers and
Directors as a group (11
persons).................... 392,460.00 93.9 167,782.27 73.4 -- -- 37,967.00 100.0 79.7
- ---------------
* 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 the
holder.
(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 power with respect to the securities
held by their respective funds. The general partners of Alta Subordinated
Debt Management III, L.P., which is the general partner of Alta Sub Debt
III, include Messrs. Craig Burr, William P. Egan, Brian McNeill, Robert
Benbow, Timothy Dibble, Jean Deleage and Jonathan Flint and Ms. Eileen
McCarthy. These general partners may be deemed to share voting and
investment power for the shares held by Alta Sub Debt III. The general
partners of Alta Communications VI Management Partners, L.P., which is the
general partner of Alta VI, include Messrs. William P. Egan, Brian McNeill,
Robert Benbow, Timothy Dibble and David Retik and Ms. Eileen McCarthy.
These general partners may be deemed to share voting and investment power
for the shares held by Alta VI. These general partners disclaim beneficial
ownership of all securities held by the funds except to the extent of their
proportionate pecuniary interests in the shares. Some of the principals of
Burr, Egan, Deleage & Co. and Alta Communications, Inc., including some of
the individuals identified above, are members of S by S, which invests
alongside Alta VI. As members of S by S, they may be deemed to share voting
and investment power for the shares held by S by S. These principals
disclaim beneficial ownership of all of these shares except to the extent
of their proportionate pecuniary interest in the shares.
Common stock ownership includes warrants to purchase 2,103 shares of Common
Stock owned by Alta Sub Debt III, 3,499 shares of Common Stock owned by
Alta VI and 80 shares of Common Stock owned by S by S.
(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.
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Collatos and Kevin J. Morroni. Messrs. Applegate and Collatos may be deemed
to share beneficial ownership of the shares owned by Spectrum Equity
Investors, L.P., and Messrs. Applegate, Collatos and Morroni may be deemed
to share beneficial ownership of the shares owned by Spectrum Equity
Investors II, L.P. These individuals disclaim beneficial ownership of all
of these shares except to the extent of their respective pecuniary
interests in the shares.
(6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110,
Attn: William O. Charman. The shares of Series A Preferred Stock and Series
B Preferred Stock beneficially owned by BancBoston Ventures Inc. are
controlled by its President, Frederick M. Fritz, and by its Managing
Director, Sanford Anstey, and by William O. Charman, who is a director of
our company.
(7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attn:
Erik M. Torgerson. The shares of Series B Preferred Stock beneficially
owned by Norwest Equity Partners VI, LP are controlled by its general
partner, Itasca LBO Partners VI, LLP, which is controlled by John E.
Lindahl, Managing Partner, and by John P. Whaley, Managing Administrative
Partner. The shares of Series B Preferred Stock beneficially owned by
Norwest Venture Partners VI, LP are controlled by its general partner,
Itasca VC partners, LLP, which is controlled by its Managing Partner,
George J. Still, Jr., and by John P. Whaley, Managing Administrative
Partner.
(8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole
general partner of HarbourVest Partners V -- Direct Fund L.P. ("HarbourVest
V") is a limited liability company whose managing member is HarbourVest
Partners, LLC. The managing directors of HarbourVest Partners, LLC are
Messrs. George Anson, John M. Begg, Philip M. Bilden, Theodore A. Clark,
Kevin S. Delbridge, William A. Johnston, Edward W. Kane, Frederick C.
Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D. Brooks Zug, and Ms.
Martha D. Vorlicek. These individuals may be deemed to share beneficial
ownership of the shares held by HarbourVest V, and disclaim beneficial
ownership of all of these shares except to the extent of their respective
pecuniary interest in the shares.
(9) The address is c/o London Merchant Securities, Carlton House, 33 Robert
Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion
Investments Limited and Westpool Investment Trust plc is a wholly-owned
subsidiary of London Merchant Supplies plc, a publicly traded company in
the U.K.
(10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut 06927,
Attn: Peter Foley. General Electric Capital Corporation is a wholly-owned
subsidiary of General Electric Corporation.
(11) The address is P.O. Box 1376, Great Falls, Montana 59403.
(12) The address is 2061 Norwich Ct., Glenview, Illinois 60025.
(13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086.
(14) The address is 7444 Molt Road, Billings, Montana 59106.
(15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404.
(16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128.
(17) The address is 511 Fortress Circle, Leesburg, Virginia 21075.
(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 our
stock option plan, Mr. Weary has the right to acquire 4,863 shares of
Common Stock pursuant to options exercisable within 60 days.
(21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112.
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(22) Through our stock option plan, Mr. Hager has the right to acquire 3,055
shares of Common Stock pursuant to options exercisable within 60 days.
(23) Mr. Gerski beneficially owns 5,414 shares of Common Stock. In addition,
through our stock option plan, Mr. Gerski has the right to acquire 4,586
shares of Common Stock pursuant to options exercisable within 60 days.
(24) Through our stock option plan, Mr. Brown has the right to acquire 555
shares of Common Stock pursuant to options exercisable within 60 days.
(25) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and 1,111
shares of Common Stock. In addition, through our stock option plan, Ms.
Linn has the right to acquire 556 shares of Common Stock pursuant to
options exercisable within 60 days.
(26) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite
4050, San Francisco, California 94111. The shares are held of record by
Alta Subordinated Debt Partners III, L.P., Alta Communications VI, L.P. and
Alta-Comm S By S, LLC. Mr. Benbow is a general partner of the respective
general partners of Alta Subordinated Debt Partners III, L.P. and Alta
Communications VI, L.P. As a general partner, he may be deemed to share
voting and investment power with respect to the shares held by the funds.
Mr. Benbow disclaims beneficial ownership of the shares held by these funds
except to the extent of his proportionate pecuniary interest in the shares.
Mr. Benbow also disclaims beneficial ownership of all shares held by Alta
Comm S by S, LLC, of which he is not a member.
(27) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th
Floor, Boston, Massachusetts 02110. The shares are held of record by
BancBoston Ventures Inc., which may be deemed to be beneficially owned by
Mr. Charman.
(28) The address is c/o Spectrum Equity Investors, 125 High Street, Suite 2600,
Boston, Massachusetts 02110. The shares are held of record by Spectrum
Equity Investors L.P. and Spectrum Equity Investors II L.P., which may be
deemed to be beneficially owned by Mr. Collatos.
(29) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111. The shares are held of record by
HarbourVest Partners V-Direct Fund L.P., which may be deemed to be
beneficially owned by Mr. Johnston.
(30) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock and
1,425 shares of Common Stock. In addition, through our stock option plan,
Mr. Liepold has the right to acquire 897 shares of Common Stock pursuant to
options exercisable within 60 days.
(31) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower, 222
South Ninth Street, Minneapolis, Minnesota 55402-3388. The shares are held
of record by Norwest Equity Partners VI, LP, which may be deemed to be
beneficially owned by Mr. Torgerson.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENTS
On February 12, 1997, Golden Sky Systems sold an aggregate of 199,000
shares of Series A preferred stock and 75 shares of common stock to a group of
venture capital investors, consisting of
- Alta Subordinated Debt Partners III, L.P.,
- Alta Communications VI, L.P.,
- Alta-Comm S By S, LLC,
- Spectrum Equity Investors, L.P.,
- Spectrum Equity Investors II, L.P., and
- BancBoston Ventures Inc.
and a group of management and other individual investors, consisting of Rodney
A. Weary, Robert B. Liepold and Jo Ellen Linn, as well as various family members
and family trusts associated with these individual investors. See "Principal
Stockholders." On February 28, 1997, Golden Sky Systems issued an aggregate of
207,000 shares of Series A preferred stock and 25 shares of common stock to:
- Alta Subordinated Debt Partners III, L.P.,
- Alta Communications VI, L.P.,
- Alta-Comm S By S, LLC,
- Spectrum Equity Investors II, L.P., and
- BancBoston Ventures Inc.
These February 1997 transactions resulted in proceeds to Golden Sky Systems
of approximately $40.6 million in the aggregate. In a series of subsequent 1997
transactions, Golden Sky Systems sold an aggregate of 12,000 shares of Series A
preferred stock to 28 investors. Of these 12,000 Series A preferred shares,
5,000 were sold to trusts the beneficiaries of which are family members of
Rodney Weary and the remainder were sold to shareholders of companies acquired
by Golden Sky Systems as well as family members and trusts associated with these
shareholders. These subsequent 1997 transactions resulted in proceeds to Golden
Sky Systems of approximately $35.6 million, in addition to the conversion of
approximately $2.4 million in stock subscriptions and $3.8 million in short term
borrowings.
Under an Agreement and Plan of Merger dated as of September 9, 1997 by and
among Golden Sky Systems, GSS Mergersub Inc., a wholly-owned subsidiary of
Golden Sky Holdings, and Golden Sky Holdings, GSS Mergersub merged with and into
Golden Sky Systems, with Golden Sky Systems being the surviving corporation.
Upon the consummation of this merger, each share of Series A preferred stock of
Golden Sky Systems was converted into a share of Series A preferred stock of
Golden Sky Holdings, each share of common stock of Golden Sky Systems was
converted into a share of common stock of Golden Sky Holdings, and each share of
capital stock of GSS Mergersub was converted into a share of common stock of
Golden Sky Systems. This merger caused Golden Sky Systems to be a wholly-owned
subsidiary of Golden Sky Holdings. Under a letter agreement dated as of
September 9, 1997, Golden Sky Systems assigned, and Golden Sky Holdings assumed,
all of the rights and obligations of Golden Sky Systems under the February 1997
stock purchase agreement governing Golden Sky Systems' February 12, 1997 and
February 28, 1997 Series A preferred stock issuances.
Under a Note Purchase Agreement dated as of November 6, 1997 by and among
Golden Sky Holdings, Golden Sky Systems and a group of venture capital investors
consisting of Norwest Equity Partners V, HarbourVest Partners V-Direct Fund,
L.P., Alta Subordinated Debt Partners III, L.P., Alta Communications VI, L.P.,
Alta-Comm S By S, LLC, Lion Investments Limited, Westpool Investment
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Trust plc, and BancBoston Ventures Inc., Golden Sky Holdings sold to these
investors an aggregate of $10.0 million principal amount of convertible
promissory notes of Golden Sky Holdings. Each of these convertible notes 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, Golden Sky Holdings issued an aggregate of
228,442 shares of Series B preferred stock at a purchase price of $200 per share
in exchange for cash and the conversion of the Series B convertible notes. These
Series B preferred shares were issued to a group of venture capital investors
consisting of
- Norwest Equity Partners V,
- HarbourVest Partners V-Direct Fund, L.P.,
- Alta Subordinated Debt Partners III, L.P.
- Alta Communications VI, L.P.,
- Alta-Comm S By S, LLC,
- Lion Investments Limited,
- Westpool Investment Trust plc,
- BancBoston Ventures Inc., and
- General Electric Capital Corporation.
See "Principal Stockholders." The November 1997 Series D preferred stock
purchase agreement provides that specified actions by Golden Sky 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 Golden Sky Holdings' board of
directors.
Subject to specified exceptions, Golden Sky Holdings and its subsidiaries
are prohibited under the terms of each of the February and November 1997 stock
purchase agreements from paying any dividends or making any distributions of
cash, property or securities of Golden Sky Holdings or any of its subsidiaries
with respect to any shares of capital stock of Golden Sky Holdings or any of its
subsidiaries, or directly or indirectly redeeming, purchasing or otherwise
acquiring for consideration any shares of capital stock of Golden Sky Holdings
or any of its subsidiaries. These prohibitions could have the effect of limiting
the cash available for Golden Sky DBS to service its debt.
On October 3, 1998, Western Montana DBS, Inc. d/b/a Rocky Mountain DBS
merged into Golden Sky Systems. In connection with the Western Montana DBS
merger, Golden Sky issued an aggregate of 51,000 shares of Series C senior
convertible preferred stock and paid an aggregate of $9.8 million in cash to the
Western Montana DBS stockholders. The $9.8 million paid by Golden Sky included
$1.0 million deposited in an escrow account to secure the Western Montana DBS
shareholders' indemnification obligations under the Western Montana DBS merger
agreement. At the time of the Western Montana DBS merger, the Golden Sky
shareholders listed below were stockholders of Western Montana DBS:
- Harold Poulson,
- Jack S. Ramirez and Carol H. Ramirez,
- Joyce Travis, Trustee of the Travis Living Trust Dated the 5th day of
March, 1998,
- James and Constance R. Hertz,
- Maxon R. and Kristina Davis,
- Louise A. Davis,
- Jay and Maria Downen,
- Otis J. Downen as Trustee of the Otis J. Downen, June 1992 Trust and
Frances Eileen Downen June 1997 Trust as Tenants in Common, and
- Chris J. Downen
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On February 19, 1999, Golden Sky Holdings transferred all the outstanding
capital stock of Golden Sky Systems and $100 in cash to Golden Sky DBS in
exchange for 100 shares of Golden Sky DBS common stock.
STOCKHOLDERS' AGREEMENT
Golden Sky Holdings and its stockholders have entered into a stockholders'
agreement dated as of November 24, 1997. Under this stockholders' agreement,
Golden Sky Holdings and the institutional holders of Golden Sky Holdings' Series
A and Series B preferred stock were granted a right of first offer with respect
to shares of Golden Sky Holdings' capital stock offered in transactions not
otherwise expressly permitted under the stockholders' agreement. Under the
stockholders' agreement, the institutional holders of Golden Sky Holdings'
Series A and Series B preferred stock requested a co-sale option with respect to
sales of capital stock made by other Golden Sky stockholders unless the sale is
expressly excepted under the stockholders' agreement. In addition, the
institutional holders of Golden Sky Holdings' Series A and Series B preferred
stock were granted the right, upon the affirmative vote of 58% of the
outstanding shares of each class of preferred stock, to cause the other holders
to (i) dispose of all their shares of capital stock of Golden Sky Holdings in
connection with a sale of all outstanding shares of Golden Sky Holdings' capital
stock or (ii) vote for the merger or consolidation of Golden Sky Holdings with
an unaffiliated acquiring entity or the sale of all or substantially all the
assets of Golden Sky Holdings. These rights terminate immediately upon an
initial public offering of Golden Sky Holdings' common stock meeting specified
criteria or a sale of Golden Sky Holdings. Under the stockholders' agreement,
Golden Sky Holdings' stockholders have agreed to fix the number of directors on
its board at seven and to elect those directors as follows:
- two directors are selected by the majority interest of a group which
includes various management and other individual investors, consisting of
Rodney A. Weary, Robert B. Liepold and Jo Ellen Linn, as well as family
members and family trusts associated with these individual investors,
- one director is selected by Alta Subordinated Debt Partners III, L.P.,
Alta Communications VI, L.P. and Alta-Comm S By S, LLC,
- one director is selected by Spectrum Equity Investors, L.P. and Spectrum
Equity Investors II, L.P.,
- one director is selected by BancBoston Ventures, Inc.,
- one director is selected by Norwest Equity Partners V, and
- one director is selected by HarbourVest Venture Partners V-Direct Fund
L.P.
Under this stockholders' agreement, Golden Sky Holdings has agreed, subject
to specified 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 "piggy-back"
registration rights and rights to registration on Form S-3, subject to specified
conditions. In consideration for their registration rights, under the
stockholders' agreement the stockholders have agreed not to sell or otherwise
dispose of shares of Golden Sky Holdings' common stock for 180 days following
any initial public offering by Golden Sky Holdings upon the request of Golden
Sky Holdings or the underwriter for the offering. The obligations of Golden Sky
Holdings to register shares of its common stock under the stockholders'
agreement will terminate as to any party thereto except Golden Sky Holdings
seven years after an initial public offering of Golden Sky Holdings' securities,
or, as to any party holding less than 2% of Golden Sky Holdings' outstanding
common stock, at any time after the first anniversary of an initial public
offering when all of the person's shares of Golden Sky Holdings common stock can
be legally transferred in a three-month period under Rule 144 under the
Securities Act, as reasonably determined by Golden Sky Holdings.
FORMER CABLE-VIDEO MANAGEMENT, INC. ARRANGEMENT
On July 1, 1996, Golden Sky Systems entered into a management agreement
with Cable-Video Management, Inc. ("CVM"), which is owned by Rodney A. Weary,
Golden Sky Systems' Chief
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Executive Officer, to administer Golden Sky Systems' first acquisition. The
management agreement was terminated effective September 30, 1996. During the
term of the agreement, total management fees of $280,000 were paid to CVM, and
Golden Sky Systems reimbursed CVM for salaries and other miscellaneous expenses
totaling approximately $343,000. Upon termination of the management agreement,
Golden Sky Systems purchased the assets of CVM for $44,000.
CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD
Golden Sky Systems has an oral consulting agreement with Robert B. Liepold,
a vice president and director of Golden Sky Systems, to provide expertise on an
"as needed" basis at the rate of $200 per hour in fiscal 1997 and at the rate of
$7,000 per month in 1998. Golden Sky Systems paid to Mr. Liepold an aggregate of
$77,000 in 1997 and $84,000 in 1998 in connection with these services. In
addition, Golden Sky Systems paid Mr. Liepold a commission of $75,000 in October
1998 in connection with a recent acquisition.
PAYMENTS TO AFFILIATES OF RODNEY A. WEARY
Golden Sky Systems utilizes the air transportation services of a company
owned by Rodney A. Weary, Golden Sky Systems' Chief Executive Officer. Golden
Sky Systems paid $506,000 in 1998, $109,000 in 1997 and $31,000 in 1996 in
connection with these services. In October 1997, Golden Sky Systems entered into
an agreement to lease an aircraft from Mr. Weary. The lease is cancelable with
six months' notice and requires monthly payments equal to the greater of $20,000
or a fixed hourly operating charge based on prevailing market rates.
In 1997, Mr. Weary loaned $150,000 to Golden Sky Systems at an interest
rate of 10% per annum. In 1996, Mr. Weary made a short-term loan in the
principal amount of $381,000 to Golden Sky Systems at an annual interest rate of
10%. These amounts were repaid by Golden Sky Systems prior to December 31, 1997.
Also in 1997, Golden Sky Systems paid $66,000 to a company affiliated with
Mr. Weary, which payment was reimbursement relating to consulting services
rendered to Golden Sky Systems.
In 1997, F.G. Weary, the father of Rodney A. Weary, loaned $215,000 to
Golden Sky Systems at an interest rate of 10% per annum. This loan, together
with accrued interest, was repaid by Golden Sky Systems prior to December 31,
1997.
DESCRIPTION OF OTHER INDEBTEDNESS
CREDIT FACILITY
The Amended and Restated Credit Agreement, dated as of May 8, 1998, among
Golden Sky Holdings, Golden Sky Systems, the banks party thereto from time to
time, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet
National Bank, as administrative agent, and General Electric Capital
Corporation, as documentation agent, which governs the Credit Facility was
amended in connection with the offering of the outstanding notes. As amended,
the Credit Facility provides for a $35.0 million term loan facility and a $115.0
million revolving credit facility, with a $40.0 million sublimit for letters of
credit. We have fully utilized the term loan availability. All of the proceeds
of borrowings under the term loan facility ("Term Loans") were used to repay
existing indebtedness and for working capital purposes. The proceeds of
borrowings under the revolving credit facility ("Revolving Loans") may be used
to effect acquisitions of rural DIRECTV markets and for general corporate,
capital expenditure and working capital purposes. Capitalized terms used in this
section but not defined herein have the meaning ascribed to these terms in the
Credit Facility.
The term loan facility is to be repaid in 16 consecutive quarterly
installments beginning March 31, 2002, with the remaining balance due December
31, 2005. Each of the quarterly payments due from March 31, 2002 through
September 30, 2005 will be in the amount of approximately $88,000, with
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$33.7 million due as a bullet payment at maturity on December 31, 2005.
Borrowings under the revolving credit facility will be available until September
30, 2005; however, the total revolving loan commitment will be reduced quarterly
commencing March 31, 2001 by approximately $1.2 million at the end of each
quarter from March 31, 2001 through December 31, 2001, by approximately $3.4
million at the end of each quarter from March 31, 2002 through December 31,
2002, by $6.9 million at the end of each quarter from March 31, 2003 through
December 31, 2003, by approximately $8.6 million at the end of each quarter from
March 31, 2004 through December 31, 2004, and by $11.5 million from March 31,
2005 through September 30, 2005. The making of each loan under the Credit
Facility is subject to the satisfaction of specified conditions, which include
not exceeding a specified "borrowing base" based on the number of paying
subscribers within the rural DIRECTV markets served by us and in rural DIRECTV
markets to be acquired by us. In addition, the Credit Facility provides for
mandatory repayments from the net proceeds of sales or other dispositions of
capital stock or material assets, and with a percentage of any excess operating
cash flow with respect to any fiscal year equal to 75%.
Borrowings by Golden Sky Systems under the Credit Facility are
unconditionally and irrevocably guaranteed by Golden Sky Holdings, us and each
of our direct and indirect subsidiaries, excluding South Plains DBS Limited
Partnership and DCE Satellite Entertainment, LLC. These borrowings are also
secured by (i) a pledge by Golden Sky Holdings of all of our capital stock, (ii)
a pledge by us of all of the capital stock of Golden Sky Systems, (iii) an equal
and ratable pledge of all of the capital stock of Golden Sky Systems'
subsidiaries, (iv) a first priority security interest in all of these
subsidiaries' assets, and (v) a collateral assignment of our NRTC Agreements.
The Credit Facility provides that we may elect that all or a portion of the
borrowings under the Credit Facility bear interest at a rate per annum equal to
either (i) the Base Rate plus the Applicable Margin or (ii) the Quoted Rate plus
the Applicable Margin. When applying the Base Rate with respect to Revolving
Loans, the Applicable Margin will be 2.50% per year, less, reduced in some cases
by a discount based on our then ratio of Net Adjusted Consolidated EBITDA to
Annualized Consolidated EBITDA. When applying the Quoted Rate with respect to
Revolving Loans, the Applicable Margin will be 3.75% per year, less a discount
based on leverage, if applicable. When applying the Base Rate with respect to
Term Loans, the Applicable Margin will be 2.75% per year, less a discount based
on leverage, if applicable. When applying the Quoted Rate with respect to Term
Loans, the Applicable Margin will be 4.00% per year, less a discount based on
leverage, if applicable. As used in this prospectus, 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 in this prospectus, the "Quoted Rate" means (a) the
quotation offered to the Administrative Agent in the New York interbank
Eurodollar market for U.S. dollar deposits of amounts in immediately available
funds comparable to the outstanding principal amount of the loan of the
Administrative Agent for which an interest rate is then being determined with
maturities comparable to the interest period applicable to the particular loan
as determined by the Administrative Agent's Treasury Funding Management on the
date which is two business days prior to the commencement of the interest period
in question, divided by (b) a percentage equal to the remainder of 100% minus
the then stated maximum rate of all reserve requirements applicable to any
member bank of the Federal Reserve System in respect of Eurocurrency funding or
liabilities as defined in Regulation D of the Board of Governors of the Federal
Reserve System.
The Credit Facility contains a number of significant covenants that, among
other things, limit our ability and the ability of our subsidiaries to incur
additional indebtedness and guaranty obligations, create liens and other
encumbrances, make restricted payments, investments, loans and advances, pay
dividends or make other distributions in respect of our capital stock, sell or
otherwise dispose of assets, make capital expenditures, merge or consolidate
with another entity, create subsidiaries, make amendments to our organizational
documents or transact with affiliates. In addition, the Credit Facility requires
the maintenance of specified financial and operating covenants, including
minimum interest coverage ratios and limits on general and administrative
expenses.
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Golden Sky Systems is required to pay commitment fees on the unused amounts
under the revolving loan commitments. These commitment fees, which will be
payable quarterly in arrears, will range from 0.5% per year to 1.25% per year
based on our utilization of the commitments.
Pursuant to an amendment to the NRTC Agreements, we and all other NRTC
members and affiliates whose monthly obligations to the NRTC have exceeded
$500,000 in the past six months are required to keep and maintain in full force
and effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Agreements. The
initial amount of the letter of credit issued at our request pursuant to the
Credit Facility is equal to three times our single largest monthly invoice from
the NRTC, and must be increased as we make additional acquisitions of rural
DIRECTV markets and when our obligations to the NRTC exceed the amount of the
original letter of credit by 67%.
THE 12 3/8% NOTES
On July 31, 1998, Golden Sky Systems, our wholly-owned subsidiary,
consummated an offering of $195 million aggregate principal amount of its
12 3/8% Notes. Interest on the 12 3/8% Notes is payable in cash semi-annually on
February 1 and August 1 of each year, with the first interest payment due
February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes
offering resulted in net proceeds of approximately $189.15 million, after
payment of underwriting discounts and other issuance costs aggregating
approximately $5.85 million. Approximately $45.2 million of the net proceeds of
the 12 3/8% Notes offering were placed in an interest reserve account to fund
the first four semi-annual interest payments, through August 1, 2000, on the
12 3/8% Notes.
The 12 3/8% Notes are unsecured senior subordinated obligations of Golden
Sky Systems and are subordinated in right of payment to all of its existing and
future senior indebtedness. The 12 3/8% Notes rank equally in right of payment
with all other existing and future senior subordinated indebtedness, if any, of
Golden Sky Systems and senior in right of payment to all existing and future
subordinated indebtedness, if any, of Golden Sky Systems.
The 12 3/8% Notes are redeemable, in whole or in part, at Golden Sky
Systems' option on or after August 1, 2003, at redemption prices decreasing from
112% during the year commencing August 1, 2003 to 108% on or after August 1,
2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to August 1, 2001, Golden Sky Systems may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of the
12 3/8% Notes, at a redemption price equal to 112.375% of the principal amount
thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption solely with the net proceeds of a public equity offering by us,
Golden Sky Holdings or Golden Sky Systems yielding gross proceeds of at least
$40.0 million and any subsequent public equity offerings, provided that, in the
case of any offering or offerings by Golden Sky Holdings or us, all the net
proceeds are contributed to Golden Sky Systems; and provided, further, that
immediately after any redemption the aggregate principal amount of the 12 3/8%
Notes outstanding must equal at least 65% of the originally issued aggregate
principal amount of the 12 3/8% Notes.
The indenture governing the 12 3/8% Notes contains restrictive covenants
that, among other things, impose limitations on our and our subsidiaries'
ability to incur additional indebtedness, pay dividends or make restricted
payments, enter into transactions with affiliates, incur debt that is
subordinate in right of payment to any senior indebtedness and senior in right
of payment to the 12 3/8% Notes, incur liens, permit restrictions on the ability
of our subsidiaries to pay dividends or make restricted payments to us, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our assets. In the event of a
change of control, as defined in the 12 3/8% Notes indenture, each holder of the
12 3/8% Notes will have the right to require Golden Sky Systems to purchase all
or a portion of the holder's 12 3/8% Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.
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THE 13 1/2% NOTES
To the extent that holders of the Outstanding Notes choose not tender their
notes in the exchange offer, these non-tendered notes will remain outstanding
after the consummation of the exchange offer. The terms of these notes will be
identical in all material respects, including principal amount at maturity,
yield to maturity and maturity, to the terms of the new notes. However, the
Outstanding Notes will continue to be subject to the transfer restrictions
contained in the legend which appears on each respective note. After the
consummation of this exchange offer, the aggregate principal amount at maturity
of any non-tendered Outstanding Notes and the new notes will be $193,100,000.
See "Risk Factors -- Completion of the exchange offer may have an adverse effect
on your ability to transfer your outstanding notes if you do not tender your
notes in the exchange offer" and "Description of the New Notes."
SELLER NOTES
In connection with the acquisition of our rural DIRECTV market in Clark
County, Nevada, we issued a promissory note in favor of TEG-DBS Services, Inc.
Under the TEG-DBS note, we are obligated to pay to TEG-DBS the principal sum of
$2.5 million, which amount is due and payable on June 12, 1999, together with
interest accrued on the unpaid principal amount at the rate of 10% per year,
which interest is payable in quarterly installments. Our obligations under the
TEG-DBS Note are secured by assets of TEG-DBS acquired by us, as described in
the Security Agreement, dated June 12, 1997 between TEG-DBS and our company. As
of December 31, 1998, the entire principal amount of the TEG-DBS note was
outstanding. A failure by us to make a payment under the TEG-DBS note would
entitle TEG-DBS, at its sole option to (i) a late payment penalty equal to 2% of
the payment amount or (ii) to accelerate the payment by us of all amounts due
under the TEG-DBS note.
In connection with the acquisition of our rural DIRECTV market in Missoula,
Montana, we issued a note payable in favor of Western Montana Entertainment
Television, Inc. in the principal amount of $3.75 million, dated December 22,
1997. The Western Montana note bears interest at an annual rate of 7%. Four
annual installments of principal and interest of $1,121,868 are payable
commencing January 5, 1999. The Western Montana note is secured by a letter of
credit.
In connection with the acquisition of our rural DIRECTV market in Enfield,
North Carolina, we issued a note payable in favor of Halifax Electric Membership
Corporation in the principal amount of $5.0 million, dated May 8, 1998. The
Halifax note bears interest at an annual rate of 7%. Interest is payable in
quarterly installments. Principal is payable in equal annual installments of
$1.0 million on January 1 of each year, commencing January 1, 1999. The
installment payment due January 1, 1999 was paid by Golden Sky Systems at the
end of December 1998. The Halifax note is secured by a letter of credit.
In connection with the acquisition of our rural DIRECTV market in
Summerdale, Alabama, we issued a note payable in favor of Baldwin County
Electric Membership Corporation in the principal amount of $5.16 million, dated
June 29, 1998. The Alabama note bore interest at an annual rate of 8%. Principal
and accrued interest was paid, in full, on January 15, 1999.
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DESCRIPTION OF THE NEW NOTES
The Outstanding Notes were, and the new notes (the "Notes") will be, issued
under the same indenture that governs the outstanding notes (the "Indenture").
The Indenture, which is dated as of February 19, 1999, is between Golden Sky
DBS, Inc. and United States Trust Company of New York, as trustee (the
"Trustee"). A copy of the form of the Indenture will be made available to
holders of the Notes upon request. Upon the effectiveness of the shelf
registration statement of which this prospectus is a part, the Indenture will be
subject to and governed by the Trust Indenture Act of 1939, as that act may have
been amended (the "Trust Indenture Act"). The summary of the material provisions
of the Indenture in this "Description of the New Notes," is not complete and is
qualified by reference to, the Trust Indenture Act, and to all of the provisions
of the Indenture, including the definitions of some of the terms therein and
those terms made a part of the Indenture by reference to the Trust Indenture
Act, as in effect on the date of the Indenture. As used in this section, the
"Issuer" refers to Golden Sky DBS, Inc. only. The definitions of many of the
capitalized terms used in this section are set forth below under
"-- Definitions."
GENERAL
The Notes will be general senior unsecured obligations of the Issuer. The
Notes are limited to $193,100,000 aggregate principal amount at maturity and
will mature on March 1, 2007. The outstanding notes were issued at a substantial
discount from their principal amount at maturity and generated gross proceeds to
the Issuer of $100,048,972. Based on the issue price of the Outstanding Notes,
the yield to maturity of the Notes is 13 1/2%, calculated on a semi-annual bond
equivalent basis, from February 19, 1999. See "Federal Income Tax
Considerations."
Cash interest will not accrue or be payable on the Notes prior to March 1,
2004. After that date, cash interest on the Notes will accrue at a rate of
13 1/2% per year and will be payable semi-annually in arrears on each March 1
and September 1, commencing on September 1, 2004, to the holders of record of
the Notes at the close of business on the February 15 and August 15, immediately
preceding the relevant interest payment date. Cash interest will accrue from the
most recent interest payment date to which interest has been paid or duly
provided for or, if no interest has been paid or duly provided for, from March
1, 2004. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
The Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. The principal of, premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Issuer in the City of New York maintained for these purposes. This
office will initially be the corporate trust office of the Trustee. No service
charge will be made for any registration of transfer, exchange or redemption of
the Notes, but the Issuer may require payment to cover any tax or other
governmental charge that may be imposed in connection therewith.
OPTIONAL REDEMPTION
Optional Redemption. The Issuer, at any time on or after March 1, 2004, may
redeem all or part of the Notes at the redemption prices, which are expressed as
percentages of principal amount at maturity, set forth below, plus accrued and
unpaid interest, if any, to the redemption date, if redeemed during the 12-month
period beginning on March 1 of the years indicated below:
REDEMPTION
YEAR PRICE
- ---- ----------
2004........................................................ 106.750%
2005........................................................ 103.375%
2006 and thereafter......................................... 100.000%
Optional Redemption upon Public Equity Offerings. In addition, at any time
prior to March 1, 2002, the Issuer may, at its option, redeem up to 35% of the
originally issued aggregate principal amount at
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maturity of the Notes, at a redemption price in cash equal to 113.5% of the
Accreted Value of the Notes at the date of redemption solely with the net
proceeds of a Public Equity Offering of the Issuer yielding gross proceeds of at
least $40 million and any subsequent Public Equity Offerings. At least 65% of
the originally issued aggregate principal amount of Notes must remain
outstanding after each redemption. The Issuer must give notice of its desire to
make any redemption within 60 days of the related Public Equity Offering.
MANDATORY REDEMPTION
The Issuer will not be required to make any mandatory sinking fund payments
in respect of the Notes. However,
(1) upon a Change of Control, the Issuer will be required to make an offer
to purchase all outstanding Notes at a price equal to 101% of the
Accreted Value thereof, or if the Change of Control occurs on or after
March 1, 2004, the principal amount at maturity thereof, in each ease
determined at the date of purchase, plus accrued interest thereon, if
any, to the date of purchase, and
(2) upon an Asset Sale, the Issuer may be obligated to make an offer to
purchase all or a portion of the Notes at a price equal to 100% of the
Accreted Value thereof, or if the Asset Sale occurs on or after March
1, 2004, the principal amount at maturity thereof, determined at the
date of purchase, plus accrued and unpaid interest, if any, to the date
of purchase. See "-- Covenants -- Disposition of Proceeds of Asset
Sales."
Selection; Effect of Redemption Notice. In the case of a partial
redemption, the Trustee will select the notes for redemption on a pro rata, by
lot or other method. Any redemption relating to a Public Equity Offering must be
made on a pro rata basis or on as nearly a basis as practicable, subject to DTC
procedures. No Notes of a principal amount at maturity of $1,000 or less can be
redeemed in part. The Issuer must be mail notice of redemption to the registered
address of each holder of Notes by first-class mail at least 30 but not more
than 60 days before the redemption date. If any Note is to be redeemed in part
only, the notice of redemption that relates to the Note shall state the portion
of the principal amount at maturity thereof to be redeemed. A new note in a
principal amount at maturity equal to the unredeemed portion of the partially
redeemed Note, will be issued in the name of the holder thereof upon
cancellation of the original Note. Upon giving of a redemption notice, interest
on any Notes called for redemption will cease to accrue from and after the date
fixed for redemption, unless the Issuer defaults in providing the funds for
redemption, and those Notes will cease to be outstanding.
CHANGE OF CONTROL
The Indenture provides that, following a Change of Control, the Issuer will
be obligated, within 30 days after the Change of Control Date, to make an offer
to purchase on a business day not later than the 60th day following the Change
of Control Date all of the then existing Notes at a purchase price in cash equal
to 101% of the Accreted Value of the Notes on the Change of Control payment
date. If the Change of Control payment date is on or after March 1, 2004, the
Change of Control purchase price must be equal to 101% of the principal amount
at maturity of the Notes, plus accrued and unpaid interest thereon, if any, to
the Change of Control payment date. The Issuer will be required to purchase all
Notes properly tendered and not withdrawn pursuant to the Change of Control
Offer.
Within 30 days following any Change of Control and prior to mailing the
notice referred to below, the Indenture provides that the Issuer covenants to
either
(1) repay in full and terminate all commitments under all Indebtedness
under the Credit Facility or offer to repay in full and terminate all
commitments under all Indebtedness under the Credit Facility and to
repay the Indebtedness owed to each lender which has accepted the offer
or
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(2) obtain the requisite consents under the Credit Facility to permit the
repurchase of the Notes as provided below.
We will first comply with the covenant in (2) above before we will be
required to repurchase Notes as contemplated by the provisions described herein.
Our failure to comply with (1) and (2) above constitute an Event of Default
described in (4), but not (2) of "-- Events of Default" below.
In order to effect a Change of Control offer, the Issuer will, not later
than the 30th day after the Change of Control date, be obligated to mail to each
holder of Notes notice of the Change of Control Offer, which notice will
(1) govern the terms of the Change of Control Offer and
(2) will state, among other things, the procedures that holders must follow
to accept the Change of Control Offer.
The Change of Control Offer must remain open for at least 20 business days.
The occurrence of some of the events that would constitute a Change of
Control would also constitute a "Change in Control" or other event of default
under the Credit Facility and/or a "Change of Control" under the 12 3/8% Notes
Indenture. The Credit Facility contains an event of default upon a "Change of
Control" as defined therein and the 12 3/8% Notes Indenture obligates Golden Sky
Systems to make an offer to repurchase the 12 3/8% Notes upon a "Change of
Control" as defined therein.
If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay the purchase price for all of
the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Issuer fails to purchase all of the Notes
tendered for purchase, this failure will constitute an Event of Default under
the Indenture. See "-- Events of Default" below.
The Issuer must comply with all 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. Any violation of the provisions of the Indenture relating to a
Change of Control offer occurring as a result of this compliance will not be
deemed a Default or an Event of Default under the Indenture.
COVENANTS
Set forth below are the material covenants that are contained in the
Indenture.
Limitation on Indebtedness of the Issuer. The Indenture provides that the
Issuer will not directly or indirectly incur, contingently or otherwise, any
Indebtedness (including any Acquired Indebtedness), except that the Issuer may
Incur
(1) Indebtedness of the Issuer evidenced by the Notes and the
Indenture,
(2) Indebtedness represented by a guarantee of
(a) the Issuer's obligations of amounts outstanding under the
Credit Facility and
(b) Indebtedness of a Restricted Subsidiary Incurred under clauses
(b)(2), (e), (h) and (i) of the definition of "Permitted Indebtedness,"
and any refinancing thereof under clause (g) of this definition,
pursuant to the covenant "Limitation on Additional Indebtedness of
Subsidiaries of the Issuer," and
(3) Indebtedness of the Issuer the proceeds of which are used solely
to refinance Indebtedness Incurred under clause (1) above; provided that
(a) the principal amount of Indebtedness incurred pursuant to this
clause (3), or, if this Indebtedness provides for an amount less than
the principal amount thereof to be due and
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payable upon a declaration of acceleration of the maturity thereof, the
original issue price of the Indebtedness, shall not exceed the sum of
(i) if prior to March 1, 2004, the total Accreted Value or, if
on or after March 1, 2004, the aggregate principal amount at maturity
of the Notes refinanced, plus
(ii) the amount of any premium reasonably determined by the
Issuer as necessary to accomplish the refinancing by means of a
tender offer or privately negotiated purchase, plus
(iii) the amount of expenses in connection therewith,
(b) the new Indebtedness shall have an Weighted Average Life to
Stated Maturity that is equal to or greater than the remaining Weighted
Average Life Stated Maturity of the Indebtedness being refinanced and
shall have no scheduled principal payment prior to the 91st day after
the Stated Maturity for the final scheduled principal payment of the
Indebtedness being refinanced, and
(c) in the case of any partial refinancing of the Notes, the new
Indebtedness shall be unsecured.
Limitation on Additional Indebtedness of Subsidiaries of the Issuer. The
Indenture provides that the Issuer will not permit any Restricted Subsidiary to,
directly or indirectly, Incur, contingently or otherwise, any Indebtedness,
including any Acquired Indebtedness, other than Permitted Indebtedness. However,
the Restricted Subsidiaries will be permitted to Incur Indebtedness, including
Acquired Indebtedness, if, at the time of and immediately after giving pro forma
effect to the Incurrence, including the application of the net proceeds
therefrom, the Debt to Operating Cash Flow Ratio of the Issuer would be less
than or equal to 6.5 to 1.0.
Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless
(1) no Default shall have occurred and be continuing at the time of or
after giving effect to the Restricted Payment,
(2) immediately after giving effect to the Restricted Payment, a
Restricted Subsidiary would be able to Incur $1.00 of Indebtedness under
the Debt to Operating Cash Flow Ratio set forth in the covenant "Limitation
on Additional Indebtedness of Subsidiaries of the Issuer," and
(3) immediately after giving effect to the Restricted Payment, the
aggregate amount of all Restricted Payments and Designation Amounts
declared or made on or after the Issue Date does not exceed an amount equal
to the sum of, without duplication,
(a) the difference between
(i) the Cumulative Operating Cash Flow determined for the period
commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of the
Restricted Payment and
(ii) 150% of Cumulative Consolidated Interest Expense determined
for the period commencing on the Issue Date and ending on the last
day of the most recent fiscal quarter immediately preceding the date
of the Restricted Payment, plus
(b) the aggregate net cash proceeds received by the Issuer either
(i) as capital contributions to the Issuer after the Issue Date
or
(ii) from the issue and sale, other than to a Subsidiary of the
Issuer, of its Qualified Equity Interests after the Issue Date, plus
(c) the aggregate net cash proceeds received by the Issuer or any
Restricted Subsidiary after the Issue Date upon the conversion of, or
exchange for, Indebtedness of the Issuer or a
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Restricted Subsidiary that has been converted into or exchanged for
Qualified Equity Interests of the Issuer, plus
(d) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, other than an Investment made
pursuant to (4) of the following paragraph, made after the Issue Date,
an amount, to the extent not included in the computation of Cumulative
Operating Cash Flow, equal to the lesser of
(i) the return of capital with respect to the Investment and
(ii) the amount of the Investment that was treated as a
Restricted Payment, plus
(e) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after
the Issue Date in accordance with "-- Designation of Unrestricted
Subsidiaries" below, the Issuer's proportionate interest equal to the
Fair Market Value of any Unrestricted Subsidiary that has been
redesignated as a Restricted Subsidiary after the Issue Date in
accordance with "-- Designation of Unrestricted Subsidiaries" below not
to exceed in any case the Designation Amount with respect to the
Restricted Subsidiary upon its Designation, minus
(f) the greater of
(i) $0 and
(ii) the Designation Amount, measured as of the date of
Designation, with respect to any Subsidiary of the Issuer that has
been Designated as an Unrestricted Subsidiary after the Issue Date in
accordance with "-- Designation of Unrestricted Subsidiaries" below
and minus
(g) 50% of the aggregate principal amount of outstanding
Indebtedness included in the calculation of clause (c) of the definition
of Permitted Indebtedness at the time of the Restricted Payment to the
extent funded with the net cash proceeds received by the Issuer either
(i) as capital contributions to the Issuer after the Issue Date
or
(ii) from the issue and sale, other than to a Subsidiary of the
Issuer, of its Qualified Equity Interests after the Issue Date.
For purposes of (b) and (c) above and without duplication and for purposes
of the definition of Total Incremental Invested Equity, the value of the
aggregate net cash proceeds received by the Issuer upon the issuance of
Qualified Equity Interests either upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of
options, warrants or rights will be the net cash proceeds received upon the
issuance of the Indebtedness, options, warrants or rights plus the incremental
cash received by the Issuer upon the conversion, exchange or exercise thereof.
The provisions of this covenant shall not prohibit
(1) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof, if at the date of declaration the
payment would comply with the provisions of the Indenture,
(2) so long as no Default shall have occurred and be continuing, the
purchase, redemption, retirement or other acquisition of any Equity
Interests of the Issuer
(a) in exchange for or conversion into or
(b) out of the net cash proceeds of the substantially concurrent
issue and sale, other than to a Subsidiary of the Issuer, of Equity
Interests of the Issuer, other than Disqualified Equity Interests;
provided that any net cash proceeds pursuant to the immediately
preceding subclause (b) are excluded from clause (3)(b) of the preceding
paragraph,
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(3) so long as no Default shall have occurred and be continuing, the
purchase, redemption, defeasance or other acquisition or retirement for
value of Subordinated Indebtedness made by exchange for, including any
exchange pursuant to the exercise of a conversion right or privilege in
which cash is paid in lieu of fractional shares or scrip, or out of the net
cash proceeds of a substantially concurrent issue or sale, other than to a
Subsidiary of the Issuer, of,
(a) Equity Interests other than Disqualified Equity Interests of
the Issuer; provided that any net cash proceeds, to the extent so used,
are excluded from clause (3) of the preceding paragraph, and/or
(b) other Subordinated Indebtedness, having a Weighted Average Life
to Maturity that is equal to or greater than the Weighted Average Life
to Maturity of the Subordinated Indebtedness being purchased, redeemed,
defeased or otherwise acquired or retired,
(4) Investments constituting Restricted Payments in Persons engaged
primarily in a Permitted Business in an amount not to exceed $10.0 million
outstanding at any time,
(5) the making of any Investment in or payment of any dividend or
distribution by the Issuer to Golden Sky Holdings for bona fide costs and
operating expenses of Golden Sky Holdings directly related to the
operations of Golden Sky Holdings and its Subsidiaries, and
(6) the payment of any dividend or distribution by the Issuer to
Golden Sky Holdings to enable it to purchase, redeem, or otherwise acquire
or retire for value Equity Interests of Golden Sky Holdings held by
employees or former employees of the Issuer, or any Subsidiary of the
Issuer, or their estates or beneficiaries under their estates, upon death,
disability, retirement or termination of employment, not to exceed $1.0
million in any year or $3.0 million in the aggregate since the Issue Date
plus, in each case, the amount of the net proceeds received by the Issuer
or the 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 the financial statements which would have made the Restricted
Payment prohibited at the time that it was made.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (4) and (6) of the second
preceding paragraph shall be included as Restricted Payments and amounts
expended pursuant to clauses (2), (3) and (5) shall be excluded. The amount of
any non-cash Restricted Payment shall be deemed to be equal to the Fair Market
Value thereof at the date of the making of the Restricted Payment.
Ownership of Golden Sky Systems. The Indenture provides that the Issuer
will at all times be the legal and beneficial owner, as defined in the
Indenture, of 100% of the Capital Stock of Golden Sky Systems.
Limitation on Liens. The Indenture provides that the Issuer will not,
directly or indirectly, create, incur, assume or suffer to exist any Lien of any
kind upon any of its property or assets, whether now owned or acquired after the
Issue Date, or any proceeds therefrom, or assign or convey any right to receive
income therefrom to secure either
(1) Subordinated Indebtedness, unless the Notes are secured by a Lien
on this property, assets or proceeds that is senior in priority to the
Liens securing the Subordinated Indebtedness, or
(2) any Indebtedness of the Issuer that is not Subordinated
Indebtedness, unless the Notes are equally and ratably secured with the
Liens securing the other Indebtedness, except, in either case for Liens to
secure Indebtedness on cash representing the proceeds of the Indebtedness
or Government Securities acquired with the cash and pledged for the purpose
of providing for the payment of interest
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on the Indebtedness and except for Liens to secure the Issuer's guarantee
of the Credit Facility and Interest Rate Protection Obligations of a
Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to
(1) pay dividends or make any other distributions to the Issuer or any
other Restricted Subsidiary on its Equity Interests or with respect to any
other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Issuer or any other Restricted Subsidiary,
(2) make loans or advances to, or guarantee any Indebtedness or other
obligations of, the Issuer or any other Restricted Subsidiary, or
(3) transfer any of its properties or assets to the Issuer or any
other Restricted Subsidiary, except for encumbrances or restrictions
existing under or by reason of
(a) restrictions under the 12 3/8% Notes Indenture, as the same may
from time to time be modified or amended and restrictions under
agreements governing Indebtedness Incurred to refinance the 12 3/8%
Notes, or refinancings thereof, in each case, so long as the
restrictions as modified or amended or contained in the agreements
governing the refinancing Indebtedness, as the case may be, are no less
favorable to the holders of the Notes in any material respect than the
restrictions under the 12 3/8% Notes Indenture on the Issue Date,
(b) restrictions under the Credit Facility so long as the
restrictions are no less favorable to the holders of the Notes in any
material respect than the restrictions under the Credit Facility in
effect on the Issue Date,
(c) restrictions under other agreements governing Indebtedness
Incurred in compliance with the Indenture, provided that any
restrictions permit the payment of dividends to the Issuer in amounts
and at the times necessary to permit the payment of cash interest due on
the Notes on and after September 1, 2004, but no permission need apply
when a default or event of default in respect of the Indebtedness has
occurred and is continuing,
(d) applicable law,
(e) any instrument governing Indebtedness or Equity Interests of an
Acquired Person acquired by the Issuer or any Restricted Subsidiary as
in effect at the time of the acquisition, except to the extent the
Indebtedness was incurred by the Acquired Person in connection with, as
a result of or in contemplation of the acquisition; provided, however,
that the encumbrances and restrictions are not applicable to the Issuer
or any Restricted Subsidiary, or the properties or assets of the Issuer
or any Restricted Subsidiary, other than the Acquired Person,
(f) customary non-assignment provisions in leases and other
contracts entered into in the ordinary course of business and consistent
with past practices, including non-assignment provisions in agreements
between the Issuer, Golden Sky Systems or any Restricted Subsidiary and
the NRTC with respect to direct broadcast satellite services,
(g) Purchase Money Indebtedness for property acquired in the
ordinary course of business that only imposes encumbrances and
restrictions on the property so acquired, and
(h) any agreement for the sale or disposition of the Equity
Interests or assets of any Restricted Subsidiary; provided, however,
that the encumbrances and restrictions described in this clause (h) are
only applicable to the particular Restricted Subsidiary or assets, as
applicable, and any sale or disposition is made in compliance with
"-- Disposition of Proceeds of Asset Sales" below to the extent
applicable thereto.
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Disposition of Proceeds of Asset Sales. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless
(1) the Issuer or the Restricted Subsidiary, as the case may be,
receives consideration at the time of the Asset Sale at least equal to the
Fair Market Value of the assets sold or otherwise disposed of and
(2) at least 85% of the 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), the Person becomes a Wholly
Owned Restricted Subsidiary.
In the case of sales pursuant to clauses (b) and (c) above not involving
solely an exchange of a Permitted Business and cash, if any, if the Fair Market
Value of the assets sold or otherwise disposed of in a single transaction or
series of transactions exceeds $5.0 million, the Issuer must obtain the written
opinion from an Independent Financial Advisor, and file the opinion with the
Trustee, stating that the terms of the Asset Sale are fair, from a financial
point of view, to the Issuer or the Restricted Subsidiary involved in the Asset
Sale. The amount of any
(1) Indebtedness, other than any Subordinated Indebtedness, of the
Issuer or any Restricted Subsidiary that is actually assumed by the
transferee in the Asset Sale and from which the Issuer and the Restricted
Subsidiaries are fully released shall be deemed to be cash for purposes of
determining the percentage of cash consideration received by the Issuer or
the Restricted Subsidiaries and
(2) notes or other similar obligations received by the Issuer or the
Restricted Subsidiaries from the transferee that are immediately converted,
sold or exchanged, or are converted, sold or exchanged within thirty days
of the related Asset Sale, by the Issuer or the Restricted Subsidiaries
into cash shall be deemed to be cash, in an amount equal to the net cash
proceeds realized upon the conversion, sale or exchange for purposes of
determining the percentage of cash consideration received by the Issuer or
the Restricted Subsidiaries.
Notwithstanding the foregoing, during the term of the Notes, the Issuer and
the Restricted Subsidiaries may engage in Asset Sales involving up to $10.0
million without complying with clause (2)(b) of the first sentence of this
paragraph.
Notwithstanding the foregoing, the Issuer or the Restricted Subsidiary, as
the case may be, may
(1) apply the Net Cash Proceeds of any Asset Sale within 365 days of
receipt thereof to repay or purchase or retire Indebtedness of Golden Sky
Systems and permanently reduce any related commitment,
(2) apply the Net Cash Proceeds of any Asset Sale to acquire,
construct or improve properties and capital assets to be used on a
Permitted Business within 365 days after the receipt thereof, or
(3) any combination of the foregoing.
To the extent that all or part of the Net Cash Proceeds of any Asset Sale
are not applied, or, in the case of clause (1) above, an offer to purchase or
retire the Indebtedness of Golden Sky Systems has not been made, within 365 days
of the Asset Sale as described in clause (1) or (2) of the immediately preceding
paragraph, the Issuer shall, within 20 days after the 365th day, make an offer
to purchase all outstanding Notes, at a purchase price in cash equal to 100% of
the Accreted Value of the Notes on the Purchase Date, unless the Purchase Date
is on or after March 1, 2004, in which case the purchase price shall be an
amount in cash equal to 100% of the principal amount at maturity thereof, plus
accrued and
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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 the Unutilized Net Cash
Proceeds, and not just the amount in excess of $10.0 million, shall be applied
as required pursuant to this paragraph.
With respect to any offer to purchase effected pursuant to this covenant,
to the extent that the principal amount at maturity of the Notes tendered
pursuant to the offer to purchase exceeds the net cash proceeds to be applied to
the purchase thereof, the Notes shall be purchased pro rata based on the
principal amount at maturity of the Notes tendered by each holder.
In the event that the Issuer makes an offer to purchase the Notes, the
Issuer shall comply with any applicable securities laws and regulations, and any
violation of the provisions of the Indenture relating to an Offer to Purchase
occurring as a result of this 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 the holder pursuant to an offer to purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal amount at maturity and subject to any proration
among tendering holders as described above.
Limitation on Issuances and Sales of Preferred Equity Interests by
Restricted Subsidiaries. The Indenture provides that the Issuer
(1) will not permit any Restricted Subsidiary to issue any Preferred
Equity Interests, other than to the Issuer or a Restricted Subsidiary, and
(2) will not permit any Person, other than the Issuer or a Restricted
Subsidiary, to own any Preferred Equity Interests of any Restricted
Subsidiary.
Limitations on Conduct of Business of the Issuer and the Restricted
Subsidiaries. The Indenture provides that the Issuer will not conduct any trade
or business, other than through a Subsidiary and the ownership of Common Stock
of Golden Sky Systems, and the Issuer will not permit any of the Restricted
subsidiaries to be primarily engaged in any business, except for a Permitted
Business.
Limitation on Transactions with Affiliates. The Indenture provides that the
Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary
to, conduct any business or enter into any transaction, or series of related
transactions that are similar or part of a common plan, with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Common Stock of the Issuer or any officer or director of the Issuer, unless
the terms of the Affiliate Transaction are set forth in writing, and are fair
and reasonable to the Issuer or the 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, which approval must be evidenced by a board resolution stating that
the Board has determined that the transaction or transactions comply with the
foregoing provisions. In addition to the foregoing, each Affiliate Transaction
involving aggregate consideration of $10.0 million or more shall be approved by
a majority of the Disinterested Directors. However, in lieu of approval by the
Disinterested Directors, the Issuer may obtain a written opinion from an
Independent Financial Advisor stating that the terms of the Affiliate
Transaction to the Issuer or the Restricted Subsidiary, as the case may be, are
fair from a financial point of view.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to
(1) transactions with or among the Issuer and any Restricted
Subsidiary or between or among Restricted Subsidiaries,
(2) customary directors' fees, indemnification and similar
arrangements, consulting fees, employee salaries, bonuses or employment
agreements, compensation or employee benefit arrangements and incentive
arrangements with any officer, director or employee of the Issuer entered
into in
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the ordinary course of business, including customary benefits thereunder,
and payments under any indemnification arrangements permitted by applicable
law,
(3) any transactions undertaken pursuant to any other contractual
obligations in existence on the Issue Date, as in effect on the Issue Date,
(4) any Restricted Payments made in compliance with "-- Limitation on
Restricted Payments" above,
(5) loans, advances and reimbursements to officers, directors and
employees of the Issuer and the Restricted Subsidiaries for travel,
entertainment, moving and other relocation expenses, in each case made in
the ordinary course of business and consistent with past business
practices,
(6) the pledge of Equity Interests of Unrestricted Subsidiaries to
support the Indebtedness thereof,
(7) the sale of products or property by any Person to the Issuer or a
Restricted Subsidiary, or by the Issuer or any Restricted Subsidiary to any
Person, in the ordinary course of business and consistent with past
practice and
(8) the issuance and sale by Golden Sky Systems of Qualified Equity
Interests.
Reports. The Indenture provides that, whether or not the Issuer has a class
of securities registered under the Exchange Act, the Issuer shall furnish
without cost to each holder of Notes and file with the Trustee and, following
the effectiveness of any Exchange Offer Registration Statement or a Shelf
Registration Statement, file with the SEC
(1) within the applicable time period required under the Exchange Act,
after the end of each fiscal year of the Issuer, the information required
by Form 10-K, or any successor form thereto, under the Exchange Act with
respect to the relevant period,
(2) within the applicable time period required under the Exchange Act
after the end of each of the first three fiscal quarters of each fiscal
year of the Issuer, the information required by Form 10-Q, or any successor
form thereto, under the Exchange Act with respect to the relevant period
and
(3) any current reports on Form 8-K, or any successor forms, required
to be filed under the Exchange Act.
Designation of Unrestricted Subsidiaries.
(1) The Issuer may designate after the Issue Date any Subsidiary of the
Issuer, other than Golden Sky Systems, as an "Unrestricted Subsidiary" under the
Indenture only if
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to the designation,
(b) at the time of and after giving effect to the designation, Golden
Sky Systems could incur $1.00 of additional Indebtedness, other than
Permitted Indebtedness, under the proviso in "-- Limitation on Additional
Indebtedness of Subsidiaries of the Issuer" above, and
(c) the Issuer would be permitted to make an Investment, other than a
Permitted Investment, at the time of the designation, assuming the
effectiveness of the designation, as contemplated by the first paragraph or
subclause (4) of the second paragraph of "-- Limitation on Restricted
Payments" above in an amount equal to the Fair Market Value of the Issuer's
proportionate interest of the Issuer and the Restricted Subsidiaries in the
Subsidiary on the applicable date.
Notwithstanding the above, no Subsidiary of the Issuer shall be designated
an Unrestricted Subsidiary if the Subsidiary distributes, directly or
indirectly, DIRECTV Services under an agreement with the
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NRTC or has any right, title or interest in the revenue or profits in, or holds
any Lien in respect of, any agreement with the NRTC.
Neither the Issuer nor any Restricted Subsidiary shall at any time
(i) provide credit support for, subject any of its property or assets,
other than the Equity Interests of any Unrestricted Subsidiary, to the
satisfaction of, or guarantee, any Indebtedness of any Unrestricted
Subsidiary, including any undertaking, agreement or instrument evidencing
the Indebtedness,
(ii) be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary, or
(iii) be directly or indirectly liable for any Indebtedness that
provides that the holder thereof may, upon notice, lapse of time or both,
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a
default with respect to any Indebtedness of any Unrestricted Subsidiary,
except, in the case of subclause (i) or (ii), to the extent otherwise
permitted under the terms of the Indenture, including, without limitation,
pursuant to "-- Limitation on Restricted Payments" above and
"-- Disposition of Proceeds of Asset Sales" above.
(2) The Issuer may revoke any designation of a Subsidiary as an
Unrestricted Subsidiary if:
(a) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to the revocation; and
(b) all Liens and Indebtedness of the Unrestricted Subsidiary
outstanding immediately following the revocation would, if incurred at the
time, have been permitted to be incurred for all purposes of the Indenture.
All designations and revocations of subsidiaries as Unrestricted
Subsidiaries must be evidenced by resolutions of the Board of Directors of the
Issuer, delivered to the Trustee certifying compliance with the foregoing
provisions.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Issuer shall not consolidate with or merge with or into, whether or not
the Issuer is the Surviving Person, any other entity and the Issuer shall not,
and shall not cause or permit any Restricted Subsidiary to, sell, convey,
assign, transfer, lease or otherwise dispose of all or substantially all of the
Issuer's properties and assets, determined on a consolidated basis for the
Issuer and the Restricted Subsidiaries, to any entity in a single transaction or
series of related transactions, unless
(1) either
(a) the Issuer shall be the Surviving Person or
(b) the Surviving Person, if other than the Issuer, shall be a
corporation, partnership or limited liability company organized and
validly existing under the laws of the United States of America or any
State thereof or the District of Columbia, and shall expressly assume by
a supplemental indenture the due and punctual payment of the principal
of, premium, if any, and interest on all the Notes and the performance
and observance of every covenant of the Indenture and the Registration
Rights Agreement to be performed or observed on the part of the Issuer,
(2) immediately thereafter, no Default shall have occurred and be
continuing,
(3) immediately after giving effect to the transaction involving the
Incurrence by the Issuer or any Restricted Subsidiary, directly or
indirectly, of additional Indebtedness, and treating any Indebtedness not
previously an obligation of the Issuer or any Restricted Subsidiary in
connection with or as a result of the transaction as having been Incurred
at the time of the transaction, the Issuer
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or the Surviving Person, as applicable, could Incur, on a pro forma basis
after giving effect to the transaction as if it had occurred at the
beginning of the latest fiscal quarter for which consolidated financial
statements of the Issuer are available, at least $1.00 of additional
Indebtedness under the proviso in "-- Limitation on Additional Indebtedness
of Subsidiaries of the Issuer" above, and
(4) the Issuer has delivered to the Trustee an opinion of counsel to
the effect that the holders of the Notes will not recognize gain or loss
for federal income tax purposes as a result of the transaction; provided,
however, that the Issuer may consolidate with or merge with or into Golden
Sky Holdings without complying with clause (3) above.
For purposes of the foregoing, the transfer, by lease, assignment, sale or
otherwise, in a single transaction or series of transactions, of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interests of which constitute all or substantially all
of the properties and assets of the Issuer shall be deemed to be the transfer of
all or substantially all the properties and assets of the Issuer.
In the event of any transaction, other than a lease, described in and
complying with the conditions listed above in which the Issuer is not the
Surviving Person and the Surviving Person is to assume all of the Obligations of
the Issuer under the Notes, the Indenture and the Registration Rights Agreement
under a supplemental indenture, the Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer and the
Issuer shall be discharged from its Obligations under the Indenture and the
Notes.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the transaction, has no clearly
established meaning under relevant law and is subject to judicial
interpretation. Accordingly, there may be a degree of uncertainty in
ascertaining whether a particular transaction would involve a disposition of
"all or substantially all" of the assets of the Issuer, and therefore it may be
unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The "Events of Default" under the Indenture include
(1) default in the payment of interest on the Notes issued thereunder
when it becomes due and payable and continuance of the default for a period
of 30 days or more,
(2) default in the payment of (a) if prior to March 1, 2004, the
Accreted Value of, and (b) if on or after March 1, 2004, the principal
amount at maturity of and premium, if any, on the Notes when due, including
the failure to make a payment to purchase Notes pursuant to a Change of
Control Offer,
(3) default in the performance, or breach, of any covenant described
under "-- Covenants -- Disposition of Proceeds of Asset Sales" or
"-- Consolidation, Merger, Sale of Assets, Etc.,"
(4) default in the performance, or breach, of any covenant in the
Indenture, other than defaults specified in clause (1), (2) or (3) above,
and continuance of the default or breach for a period of 30 days or more
after written notice to the Issuer by the Trustee or to the Issuer and the
Trustee by the holders of at least 25% in aggregate principal amount at
maturity of the outstanding Notes, in each case, when the notice is deemed
received in accordance with the Indenture,
(5) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $15.0 million or more under which the Issuer or a Restricted
Subsidiary is obligated, and either
(a) the Indebtedness is already due and payable in full and has not
been paid in full, and the failure to pay continues for a period of 30
days or more, or
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(b) the failure results in the acceleration of the final maturity
of the Indebtedness, which acceleration has not been rescinded prior to
any declaration of acceleration of the Notes,
(6) one or more judgments, orders or decrees, not subject to appeal,
for the payment of money of $15.0 million or more, either individually or
in the aggregate, in all cases net of amounts covered by insurance for
which coverage is not being challenged or denied, shall be entered against
the Issuer or any of the Issuer's Significant Restricted Subsidiaries or
any of their respective properties and shall not be discharged, paid or
stayed within 60 days after the right of appeal has expired, or
(7) specified events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Issuer or any of
the Issuer's Significant Restricted Subsidiaries shall have occurred.
If an Event of Default with respect to the Notes, other than an Event of
Default with respect to the Issuer described in clause (7) of the preceding
paragraph, occurs and is continuing, the Trustee or the holders of at least 25%
in aggregate principal amount at maturity of the outstanding Notes by notice in
writing to the Issuer may declare Default Amount of all the outstanding Notes to
be due and payable immediately and the Default Amount will become immediately
due and payable. If an Event of Default specified in clause (6) of the preceding
paragraph with respect to the Issuer occurs under the Indenture, the outstanding
Notes will automatically become immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of the Notes.
Notwithstanding the foregoing, in the event of a declaration of
acceleration in respect of the Notes because an Event of Default specified in
clause (5) above shall have occurred and be continuing, the declaration of
acceleration shall be automatically annulled if the Indebtedness that is the
subject of the Event of Default has been discharged or paid or the Event of
Default shall have been cured or waived by the holders of the Indebtedness and
written notice of the discharge, cure or waiver, as the case may be, shall have
been given to the Trustee by the Issuer or by the requisite holders of the
Indebtedness or a trustee, fiduciary or agent for the holders, within 30 days
after the 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 the
30-day period.
Any declaration of acceleration 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, premium, if any, or
interest on the Notes, upon the conditions provided in the Indenture. For
information as to waiver of defaults, see "-- Amendment and Waivers" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the outstanding
Notes, give the holders of the Notes notice of all uncured Defaults or Events of
Default known to it. However, except in the case of an Event of Default in
payment with respect to the 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 the notice if and so long as a committee of its
trust officers in good faith determines that the withholding of the 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
(1) the holder shall have previously given to the Trustee written
notice of a continuing Event of Default thereunder,
(2) the holders of at least 25% of the aggregate principal amount at
maturity of the outstanding Notes under the Indenture shall have made
written request, and offered reasonable indemnity, to the Trustee to
institute the proceeding as Trustee, and
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(3) the Trustee shall have not received from the holders of a majority
in aggregate principal amount at maturity of outstanding Notes a direction
inconsistent with the request and shall have failed to institute the
proceeding within 45 days.
However, these limitations do not apply to a suit instituted by a holder of
a Note for enforcement of payment of the Default Amount and premium, if any, on
a Note on or after the respective due dates expressed in the Note.
The Issuer will be required to furnish to the Trustee annually a statement
as to the performance by it of its obligations under the Indenture and as to any
default in performance.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect to
the Notes, except for specified obligations, including those regarding any trust
established for a defeasance and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes as
required by the Indenture and to maintain agencies in respect of Notes. The
Issuer may at any time terminate its obligations under specified covenants of
the Indenture, some of which are described under "-- Covenants" above, and any
omission to comply with these obligations shall not constitute a Default with
respect to the Notes. To exercise either defeasance or covenant defeasance, the
Issuer must irrevocably deposit in trust, for the benefit of the holders of the
Notes, with the Trustee money, in United States dollars, or U.S. government
obligations, denominated in United States dollars, or a combination thereof, in
amounts sufficient to pay the principal at maturity of, and premium, if any, and
interest on the Notes to redemption or maturity and comply with other specified
conditions, including the delivery of a legal opinion as to specified tax
matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect,
except as to surviving rights or registration of transfer or exchange of Notes,
as to all outstanding Notes when either
(1) all of these Notes theretofore authenticated and delivered, except
lost, stolen or destroyed Notes that have been replaced or paid and Notes
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from the trust, have been delivered to the Trustee for
cancellation, or
(2) (a) all of these Notes not theretofore delivered to the Trustee
for cancellation have become due and payable and the Issuer has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in
trust for the purpose an amount of money sufficient to pay and discharge
the entire indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation, for principal amount at maturity of, premium, if
any, and accrued interest to the date of deposit,
(b) the Issuer has paid all sums payable by it under the Indenture,
and
(c) the Issuer has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of the Notes at
maturity or on the redemption date, as the case may be.
In addition, the Issuer must deliver an officers' certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENT AND WAIVERS
From time to time, the Issuer, when authorized by resolutions of the
Issuer's Board of Directors, and the Trustee, without the consent of the holders
of the Notes, may amend, waive or supplement the Indenture or the Notes for
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act or making
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any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the Notes may be made by the
Issuer and the Trustee by supplemental indenture with the consent of the holders
of not less than a majority of the aggregate principal amount at maturity of the
outstanding Notes. However, no modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby,
(1) reduce the principal amount at maturity of, change the fixed
maturity of, or alter the redemption provisions of, the Notes,
(2) change the currency in which any Notes or amounts owing thereon
are payable,
(3) reduce the percentage of the aggregate principal amount at
maturity outstanding of Notes which must consent to an amendment,
supplement or waiver or consent to take any action under the Indenture or
the Notes,
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes,
(5) waive a default in payment with respect to the Notes,
(6) following the occurrence of a Change of Control or an Asset Sale,
alter the Issuer's obligation to purchase the Notes in accordance with the
Indenture or waive any default in the performance thereof,
(7) reduce or change the rate or time for payment of interest on the
Notes or amend or modify the definition of Accreted Value or
(8) affect the ranking of the Notes in a manner adverse to the holder
of the Notes.
REGARDING THE TRUSTEE
United States Trust Company of New York will serve as Trustee under the
Indenture.
GOVERNING LAW
The Indenture provides that the Indenture and the Notes will be governed by
and construed in accordance with laws of the State of New York without giving
effect to principles of conflicts of law.
DEFINITIONS
Set forth below is a summary of many of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all of
these terms, as well as any other capitalized terms used herein for which no
definition is provided.
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"Accreted Value" as of any date (the "Specified Date") means, with respect
to each $1,000 principal amount at maturity of Notes:
(1) if the Specified Date is one of the following dates (each a
"Semi-Annual Accreted Date"), the amount set forth opposite this date
below:
SEMI-ANNUAL ACCRETED
ACCRETED DATE VALUE
- ------------- ---------
02/19/99.................................................... $ 518.12
09/01/99.................................................... 555.51
03/01/00.................................................... 593.00
09/01/00.................................................... 633.03
03/01/01.................................................... 675.76
09/01/01.................................................... 721.37
03/01/02.................................................... 770.07
09/01/02.................................................... 822.05
03/01/03.................................................... 877.53
09/01/03.................................................... 936.77
03/01/04.................................................... 1,000.00
(2) if the Specified Date occurs between two Semi-Annual Accreted
Dates, the sum of
(a) the Accreted Value for the Semi-Annual Accreted Date
immediately preceding the Specified Date and
(b) an amount equal to the product of
(i) the Accreted Value for the immediately following Semi-Annual
Accreted Date less the Accreted Value for the immediately preceding
Semi-Annual Accreted Date and
(ii) a fraction, the numerator of which is the number of days
from the immediately preceding Semi-Annual Accreted Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180.
"Acquired Indebtedness" means Indebtedness of a Person
(1) assumed in connection with an Acquisition from the Person or
(2) existing at the time the Person becomes a Restricted Subsidiary or
is merged or consolidated with or into the Issuer or any Restricted
Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person that merges with or into or becomes a Subsidiary of the specified Person.
"Acquisition" means
(1) any capital contribution, by means of transfers of cash or other
property to others or payments for property or services for the account or
use of others, or otherwise, by the Issuer or any Restricted Subsidiary to
any other Person, or any acquisition or purchase of Equity Interests of any
other Person by the Issuer or any Restricted Subsidiary, in either case
pursuant to which the Person shall become a Restricted Subsidiary or shall
be consolidated or merged with or into the Issuer or any Restricted
Subsidiary or
(2) any acquisition by the Issuer or any Restricted Subsidiary of the
assets of any Person which constitute substantially all of an operating
unit or line of business of the 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 the 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 the Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, however, that
(1) beneficial ownership of 10.0% or more of the voting power of the
then outstanding voting securities of a Person shall be deemed to be
control; and
(2) no individual, other than a director of the Issuer or an officer
of the Issuer with a policy making function, shall be deemed an Affiliate
of the Issuer or any of the Issuer's Subsidiaries solely by reason of the
individual's employment, position or responsibilities by or with respect to
the Issuer or any of the Issuer's Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer,
lease, that has the effect of a disposition, or other disposition, including,
without limitation, any merger, consolidation or sale-leaseback transaction, to
any Person other than the Issuer or a Restricted Subsidiary, in one transaction
or a series of related transactions, of
(1) any Equity Interest of any Restricted Subsidiary,
(2) any material license, franchise or other authorization of the
Issuer or any Restricted Subsidiary,
(3) any assets of the Issuer or any Restricted Subsidiary that
constitute substantially all of an operating unit or line of business of
the Issuer or any Restricted Subsidiary, or
(4) any other property or asset of the Issuer or any Restricted
Subsidiary outside of the ordinary course of business, including the
receipt of proceeds paid on account of the loss of or damage to any
property or asset, except to the extent used to repurchase or repair the
property or asset, and awards of compensation for any asset taken by
condemnation, eminent domain or similar proceedings.
The term "Asset Sale" shall not include
(1) any transaction consummated in compliance with "-- Consolidation,
Merger, Sale of Assets, Etc." above and the creation of any Lien not
prohibited by "-- Covenants -- Limitation on Liens" above; provided,
however, that any transaction consummated in compliance with
"-- Consolidation, Merger, Sale of Assets, Etc." above involving a sale,
conveyance, assignment, transfer, lease or other disposal of less than all
of the properties or assets of the Issuer and the Restricted Subsidiaries
shall be deemed to be an Asset Sale with respect to the properties or
assets of the Issuer and Restricted Subsidiaries that are not so sold,
conveyed, assigned, transferred, leased or otherwise disposed of in the
transaction,
(2) sales of property or equipment that has become worn out, obsolete
or damaged or otherwise unsuitable for use in connection with the business
of the Issuer or any Restricted Subsidiary, as the case may be, and
(3) any transaction consummated in compliance with
"-- Covenants -- Limitation on Restricted Payments" above.
"Board of Directors" means
(1) in the case of a Person that is a corporation, the board of
directors of that Person and
(2) in the case of any other Person, the board of directors, board of
managers, management committee or similar governing body of that Person, or
in the case of a limited partnership, of that
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Person's general partner, or in the case of a limited liability company, of
that Person's manager, or any authorized committee thereof responsible for
the management of the business and affairs of the 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 that time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means
(1) any evidence of Indebtedness, with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or
less, issued or directly and fully guaranteed or insured by the United
States or any agency or instrumentality thereof that, provided that the
full faith and credit of the United States is pledged in support thereof or
the Indebtedness constitutes a general obligation of the United States,
have maturities of not more than six months from the date of acquisition,
(2) time deposits, certificates of deposit or acceptances, with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less, of any financial institution that is a member
of the Federal Reserve System, in each case having combined capital and
surplus and undivided profits, or any similar capital concept, of not less
than $200.0 million and whose senior unsecured debt is rated at least "A-1"
by S&P or "P-1" by Moody's,
(3) commercial paper with a maturity of 365 days or less issued by a
corporation, other than an Affiliate of the Issuer, organized under the
laws of the United States or any State thereof and rated at least "A-1" by
S&P or "P-1" by Moody's and in each case maturing not more than six months
after the date of acquisition,
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above and
entered into with any bank meeting the qualifications specified in clause
(2) above, and
(5) money market funds that invest substantially all of their assets
in securities described in the preceding clauses (1) through (4).
"Change of Control" is defined to mean the occurrence of
(1) any "person" or "group", as those 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 the person has the right to acquire,
whether the right is exercisable immediately or only after the passage of
time, directly or indirectly, of more than 50% of the total Voting Equity
Interests of the Issuer,
(2) the Issuer consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes
of all or substantially all of its assets to any Person, or any Person
consolidates with, or merges with or into, the Issuer, pursuant to a
transaction in which the outstanding Voting Equity Interests of the Issuer
are converted into or exchanged for cash, securities or other property,
other than any transaction where
(a) the outstanding Voting Equity Interests of the Issuer are
converted into or exchanged for
(i) Voting Equity Interests, other than Disqualified Equity
Interests, of the surviving or transferee corporation or its parent
corporation and/or
(ii) cash, securities and other property in an amount that could
be paid by the Issuer as a Restricted Payment under the Indenture and
(ii) immediately after the transaction no "person" or "group", as
those terms are used in Sections 13(d) and 14(d) of the Exchange
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Act, excluding the Permitted Holders, is the "beneficial owner", as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a person shall be deemed to have "beneficial ownership" of all
securities that the person has the right to acquire, whether this
right is exercisable immediately or only after the passage of time,
directly or indirectly, of more than 50% of the total Voting Equity
Interests of the surviving or transferee corporation or its parent
corporation, as applicable,
(3) during any consecutive two-year period, individuals who at the
beginning of the period constituted the Board of Directors, together with
any new directors whose election by the Board of Directors or whose
nomination for election by the stockholders of the Issuer was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason, other than
by action of the Permitted Holders, to constitute a majority of the Board
of Directors then in office, or
(4) the approval by stockholders of the Issuer of any liquidation or
dissolution of the Issuer.
"Change of Control Date" has the meaning set forth under "-- Change of
Control" above.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents, however designated
and whether voting or nonvoting, of, the Person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of common stock.
"Consolidated Income Tax Expense" means, with respect to the Issuer for any
period, the provision for federal, state, local and foreign income taxes payable
by the Issuer and the Restricted Subsidiaries for the period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Issuer for any
period, without duplication, the sum of
(1) the interest expense of the Issuer and the Restricted Subsidiaries
for the period as determined on a consolidated basis in accordance with
GAAP, including, without limitation,
(a) any amortization of debt discount,
(b) the net cost under Interest Rate Protection Obligations,
including any amortization of discounts,
(c) the interest portion of any deferred payment obligation,
(d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, and
(e) all capitalized interest and all accrued interest,
(2) the interest component of Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by the Issuer and the Restricted
Subsidiaries during the period as determined on a consolidated basis in
accordance with GAAP, and
(3) dividends and distributions in respect of Disqualified Equity
Interests actually paid in cash by the Issuer during the period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Issuer and the Restricted Subsidiaries for the period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating net income, by excluding, without duplication,
(1) all extraordinary gains or losses and all gains and losses from
the sales or other dispositions of assets out of the ordinary course of
business, net of taxes, fees and expenses relating to the transaction
giving rise thereto, for the period,
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(2) that portion of net income derived from or in respect of
investments in Persons other than Restricted Subsidiaries, except to the
extent actually received in cash by the Issuer or any Restricted
Subsidiary, subject, in the case of any Restricted Subsidiary, to the
provisions of clause (5) of this definition,
(3) the portion of net income, or loss, allocable to minority
interests in any Person, other than a Restricted Subsidiary, for the
period, except to the extent actually received in cash by the Issuer or any
Restricted Subsidiary, subject, in the case of any Restricted Subsidiary,
to the provisions of clause (5) of this definition,
(4) net income or loss of any other Person combined with the Issuer or
any Restricted Subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination, and
(5) the net income of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time, regardless of any waiver,
permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
Equity Interest holders, except, solely for the purposes of the "Limitation
on Additional Indebtedness of Subsidiaries of the Issuer" covenant and for
determining the amount available under clause (3) of the "Limitation on
Restricted Payments" covenant for a proposed Restricted Payment
constituting an Investment, for any restriction in any agreement or
instrument governing Indebtedness outstanding on the Issue Date or Incurred
in compliance with the Indenture.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for the period increased, without duplication, by the
sum of
(1) Consolidated Income Tax Expense for the period to the extent
deducted in determining Consolidated Net Income for the period,
(2) Consolidated Interest Expense for the period to the extent
deducted in determining Consolidated Net Income for the period,
(3) all dividends on Preferred Equity Interests to the extent not
taken into account for computing Consolidated Net Income for the period,
and
(4) depreciation, amortization and any other non-cash items for the
period to the extent deducted in determining Consolidated Net Income for
the period, other than any non-cash item that requires the accrual of, or a
reserve for, cash charges for any future period, of the Issuer and the
Restricted Subsidiaries, including, without limitation, amortization of
capitalized debt issuance costs for the 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 of these reserves were not permitted to be added back in the
calculation of Consolidated Operating Cash Flow for a prior period pursuant
to clause (4) above, for the 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 Golden Sky
Holdings, Golden Sky Systems, the banks party thereto from time to time,
Paribas, formerly known as Banque Paribas, as Syndication Agent, Fleet National
Bank, as Administrative Agent, and General Electric Capital Corporation, as
Documentation Agent, including any deferrals, renewals, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto, including, without limitation, any deferrals, renewals,
extensions, replacements, refinancings, refundings, amendments, modifications or
supplements that increase the aggregate amount of commitments or borrowings
thereunder or add Subsidiaries of the Issuer as an 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,
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guarantees, security agreements, pledge agreements, mortgages, note agreements,
other collateral documents and note agreements and other instruments and
agreements executed in connection therewith.
"Cumulative Operating Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Issuer is available or, if cumulative
Consolidated Operating Cash Flow for the period is negative, the negative amount
by which cumulative Consolidated Operating Cash Flow is less than zero.
"DBS" means direct broadcast satellite.
"Debt to Operating Cash Flow Ratio" means the ratio of
(1) an amount equal to the Total Consolidated Indebtedness as of the
date of calculation (the "Determination Date") to
(2) four times the Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding the Determination Date (the "Measurement Period"). For purposes
of calculating Consolidated Operating Cash Flow for the Measurement Period
immediately prior to the relevant Determination Date,
(a) any Person that is a Restricted Subsidiary on the Determination
Date, or would become a Restricted Subsidiary on the Determination Date
in connection with the transaction that requires the determination of
Consolidated Operating Cash Flow, will be deemed to have been a
Restricted Subsidiary at all times during the Measurement Period,
(b) any Person that is not a Restricted Subsidiary on the
Determination Date, or would cease to be a Restricted Subsidiary on the
Determination Date in connection with the transaction that requires the
determination of Consolidated Operating Cash Flow, will be deemed not to
have been a Restricted Subsidiary at any time during the Measurement
Period, and
(c) if the Issuer or any Restricted Subsidiary shall have in any
manner
(i) acquired, including through an Acquisition or the
commencement of activities constituting an operating business, or
(ii) disposed of, including by way of an Asset Sale or the
termination or discontinuance of activities constituting an operating
business, any operating business during the Measurement Period or
after the end of the period and on or prior to the Determination
Date,
The 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 an operating business, all transactions had been consummated on the
first day of the Measurement Period and, in the case of an Asset Sale or
termination or discontinuance of activities constituting an operating business,
all transactions had been consummated prior to the first day of the Measurement
Period; provided, however, that the pro forma adjustment shall not give effect
to the Operating Cash Flow of any Acquired Person to the extent that the
Person's net income would be excluded pursuant to clause (5) of the definition
of Consolidated Net Income.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Default Amount" means,
(1) prior to March 1, 2004, the Accreted Value of the Notes as of the
payment date, and
(2) after March 1, 2004, the principal amount at maturity thereof,
plus, in the case of clause accrued and unpaid interest thereon, if any, to
the payment date.
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"Designation" has the meaning set forth in "-- Covenants -- Designation of
Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth in
"-- Covenants -- Designation of Unrestricted Subsidiaries" above.
"DIRECTV Services" means DBS television services and all other video,
audio, data packages, "a la carte" programming services and other services
offered by DIRECTV, Inc., the predecessor-in-interest of Hughes Communications
Galaxy, Inc., or its successors or assigns.
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Issuer's Board of Directors other than
a director who
(1) has any material direct or indirect financial interest in or with
respect to the transaction or series of related transactions or
(2) is an employee or officer of the Issuer or an Affiliate that is
itself a party to the transaction or series of transactions or an Affiliate
of a party to the transaction or series of related transactions.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving the Person (whether or not the Person is
the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms, or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof, or upon the happening of
any event, other than a Change of Control, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable, at the option
of the holder thereof, in whole or in part, or exchangeable into Indebtedness on
or prior to the earlier of the maturity date of the Notes or the date on which
no Notes remain outstanding.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in, however designated, corporate stock or other equity
participations, including partnership interests, whether general or limited, or
member interests in the Person, including any Preferred Equity Interests.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Issuer and the
Restricted Subsidiaries in existence on the Issue Date until the amounts are
repaid.
"Fair Market Value" means, with respect to any asset, the price, after
taking into account any liabilities relating to the assets, that could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction. However, the Fair Market Value of any
asset or assets shall be determined conclusively by the Board of Directors of
the Issuer acting in good faith, and shall be evidenced by resolutions of the
Board of Directors of the Issuer delivered to the Trustee.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States that are applicable at the date of
determination and that are consistently applied for all applicable periods.
"Golden Sky Holdings" means Golden Sky Holdings, Inc. or any successor or
assign thereof that owns 100% of the Equity Interests of the Issuer.
"Golden Sky Systems" means Golden Sky Systems, Inc., a Wholly Owned
Restricted subsidiary.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States are pledged.
"guarantee" means, as applied to any obligation,
(1) a guarantee, other than by endorsement of negotiable instruments
for collection in the ordinary course of business, direct or indirect, in
any manner, of any part or all of the obligation and
(2) an agreement, direct or indirect, contingent or otherwise, the
practical effect of which is to assure in any way the payment or
performance, or payment of damages in the event of non-performance, of all
or any part of the obligation, including, without limiting the foregoing,
the payment of amounts drawn down by letters of credit.
A guarantee shall include, without limitation, any agreement to maintain or
preserve any other Person's financial condition or to cause any other Person to
achieve specified 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 these 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.
"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 the Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any Indebtedness or other obligation on the balance sheet of the 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 the Person and whether
or not contingent,
(1) every obligation of the Person for money borrowed,
(2) every obligation of the Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses,
(3) every reimbursement obligation of the Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for
the account of the Person,
(4) every obligation of the Person issued or assumed as the deferred
purchase price of property or services, but excluding trade accounts
payable incurred in the ordinary course of business and payable in
accordance with industry practices, or other accrued liabilities arising in
the ordinary course of business that are not overdue or that are being
contested in good faith,
(5) every Capital Lease Obligation of the Person,
(6) every net obligation under interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and other
agreements or arrangements designed to protect the Person against
fluctuations in interest rates,
(7) every obligation of the type referred to in clauses (1) through
(6) of another Person and all dividends of another Person the payment of
which, in either case, the Person has guaranteed or is responsible or
liable for, directly or indirectly, as obligor, guarantor or otherwise, and
(8) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (1) through (7) above.
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The term "Indebtedness'
(1) shall never be calculated taking into account any cash and Cash
Equivalents held by the Person,
(2) shall not include obligations of any Person
(a) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business, provided
that the obligations are extinguished within two Business Days of their
incurrence unless covered by an overdraft line,
(b) resulting from the endorsement of negotiable instruments for
collection in the ordinary course of business and consistent with past
business practices and
(c) under standby letters of credit to the extent collateralized by
cash or Cash Equivalents,
(3) to the extent that it provides that an amount less than the
principal amount thereof shall be due upon any declaration of acceleration
thereof shall be deemed to be incurred or outstanding in an amount equal to
the accreted value thereof at the date of determination,
(4) shall include the liquidation preference and any mandatory
redemption payment obligations in respect of any Disqualified Equity
Interests of the Issuer or any Restricted Subsidiary, and
(5) shall not include obligations under performance bonds, performance
guarantees, surety bonds and appeal bonds, letters of credit or similar
obligations, Incurred in the ordinary course of business, including standby
letters of credit securing obligations to the NRTC Incurred in the ordinary
course of business that are not overdue or that are being contested in good
faith by appropriate proceedings, other than obligations under or in
respect of any direct or indirect credit support for obligations of any
Unrestricted Subsidiary.
"Independent Financial Advisor" means a nationally recognized accounting,
appraisal or investment banking firm or consultant with experience advising DBS
businesses that is, in the judgment of the Issuer's Board of Directors,
qualified to perform the task for which it has been engaged
(1) that does not, and whose directors, officers and employees or
Affiliates do not, have a direct or indirect financial interest in the
Issuer and
(2) that, in the judgment of the Board of Directors of the Issuer, is
otherwise independent and qualified to perform the task for which it is to
be engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of the Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
the Person, whether voluntary or involuntary.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of the Person under
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements, and
(2) other agreements or arrangements designed to protect the 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 Issuer of Qualified Equity
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Interests of the Issuer in exchange for any capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness constitute an
Investment. The amount of any Investment shall be
(1) the original cost of the Investment, plus
(2) the cost of all additions thereto, and minus
(3) the amount of any portion of the Investment repaid to the 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 the
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, the
property shall be valued at its Fair Market Value at the time of the transfer,
as determined in good faith by the Board of Directors, or comparable body, of
the Person making the transfer or receiving the repayment.
"Investment Grade" means, with respect to a security, that the security is
rated by at least two nationally recognized statistical rating organizations in
one of each organization's four highest generic rating categories.
"Issue Date" means the original issue date of the outstanding notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind, including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest.
"Marketable Securities" means
(1) Government Securities,
(2) any certificate of deposit maturing not more than 365 days after
the date of acquisition issued by, or time deposit of, an Eligible
Institution,
(3) commercial paper maturing not more than 365 days after the date of
acquisition issued by a corporation, other than an Affiliate of the Issuer,
with an Investment Grade rating, at the time as of which any investment
therein is made, issued or offered by an Eligible Institution,
(4) any bankers' acceptances or money market deposit accounts issued
or offered by an Eligible Institution, and
(5) any fund investing substantially in investments of the types
described in clauses (1) through (4) above.
"Maturity Date" means the date, which is set forth on the face of the
Notes, on which the Notes will mature.
"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Issuer or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of
(1) the direct costs relating to the Asset Sale, including, without
limitation, legal, accounting and investment banking fees and sales
commissions, and any relocation expenses incurred as a result thereof,
(2) taxes paid or payable as a result thereof, after taking into
account any available tax credits or deductions and any tax sharing
arrangements,
(3) amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of the Asset
Sale,
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(4) amounts deemed, in good faith, appropriate by the Board of
Directors of the Issuer to be provided as a reserve, in accordance with
GAAP, against any liabilities associated with the assets that are the
subject of the Asset Sale, provided that the amount of any reserves shall
be deemed to constitute Net Cash Proceeds at the time the reserves shall
have been released or are not otherwise required to be retained as a
reserve, and
(5) with respect to Asset Sales by Restricted Subsidiaries, the
portion of the cash payments attributable to Persons holding a minority
interest in the Restricted Subsidiary.
"NRTC" means the National Rural Telecommunications Cooperative and any
successor entity to it.
"Obligations" means any principal, interest, including, without limitation,
Post-Petition Interest, premium, penalties, fees, indemnification's,
reimbursement obligations, damages and other liabilities payable under the
documentation governing any Indebtedness, including the Notes.
"Offer" has the meaning set forth under "-- Covenants -- Disposition of
Proceeds of Asset Sales."
"Permitted Acquisition Deposits" means any advance or payment of funds,
whether as consideration for an option to purchase or as a deposit, binder or
earnest money, whether or not refundable, and whether or not made into escrow,
made pursuant to any written agreement, term sheet, letter of intent or other
instrument providing for the Acquisition of any High Power Satellite
Transmission Business.
"Permitted Business" means those businesses in which the Issuer and the
Restricted Subsidiaries are engaged on the Issue Date or business reasonably
related thereto, including, without limitation, the High Power Satellite
Transmission Business and the business of satellite data transmission.
"Permitted Holders" any of
(1) means Burr, Egan, Deleage & Co., Spectrum Equity Investors, L.P.,
BancBoston Ventures Inc., Norwest Equity Partners and HarbourVest Partners
LLC and
(2) their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness, each of which
shall be given independent effect:
(1) Indebtedness of any Restricted Subsidiary outstanding on the Issue
Date;
(2) (a) Indebtedness under the Credit Facility of any Restricted
Subsidiary, and, without duplication, any guarantee thereof by any other
Restricted Subsidiary, Incurred in an aggregate principal amount at any one
time outstanding not to exceed $150.0 million, which amount shall be
reduced by
(i) any permanent reduction of commitments thereunder and
(ii) any other repayment accompanied by a permanent reduction of
commitments thereunder, other than in connection with any refinancing
thereof where the aggregate principal amount outstanding and
commitments thereunder immediately prior thereto are not greater than
the amounts immediately thereafter, and
(b) Indebtedness of any Restricted Subsidiary, and, without
duplication, any guarantee thereof by any other Restricted Subsidiary,
Incurred to fund Acquisitions of Permitted Businesses, Capital Lease
Obligations, Investments permitted under the Indenture and working
capital to support a Permitted Business in an aggregate principal amount
at any one time outstanding not to exceed $65.0 million, which amount
shall be reduced by any permanent reduction of commitments thereunder,
(3) Indebtedness of Golden Sky Systems to the extent that, at the time
of and after giving effect to the Incurrence thereof, the total aggregate
principal amount of Indebtedness Incurred under this clause (3) and any
refinancing thereof, whether initial or successive, Incurred pursuant to
and
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otherwise Incurred in compliance with the Indenture would not exceed 200%
of Total Incremental Invested Equity, which includes the contributed
proceeds from the issuance of the Notes;
(4) Indebtedness of any Restricted Subsidiary owed to and held by the
Issuer or any Restricted Subsidiary; provided, however, that an Incurrence
of Indebtedness that is not permitted by this clause (4) shall be deemed to
have occurred upon
(a) any sale or other disposition of any Indebtedness of any
Restricted Subsidiary referred to in this clause (4) to a Person, other
than the Issuer or any other Restricted Subsidiary, or
(b) the Designation of a Restricted Subsidiary that holds
Indebtedness of any other Restricted Subsidiary as an Unrestricted
Subsidiary,
(5) Interest Rate Protection Obligations of any Restricted Subsidiary
relating to Indebtedness of a Restricted Subsidiary, which Indebtedness (a)
bears interest at fluctuating interest rates and (b) is otherwise permitted
to be Incurred under this covenant, and guarantees by any Restricted
Subsidiary thereof; provided, however, that the notional principal amount
of the Interest Rate Protection Obligations does not exceed the principal
amount of the Indebtedness to which the Interest Rate Protection
Obligations relate,
(6) indemnification obligations of any Restricted Subsidiary and
guarantees thereof under agreements providing for the disposition of assets
or one or more businesses or Restricted Subsidiaries; provided, however,
that these obligations do not exceed at any time the Fair Market Value of
the gross proceeds received by the Restricted Subsidiaries for the
disposition,
(7) Indebtedness to the extent representing a replacement, renewal,
refinancing or extension (collectively, a "refinancing") of outstanding
Indebtedness Incurred in compliance with the Debt to Operating Cash Flow
Ratio of the covenant "Limitation on Additional Indebtedness of
Subsidiaries of the Issuer" or clause (1), (2)(b), (8) or (9) of this
definition, provided, however, that
(a) any refinancing shall not exceed the sum of the principal
amount, or, if the Indebtedness provides for a lesser amount to be due
and payable upon a declaration of acceleration thereof at the time of
the refinancing, an amount no greater than the 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 the refinancing and the
reasonable fees and expenses incurred in connection therewith,
(b) Indebtedness representing a refinancing of Indebtedness shall
have a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of the Indebtedness being refinanced,
and
(c) with respect to any refinancing of Indebtedness Incurred
pursuant to subparagraph (8) or (9) of this definition, the refinancing
pursuant to this clause (7) shall also be deemed to be Incurred pursuant
to clause (8) or (9), as the case may be, of this paragraph; for the
avoidance of doubt, the result of which is that a refinancing does not
create new debt incurrence capacity under these clauses,
(8) Indebtedness of any Restricted Subsidiary Incurred to finance the
acquisition of the exclusive right to distribute DIRECTV Services within
designated rural DIRECTV markets; provided, however, that the Indebtedness
shall be Permitted Indebtedness under this subparagraph (8) in an amount
not greater than the face amount of any letter of credit issued under the
Credit Facility to support the Indebtedness, it being understood that the
issuance of the letter of credit, but only for so long as the letter of
credit remains outstanding, constitutes a reduction in the amount of
Permitted Indebtedness available to be Incurred under clause (2) of this
definition, and
(9) in addition to the items referred to in subparagraphs (1) through
(8) above, Indebtedness of any of the Restricted Subsidiaries, including
any Indebtedness under the Credit Facility that utilizes
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this clause (9), having an aggregate principal amount for the Restricted
Subsidiaries not to exceed $25.0 million at any time outstanding.
Indebtedness of any Person or any of its Subsidiaries existing at the time
the Person becomes a Restricted Subsidiary, or is merged into or consolidated
with the Issuer or any Restricted Subsidiary, whether or not the Indebtedness
was Incurred in connection with, or in contemplation of, the Person becoming a
Restricted Subsidiary, or being merged into or consolidated with the Issuer or
any Restricted Subsidiary, shall be deemed Incurred at the time any Person
becomes a Restricted Subsidiary or merges into or consolidates with the Issuer
or any Restricted Subsidiary.
"Permitted Investments" means
(1) Cash Equivalents,
(2) Investments by the Issuer or any Restricted Subsidiary in any
Person that is or will become immediately after the Investment a Restricted
Subsidiary or that will merge or consolidate into the Issuer or a
Restricted Subsidiary,
(3) Investments in the Issuer by any Restricted Subsidiary,
(4) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits,
(5) loans and advances to employees made in the ordinary course of
business not to exceed $1.0 million in the aggregate at any one time
outstanding,
(6) Interest Rate Protection Obligations,
(7) bonds, notes, debentures or other securities received as a result
of Asset Sales permitted under "-- Covenants -- Disposition of Proceeds of
Asset Sales" above not to exceed 25% of the total consideration for the
Asset Sales, determined and computed as set forth under "-- Covenants --
Disposition of Proceeds of Asset Sales",
(8) transactions with officers, directors and employees of the Issuer
or any Restricted Subsidiary entered into in the ordinary course of
business, including compensation or employee benefit arrangements with any
director or employee, and consistent with past business practices,
(9) Investments existing as of the Issue Date and any amendment,
extension, renewal or modification thereof to the extent that any
amendment, extension, renewal or modification does not require the Issuer
or any Restricted Subsidiary to make any additional cash or non-cash
payments or provide additional services in connection therewith, and
(10) Permitted Acquisition Deposits.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes, however designated, that is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of the Person, over Equity
Interests of any other class in the Person.
"principal amount at maturity" means $1,000 per $1,000 face amount of the
Notes.
"Public Equity Offering" means an underwritten public offering of Equity
Interests, other than Disqualified Equity Interests, of the Issuer made on a
primary basis by the Issuer pursuant to a registration statement filed with and
declared effective by the SEC in accordance with the Securities Act.
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"Purchase Money Indebtedness" means Indebtedness of any Restricted
Subsidiary Incurred for the purpose of financing all or any part of the purchase
price or the cost of construction or improvement of any property. However, the
aggregate principal amount of the Indebtedness must not exceed the lesser of the
Fair Market Value of the property or the purchase price or cost, including any
refinancing of the 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 the
Person other than any Disqualified Equity Interest.
"Restricted Payment" means any of the following
(1) the declaration or payment of any dividend or any other
distribution on Equity Interests of the Issuer or any payment made to the
direct or indirect holders of Equity Interests of the Issuer, other than
dividends or distributions payable solely in Equity Interests, other than
Disqualified Equity Interests, of the Issuer, or in options, warrants or
other rights to purchase Equity Interests, other than Disqualified Equity
Interests, of the Issuer,
(2) the purchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Issuer, other than any Equity
Interests owned by the Issuer or a Wholly Owned Restricted Subsidiary,
(3) the purchase, redemption, defeasance or other acquisition or
retirement for value prior to any scheduled repayment, sinking fund or
maturity of any Subordinated Indebtedness, other than any Subordinated
Indebtedness held by a Wholly Owned Restricted Subsidiary, or
(4) the making by the Issuer or any Restricted Subsidiary of any
Investment, other than a Permitted Investment, in any Person.
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board of Directors of the Issuer, by a resolution of the
Board of Directors of the Issuer delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "-- Covenants -- Designation of Unrestricted
Subsidiaries" above. Any designation of a Subsidiary as an Unrestricted
Subsidiary may be revoked by a resolution of the Board of Directors of the
Issuer delivered to the Trustee, subject to the provisions of the covenant.
"SEC" means the Securities and Exchange Commission.
"Seller Notes" means any promissory notes issued by a Restricted Subsidiary
to any Person selling any assets or properties to the Issuer or any Restricted
Subsidiary in an Acquisition, including those outstanding on the Issue Date.
"Significant Restricted Subsidiary" means, at any date of determination,
(1) any Restricted Subsidiary that, together with its Subsidiaries
that constitute Restricted Subsidiaries,
(a) for the most recent fiscal year of the Issuer accounted for
more than 5.0% of the consolidated revenues of the Issuer and the
Restricted Subsidiaries or
(b) as of the end of the most recent fiscal year owned more than
5.0% of the consolidated assets of the Issuer and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements
of the Issuer and the Restricted Subsidiaries for that year prepared in
conformity with GAAP, and
(2) any Restricted Subsidiary that, when aggregated with all other
Restricted Subsidiaries that are not otherwise Significant Restricted
Subsidiaries and as to which any event described in clause (5), (7) or (8)
of "-- Events of Default" above has occurred, would constitute a
Significant Restricted Subsidiary under clause (1) of this definition.
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"Stated Maturity," when used with respect to any Note or any installment of
interest thereon, means the date specified in the Note as the fixed date on
which the principal of the Note or the installment of interest is due and
payable.
"Subordinated Indebtedness" means, with respect to the Issuer, Indebtedness
of the Issuer that is expressly subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person,
(1) any corporation of which the outstanding Voting Equity Interests
having at least a majority of the votes entitled to be cast in the election
of directors shall at the time be owned, directly or indirectly, by the
Person, or
(2) any other Person of which at least a majority of Voting Equity
Interests are at the time, directly or indirectly, owned by the 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 Issuer and the Restricted Subsidiaries outstanding as of
the date of determination.
"Total Incremental Invested Equity" means, at any date of determination,
the sum of, without duplication,
(1) the aggregate net cash proceeds received by Golden Sky Systems
either
(a) as capital contributions to Golden Sky Systems on or after the
Issue Date, including any capital contributions made out of the proceeds
from the issuance of the Notes, or
(b) from the issue and sale, other than to a Subsidiary of Golden
Sky Systems by Golden Sky Systems, of its Qualified Equity Interests
after the Issue Date, plus
(2) the aggregate net proceeds received by Golden Sky Systems or any
other Restricted Subsidiary after the Issue Date from the issuance, other
than to a Subsidiary of Golden Sky Systems, of Qualified Equity Interests
upon the conversion of, or in exchange for, Indebtedness of Golden Sky
Systems or another Restricted Subsidiary that has been converted into or
exchanged for Qualified Equity Interests of Golden Sky Systems, minus
(3) the aggregate amount of all Restricted Payments made on or after
the Issue Date and all Designation Amounts arising after the Issue Date,
but only to the extent the amount set forth in this clause (3) would exceed
the amount determined under subclause (a) of clause (3) of the first
paragraph under the "Limitation on Restricted Payments" covenant, plus
(4) in the case of the disposition or repayment of any Investment
which has been deducted pursuant to clause (3) of this definition, an
amount equal to the lesser of the return of capital with respect to the
Investment and the amount of the Investment which has been deducted
pursuant to clause (3), plus
(5) in the case of any Revocation with respect to any Subsidiary that
was made the subject of Designation after the Issue Date and as to which a
Designation Amount has been deducted pursuant to clause (3) of this
definition, an amount equal to the lesser of the Designation Amount or the
Fair Market Value of the Investment of Golden Sky Systems and the other
Restricted Subsidiaries in the Subsidiary at the time of Revocation.
"12 3/8% Notes" means the $195,000,000 aggregate principal amount of
12 3/8% Senior Subordinated Notes due 2006 of Golden Sky Systems.
"12 3/8% Notes Indenture" means the indenture dated July 31, 1998 governing
the 12 3/8% Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
an Unrestricted Subsidiary pursuant to "-- Covenants -- Designation of
Unrestricted Subsidiaries" above. Any designation
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of a subsidiary as an Unrestricted Subsidiary may be revoked by a resolution of
the Board of Directors of the Issuer delivered to the Trustee, subject to the
provisions of "-- 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 the
corporation or the Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required scheduled payment of principal,
including payment of final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between that date and the making of the payment, by
(2) the then outstanding aggregate principal amount of the
Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests, other than directors' qualifying
shares, of which are owned, directly or indirectly, by the Issuer.
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BOOK ENTRY; DELIVERY AND FORM
The Outstanding Notes were initially issued in the form of
(1) in the case of Outstanding Notes initially purchased by "qualified
institutional buyers", as defined in Rule 144A under the Securities Act,
two permanent global certificates in definitive, fully registered form, and
(2) in the case of Outstanding Notes initially purchased by non-U.S.
persons in reliance on Regulation S under the Securities Act, by a single
permanent global certificate in definitive, fully registered form.
On the closing date of the offering of the Outstanding Notes, we deposited
these global certificates representing the Outstanding Notes with The Depository
Trust Corporation (DTC). These global certificates were registered in the name
of Cede & Co., as nominee of DTC. The new notes exchanged for the Outstanding
Notes will be represented by two, permanent global certificates in definitive,
fully registered form (collectively, the "Global Note"). Upon the completion of
this exchange offer, the Global Note will be deposited with, or on behalf of,
DTC and registered in the name of Cede & Co., as nominee of DTC.
The Global Note. Pursuant to procedures established by DTC,
(1) upon the issuance of the Global Note, DTC or its custodian will
credit, for the respective accounts of each holder of new notes who has an
account with DTC ("DTC participants"), on its internal records, the
principal amount at maturity of new notes beneficially owned by the DTC
participant and represented by the Global Note, and
(2) ownership of beneficial interests in the Global Note will be shown
on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee, with respect to the interests of
DTC participants, and the records of DTC participants, with respect to
interests of persons other than DTC participants who hold those interests
through DTC participants.
Initially, ownership of beneficial interests in the Global Note will be
limited to persons who are DTC participants or persons who hold interests
through DTC participants.
So long as DTC, or its nominee, is the registered owner or holder of the
new notes, DTC or its nominee, as the case may be, will be considered the sole
owner or holder of the new notes represented by the Global Note for all purposes
under the indenture. No beneficial owner of an interest in the Global Note will
be able to transfer that interest except in accordance with DTC's procedures and
the procedures provided for under the indenture.
Payments of the principal of, premium, if any, and interest on, the Global
Note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the trustee, any paying agent under the indenture or our
company has any responsibility or liability for any aspect of:
- the records relating to beneficial ownership interests in the Global Note
- payments made on account of beneficial ownership interests in the Global
Note, or
- maintaining, supervising or reviewing any records relating to that
beneficial ownership interest.
DTC or its nominee, upon receipt of any payment of principal, premium, if
any, or interest in respect of the Global Note, will credit DTC participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount at maturity of the Global Note as shown on the
records of DTC or its nominee. Payments by DTC participants to owners of
beneficial interests in the Global Note held through DTC participants are
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for customers. These payments are the responsibility of the DTC
participants.
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Transfers between DTC participants will be effected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a certificated note for any reason,
including to sell notes to persons in states which require physical delivery of
the notes, or to pledge these securities, the holder will need to transfer its
interest in the Global Note, in accordance with the normal procedures of DTC and
with the procedures described in the indenture.
DTC has advised us that it will take action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more DTC participants to whose account
the DTC interests in the Global Note are credited and only in respect of that
portion of the aggregate principal amount at maturity of notes as to which the
DTC participant or DTC participants has or have given that direction. However,
if there is an event of default under the indenture, DTC will exchange the
Global Note for certificated securities, which it will distribute to its
participants.
DTC has advised us that it:
(1) is a limited purpose trust company organized under the laws of the
State of New York,
(2) is a member of the Federal Reserve System,
(3) is a "clearing corporation" within the meaning of the Uniform
Commercial Code,
(4) is a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act, and
(5) was created to hold securities for its participants and facilitate
the clearance and settlement of securities transactions between DTC
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates.
DTC participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the DTC system is
available to others including banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the Global Note among DTC participants, it is under no
obligation to perform these procedures, and these procedures may be discontinued
at any time. Neither we nor the trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by us within 90 days, certificated securities will be issued in
exchange for the Global Note.
SAME-DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the outstanding notes be
made in immediately available funds. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the new notes are expected to be eligible to trade
in the PORTAL Market and to trade in the Depositary's Same-day Funds Settlement
System, and any permitted secondary market trading activity in the new notes
will therefore be required by the Depositary to be settled in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement arrangements on trading activity in the new notes.
TRANSFER AND EXCHANGE
A holder of new notes will be permitted to transfer or exchange its new
notes in accordance with the indenture. The registrar under the indenture may
require a holder, among other things, to furnish
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appropriate endorsements and transfer documents, and to pay any taxes and fees
required by law or permitted by the indenture. The registrar is not required to
transfer or exchange any new note selected for redemption. Also, the registrar
is not required to transfer or exchange any new note for a period of 15 days
before a selection of the new notes to be redeemed.
The registered holder of a new note will be treated as the owner of it for
all purposes.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes, subject to the limitations set forth
below, the material U.S. federal income tax consequences associated with this
exchange offer and the acquisition, ownership and disposition of the new notes.
The discussion is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), its legislative history, judicial authority, current
administrative rulings and practice, and existing and proposed Treasury
Regulations, including regulations concerning the treatment of debt instruments
issued with original issue discount (the "OID Regulations"), all as in effect
and existing on the date hereof. Legislative, judicial or administrative changes
or interpretations may be forthcoming that could alter or modify the validity of
the statements and conclusions set forth below. Any of these changes or
interpretations may be retroactive and could adversely affect a holder of the
outstanding notes or the new notes. This discussion assumes that the outstanding
notes and the new notes are or will be held as capital assets, as defined in
Section 1221 of the Code, by the holders thereof. Except as otherwise described
herein, this discussion applies only to a holder who purchased notes for cash at
the "issue price", as defined below, and who is:
(1) a citizen or resident of the United States for United States
federal income tax purposes,
(2) a corporation created or organized in or under the laws of the
United States or of any political subdivision thereof,
(3) an estate the income of which is subject to United States federal
income taxation regardless of its source, or
(4) a trust that is subject to the primary supervision of a court
within the United States and the control of one or more United States
persons as described in Section 7701(a)(30) of the Code (a "U.S. Holder").
The following discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to particular holders in light of
their personal investment circumstances or status, including non-U.S. holders
who realize income or gain in respect of the new notes which is effectively
connected with their conduct of a U.S. trade or business, nor does it discuss
the U.S. federal income tax consequences to holders subject to special treatment
under the U.S. federal income tax laws, like some types of financial
institutions, insurance companies, dealers in securities, persons who hold the
new notes through partnerships or other pass-through entities, tax-exempt
organizations, or persons that hold new notes as part of a straddle or a hedging
or conversion transaction. Moreover, the effect of any applicable state, local
or foreign tax laws is not discussed.
THE FOLLOWING DISCUSSION IS FOR YOUR GENERAL INFORMATION ONLY. YOU ARE
STRONGLY URGED TO CONSULT WITH YOUR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF
YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THIS EXCHANGE
OFFER AND THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
EXCHANGE OF NOTES
The exchange of outstanding notes for new notes pursuant to this exchange
offer should not be treated as an "exchange" for federal income tax purposes,
because the new notes should not be considered to differ materially in kind or
extent from the outstanding notes. Rather, the new notes received by a holder of
outstanding notes should be treated as a continuation of the outstanding notes
in the hands of the holder. As a result, there will be no federal income tax
consequences to a holder exchanging outstanding notes for new notes pursuant to
this exchange offer. A holder shall have the same adjusted issue price, adjusted
basis and holding period in the new notes as it had in the outstanding notes
immediately before the exchange.
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ORIGINAL ISSUE DISCOUNT
General
The new notes will be treated as issued with original issue discount
("OID"), and each U.S. Holder is required to include in income, in each year,
regardless of whether the U.S. Holder is a cash or accrual basis taxpayer, in
advance of the receipt of cash payments on the notes, that portion of the OID,
computed on a constant yield-to-maturity basis, attributable to each day during
the year in which the U.S. Holder held the notes.
The Amount of Original Issue Discount
The amount of OID with respect to each new note is equal to the excess of
(1) its "stated redemption price at maturity" over (2) the "issue price" of the
outstanding note exchanged therefor. Under the OID Regulations, the "issue
price" is the initial offering price to the public, not including any bond
house, broker or similar person or organization acting in the capacity of an
underwriter, placement agent or wholesaler, at which a substantial amount of the
outstanding notes were sold, and the "stated redemption price at maturity" of
each new note is the sum of all cash payments, whether denominated as principal
or interest, provided by the note.
Taxation of Original Issue Discount
Except as described below in the section entitled "High Yield Discount
Obligations," a U.S. Holder of a debt instrument issued with OID is required to
include in gross income, generally as ordinary interest income, for U.S. federal
income tax purposes an amount equal to the sum of the "daily portions" of the
OID for all days during the taxable year on which the holder holds the debt
instrument. The daily portions of OID required to be included in a holder's
gross income in a taxable year is determined upon a constant yield-to-maturity
basis by allocating to each day during the taxable year on which the holder
holds the debt instrument a pro rata portion of the OID on the debt instrument
which is attributable to the "accrual period", generally the period between
interest payment or compounding dates, in which the day is included. The amount
of the OID attributable to each "accrual period" is the product of (1) the
"adjusted issue price" at the beginning of the accrual period and (2) the "yield
to maturity" of the debt instrument, stated in a manner appropriately taking
into account the length of the accrual period. The "adjusted issue price" of
each new note at the beginning of an accrual period generally will be equal to
the issue price of the outstanding note exchanged therefor plus the aggregate
amount of OID that accrued in all prior accrual periods, less any cash payments
that have been made on the outstanding note or the new note. Payments on the new
notes are not separately included in a U.S. Holder's income as interest, but
rather are treated first as payments of previously accrued and unpaid OID and
then as payments of principal.
Effect of Mandatory and Optional Redemptions on OID
We do not intend to treat the possibility of an optional or mandatory
redemption or repurchase of the new notes as giving rise to any additional
accrual of OID or recognition of ordinary income upon redemption, sale or
exchange of a new note. U.S. Holders may wish to consider the portion of the OID
Regulations regarding the treatment of contingencies and may wish to consult
their tax advisors in this regard.
SALE, EXCHANGE OR REDEMPTION
Unless a nonrecognition provision applies, the sale, exchange, redemption,
including pursuant to an offer by us, or other disposition of a new note is a
taxable event for U.S. federal income tax purposes. In this event, a U.S. Holder
will recognize gain or loss equal to the difference between (1) the amount of
cash plus the fair market value of any property received upon the sale,
exchange, redemption or other taxable disposition and (2) the U.S. Holder's
adjusted tax basis therein. A U.S. Holder's adjusted tax basis in a new note
generally will equal the cost to the U.S. Holder of the outstanding note
exchanged therefor, increased by the amount of OID previously included in the
U.S. Holder's income with respect to
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the new note and decreased by the amount of any principal or interest payments
previously received by the U.S. Holder on the note. Gain or loss realized on a
sale, exchange, redemption or other taxable disposition of the new note should
be capital gain or loss and will be long-term capital gain or loss if the note
has been held by the U.S. Holder for more than one year at the time of the sale,
exchange, redemption or other taxable disposition. The maximum rate of tax on
long-term capital gains on capital assets held by an individual for more than
one year generally is 20%. The deductibility of capital losses is subject to
limitations.
HIGH-YIELD DISCOUNT OBLIGATIONS
The new notes will constitute "applicable high yield discount obligations"
("AHYDOs") since the yield to maturity of the notes equals or exceeds the sum of
the "applicable federal rate" in effect at the time of the issuance of the notes
(the "AFR") plus five percentage points and the new notes are issued with
"significant original issue discount." Accordingly, we generally may not deduct
any portion of OID on the obligations until this portion of OID is actually
paid. In addition, since the yield-to-maturity of the new notes exceeds the sum
of the AFR plus six percentage points, a portion of the OID on the notes,
generally equal to the product of the total OID on the notes times the ratio of
(1) the excess of the yield to maturity over the sum of the AFR plus six
percentage points to (2) the yield to maturity, will not be deductible by us at
any time (the "non-deductible portion"). To the extent that the non-deductible
portion of OID would have been treated as a dividend if it had been distributed
with respect to our stock, this portion of OID will be treated as a dividend to
holders of the new notes for purposes of the rules relating to the dividends
received deduction for corporate holders.
NON-U.S. HOLDERS
Payments of principal, if any, and interest, including OID, by us or our
agent to any holder who is a beneficial owner of a new note and who holds the
new note as a capital asset but who is not a U.S. Holder are not subject to U.S.
federal income or withholding tax provided, in the case of interest, including
OID, that:
(1) the holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of our stock entitled to
vote and, is not a controlled foreign corporation for U.S. federal income
tax purposes that is related to us through stock ownership, and
(2) the holder either (A) certifies to us or our agent, under
penalties of perjury, that it is not a U.S. Holder and provides its name
and address, or (B) is a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and certifies
to us or our agent, under penalties of perjury, that the certification
described in clause (A) hereof has been received from the beneficial owner
by it or by another financial institution acting for the beneficial owner
and furnishes us with a copy thereof.
A holder of a new note who is not a U.S. Holder, and who does not meet the
requirements of (1) or (2) above, would generally be subject to U.S. federal
withholding tax at a flat rate of 30%, or a lower applicable treaty rate, on
payments of interest, including OID, on the notes.
Treasury Regulations recently issued by the IRS, which will be effective
January 1, 2000, make modifications to the certification procedures applicable
to non-U.S. Holders. In general, these regulations unify certification
procedures and forms and clarify and modify reliance standards. A non-U.S.
Holder should consult its own advisor regarding the effect of the new Treasury
Regulations.
Any capital gain realized upon the sale, exchange, redemption or other
disposition of a new note by a holder who is not a U.S. Holder and who holds the
note as a capital asset is not subject to U.S. federal income or withholding
taxes unless, in the case of an individual, the holder is present in the United
States for 183 days or more in the taxable year of the sale, exchange,
redemption or other disposition and other specified conditions are met.
111
114
BACKUP WITHHOLDING AND INFORMATION REPORTING FOR U.S. AND NON-U.S. HOLDERS
Noncorporate U.S. Holders may be subject to backup withholding at a rate of
31% on payments of principal and interest, including OID, on, and the proceeds
of a disposition of, a new note. Backup withholding will apply only if the U.S.
Holder (1) fails to furnish its Taxpayer Identification Number ("TIN") which, in
the case of an individual, would be his or her Social Security number, (2)
furnishes an incorrect TIN, (3) is notified by the IRS that it has failed to
properly report payments of interest and dividends or (4) under specified
circumstances, fails to certify, under penalty of perjury, that it has furnished
a correct TIN and has not been notified by the IRS that it is subject to backup
withholding. U.S. Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining an exemption if applicable.
Treasury Regulations provide that backup withholding will not apply to
payments on the new notes by us to a non-U.S. Holder if the holder certifies as
to its non-U.S. status under penalties of perjury or otherwise establishes an
exemption provided that neither we nor our paying agent has actual knowledge
that the holder is a U.S. person or that the conditions of any other exception
are not, in fact, satisfied.
The payment of the proceeds from the disposition of new notes to or through
the U.S. office of any broker, U.S. or foreign, will be subject to possible
backup withholding unless the owner certifies as to its non-U.S. Holder status
under penalty of perjury or otherwise establishes an exemption, provided that
the broker does not have actual knowledge that the holder is a U.S. person or
that the conditions of any other exemption are not, in fact, satisfied. Backup
withholding will not apply to payments made through foreign offices of a broker
that is not a U.S. person or a U.S. related person, absent actual knowledge that
the payee is U.S. person. For purposes of this paragraph, a "U.S. related
person" is (1) a "controlled foreign corporation" for U.S. federal income tax
purposes, (2) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment, or for any part of the period that the broker has been in
existence, is derived from activities that are effectively connected with the
conduct of a U.S. trade or business, or (3) with respect to payments made after
December 31, 1999, a foreign partnership that, at any time during its taxable
year, is 50% or more, by income or capital interest, owned by U.S. persons or is
engaged in the conduct of a U.S. trade or business. Treasury Regulations provide
a number of presumptions under which a non-U.S. Holder will be subject to backup
withholding unless the non-U.S. Holder provides a certification as to its non-
U.S. Holder status.
The amount of any backup withholding from a payment to a U.S. Holder or a
non-U.S. Holder will be allowed as a credit against the holder's United States
federal income tax liability and may entitle the holder to a refund, provided
that the required information is furnished to the IRS.
We will furnish annually to the IRS and to record holders of the new notes,
other than with respect to exempt holders, information relating to the stated
interest and the OID accruing during the calendar year. This information will be
based on the amount of OID that would have accrued to a holder who acquired the
note on original issue.
112
115
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account pursuant to
this exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of those new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for outstanding notes
if the outstanding notes were acquired by the broker-dealer as a result of
market-making or other trading activities. We have agreed that, for a period of
90 days after the date of the expiration of this exchange offer, we will make
this prospectus available to any broker-dealer for use in connection with any
resale of notes. In addition, for a period of 90 days after the expiration date,
all dealers effecting transactions in the new notes may be required to deliver a
prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to this exchange offer may be sold from time to time:
- in one or more transactions in the over-the-counter market,
- in negotiated transactions,
- through the writing of options on the new notes, or
- through a combination of these methods of resale.
Resales of new notes may be at market prices prevailing at the time of
resale, at prices related to the prevailing market prices or at negotiated
prices. Any resale may be made directly to purchasers or to or through brokers
or dealers who may receive compensation in the form of commissions or
concessions from any broker-dealer and/or the purchasers of any these new notes.
Any broker-dealer that resells new notes that were received by it for its own
account pursuant to this exchange offer and any broker or dealer that
participates in a distribution of new notes may be deemed to be an "underwriter"
within the meaning of the Securities Act. If a broker or dealer is deemed to be
an underwriter, any profit on any resale of new notes and any commissions or
concessions received by that person may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal requires any
broker-dealer who exchanges outstanding notes for new notes to acknowledge that
it will deliver a prospectus. A broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act solely by virtue
of making that acknowledgment. We have no arrangement or understanding with any
broker or dealer to distribute the new notes issued in the exchange offer.
For a period of 90 days after the expiration date of the exchange offer we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests those documents
in its letter of transmittal.
LEGAL MATTERS
The validity of the new notes will be passed upon for us by Reboul,
MacMurray, Hewitt, Maynard & Kristol, New York, New York.
EXPERTS
The following financial statements appearing in this prospectus have been
audited by KPMG LLP, independent auditors, as stated in their reports, and are
included herein in reliance upon their reports:
(1) Golden Sky DBS's balance sheet as of February 2, 1999, the date of
its inception,
(2) our consolidated financial statements for the period from Golden
Sky Systems' inception on June 25, 1996, to December 31, 1996, and for the
years ended December 31, 1997 and 1998,
(3) financial statements of Thunderbolt Systems, Inc. for the years
ended December 31, 1996, 1995, and 1994,
113
116
(4) financial statements of TEG DBS Systems, Inc. for the years ended
December 31, 1996 and 1995,
(5) financial statements of Direct Vision for the years ended December
31, 1996, 1995 and 1994,
(6) financial statements of Satellite Entertainment, Inc. for the
years ended December 31, 1996, 1995, and 1994,
(7) financial statements of GVEC Rural TV, Inc. for the years ended
December 31, 1996, 1995 and 1994,
(8) financial statements of JECTV for the years ended December 31,
1996, 1995 and 1994,
(9) financial statements of Argos Support Services Company for the
years ended December 31, 1996 and 1995,
(10) financial statements of direct broadcast satellite, a segment of
CTS Communication Corporation, for the years ended December 31, 1996, 1995
and 1994,
(11) financial statements of direct broadcast satellite LC for the
period from January 1, 1997 to November 17, 1997,
(12) financial statements of Cal-Ore Digital TV, Inc. for the period
from January 1, 1997 to December 8, 1997 and for the year ended December
31, 1996,
(13) financial statements of NRTC System No. 0093, a segment of Cable
and Communications Corporation, for each of the years in the three year
period ended December 31, 1996, and
(14) financial statements of Lakeland DBS, Inc. for the period from
January 1, 1997 to December 24, 1997 and for the year ended December 31,
1996.
The financial statements of Western Montana DBS, Inc. dba Rocky Mountain
DBS for each of the years in the three-year period ended December 31, 1996 and
for the year ended December 31, 1997 have been audited by Loucks & Glassley,
pllp, independent auditors, as stated in their report, and are included herein
in reliance upon their report.
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
their report.
The financial statements of Western Montana Entertainment Television, Inc.
for the year ended December 31, 1996 and for period ended December 22, 1997 have
been audited by Summers, McNea and Company, P.C., independent auditors, as
stated in their report, and are included herein in reliance upon their report.
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 their report.
The financial statements of Triangle Communication System, Inc. for each of
the years in the three-year period ended December 31, 1997 have been audited by
Eide Helmeke PLLP, independent auditors, as stated in their report, and are
included herein in reliance upon their report.
The financial statements of direct broadcast satellite, a segment of Nemont
Communications Inc., for the year ended December 31, 1997 have been audited by
CHMS, P.C., independent auditors, as stated in their report, and are included
herein in reliance upon their report.
114
117
The financial statements of direct broadcast satellite Segment of Cumby
Cellular, Inc. for the year ended December 31, 1997 have been audited by Curtis
Blakely & Co., P.C., independent auditors, as stated in their report, and are
included herein in reliance upon their report.
The financial statements of direct broadcast satellite, a segment of
Volcano Vision, Inc., for the year ended December 31, 1997 have been audited by
Moss Adams LLP, independent auditors, as stated in their report and are included
herein in reliance upon their reports.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999 all dealers that effect transactions in these
securities, whether or not participating in this exchange offer, may be required
to deliver a prospectus. This obligation is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
---------------------
You should rely only on the information and representations contained or
incorporated by reference in this prospectus or the accompanying letter of
transmittal. We have not authorized anyone to provide you with information or
representations that are different from these contained in this prospectus or
the accompanying letter of transmittal. 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 an offer or solicitation. Neither the delivery of
this prospectus or the accompanying letter of transmittal or both together, nor
any sale made hereunder shall under any circumstances imply that the information
contained in this prospectus is correct as of any date subsequent to the date
hereof.
---------------------
The exchange agent for this exchange offer is United States Trust Company
of New York and may be contacted as follows:
By Overnight Courier and by Hand delivery after 4:30 PM on Expiration Date:
United States Trust Company of New York
770 Broadway, 13th Floor
Attn: Corporate Trust Services
New York, New York 10003
By Hand Delivery to 4:30 PM:
United States Trust Company of New York
111 Broadway, Lower Level
Attn: Corporate Trust Window
New York, New York 10006
By Registered or Certified Mail:
United States Trust Company of New York
P.O. Box 844, Cooper Station
Attn: Corporate Trust Services
New York, New York 10276-0844
115
118
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
GOLDEN SKY DBS, INC.
Independent Auditors' Report.............................. F-2
Balance Sheet as of February 2, 1999...................... F-3
Independent Auditors' Report.............................. F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998 and March 31, 1999................................ F-5
Consolidated Statements of Operations for the period from
inception (June 25, 1996) through December 31, 1996,
for the years ended December 31, 1997 and 1998, and for
the three months ended March 31, 1998 and 1999......... F-6
Consolidated Statements of Stockholder's Equity (Deficit)
for the period from inception (June 25, 1996) through
December 31, 1996, for the years ended December 31,
1997 and 1998, and for the three months ended March 31,
1999................................................... F-7
Consolidated Statements of Cash Flows for the period from
inception (June 25, 1996) through December 31, 1996,
for the years ended December 31, 1997 and 1998, and for
the three months ended March 31, 1998 and 1999......... F-8
Notes to Consolidated Financial Statements................ F-9
FINANCIAL STATEMENTS OF SIGNIFICANT ACQUIRED BUSINESSES
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-33
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-41
TEG DBS Systems, Inc. .................................... F-48
TEG DBS Systems, Inc. (unaudited)......................... F-53
Direct Vision (a segment of Mankato Citizens Telephone
Company)............................................... F-56
Direct Vision (a segment of Mankato Citizens Telephone
Company) (unaudited)................................... F-64
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association).......................... F-68
Satellite Entertainment, Inc. (a wholly-owned subsidiary
of Ace Telephone Association) (unaudited).............. F-77
GVEC Rural TV, Inc. ...................................... F-81
GVEC Rural TV, Inc. (unaudited)........................... F-91
JECTV (a segment of Jackson Electric Cooperative)......... F-95
JECTV (a segment of Jackson Electric Cooperative)
(unaudited)............................................ F-104
Argos Support Services Company............................ F-109
Argos Support Services Company (unaudited)................ F-118
Gardonville Systems, Inc. ................................ F-122
Direct Broadcast Satellite (a segment of CTS
Communications Corporation)............................ F-129
Direct Broadcast Satellite (a segment of CTS
Communications Corporation) (unaudited)................ F-137
Souris River Television, Inc. ............................ F-141
Souris River Television, Inc. (unaudited)................. F-150
DBS LC.................................................... F-155
Western Montana Entertainment Television, Inc. ........... F-160
South Plains DBS Limited Partnership...................... F-168
Cal-Ore Digital TV, Inc. ................................. F-188
NRTC System No. 0093 (a segment of Cable and
Communications Corporation)............................ F-203
NRTC System No. 0093 (a segment of Cable and
Communications Corporation) (unaudited)................ F-212
Lakeland DBS.............................................. F-216
Triangle Communications System, Inc. ..................... F-222
Direct Broadcast Satellite (a segment of Nemont
Communications, Inc.).................................. F-232
DBS Segment of Cumby Cellular, Inc. ...................... F-241
DBS Segment of Cumby Cellular, Inc. (unaudited)........... F-249
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.).................................................. F-255
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.) (unaudited)...................................... F-264
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-271
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-280
F-1
119
INDEPENDENT AUDITORS' REPORT
Board of Directors
Golden Sky DBS, Inc.
We have audited the accompanying balance sheet of Golden Sky DBS, Inc. (a
wholly-owned subsidiary of Golden Sky Holdings, Inc.) as of February 2, 1999.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Golden Sky DBS, Inc. as of February
2, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
February 3, 1999
Kansas City, Missouri
F-2
120
GOLDEN SKY DBS, INC.
BALANCE SHEET
FEBRUARY 2, 1999
ASSETS
Cash........................................................ $100
====
STOCKHOLDER'S EQUITY
Common Stock, par value $.01; 1,000 shares authorized, 100
shares issued and outstanding............................. $100
Retained earnings........................................... --
----
Total stockholder's equity........................ $100
====
NOTES TO BALANCE SHEET
Organization and Nature of Operations
Golden Sky DBS, Inc. (the "Issuer"), a wholly-owned subsidiary of Golden
Sky Holdings, Inc. ("Holdings"), is a Delaware corporation formed on February 2,
1999 for the purpose of effecting an offering of Senior Discount Notes. Holdings
transferred to the Issuer all of the capital stock of its wholly-owned
subsidiary Golden Sky Systems, Inc.("GSS"). GSS is Delaware corporation formed
on June 25, 1996 for the purpose of acquiring, owning and operating rural direct
broadcast satellite (DBS) television territories throughout the United States.
The transfer was reported at predecessor cost, which at December 31, 1998 was
$15.9 million.
F-3
121
INDEPENDENT AUDITORS' REPORT
Board of Directors
Golden Sky DBS, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
DBS, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from inception (June 25, 1996) through December 31, 1996, and for the years
ended December 31, 1997 and 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden Sky
DBS, Inc. as of December 31, 1997 and 1998 and the results of their operations
and their cash flows for the period from inception (June 25, 1996) through
December 31, 1996, and for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
February 22, 1999, except for paragraph seven
of Note 5, which is as of March 22, 1999
Kansas City, Missouri
F-4
122
GOLDEN SKY DBS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 13,632 $ 4,460 $ 39,276
Restricted cash, current portion.......................... -- 28,083 22,892
Subscriber receivables (net of allowance for uncollectible
accounts of $138, $293 and $252 respectively).......... 3,843 8,632 9,448
Other receivables......................................... 335 2,465 994
Inventory................................................. 2,174 10,146 8,683
Prepaid expenses and other................................ 127 1,859 959
-------- -------- ---------
Total current assets........................................ 20,111 55,645 82,252
Restricted cash, net of current portion..................... -- 23,534 11,827
Property and equipment (net of accumulated depreciation of
$1,061, $3,214 and $3,983 respectively)................... 2,936 4,994 5,914
Intangible assets, net...................................... 129,896 233,139 245,773
Deferred financing costs.................................... 3,106 10,541 12,471
Other assets................................................ 187 218 475
-------- -------- ---------
Total assets...................................... $156,236 $328,071 $ 358,712
======== ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.................................... $ 8,471 $ 13,539 $ 15,012
Interest payable.......................................... 786 11,009 4,348
Current maturities of long-term obligations............... 2,538 8,916 2,819
Unearned revenue.......................................... 2,630 5,574 6,392
Accrued payroll and other................................. 1,859 1,403 1,503
-------- -------- ---------
Total current liabilities................................... 16,284 40,441 30,074
Long-term obligations, net of current maturities:
12 3/8% Notes............................................. -- 195,000 195,000
13 1/2% Notes............................................. -- -- 101,569
Bank debt................................................. 60,000 67,000 35,000
Seller notes payable...................................... 6,200 6,912 6,912
Other notes payable and obligations under capital
leases................................................. 375 376 441
Minority interest......................................... 2,928 2,420 2,288
-------- -------- ---------
Total long-term obligations, net of current maturities...... 69,503 271,708 341,210
-------- -------- ---------
Total liabilities........................................... 85,787 312,149 371,284
Commitments and contingencies............................... -- -- --
Stockholder's Equity (Deficit):
Common Stock, par value $.01; 1,000 shares authorized;
1,000 shares issued and outstanding at December 31,
1997 and 1998; 100 shares issued and outstanding at
March 31, 1999......................................... -- -- --
Additional paid-in capital................................ 87,400 97,600 97,913
Accumulated deficit....................................... (16,951) (81,678) (110,485)
-------- -------- ---------
Total stockholder's equity (deficit)........................ 70,449 15,922 (12,572)
-------- -------- ---------
Total liabilities and stockholder's equity
(deficit)....................................... $156,236 $328,071 $ 358,712
======== ======== =========
See accompanying notes to consolidated financial statements.
F-5
123
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
INCEPTION YEARS ENDED THREE MONTHS ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
------------ -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue:
DBS services........................... $ 219 $ 16,452 $ 74,910 $13,884 $ 30,502
Lease and other........................ 36 944 1,014 245 197
------- -------- -------- ------- --------
Total revenue............................ 255 17,396 75,924 14,129 30,699
Costs and Expenses:
Costs of DBS services.................. 130 9,304 45,291 8,250 19,186
System operations...................... 26 3,796 11,021 1,787 4,270
Sales and marketing.................... 73 7,316 32,201 4,670 12,809
General and administrative............. 1,035 2,331 7,431 1,108 2,948
Depreciation and amortization.......... 97 7,300 23,166 4,348 8,220
------- -------- -------- ------- --------
Total costs and expenses................. 1,361 30,047 119,110 20,163 47,433
------- -------- -------- ------- --------
Operating loss........................... (1,106) (12,651) (43,186) (6,034) (16,734)
Non-operating Items:
Interest and investment income......... 1 40 1,573 28 823
Interest expense....................... (62) (3,173) (20,537) (2,281) (9,961)
------- -------- -------- ------- --------
Total non-operating items................ (61) (3,133) (18,964) (2,253) (9,138)
------- -------- -------- ------- --------
Loss before income taxes................. (1,167) (15,784) (62,150) (8,287) (25,872)
Income taxes............................. -- -- -- -- --
------- -------- -------- ------- --------
Loss before extraordinary charge......... (1,167) (15,784) (62,150) (8,287) (25,872)
Extraordinary charge on early retirement
of debt................................ -- -- (2,577) -- (2,935)
------- -------- -------- ------- --------
Net loss....................... $(1,167) $(15,784) $(64,727) $(8,287) $(28,807)
======= ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-6
124
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- --------
Balance at inception (June 25, 1996)............... $ -- $ -- $ -- $ --
Issuance of 1,000 shares of Golden Sky Systems
Common Stock.................................. -- 1 -- 1
Net loss......................................... -- -- (1,167) (1,167)
---- ------- --------- --------
Balance at December 31, 1996....................... -- 1 (1,167) (1,166)
Cancellation of originally issued Golden Sky
Systems Common Stock.......................... -- (1) -- (1)
Issuance of 1,000 shares of new Golden Sky
Systems Common Stock.......................... -- -- -- --
Contribution from Golden Sky Holdings, Inc. ..... -- 87,400 -- 87,400
Net loss......................................... -- -- (15,784) (15,784)
---- ------- --------- --------
Balance at December 31, 1997....................... -- 87,400 (16,951) 70,449
Contribution from Golden Sky Holdings, Inc. ..... -- 10,200 -- 10,200
Net loss......................................... -- -- (64,727) (64,727)
---- ------- --------- --------
Balance at December 31, 1998....................... $ -- $97,600 $ (81,678) $ 15,922
Issuance of 100 shares of Golden Sky DBS Common
Stock......................................... -- -- -- --
Deferred compensation pursuant to stock options
(unaudited)................................... -- 313 -- 313
Net loss (unaudited)............................. -- -- (28,807) (28,807)
---- ------- --------- --------
Balance at March 31, 1999 (unaudited).............. $ -- $97,913 $(110,485) $(12,572)
==== ======= ========= ========
See accompanying notes to consolidated financial statements.
F-7
125
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
INCEPTION YEARS ENDED THREE MONTHS ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------- -------------------------
1996 1997 1998 1998 1999
------------ --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(1,167) $ (15,784) $ (64,727) $ (8,287) $(28,807)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 97 7,300 23,166 4,348 8,220
Amortization of debt discount, deferred
financing costs and other................. -- 215 977 252 1,858
Extraordinary charge on early retirement of
debt...................................... -- -- 2,577 -- 2,935
Change in operating assets and liabilities,
net of acquisitions:
Subscriber receivables, net of unearned
revenue................................. (13) (2,501) (1,757) (622) 46
Other receivables......................... (123) (161) (2,130) (174) 1,471
Inventory................................. (31) (1,604) (8,049) (859) 1,463
Prepaid expenses and other................ (17) (203) (1,228) (160) 683
Trade accounts payable.................... 372 7,515 5,068 3,897 1,473
Interest payable.......................... 53 733 10,223 533 (6,661)
Accrued payroll and other................. 39 1,391 (708) (1,305) 81
------- --------- --------- -------- --------
Net cash used in operating activities......... (790) (3,099) (36,588) (2,377) (17,238)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets......... (2,806) (120,051) (104,487) (27,647) (20,334)
Offering proceeds and investment earnings
placed in escrow............................ -- -- (51,617) -- (709)
Purchases of property and equipment........... (105) (998) (3,317) (684) (1,144)
Proceeds from interest escrow account......... -- -- -- -- 12,158
Release of amounts reserved for contingent
reduction of bank debt...................... -- -- -- -- 5,449
Other......................................... (320) 320 (500) -- (48)
------- --------- --------- -------- --------
Net cash used in investing activities......... (3,231) (120,729) (159,921) (28,331) (4,628)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from investors' subscriptions to
purchase preferred stock.................... 2,499 -- -- -- --
Proceeds from issuance of Series A Convertible
Participating Preferred Stock............... -- 34,289 -- -- --
Net proceeds from issuance of 12 3/8% Notes... -- -- 189,150 -- --
Proceeds from issuance of 13 1/2% Notes....... -- -- -- -- 100,049
Borrowings on bank debt....................... -- 75,000 90,000 21,000 21,000
Principal payments on bank debt............... -- (15,000) (83,000) -- (53,000)
Proceeds from issuance of notes payable....... 2,396 2,115 -- -- --
Principal payments on notes payable and
obligations under capital leases............ (396) (2,902) (3,675) (64) (6,032)
Proceeds from issuance of Common Stock........ 1 -- -- -- --
Contribution from Golden Sky Holdings, Inc.... -- 46,800 -- -- --
Increase in deferred financing costs.......... -- (3,321) (5,138) (242) (5,335)
------- --------- --------- -------- --------
Net cash provided by financing activities..... 4,500 136,981 187,337 20,694 56,682
------- --------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 479 13,153 (9,172) (10,014) 34,816
Cash and cash equivalents, beginning of
period...................................... -- 479 13,632 13,632 4,460
------- --------- --------- -------- --------
Cash and cash equivalents, end of period...... $ 479 $ 13,632 $ 4,460 $ 3,618 $ 39,276
======= ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest........................ $ 9 $ 2,225 $ 9,337 $ 1,315 $ 14,390
Property and equipment acquired under
capitalized lease obligations............... -- 554 609 163 78
Retirement of bank debt from borrowings under
the Credit Facility......................... -- -- 88,000 -- --
Issuance of seller notes payable in
acquisitions................................ 2,450 8,600 10,157 -- --
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-8
126
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 1999 and for the Three-Month Periods Ended March
31, 1999 and 1998 is Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
Organization and Legal Structure
Golden Sky DBS, Inc. ("the Company" or "Golden Sky DBS") was formed in
February 1999 for the purpose of completing a private offering (the "13 1/2%
Notes Offering") of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2%
Notes"). The 13 1/2% Notes Offering was consummated pursuant to Rule 144A of the
Securities Act of 1933, as amended. In April 1999, Golden Sky DBS filed a
registration statement with the Securities and Exchange Commission relating to
the exchange of the privately issued 13 1/2% Notes for publicly registered notes
with substantially identical terms (including principal amount, interest rate,
maturity, security and ranking).
Upon formation, Golden Sky DBS issued 100 shares of its common stock to
Golden Sky Holdings, Inc. ("Holdings") in exchange for $100 and the subsequent
transfer of all of the capital stock of Golden Sky Systems, Inc. ("Systems") to
Golden Sky DBS. Until February 1999, Systems was a wholly-owned subsidiary of
Holdings. Upon completion of the aforementioned transfer, Systems became a
wholly-owned subsidiary of Golden Sky DBS. Accordingly, Systems has been treated
as the predecessor to Golden Sky DBS and the historical financial statements of
Golden Sky DBS are those of Systems.
Principal Business
Systems is the second largest independent provider of DIRECTV subscription
television services. DIRECTV is the leading direct broadcast satellite ("DBS")
company serving the continental United States. Systems was formed on June 25,
1996 ("Inception") and is a non-voting affiliate of the National Rural
Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with Hughes
Communications Galaxy, Inc. ("Hughes") for the exclusive right to distribute
DIRECTV programming to homes in certain rural territories of the United States
("Rural DIRECTV Markets"). As of March 31, 1999, Systems had acquired 51 Rural
DIRECTV Markets in 23 states with approximately 1.8 million households. As of
that same date, Systems served approximately 263,500 subscribers.
Significant Risks and Uncertainties
Substantial Leverage. The Company is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December 31,
1998 and March 31, 1999, the Company had outstanding long-term debt (including
current portion) totaling approximately $278.2 million and $341.7 million,
respectively. Substantially all of the Company's and its subsidiaries' assets
are pledged as collateral on its long-term debt. Further, the terms associated
with the Company's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for the Company and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement the Company's business strategy.
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, the Company has sustained
significant losses since Inception. The Company's operating losses were $1.1
million, $12.7 million and $43.2 million for the periods ended December 31,
1996, 1997 and 1998, respectively. The Company's net losses during those same
periods aggregated $1.2 million, $15.8 million and $64.7 million, respectively.
During the three months ended March 31, 1998 and 1999, the Company's operating
losses totaled $6.0 million and $16.7 million, respectively; net losses totaled
$8.3 million and $28.8 million during those same periods. Improvement in the
Company's results of operations is principally dependent upon its ability to
cost effectively expand its subscriber base, control subscriber churn (i.e., the
rate at which subscribers terminate service), and effectively manage its
operating and overhead costs.
F-9
127
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
No assurance can be given that the Company will be effective with regard to
these matters. The Company incurs significant costs to acquire DIRECTV
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber churn. The Company anticipates that it will continue to
experience operating losses through at least 1999. There can be no assurance
that such operating losses will not continue beyond 1999 or that the Company's
operations will generate sufficient cash flows to pay its obligations, including
its obligations on its long-term debt.
Restrictions on Dividends and Other Distributions. The ability of Systems
and its subsidiaries to pay dividends and make other distributions and advances
is subject to, among other things, the terms of its long-term debt obligations
and applicable law. As a result, Systems may be limited in its ability to make
dividend payments and other distributions to Golden Sky DBS at the time such
distributions are needed by Golden Sky DBS to meet its obligations.
Reliance on DIRECTV/NRTC. The Company obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result, the
Company would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, the Company relies upon DIRECTV to continue to
provide programming services on a basis consistent with its past practice. Any
change in such practice due to, for example, a failure to replace a satellite
upon the expiration of its useful orbital life or a delay in launching a
successor satellite may prevent the Company from continuing to provide DBS
services and could have a material adverse effect on the Company's financial
condition and results of operations. Additionally, the Company's ability to
offer DIRECTV programming services depends upon agreements between the NRTC and
Hughes and between Systems and the NRTC. The NRTC's interests may differ from
the Company's interests. The Company would be materially and adversely affected
by the termination of the NRTC's agreement with Hughes and/or the termination of
Systems' agreements with the NRTC. Systems' agreements with the NRTC require
that it use the NRTC for certain support services including subscriber
information and data reporting capability, retail billing services and central
office subscriber services. Such services are critical to the operation and
management of the Company's business.
Competition. The subscription television industry is highly competitive.
The Company faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than the Company. The
Company's ability to effectively compete in the subscription television industry
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Golden Sky DBS and its majority owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Minority interest represents the
cumulative earnings and losses, after capital contributions, attributable to
minority partners and stockholders.
The unaudited consolidated financial statements as of March 31, 1999 and
for the three-month periods ended March 31, 1998 and 1999 include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position, results of operations and cash flows. Operating results for the
three-month periods ended March 31, 1998 and 1999 are not necessarily indicative
of the results that may be expected for the full fiscal years.
F-10
128
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number of
estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997
and 1998 and March 31, 1999, cash and cash equivalents include cash on hand,
demand deposits and money market accounts.
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with Systems'
12 3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash,
which is held in escrow, is invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the indenture. As of December 31, 1998, and March 31, 1999,
restricted cash was composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of receivers, satellite dishes and accessories ("DBS Equipment").
The Company subsidizes the cost to the consumer of such equipment, which is
required to receive DIRECTV programming services. Additionally, the Company
subsidizes the cost to the consumer of installation of DBS Equipment. Equipment
and installation revenues and related expenses are recognized upon delivery and
installation of DBS Equipment. Net transaction costs associated with the sale
and installation of DBS Equipment are reported as a component of sales and
marketing expenses in the accompanying consolidated statements of operations.
During the periods ended December 31, 1996, 1997 and 1998, aggregate proceeds
from the sale and installation of DBS Equipment totaled $57,000, $3.8 million
and $11.0 million, respectively; related cost of sales totaled $68,000, $4.6
million and $25.8 million during those same periods. During the three months
ended March 31, 1998 and 1999, aggregate proceeds from the sale and installation
of DBS Equipment totaled $2.3 million during each period; related cost of sales
totaled $8.8 million and $4.3 million during those same periods.
Long-lived Assets
The Company reviews its long-lived assets (e.g., property and equipment)
and certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For assets which are held and used in
operations, the asset would be impaired if the book value of the asset exceeded
the undiscounted future cash flows related to the asset. For those assets which
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. The Company considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
F-11
129
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited, generally up to
12 years. The expected period to be benefited corresponds to the remaining
estimated orbital lives of the satellites used by Hughes for distribution of
DIRECTV programming services. Hughes' satellites are estimated to have orbital
lives of approximately 15 years from the respective launch dates in December
1993, August 1994 and June 1995.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying value approximates fair value
as a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of the 12 3/8% Notes (as
defined) is based on quoted market prices. As of December 31, 1998, the
carrying value of the 12 3/8% Notes was $195.0 million; the fair value of
the 12 3/8% Notes approximated $199.9 million as of that same date. The
carrying value of Systems' Credit Facility (as defined) and other notes
payable approximate fair value as interest rates are variable or
approximate market rates.
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months
and revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative costs
related to the Company's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $33,000,
$1.4 million and $5.1 million during the periods ended December 31, 1996, 1997
and 1998, respectively. During the three-month periods ended March 31, 1998 and
1999, advertising costs totaled approximately $730,000 and $1.1 million,
respectively.
Income Taxes
Systems elected to be taxed as an S Corporation for federal income tax
purposes in 1996. As an S Corporation, Systems was generally not directly
subject to income taxation. On February 12, 1997, Systems terminated its S
Corporation status, and thereafter is subject to income taxation as a C
Corporation under Subchapter "C" of the Internal Revenue Code. Upon their
formation, Holdings and Golden Sky DBS elected to be taxed as C Corporations for
federal income tax purposes. Pro forma income taxes have not been presented
because the Company has incurred operating losses in all periods.
F-12
130
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effects of Recently Issued Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") during the first quarter
of 1998. FAS No. 130 established new rules for the reporting of comprehensive
income and its components. FAS No. 130 has no impact on net income or
stockholder's equity. The Company has no components of comprehensive income
other than net loss and thus, adoption of FAS No. 130 had no effect on its
financial statements.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No.
133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Currently, the Company has no derivative instruments or
hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to
have a material effect on the Company's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, defines costs related to start-up activities
and requires that such costs be expensed as incurred. As the Company previously
has expensed all such costs, the adoption of SOP 98-5 is not expected to effect
the Company's financial position or results of operations.
Reclassifications
Certain amounts from the prior years' consolidated financial statements
have been reclassified to conform with the current year presentation.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for one to three months, to new subscribers. The retail price of such free
programming promotions is expensed in the month the subscriber activates
service. During the three months ended March 31, 1999, sales and marketing
expenses attributable to such promotions totaled $1.9 million. Related non-cash
revenue is recognized in the month service is provided and totaled $1.7 million
during the three months ended March 31, 1999.
3. ACQUISITIONS
The Company accounts for its acquisitions using the purchase method. The
Company's consolidated statements of operations for the periods ended December
31, 1996, 1997 and 1998 and March 31, 1999 include the results of operations of
acquired Rural DIRECTV Markets from the respective acquisition dates.
The aggregate purchase price (including direct acquisition costs) for the
acquisitions completed during 1996, 1997 and 1998 and the three months ended
March 31, 1999 were allocated as follows (dollars in thousands):
YEARS ENDED DECEMBER 31,
---------------------------- THREE MONTHS ENDED
1996 1997 1998 MARCH 31, 1999
------ -------- -------- ------------------
DIRECTV distribution rights.......... $4,664 $116,394 $114,747 $17,200
Customer lists....................... 453 9,450 7,114 --
Non-compete agreements............... 35 4,879 2,587 3,058
Property and equipment............... 135 1,953 204 --
Minority interest.................... -- (2,931) -- --
Working capital, net................. (31) (20) 192 76
------ -------- -------- -------
$5,256 $129,725 $124,844 $20,334
====== ======== ======== =======
F-13
131
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following summarizes the Company's acquisitions of Rural DIRECTV
Markets consummated during 1996, 1997, 1998 and 1999 (dollars in thousands):
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-14
132
GOLDEN SKY DBS, 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
========
Breda Telephone Corporation............. January 11, 1999 Iowa $ 8,628
Thunderbolt Systems, Inc................ January 15, 1999 Missouri 2,573
Siskiyou Ruralvision, Inc............... February 26, 1999 California 4,590
Baraga Telephone Company................ March 3, 1999 Michigan 4,543
--------
Total 1999 acquisitions....... $ 20,334
========
Subsequent to March 31, 1999, the Company acquired the exclusive rights to
provide DIRECTV programming in three additional Rural DIRECTV Markets. These
Rural DIRECTV Markets served approximately 6,500 subscribers as of the
respective acquisition dates. The aggregate purchase price (excluding direct
acquisition costs) of these acquisitions, which represent approximately 47,000
television households, totaled $11.6 million.
The unaudited pro forma information presented below, excluding five
acquisitions that were immaterial individually and in the aggregate, reflects
the Company's acquisitions of Rural DIRECTV Markets consummated during 1997 and
1998 as if each such acquisition had occurred as of the beginning of the period
presented. The Company's acquisitions of Rural DIRECTV Markets during 1999 were
not material and have been excluded from the unaudited pro forma information
presented below. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated at those times (dollars in thousands).
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
Total revenue............................................... $ 39,937 $ 87,857
Net loss before extraordinary charge........................ (26,654) (79,813)
F-15
133
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
During 1997, Systems acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). In April 1999, Systems exercised its option to
purchase, for approximately $3.9 million, the remaining ownership interest in
DCE that it does not hold. Systems' purchase of the remaining DCE ownership
interest is expected to close in June 1999.
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,
------------------- MARCH 31, ESTIMATED
1997 1998 1999 USEFUL LIFE
-------- -------- ----------- -----------
(UNAUDITED)
DIRECTV distribution rights............ $121,969 $236,531 $251,969 10-12 years
Customer lists......................... 9,903 17,018 18,603 5 years
Non-compete agreements................. 4,914 7,501 10,559 3 years
-------- -------- --------
136,786 261,050 281,131
Less accumulated amortization.......... (6,890) (27,911) (35,358)
-------- -------- --------
Intangible assets, net............... $129,896 $233,139 $245,773
======== ======== ========
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
12 3/8% Notes........................................ $ -- $195,000 $195,000
13 1/2% Notes........................................ -- -- 101,569
Bank debt............................................ 60,000 67,000 35,000
Seller notes payable................................. 8,600 15,407 9,414
Other notes payable and obligations under capital
leases............................................. 513 797 758
Minority interest.................................... 2,928 2,420 2,288
------- -------- --------
Total long-term obligations.......................... 72,041 280,624 344,029
Less current maturities.............................. (2,538) (8,916) (37,819)
------- -------- --------
Long-term obligations, net of current maturities... $69,503 $271,708 $306,210
======= ======== ========
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, with the first interest payment due
February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes
Offering resulted in net proceeds to the Company of approximately $189.2 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $5.8 million). Approximately $45.2 million of the net proceeds of
the 12 3/8% Notes Offering were placed in escrow to fund the first four
semi-annual interest payments (through August 1, 2000) on the 12 3/8% Notes.
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of
F-16
134
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option
on or after August 1, 2003, at redemption prices decreasing from 112% during the
year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, on or prior
to August 1, 2001, Systems may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the 12 3/8% Notes, at a
redemption price equal to 112.375% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of redemption solely with the
net proceeds of a public equity offering of Systems or Holdings yielding gross
proceeds of at least $40.0 million and any subsequent public equity offerings
(provided that, in the case of any such offering or offerings by Holdings, all
the net proceeds thereof are contributed to Systems); provided, further that
immediately after any such redemption the aggregate principal amount of Notes
outstanding must equal at least 65% of the originally issued aggregate principal
amount of the 12 3/8% Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
Systems' ability to incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur indebtedness that is subordinate in right of
payment to any senior indebtedness and senior in right of payment to the 12 3/8%
Notes, incur liens, permit restrictions on the ability of subsidiaries to pay
dividends or make certain payments to Systems, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of Systems' assets.
In the event of a change of control, as defined in the 12 3/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase.
The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act"). During 1998,
Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective). Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.7 million (after initial purchasers' discount and other offering expenses).
The 13 1/2% Notes have an aggregate balance due at stated maturity of $193.1
million. Golden Sky DBS contributed to net proceeds of the 13 1/2% Notes
Offering to Systems, of which Systems used $53.0 million to repay existing
revolving credit indebtedness. Cash interest on the 13 1/2% Notes will not
accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a rate
of 13 1/2% per annum and be payable in arrears on March 1 and September 1 of
each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1,
2007.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS's direct and indirect subsidiaries. Golden Sky
DBS's ability to pay interest on the notes when interest is due and
F-17
135
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
to redeem the notes at maturity will depend on whether its direct and indirect
subsidiaries can pay dividends or make other distributions to it under the terms
of such subsidiaries indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the
13 1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 13 1/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets. In
the event of a change of control, as defined in the 13 1/2% Notes Indenture,
each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS
to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to
101% of the accreted value of the notes, plus accrued and unpaid interest, if
any, to the date of purchase.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin). At
December 31, 1997, the effective rates on these loans ranged from 9% to 11%.
During May 1998, the Company entered into a seven-year, $150.0 million
amended credit facility (the "Credit Facility") with a syndicate of lenders. The
Credit Facility provides for a term loan commitment of $35.0 million and a
revolving loan commitment of $115.0 million. Borrowings under the Credit
Facility bear interest at variable rates (approximately 10% as of December 31,
1998) calculated on a base rate, such as the prime rate or LIBOR, plus an
applicable margin. As of December 31, 1998, aggregate borrowings outstanding
under the Credit Facility totaled $67.0 million, including $35.0 million
borrowed pursuant to the Credit Facility's term loan commitment.
Upon execution of the Credit Facility, Systems recognized an extraordinary
charge of approximately $2.6 million to write-off unamortized deferred financing
costs associated with the Credit Agreement.
In February 1999, Systems' Credit Facility was amended (the "Amended Credit
Facility") to permit, among other things, the offering of senior discount notes
by Golden Sky DBS. The Amended Credit Facility's term loan commitment amortizes
in specified quarterly installments from March 31, 2002 through maturity on
December 31, 2005. The availability of revolving loan borrowings under the
Amended Credit Facility reduces by specified amounts over the period from March
31, 2001 through maturity on September 30, 2005. In February 1999, Systems
repaid all outstanding borrowings under the revolving loan commitment. Such
repayment was funded from the contribution by Golden Sky DBS of the net proceeds
of the 13 1/2% Notes Offering to Systems and totaled $53.0 million. As of March
31, 1999, no borrowings were outstanding under the Amended Credit Facility's
revolving loan commitment. As of that same date, outstanding borrowings under
the Amended Credit Facility's term loan commitment totaled $35.0 million. Upon
execution of the Amended Credit Facility. Systems recognized an extraordinary
charge of approximately $2.9 million to write-off unamortized deferred financing
costs associated with the Credit Facility.
F-18
136
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Amended Credit Facility contains a number of significant covenants
that, among other things, limit Systems' ability to incur additional
indebtedness and guaranty obligations, create liens and other encumbrances, make
certain payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or transact
with affiliates. As of each of December 31, 1997 and 1998 and March 31, 1999, no
amounts were available for distribution to Holdings.
The Amended Credit Facility also contains a number of financial covenants
that will require Systems to meet certain financial ratios and financial
condition tests. These financial covenants, in certain instances, become
effective at different points in time and vary over time. The covenants include
limitations on indebtedness per subscriber, limitations on subscriber
acquisition costs, maintenance of a minimum fixed charge coverage ratio,
maintenance of minimum interest coverage ratios, and limitations on indebtedness
to pro forma EBITDA (earnings before interest, taxes, depreciation and
amortization) ratios. Revolving credit availability under the Credit Facility
depends upon satisfaction of the various covenants as well as minimum subscriber
base requirements.
As of December 31, 1998, the Company was in compliance with all of the
covenants under the Amended Credit Facility. For the three months ended March
31, 1999, Systems exceeded the limitation on subscriber acquisition costs (i.e.,
sales and marketing expenses) prescribed by the Amended Credit Facility.
Excluding the effects of DIRECTV's national sales promotions that offered free
programming to new subscribers, and higher incremental subscriber acquisition
costs associated with the conversion of Primestar subscribers to Systems'
DIRECTV service, Systems would have been in compliance with the Amended Credit
Facility's limitation on subscriber acquisition costs. In June 1999, Systems
received a waiver from the banks of this technical violation. Further, the
Amended Credit Facility's limitation on subscriber acquisition costs was
increased as part of an amendment that was executed in June 1999.
Commitment fees are payable on unused amounts available under the Amended
Credit Facility. Such commitment fees, which are payable quarterly in arrears,
range from 0.50% per annum to 1.25% per annum based on Systems' utilization of
such commitments.
Seller Notes Payable
In connection with certain 1996 acquisitions, the Company issued seller
notes payable totaling $2.5 million and bearing interest at an annual rate of
10%. These notes were repaid during 1997. The Company also issued seller notes
payable totaling $8.6 million in connection with certain 1997 acquisitions and
$10.2 million in connection with certain 1998 acquisitions. As of December 31,
1998, and March 31, 1999, approximately $13.9 million and $6.9 million,
respectively of the outstanding seller notes payable were collateralized by bank
letters of credit. The seller notes payable bear interest at rates ranging from
7% to 10%.
Other Notes Payable
In November 1996, the Company issued $2.0 million in promissory notes to a
group of lenders under a bridge financing agreement. The notes bore interest at
the rate of 10% per annum. In February 1997, these notes, along with $1.8
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems issued warrants exercisable for 5,682 shares
of its Common Stock at an exercise price of $.01 per share. These warrants were
immediately exercisable and expire on February 12, 2007. At the date of
issuance, the fair value of the warrants was not material. These warrants were
assumed by Holdings after its formation.
F-19
137
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Future maturities of amounts outstanding under Systems' long-term
obligations as of December 31, 1998 are summarized as follows (dollars in
thousands, bank debt amounts reflect February 1999 amendment):
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-20
138
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of incentive stock option activity during 1997 and 1998 is as
follows:
YEAR ENDED
-----------------------------------------
1997 1998
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
Options outstanding, beginning of period......... -- $ -- 62,525 $1.00
Granted.......................................... 62,525 1.00 18,693 1.00
Exercised........................................ -- -- (24,831) 1.00
Forfeited........................................ -- -- (7,642) 1.00
------ ----- ------- -----
Options outstanding, end of period............... 62,525 $1.00 48,745 $1.00
====== ===== ======= =====
Options exercisable, end of period............... 8,684 $1.00 5,595 $1.00
====== ===== ======= =====
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25,
because the exercise price of employee stock options granted pursuant to the
Stock Incentive Plan is equal to or greater than the fair value of the
underlying stock on the date of grant, no compensation expense is recognized. In
October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt FAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if Systems had accounted for its stock-based compensation
using the fair value method prescribed by that statement. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the corresponding vesting period. All options are initially assumed
to vest. Compensation previously recognized is reversed to the extent applicable
to forfeitures of unvested options. The fair value of each option grant was
estimated at the date of the grant using a Black-Scholes option valuation model
with the following weighted-average assumptions:
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 Companys' net loss.
8. 401(K) RETIREMENT PLAN
The Company sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. The Company made no
discretionary employer matching contributions to the 401(k) Plan during the
years ended December 31, 1997 and 1998 and the three-month period ended March
31, 1999. Administrative expenses associated with the 401(k) Plan during those
same periods were not material.
F-21
139
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
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-22
140
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
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-23
141
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office, warehouse and
storage space that expire at various dates. Future minimum lease payments as of
December 31, 1998 are summarized as follows (dollars in thousands):
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, 1998
and the three month period ended March 31, 1999, Systems paid $5,000, $77,000,
$159,000 (including $75,000 paid in connection with a 1998 acquisition) and
$21,000, respectively, to one of its directors for consulting services.
During 1996, the Company's president provided Systems with a short-term
loan in the amount of $381,000. In 1997, the Company received an additional
$150,000 short-term loan from its president and a $215,000 short-term loan from
a shareholder. Each of these loans bore interest at an annual rate of 10% and
were repaid during 1997.
Systems has contracted with an entity owned by its president for air
transportation services. Such services include the lease of an aircraft. This
lease is cancelable with six months notice and requires monthly payments equal
to the greater of $20,000 or an aggregate fixed hourly operating charge. The
fixed hourly operating charge is based on prevailing market prices. The total
cost of such services received by Systems approximated $31,000, $109,000,
$506,000 and $79,000 during 1996, 1997, 1998 and the three months period ended
March 31, 1999, respectively.
F-24
142
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. VALUATION AND QUALIFYING ACCOUNTS
Systems' valuation and qualifying accounts are as follows (in thousands):
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 Systems, Systems' guarantor
subsidiaries and Systems' non-guarantor subsidiaries is as follows (dollars in
thousands):
Consolidated Balance Sheet -- December 31, 1997
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
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-25
143
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1997
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
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 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 provided by (used in) operating
activities.................................... (4,596) 1,088 409 -- (3,099)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets........... (120,051) -- -- -- (120,051)
Other........................................... 320 -- -- -- 320
Purchases of property and equipment............. (992) (6) -- -- (998)
--------- ------ ---- ----- ---------
Net cash used in investing activities........... (120,723) (6) -- -- (120,729)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A Preferred
Stock......................................... 34,289 -- -- -- 34,289
Borrowings under the Credit Agreement........... 75,000 -- -- -- 75,000
Principal payments on the Credit Agreement...... (14,995) (5) -- -- (15,000)
Proceeds from issuance of notes payable......... 2,115 -- -- -- 2,115
Principal payments on notes payable and
obligations under capital leases.............. (2,902) -- -- -- (2,902)
Contribution from Holdings...................... 46,800 -- -- -- 46,800
Increase in deferred financing costs............ (3,321) -- -- -- (3,321)
--------- ------ ---- ----- ---------
Net cash provided by (used in) financing
activities.................................... 136,986 (5) -- -- 136,981
Net increase in cash and cash equivalents....... 11,667 1,077 409 -- 13,153
Cash and cash equivalents, beginning of
period........................................ 479 -- -- -- 479
--------- ------ ---- ----- ---------
Cash and cash equivalents, end of period........ $ 12,146 $1,077 $409 $ -- $ 13,632
========= ====== ==== ===== =========
F-26
144
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Balance Sheet -- December 31, 1998
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
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-27
145
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1998
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
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 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-28
146
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Balanced Sheet -- March 31, 1999
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- -------------- --------------- ------------
ASSETS
Current assets:
Cash and cash equivalents..... $ 37,394 $ 787 $ 1,095 $ -- $ -- $ 39,276
Restricted cash, current
portion..................... 22,892 -- -- -- -- 22,892
Subscriber receivables, net... 7,457 1,128 863 -- -- 9,448
Other receivables............. 976 -- 18 -- -- 994
Inventory..................... 7,504 921 258 -- -- 8,683
Prepaid expenses and other.... 919 37 3 -- -- 959
-------- ------- ------- -------- --------- ---------
Total current assets............ 77,142 2,873 2,237 -- -- 82,252
Restricted cash, net of current
portion....................... 11,827 -- -- -- -- 11,827
Property and equipment, net..... 5,387 335 192 -- -- 5,914
Investment in subsidiaries...... 26,296 -- -- 84,701 (110,997) --
Intangible assets, net.......... 219,979 24,415 3,524 -- (2,145) 245,773
Deferred financing costs........ 8,175 -- -- 4,296 -- 12,471
Other assets.................... 390 85 -- -- -- 475
-------- ------- ------- -------- --------- ---------
Total assets............ $349,196 $27,708 $ 5,953 $ 88,997 $(113,142) $ 358,712
======== ======= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable........ $ 14,813 $ 127 $ 72 $ -- $ -- $ 15,012
Interest payable.............. 4,348 -- -- -- -- 4,348
Current maturities of
long-term obligations....... 2,793 26 -- -- -- 2,819
Unearned revenue.............. 5,099 857 436 -- -- 6,392
Accrued payroll and other..... 1,060 360 1 -- 82 1,503
Intercompany Payables......... (11,242) 5,748 4,754 -- 740 --
-------- ------- ------- -------- --------- ---------
Total current
liabilities........... 16,871 7,118 5,263 -- 822 30,074
Long-term obligations, net of
current maturities:
12 3/8% Notes................. 195,000 -- -- -- -- 195,000
13 1/2% Notes................. -- -- -- 101,569 -- 101,569
Bank debt..................... 35,000 -- -- -- -- 35,000
Seller notes payable.......... 6,912 -- -- -- -- 6,912
Other notes payable and
obligations under capital
leases...................... 441 -- -- -- -- 441
Minority interest............. -- -- -- -- 2,288 2,288
-------- ------- ------- -------- --------- ---------
Total long-term obligations, net
of current maturities......... 237,353 -- -- 101,569 2,288 341,210
-------- ------- ------- -------- --------- ---------
Total liabilities....... 254,224 7,118 5,263 101,569 3,110 371,284
Stockholder's Equity (Deficit):
Common stock.................. -- 896 -- -- (896) --
Additional paid-in capital.... 193,261 1,967 -- 8,968 (106,283) 97,913
Accumulated deficit........... (98,289) 17,727 690 (21,540) (9,073) (110,485)
-------- ------- ------- -------- --------- ---------
Total stockholder's
equity (deficit)...... 94,972 20,590 690 (12,572) (116,252) (12,572)
-------- ------- ------- -------- --------- ---------
Total liabilities and
stockholder's equity
(deficit)............. $349,196 $27,708 $ 5,953 $ 88,997 $(113,142) $ 358,712
======== ======= ======= ======== ========= =========
F-29
147
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Three Months Ended March 31, 1999
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- -------------- --------------- ------------
Revenue:
DBS services.................. $ 23,669 $4,529 $2,304 $ -- $ -- $ 30,502
Lease and other............... 194 3 -- -- -- 197
-------- ------ ------ ------- ---- --------
Total revenue................... 23,863 4,532 2,304 -- -- 30,699
Costs and Expenses:
Costs of DBS services......... 15,098 2,697 1,451 -- (60) 19,186
System operations............. 3,130 725 415 -- -- 4,270
Sales and marketing........... 11,063 1,107 639 -- -- 12,809
General and administrative.... 2,870 50 28 -- -- 2,948
Depreciation and
amortization................ 7,203 681 336 -- -- 8,220
-------- ------ ------ ------- ---- --------
Total costs and expenses........ 39,364 5,260 2,869 -- (60) 47,433
-------- ------ ------ ------- ---- --------
Operating loss.................. (15,501) (728) (565) -- 60 (16,734)
Non-operating Items:
Interest and investment
income...................... 823 -- -- -- -- 823
Interest expense.............. (8,347) (2) -- (1,612) -- (9,961)
-------- ------ ------ ------- ---- --------
Total non-operating items....... (7,524) (2) -- (1,612) -- (9,138)
-------- ------ ------ ------- ---- --------
Loss before income taxes........ (23,025) (730) (565) (1,612) 60 (25,872)
Income taxes.................... -- -- -- -- -- --
-------- ------ ------ ------- ---- --------
Loss before extraordinary
charge........................ (23,025) (730) (565) (1,612) 60 (25,872)
Extraordinary charge on early
retirement of debt............ (2,935) -- -- -- -- (2,935)
-------- ------ ------ ------- ---- --------
Net loss................ $(25,960) $ (730) $ (565) $(1,612) $ 60 $(28,807)
======== ====== ====== ======= ==== ========
F-30
148
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Cash Flows -- Three Months Ended March 31, 1999
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- -------------- --------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss........................ $(25,960) $ (730) $ (565) $ (1,612) $ 60 $(28,807)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 7,177 681 362 -- -- 8,220
Amortization of debt discount,
deferred financing costs and
other....................... 246 -- -- 1,612 -- 1,858
Extraordinary charge on early
retirement of debt.......... 2,935 -- -- -- 2,935
Change in operating assets and
liabilities, net of
acquisitions:
Subscriber receivables, net
of unearned revenue....... 122 (17) (59) -- -- 46
Other receivables........... 1,385 87 (1) -- -- 1,471
Inventory................... 1,810 (338) 51 -- (60) 1,463
Prepaid expenses and
other..................... 683 -- -- -- -- 683
Trade accounts payable...... 1,331 77 65 -- -- 1,473
Interest payable............ (6,661) -- -- -- -- (6,661)
Intercompany payable........ 1,348 (145) (1,203) -- -- --
Accrued payroll and other... 83 (3) 1 -- -- 81
-------- ------- ------- -------- ---- --------
Net cash used in operating
activities.................... (15,501) (388) (1,349) -- -- (17,238)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisitions of Rural DIRECTV
Markets....................... (20,334) -- -- -- -- (20,334)
Offering proceeds and investment
earnings placed in escrow..... (709) -- -- -- -- (709)
Purchases of property and
equipment..................... (1,144) -- -- -- -- (1,144)
Proceeds from interest escrow
account....................... 12,158 -- -- -- -- 12,158
Release of amounts reserved for
contingent reduction of bank
debt.......................... 5,449 -- -- -- -- 5,449
Investment in subsidiary........ 95,661 -- -- (95,661) -- --
Other........................... (66) 18 -- -- -- (48)
-------- ------- ------- -------- ---- --------
Net cash provided by (used in)
investing activities.......... 91,015 18 -- (95,661) -- (4,628)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of
13 1/2% Notes................. -- -- -- 100,049 -- 100,049
Borrowings on bank debt......... 21,000 -- -- -- -- 21,000
Principal payments on bank
debt.......................... (53,000) -- -- -- -- (53,000)
Principal payments on notes
payable and obligations under
capital leases................ (6,000) (32) -- -- -- (6,032)
Increase in deferred financing
costs......................... (947) -- -- (4,388) -- (5,335)
-------- ------- ------- -------- ---- --------
Net cash provided by (used in)
financing activities.......... (38,947) (32) -- 95,661 -- 56,682
-------- ------- ------- -------- ---- --------
Net increase (decrease) in cash
and cash equivalents.......... 36,567 (402) (1,349) -- -- 34,816
Cash and cash equivalents,
beginning of period........... 827 1,189 2,444 -- 4,460
-------- ------- ------- -------- ---- --------
Cash and cash equivalents, end
of period..................... $ 37,394 $ 787 $ 1,095 $ -- $ -- $ 39,276
======== ======= ======= ======== ==== ========
F-31
149
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Systems' quarterly results of operations are summarized as follows (in
thousands):
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)
F-32
150
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-33
151
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-34
152
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-35
153
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-36
154
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-37
155
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-38
156
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 recorded. For the five
months ended December 31, 1994, the company incurred a loss and no income taxes
were due.
F-39
157
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS -- (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
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-40
158
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
(UNAUDITED)
F-41
159
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-42
160
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-43
161
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-44
162
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-45
163
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.
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.
F-46
164
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
SELECTED INFORMATION -- (CONTINUED)
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-47
165
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-48
166
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-49
167
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-50
168
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-51
169
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-52
170
TEG DBS SYSTEMS, INC.
(UNAUDITED)
SPECIAL PURPOSE STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
F-53
171
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-54
172
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-55
173
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-56
174
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-57
175
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-58
176
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-59
177
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-60
178
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-61
179
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 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.
F-62
180
DIRECT VISION
(A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY)
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 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-63
181
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-64
182
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-65
183
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-66
184
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-67
185
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-68
186
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-69
187
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-70
188
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-71
189
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-72
190
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-73
191
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.
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
F-74
192
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
======= ======== =======
(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.
F-75
193
SATELLITE ENTERTAINMENT, INC.
(A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-76
194
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-77
195
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-78
196
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-79
197
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-80
198
GVEC RURAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-81
199
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-82
200
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-83
201
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-84
202
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-85
203
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-86
204
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-87
205
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-88
206
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-89
207
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-90
208
GVEC RURAL TV, INC.
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-91
209
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-92
210
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-93
211
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-94
212
JECTV
(A SEGMENT OF JACKSON ELECTRIC COOPERATIVE)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
F-95
213
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-96
214
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-97
215
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-98
216
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-99
217
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-100
218
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-101
219
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-102
220
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-103
221
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-104
222
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-105
223
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-106
224
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-107
225
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-108
226
ARGOS SUPPORT SERVICES COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORTS THEREON)
F-109
227
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-110
228
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-111
229
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-112
230
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-113
231
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-114
232
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-115
233
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-116
234
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-117
235
ARGOS SUPPORT SERVICES COMPANY
STATEMENTS OF OPERATIONS AND
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
F-118
236
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-119
237
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-120
238
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-121
239
GARDONVILLE SYSTEMS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-122
240
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-123
241
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-124
242
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-125
243
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-126
244
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-127
245
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-128
246
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-129
247
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-130
248
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-131
249
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-132
250
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-133
251
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-134
252
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-135
253
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-136
254
DIRECT BROADCAST SATELLITE
(A SEGMENT OF CTS COMMUNICATION CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
F-137
255
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-138
256
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-139
257
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-140
258
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
F-141
259
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-142
260
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-143
261
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-144
262
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-145
263
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-146
264
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-147
265
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-148
266
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-149
267
SOURIS RIVER TELEVISION, INC.
MINOT, NORTH DAKOTA
FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
F-150
268
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-151
269
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-152
270
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-153
271
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-154
272
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-155
273
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-156
274
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-157
275
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-158
276
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-159
277
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
AUDITED FINANCIAL STATEMENTS
AS OF
DECEMBER 22, 1997 AND DECEMBER 31, 1996
F-160
278
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-161
279
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-162
280
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-163
281
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-164
282
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-165
283
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-166
284
WESTERN MONTANA ENTERTAINMENT TELEVISION, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. CONCENTRATIONS OF CREDIT RISKS:
The Company maintains its general checking account in one financial
institution whose balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 22, 1997 and December 31, 1996, the
general checking account balances in this financial institution aggregated
$122,889 and $169,561, respectively.
6. RELATED PARTY TRANSACTIONS:
Western Montana Entertainment Television, Inc. (WMET) and Missoula Electric
Cooperative, Inc. (MEC) had entered into a Services Agreement dated October 17,
1996 which was to continue for perpetuity but could be terminated by ninety (90)
days written notice by either party. The Services Agreement provided that MEC
could provide, and WMET could purchase a variety of services provided by MEC.
Such services were charged to WMET at MEC's actual costs incurred (i.e no profit
was realized by MEC on services provided). Such services were billed by MEC to
WMET through an intercompany payable/receivable account. In addition to costs
incurred under the Services Agreement, the intercompany account has been charged
for franchise fee costs, organizational costs, and equipment purchases. The
balance owing to MEC as reflected in the accompanying balance sheets as due to
affiliated cooperative as of December 22, 1997 and December 31, 1996 was
$666,118 and $897,980, respectively. No definite terms of repayment have been
provided for.
7. INCOME TAXES:
The Company had net operating loss carryforwards, for tax purposes, in the
amount of approximately $288,057 that were due to expire in the years 2009
through 2011. These tax net operating losses were used to offset federal and
state income taxes upon filing the Company December 31, 1997 tax return due to
the gain on sale of WMET assets to Golden Sky Systems, Inc. as discussed below.
8. SUBSEQUENT EVENT -- SALES AGREEMENT WITH GOLDEN SKY SYSTEMS, INC.
On December 22, 1997 all operating assets and franchise agreements of WMRT
were purchased by Golden Sky Systems, Inc. for $6,604,874. The allocation was as
follows:
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-167
285
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-168
286
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-169
287
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-170
288
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-171
289
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-172
290
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-173
291
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-174
292
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-175
293
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-176
294
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-177
295
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-178
296
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-179
297
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-180
298
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-181
299
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-182
300
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-183
301
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-184
302
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-185
303
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-186
304
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-187
305
CAL-ORE DIGITAL TV, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-188
306
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-189
307
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-190
308
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-191
309
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-192
310
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-193
311
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-194
312
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-195
313
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-196
314
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-197
315
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-198
316
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-199
317
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-200
318
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-201
319
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-202
320
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-203
321
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-204
322
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-205
323
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-206
324
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-207
325
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-208
326
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-209
327
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-210
328
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-211
329
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-212
330
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-213
331
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-214
332
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-215
333
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-216
334
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-217
335
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-218
336
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-219
337
LAKELAND DBS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Lakeland DBS, Inc. (the Company) is an Oklahoma S-corporation formed for
the purpose of operating direct broadcast satellite (DBS) television systems and
is owned Charles O. Smith, Betty R. Smith, and Orlean M. Smith (Stockholders).
The Company is an affiliate of Canadian Valley Telephone Company (Canadian
Valley). Canadian Valley owns the DBS rights for which the Company provides
management services. Canadian Valley is an affiliated associate member of the
National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted
with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing
rights for distribution of DirecTV satellite television programming in the
United States. The marketing rights give the owner exclusive rights to
distribution of DirecTV service within the contract area. In 1994, Hughes
launched the satellites that provide programming for DirecTV. At December 24,
1997 and December 31, 1996, Canadian Valley had the operating rights for
portions of six counties in Oklahoma and Colorado. Canadian Valley transferred
the DBS rights to the Company on December 24, 1997.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenues represent subscriber advance billings for one
or more months and are deferred until the service is provided. Equipment and
installation sales and related costs are recognized when the equipment is
delivered to the customer.
In addition to selling satellite television equipment, in December of 1997
the Company began leasing the equipment to customers under operating lease
arrangements. These leases are at fixed monthly rental charges ranging from $10
to $16 per month, and are month-to-month leases which can be terminated at any
time upon return of the DBS equipment to the Company.
Intangible Assets
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are amortized on a straight-line basis over
ten years, which is the expected useful life of the satellites providing DBS
services. Because, until December 24, 1997 Canadian Valley owned such rights,
the intangible asset was maintained on Canadian Valley's accounts, therefore no
amortization expense was recorded on the Company's books. Had the Company owned
the marketing rights, they would have recorded additional amortization expense
of $50,492 and $51,336 for the period from January 1, 1997 to December 24, 1997
and the year ended December 31, 1996, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make a number of estimates
and assumptions which affect the reported amounts of assets and liabilities, as
well as the reported amounts of revenues and expenses during the period. Actual
results could differ from these estimates.
Income Taxes
The Company is an S Corporation for federal and state income tax purposes
and files its taxes on a consolidated basis with the Parent and its other
wholly-owned subsidiaries. Accordingly, income taxes are the responsibility of
the stockholders and are not reflected in the accompanying financial statements.
F-220
338
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-221
339
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
F-222
340
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-223
341
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-224
342
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-225
343
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-226
344
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-227
345
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-228
346
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-229
347
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-230
348
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-231
349
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-232
350
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-233
351
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-234
352
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-235
353
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-236
354
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-237
355
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-238
356
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-239
357
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-240
358
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY, TEXAS
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
AS OF DECEMBER 31, 1997
WITH INDEPENDENT AUDITOR'S REPORT
F-241
359
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-242
360
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-243
361
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-244
362
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-245
363
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-246
364
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-247
365
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-248
366
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY TEXAS
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
(UNAUDITED)
F-249
367
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-250
368
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-251
369
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-252
370
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-253
371
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-254
372
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
PINE GROVE, CALIFORNIA
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-255
373
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-256
374
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-257
375
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-258
376
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-259
377
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-260
378
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-261
379
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-262
380
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-263
381
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-264
382
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-265
383
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-266
384
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-267
385
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-268
386
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-269
387
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-270
388
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-271
389
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-272
390
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-273
391
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-274
392
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-275
393
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-276
394
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-277
395
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-278
396
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-279
397
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-280
398
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-281
399
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-282
400
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-283
401
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-284
402
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-285
403
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-286
404
================================================================================
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL. IF ANY PERSON DOES GIVE
SUCH INFORMATION OR MAKES SUCH A REPRESENTATION, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. NEITHER
THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH TOGETHER
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON
IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
LETTER OF TRANSMITTAL OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
THE EXCHANGE AGENT FOR THIS EXCHANGE OFFER IS UNITED STATES TRUST COMPANY OF NEW
YORK AND MAY BE CONTACTED AS FOLLOWS:
BY OVERNIGHT COURIER AND BY HAND DELIVERY AFTER 4:30 PM ON EXPIRATION DATE:
UNITED STATES TRUST COMPANY OF NEW YORK
770 BROADWAY, 13TH FLOOR
ATTN: CORPORATE TRUST SERVICES
NEW YORK, NEW YORK 10003
BY HAND DELIVERY TO 4:30 PM:
UNITED STATES TRUST COMPANY OF NEW YORK
111 BROADWAY, LOWER LEVEL
ATTN: CORPORATE TRUST WINDOW
NEW YORK, NEW YORK 10006
BY REGISTERED OR CERTIFIED MAIL:
UNITED STATES TRUST COMPANY OF NEW YORK
P.O. BOX 844, COOPER STATION
ATTN: CORPORATE TRUST SERVICES
NEW YORK, NEW YORK 10276-0844
================================================================================
================================================================================
[GOLDEN SKY LOGO]
GOLDEN SKY DBS, INC.
OFFER TO EXCHANGE ITS
13 1/2% SENIOR DISCOUNT NOTES
DUE 2007, SERIES B,
FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR DISCOUNT NOTES
DUE 2007, SERIES A
---------------------------
PROSPECTUS
---------------------------
, 1999
================================================================================
405
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("DGCL") empowers a Delaware corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. A corporation may indemnify such person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation to procure a
judgment in its favor under the same conditions, except that no indemnification
is permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses (including attorneys' fees)
which he actually and reasonably incurred in connection therewith. The
indemnification provided is not deemed to be exclusive of any other rights to
which an officer or director may be entitled under any corporation's by-law,
agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, the registrant has adopted a
by-law that provides that, to the fullest extent permitted by DGCL, the
registrant shall indemnify any person serving as a director or officer of the
registrant and every such director or officer serving at the request of the
registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise for expenses incurred in
the defense of, or in connection with, any threatened, pending or completed
action, suit or proceeding whether civil, criminal, administrative or
investigative. Under Section 145 of the DGCL and the registrant's by-laws, such
indemnification shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
The registrant has purchased and maintains insurance to protect persons
entitled to indemnification pursuant to its by-laws and the DGCL against
expenses, judgments, fines and amounts paid in settlement, to the fullest extent
permitted by the DGCL.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Stock Purchase Agreement, dated as of July 11, 1997,
among Golden Sky Systems, Inc., Argos Support Services
Company and the several shareholders named therein
(incorporated by reference to Exhibit 2.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
II-1
406
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.2 -- Asset Purchase Agreement, dated as of July 10, 1998, by
and between Golden Sky Systems, Inc. and Volcano Vision,
Inc. (incorporated by reference to Exhibit 2.2 to Golden
Sky Systems, Inc.'s Registration Statement filed on Form
S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
2.3 -- Agreement and Plan of Merger, dated as of September 1,
1998, among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., Western Montana DBS, Inc. d/b/a Rock
Mountain DBS and the stockholders of Western Montana DBS,
Inc. named therein (incorporated by reference to Exhibit
2.3 to Golden Sky Systems, Inc.'s Registration Statement
filed on Form S-4 (Commission File No. 333-64367) which
became effective on March 22, 1999).
3.1 -- Certificate of Incorporation of the registrant.*
3.2 -- By-Laws of the registrant, adopted as of February 2,
1999.*
4.1 -- Indenture, dated as of February 19, 1999, between the
registrant, as issuer, and United States Trust Company of
New York, as trustee, relating to the registrant's
13 1/2% Senior Discount Notes due 2007, Series A, and
13 1/2% Senior Discount Notes due 2007, Series B.*
4.2 -- Form of 13 1/2% Senior Discount Note due 2007, Series B
of the Registrant (included as Exhibit A-2 in Exhibit
4.1).*
4.3 -- Registration Rights Agreement, dated as of February 19,
1999, by and among the registrant, and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc
Montgomery Securities LLC, Donaldson Lufkin, Jenrette
Securities Corporation and Fleet Securities, Inc., as
initial purchasers.*
5.1 -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
as to the legality of the securities being registered.*
10.1 -- Purchase Agreement, dated February 11, 1999, among
registrant, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC,
Donaldson Lufkin, Jenrette Securities Corporation and
Fleet Securities, Inc., relating to the issuance and sale
of $193,100,000 aggregate principal amount at maturity of
the registrant's 13 1/2% Senior Discount Notes due 2007,
Series A.*
10.2 -- Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC,
relating to the issuance and sale of $195,000,000
aggregate principal amount of the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A
(incorporated by reference to Exhibit 10.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.3 -- Indenture, dated as of July 31, 1998, by and among Golden
Sky Systems, Inc., as issuer, Argos Support Services
Company, as guarantor, PrimeWatch, Inc., as guarantor,
and State Street Bank and Trust Company of Missouri,
N.A., as trustee, relating to the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A and 12 3/8%
Senior Subordinated Notes due 2006, Series B
(incorporated by reference to Exhibit 4.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.4 -- Form of 12 3/8% Senior Subordinated Note due 2006, Series
B of Golden Sky Systems, Inc., (included as Exhibit A-2
in Exhibit 10.3)(incorporated by reference to Exhibits
4.1 and 4.2 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
II-2
407
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.5 -- Registration Rights Agreement, dated as of July 31, 1998,
by and among Golden Sky Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, as initial purchasers
(incorporated by reference to Exhibit 4.3 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.6 -- Escrow Agreement, dated as of July 31, 1998, by and among
State Street Bank and Trust Company of Missouri, N.A., as
escrow Agent, and State Street Bank and Trust Company of
Missouri, N.A., as trustee under the Indenture, and
Golden Sky Systems, Inc. (incorporated by reference to
Exhibit 4.4 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.7 -- Account Control Agreement, dated as of July 31, 1998, by
and among Golden Sky Systems, Inc., State Street Bank and
Trust Company of Missouri, N.A., as escrow agent, and
State Street Bank and Trust Company, as custodian and
securities intermediary (incorporated by reference to
Exhibit 4.5 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.8 -- Guarantee of Argos Support Services Company, dated July
31, 1998 (incorporated by reference to Exhibit 4.6 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
10.9 -- Guaranty of PrimeWatch, Inc., dated July 31, 1998
(incorporated by reference to Exhibit 4.7 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 33-64367) which became effective on
March 22, 1999).
10.10 -- Amended and Restated Credit Agreement, dated as of July
7, 1997, amended and restated as of May 8, 1998, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.'s,
various banks, Paribas (formerly known as Banque
Paribas), as Syndication Agent, Fleet National Bank, as
Administrative Agent, and General Electric Capital
Corporation, as Documentation Agent (incorporated by
reference to Exhibit 10.2 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
10.11 -- Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended (incorporated by
reference to Exhibit 10.3 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
10.12 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Rodney A. Weary
(incorporated by reference to Exhibit 10.6 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.13 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated
by reference to Exhibit 10.7 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.14 -- Employment Agreement, dated as of November 3, 1997,
between Golden Sky Systems, Inc. and William J. Gerski
(incorporated by reference to Exhibit 10.8 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.15 -- Employment Agreement, dated August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.10 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
II-3
408
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 -- Non-Competition Agreement between Golden Sky Systems,
Inc. and Rodney A. Weary (incorporated by reference to
Exhibit 10.11 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.17 -- Non-Competition Agreement, between Golden Sky Systems,
Inc. and Jo Ellen Linn (incorporated by reference to
Exhibit 10.12 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.18 -- Non-Competition Agreement, dated August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.13 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.19 -- Form of Director Indemnification Agreement, dated
February 12, 1997, between Golden Sky Holdings, Inc. and
each of the members of Golden Sky Holdings' Board of
Directors (incorporated by reference to Exhibit 10.14 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
10.20 -- Confidentiality and Proprietary Rights Agreements, dated
August 24, 1998, between Golden Sky Systems, Inc. and
John R. Hager (incorporated by reference to Exhibit 10.15
to Golden Sky Systems, Inc.'s Registration Statement
filed on Form S-4 (Commission File No. 333-64367) which
became effective on March 22, 1999).
10.21 -- Exchange Agency Agreement, dated as of November 24, 1998,
between the registrant and State Street Bank and Trust
Company of Missouri, N.A., as Exchange Agent
(incorporated by reference to Exhibit 10.16 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.22 -- First Amendment to Amended and Restated Credit Agreement,
dated as of February 10, 1999, among Golden Sky Holdings,
Inc., the registrant, various banks, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent
(incorporated by reference to Exhibit 10.17 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.23 -- Office Building Lease, dated January 27, 1999, between
Belletower Partners, L.L.C. and the registrant
(incorporated by reference to Exhibit 10.18 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.24 -- Amendment and Waiver, dated as of June 14, 1999, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
various banks, Paribas (formerly known as Banque
Paribas), as Syndication Agent, Fleet National Bank, as
Administrative Agent and General Electric Capital
Corporation, as Documentation Agent.
10.25 -- Employment Agreement, dated May 17, 1999, between Golden
Sky Systems, Inc. and Gordon Smith.*
10.26 -- Non-Competition Agreement, dated May 17, 1999, between
Golden Sky Systems, Inc. and Gordon Smith.*
12.1 -- Statements re Computation of Ratios.*
21.1 -- Subsidiaries of the registrant.*
23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol
(included in their opinion filed as Exhibit 5.1).*
23.2 -- Consent of KPMG LLP.
II-4
409
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.3 -- Consent of Eide Bailly LLP (formerly known as Eide
Helmeke PLLP).
23.4 -- Consent of Loucks & Glassley, pllp.
23.5 -- Consent of Bolinger, Segars, Gilbert & Moss, L.L.P.
23.6 -- Consent of Moss Adams LLP.
23.7 -- Consent of Curtis Blakely & Co., P.C.
23.8 -- Consent of CHMS P.C.
23.9 -- Consent of Anderson & Company.
23.10 -- Consent of Olsen Thielen & Co., LTD
23.11 -- Consent of Summers, McNea & Company, P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc.*
25.1 -- Statement on Form T-1 of Eligibility of Trustee.*
27.1 -- Financial Data Schedule.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
99.3 -- Stock Purchase Agreement, dated as of February 12, 1997,
among Golden Sky Systems, Inc., Rodney A. Weary and the
investors named herein (incorporated by reference to
Exhibit 99.3 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
99.4 -- Stock Purchase Agreement, dated as of November 24, 1997,
by and among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., Rodney A. Weary, and the investors named
therein (incorporated by reference to Exhibit 99.4 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
99.5 -- Stockholders Agreement, dated as of November 24, 1997, by
and among Golden Sky Holdings, Inc. and the investors and
other stockholders named therein. (incorporated by
reference to Exhibit 99.5 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
- ---------------
* Previously filed.
(b) Financial Statement Schedules.
None.
II-5
410
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933:
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered could not exceed that which was registered) and any
division from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of this chapter at the start of any delayed offering or
throughout a continuous offering. Financial statements and information required
by Section 10(a)(3) of the Act need not be furnished, provided that the
registrant includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the prospectus is
at least as current as the date of those financial statements. Notwithstanding
the foregoing, with respect to registration statements on Form F-3, a
post-effective amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter
if such financial statements and information are contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
II-6
411
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
412
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kansas City, State of
Missouri, on July 9, 1999.
GOLDEN SKY DBS, INC.
By: /s/ JOHN R. HAGER
----------------------------------
John R. Hager
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RODNEY A. WEARY Chairman of the Board, Chief July 9, 1999
- --------------------------------------------------- Executive Officer and Director
Rodney A. Weary (Principal Executive Officer)
/s/ JOHN R. HAGER Chief Financial Officer (Principal July 9, 1999
- --------------------------------------------------- Financial and Accounting Officer)
John R. Hager
* Director July 9, 1999
- ---------------------------------------------------
Robert F. Benbow
* Director July 9, 1999
- ---------------------------------------------------
William O. Charman
* Director July 9, 1999
- ---------------------------------------------------
William P. Collatos
* Director July 9, 1999
- ---------------------------------------------------
William A. Johnston
* Director July 9, 1999
- ---------------------------------------------------
Robert B. Liepold
* Director July 9, 1999
- ---------------------------------------------------
Erik M. Torgerson
* By signing his name hereto, Rodney A. Weary is executing this document on
behalf of the persons indicated above pursuant to powers of attorney executed
by such persons and filed with the Securities and Exchange Commission.
/s/ RODNEY A. WEARY
------------------------------------
Rodney A. Weary
Attorney-in-fact
II-8
413
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Stock Purchase Agreement, dated as of July 11, 1997,
among Golden Sky Systems, Inc., Argos Support Services
Company and the several shareholders named therein
(incorporated by reference to Exhibit 2.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
2.2 -- Asset Purchase Agreement, dated as of July 10, 1998, by
and between Golden Sky Systems, Inc. and Volcano Vision,
Inc. (incorporated by reference to Exhibit 2.2 to Golden
Sky Systems, Inc.'s Registration Statement filed on Form
S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
2.3 -- Agreement and Plan of Merger, dated as of September 1,
1998, among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., Western Montana DBS, Inc. d/b/a Rock
Mountain DBS and the stockholders of Western Montana DBS,
Inc. named therein (incorporated by reference to Exhibit
2.3 to Golden Sky Systems, Inc.'s Registration Statement
filed on Form S-4 (Commission File No. 333-64367) which
became effective on March 22, 1999).
3.1 -- Certificate of Incorporation of the registrant.*
3.2 -- By-Laws of the registrant, adopted as of February 2,
1999.*
4.1 -- Indenture, dated as of February 19, 1999, between the
registrant, as issuer, and United States Trust Company of
New York, as trustee, relating to the registrant's
13 1/2% Senior Discount Notes due 2007, Series A, and
13 1/2% Senior Discount Notes due 2007, Series B.*
4.2 -- Form of 13 1/2% Senior Discount Note due 2007, Series B
of the Registrant (included as Exhibit A-2 in Exhibit
4.1).*
4.3 -- Registration Rights Agreement, dated as of February 19,
1999, by and among the registrant, and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc
Montgomery Securities LLC, Donaldson Lufkin, Jenrette
Securities Corporation and Fleet Securities, Inc., as
initial purchasers.*
5.1 -- Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
as to the legality of the securities being registered.*
10.1 -- Purchase Agreement, dated February 11, 1999, among
registrant, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC,
Donaldson Lufkin, Jenrette Securities Corporation and
Fleet Securities, Inc., relating to the issuance and sale
of $193,100,000 aggregate principal amount at maturity of
the registrant's 13 1/2% Senior Discount Notes due 2007,
Series A.*
10.2 -- Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC,
relating to the issuance and sale of $195,000,000
aggregate principal amount of the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A
(incorporated by reference to Exhibit 10.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
414
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.3 -- Indenture, dated as of July 31, 1998, by and among Golden
Sky Systems, Inc., as issuer, Argos Support Services
Company, as guarantor, PrimeWatch, Inc., as guarantor,
and State Street Bank and Trust Company of Missouri,
N.A., as trustee, relating to the registrant's 12 3/8%
Senior Subordinated Notes due 2006, Series A and 12 3/8%
Senior Subordinated Notes due 2006, Series B
(incorporated by reference to Exhibit 4.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.4 -- Form of 12 3/8% Senior Subordinated Note due 2006, Series
B of Golden Sky Systems, Inc., (included as Exhibit A-2
in Exhibit 10.3)(incorporated by reference to Exhibits
4.1 and 4.2 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.5 -- Registration Rights Agreement, dated as of July 31, 1998,
by and among Golden Sky Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, as initial purchasers
(incorporated by reference to Exhibit 4.3 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.6 -- Escrow Agreement, dated as of July 31, 1998, by and among
State Street Bank and Trust Company of Missouri, N.A., as
escrow Agent, and State Street Bank and Trust Company of
Missouri, N.A., as trustee under the Indenture, and
Golden Sky Systems, Inc. (incorporated by reference to
Exhibit 4.4 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.7 -- Account Control Agreement, dated as of July 31, 1998, by
and among Golden Sky Systems, Inc., State Street Bank and
Trust Company of Missouri, N.A., as escrow agent, and
State Street Bank and Trust Company, as custodian and
securities intermediary (incorporated by reference to
Exhibit 4.5 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.8 -- Guarantee of Argos Support Services Company, dated July
31, 1998 (incorporated by reference to Exhibit 4.6 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
10.9 -- Guaranty of PrimeWatch, Inc., dated July 31, 1998
(incorporated by reference to Exhibit 4.7 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 33-64367) which became effective on
March 22, 1999).
10.10 -- Amended and Restated Credit Agreement, dated as of July
7, 1997, amended and restated as of May 8, 1998, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.'s,
various banks, Paribas (formerly known as Banque
Paribas), as Syndication Agent, Fleet National Bank, as
Administrative Agent, and General Electric Capital
Corporation, as Documentation Agent (incorporated by
reference to Exhibit 10.2 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
415
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.11 -- Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended (incorporated by
reference to Exhibit 10.3 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
10.12 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Rodney A. Weary
(incorporated by reference to Exhibit 10.6 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.13 -- Employment Agreement, dated February 12, 1997, between
Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated
by reference to Exhibit 10.7 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.14 -- Employment Agreement, dated as of November 3, 1997,
between Golden Sky Systems, Inc. and William J. Gerski
(incorporated by reference to Exhibit 10.8 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.15 -- Employment Agreement, dated August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.10 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.16 -- Non-Competition Agreement between Golden Sky Systems,
Inc. and Rodney A. Weary (incorporated by reference to
Exhibit 10.11 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.17 -- Non-Competition Agreement, between Golden Sky Systems,
Inc. and Jo Ellen Linn (incorporated by reference to
Exhibit 10.12 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.18 -- Non-Competition Agreement, dated August 24, 1998, between
Golden Sky Systems, Inc. and John R. Hager (incorporated
by reference to Exhibit 10.13 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.19 -- Form of Director Indemnification Agreement, dated
February 12, 1997, between Golden Sky Holdings, Inc. and
each of the members of Golden Sky Holdings' Board of
Directors (incorporated by reference to Exhibit 10.14 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
10.20 -- Confidentiality and Proprietary Rights Agreements, dated
August 24, 1998, between Golden Sky Systems, Inc. and
John R. Hager (incorporated by reference to Exhibit 10.15
to Golden Sky Systems, Inc.'s Registration Statement
filed on Form S-4 (Commission File No. 333-64367) which
became effective on March 22, 1999).
10.21 -- Exchange Agency Agreement, dated as of November 24, 1998,
between the registrant and State Street Bank and Trust
Company of Missouri, N.A., as Exchange Agent
(incorporated by reference to Exhibit 10.16 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
416
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.22 -- First Amendment to Amended and Restated Credit Agreement,
dated as of February 10, 1999, among Golden Sky Holdings,
Inc., the registrant, various banks, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent
(incorporated by reference to Exhibit 10.17 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.23 -- Office Building Lease, dated January 27, 1999, between
Belletower Partners, L.L.C. and the registrant
(incorporated by reference to Exhibit 10.18 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.24 -- Amendment and Waiver, dated as of June 14, 1999, among
Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
various banks, Paribas (formerly known as Banque
Paribas), as Syndication Agent, Fleet National Bank, as
Administrative Agent and General Electric Capital
Corporation, as Documentation Agent.
10.25 -- Employment Agreement, dated May 17, 1999, between Golden
Sky Systems, Inc. and Gordon Smith.*
10.26 -- Non-Competition Agreement, dated May 17, 1999, between
Golden Sky Systems, Inc. and Gordon Smith.*
12.1 -- Statements re Computation of Ratios.*
21.1 -- Subsidiaries of the registrant.*
23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol
(included in their opinion filed as Exhibit 5.1).*
23.2 -- Consent of KPMG LLP.
23.3 -- Consent of Eide Bailly LLP (formerly known as Eide
Helmeke PLLP).
23.4 -- Consent of Loucks & Glassley, pllp.
23.5 -- Consent of Bolinger, Segars, Gilbert & Moss, L.L.P.
23.6 -- Consent of Moss Adams LLP.
23.7 -- Consent of Curtis Blakely & Co., P.C.
23.8 -- Consent of CHMS P.C.
23.9 -- Consent of Anderson & Company.
23.10 -- Consent of Olsen Thielen & Co., LTD
23.11 -- Consent of Summers, McNea & Company, P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc.*
25.1 -- Statement on Form T-1 of Eligibility of Trustee.*
27.1 -- Financial Data Schedule.*
99.1 -- Form of Letter of Transmittal.*
99.2 -- Form of Notice of Guaranteed Delivery.*
417
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.3 -- Stock Purchase Agreement, dated as of February 12, 1997,
among Golden Sky Systems, Inc., Rodney A. Weary and the
investors named herein (incorporated by reference to
Exhibit 99.3 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
99.4 -- Stock Purchase Agreement, dated as of November 24, 1997,
by and among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., Rodney A. Weary, and the investors named
therein (incorporated by reference to Exhibit 99.4 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
99.5 -- Stockholders Agreement, dated as of November 24, 1997, by
and among Golden Sky Holdings, Inc. and the investors and
other stockholders named therein. (incorporated by
reference to Exhibit 99.5 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
- ---------------
* Previously filed.