-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIKxxdDfXR4Eumo+BSHEF0QX98j76QSZ1z72pSTCToW6qHu9mnQhopLvYrjCR+4O WlJO2q/Oa8bhMJYwA/Ioiw== 0001035704-99-000194.txt : 19990419 0001035704-99-000194.hdr.sgml : 19990419 ACCESSION NUMBER: 0001035704-99-000194 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 19990416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN SKY DBS INC CENTRAL INDEX KEY: 0001082925 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 431839531 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-76413 FILM NUMBER: 99595538 BUSINESS ADDRESS: STREET 1: 605 WEST 47TH STREET, SUITE 300 CITY: KANSAS CITY STATE: MO ZIP: 64112 BUSINESS PHONE: 8167535544 S-4 1 S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------- FORM S-4 --------------------- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- 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 C. WIEDEMANN, ESQ. REBOUL, MACMURRAY, HEWITT, MAYNARD & KRISTOL 45 ROCKEFELLER PLAZA NEW YORK, NY 10111 (212) 841-5700 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------------- CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------------- 13 1/2% Senior $193,100,000 53.0% $102,335,308 $28,450 Discount Notes, Principal Amount due 2007, Series B At Maturity - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee based on the aggregate accreted value of the 13 1/2% Senior Discount Notes due 2007, Series A, as of April 16, 1999. --------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 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 --------------------- MATERIAL TERMS OF THIS EXCHANGE OFFER - - We are offering to exchange our new 13 1/2% Senior Discount Notes due 2007, Series B, for our outstanding 13 1/2% Senior Discount Notes Due 2007, Series A, which we sold in a private offering on February 19, 1999, - - Unless we extend it, this exchange offer expires at 5:00 p.m., New York City time, on , 1999, - - We will accept for exchange all outstanding notes that are properly tendered and not validly withdrawn prior to the expiration of this exchange offer, - - Outstanding notes that are tendered may be withdrawn any time prior to the expiration of this exchange offer, - - Unlike the outstanding notes, the new notes will have been registered under the Securities Act of 1993, - - The terms of the new notes are identical in all material respects (including principal amount at maturity, yield to maturity and maturity) to the terms of the outstanding notes, except that the new notes do not contain the transfer restrictions or registration rights relating to the outstanding notes, - - Although we have agreed to pay all the expenses of this exchange offer, we will not receive any proceeds from it, and - - If you do not tender your outstanding notes in this exchange offer, they will remain outstanding and will be entitled to substantially all of the same rights and subject to the same limitations, including restrictions upon transfer, applicable to them now. Following this exchange offer, we will have no further obligation to register outstanding notes under the Securities Act. To the extent that outstanding notes are tendered and accepted in this exchange offer, the ability to resell outstanding notes that are not tendered could be adversely affected. See "Risk Factors -- Consequences of the Exchange Offer to Holders of the Outstanding Notes" and "The Exchange Offer -- Terms of the Exchange Offer." --------------------- THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL THAT YOU ARE RECEIVING WITH IT CONTAIN IMPORTANT INFORMATION. YOU ARE URGED TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER YOUR OUTSTANDING NOTES FOR NEW NOTES PURSUANT TO THIS EXCHANGE OFFER. This prospectus, together with the accompanying letter of transmittal, is being sent to all registered holders of outstanding notes as of , 1999. We are not making this exchange offer to, nor will we accept tenders from, or on behalf of, holders of outstanding notes in any jurisdiction in which the making or acceptance of this exchange offer would violate applicable law. SEE "RISK FACTORS" ON PAGE 17 FOR A DESCRIPTION OF SOME RISKS THAT YOU SHOULD CONSIDER BEFORE YOU DECIDE TO TENDER YOUR OUTSTANDING NOTES FOR NEW NOTES IN THIS EXCHANGE OFFER. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE COMPLETENESS OR TRUTH OF THIS PROSPECTUS. ANY STATEMENT TO THE CONTRARY IS AGAINST THE LAW. --------------------- The date of this prospectus is , 1999. 3 TABLE OF CONTENTS
PAGE ---- Additional Information...................................... 1 Forward-Looking Statements.................................. 2 Sources of Material Information............................. 3 Summary of the Prospectus................................... 4 Risk Factors................................................ 17 Use of Proceeds............................................. 31 The Exchange Offer.......................................... 31 Capitalization.............................................. 37 Pro Forma Financial Statements.............................. 38 Selected Consolidated Financial Data........................ 43 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ 45 Business.................................................... 55 Management.................................................. 69 Principal Stockholders...................................... 74 Certain Relationships and Related Transactions.............. 78 Description of Other Indebtedness........................... 81 Description of the New Notes................................ 85 Book Entry; Delivery and Form............................... 116 Certain Federal Income Tax Considerations................... 119 Plan of Distribution........................................ 123 Legal Matters............................................... 123 Experts..................................................... 123 Index to Financial Statements............................... F-1
ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-4 with respect to the new notes. This prospectus does not contain all the information described in such registration statement and its the exhibits and schedules. The registration statement and its exhibits and schedules may be inspected and copied at prescribed rates at (1) the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, (2) the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048, (3) the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or (4) the Public Reference Section of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site that contains reports, proxy statements and other information regarding companies, including ours, that electronically file such information with the Commission. The address of the Commission's Web site is http://www.sec.gov. Because we registered the new notes with the Commission, we are now subject to the reporting requirements of the Securities Exchange Act of 1934. As provided in the Exchange Act, we are required to file periodic reports and other information with the Commission. Our obligation to file this information with the Commission under the Exchange Act may be suspended if the new notes are owned in the name of less than 300 holders at the beginning of any of our fiscal years, other than the fiscal year in which the 1 4 registration statement becomes effective. However, the indenture governing the notes provides that we must file with the Commission and provide you with copies of annual reports and the other information, documents and reports specified in Sections 13 and 15(d) of the Exchange Act as long as any of the outstanding notes or new notes remain outstanding. Important business and financial information about our company is deemed to be a part of this prospectus even though it is not included in, or delivered with, this prospectus. This information is available without charge to you upon written or oral request to us at 4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112, Attention: Investor Relations, (816) 753-5544. To obtain such information, you must request the information no later than five business days prior to the expiration date of the exchange offer. ------------------------ FORWARD-LOOKING STATEMENTS This prospectus forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties, and assumptions about us, including - uncertainties regarding our acquisition strategy, - our dependence on our service providers and agreements to deliver our programming services, - trends in our industry, including continued growth of the direct-to-home television industry, upgrading of cable systems, continued consolidation, increased competition with other subscription television providers and the development of new technologies, - uncertainties regarding our ability to continue to grow and retain our subscriber base, including unforeseen increases in the cost to acquire new subscribers, - an unexpected interruption of our business or the collection of our revenues due to the failure of parties other than us to remediate Year 2000 issues, - our reliance on satellite transmission technology, - government regulation of our business, and - general economic and business conditions. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. ------------------------ 2 5 SOURCES OF MATERIAL INFORMATION This prospectus contains information obtained from sources other than us concerning, among other things, - our industry and markets, - our principal direct and indirect suppliers of services, - DIRECTV, Inc. (DIRECTV), - the NRTC (as defined in the first paragraph of the "Summary of the Prospectus" section below), - Rural DIRECTV Markets (as defined in the first paragraph of the "Summary of the Prospectus" section below), and - the NRTC's relationship (contractual and otherwise) with DIRECTV. Such information is material to understanding our business and prospects. Specifically, while our sole business is the offering of DIRECTV services, we have no direct contractual relationship with DIRECTV relating to our principal markets and obtain those services through the NRTC. The NRTC receives DIRECTV services pursuant to arrangements with DIRECTV, the terms of which have been kept confidential by the NRTC. We rely upon the NRTC to have accurately represented the scope and term of its arrangements with Hughes Communications Galaxy, Inc., DIRECTV's predecessor-in-interest (Hughes) and DIRECTV. Under our arrangements with the NRTC, the NRTC provides substantial services to us, including billing and customer authorization, and we rely upon the NRTC to provide us with accurate and complete information concerning our customers. Information concerning the NRTC and its arrangements with DIRECTV is based upon information that has been made available to us by the NRTC or is otherwise publicly available. Except where otherwise indicated, information regarding numbers of households and/or subscribers in Rural DIRECTV Markets is based upon information compiled by Claritas, Inc., which we have supplemented where necessary with information compiled by the U.S. Postal Service. Other industry-related information has been derived from Sky Report and DBS Digest. While we believe these and other third-party sources of information to be reliable, we have not independently verified such information and are not in a position to do so. We make no representation as to the accuracy or completeness of such information. See "Risk Factors -- Our Reliance Upon the NRTC." The following trademarks owned by third parties are used in this prospectus: DIRECTV(R), USSB(R), Total Choice(R), NFL SUNDAY TICKET(TM), NHL(R) CENTER ICE(R) and DirecPC(R). 3 6 SUMMARY OF THE PROSPECTUS This summary may not contain all the information that may be important to you. We urge you to carefully read the entire prospectus, including the financial data and related notes, and the other documents to which it refers to fully understand the terms of the notes and the exchange offer. Golden Sky DBS, Inc. (Golden Sky DBS), the issuer of the notes, is a newly-formed holding company whose sole asset is the capital stock of Golden Sky Systems, Inc. (Systems), its operating subsidiary. The terms "our company," "us," "we," "our" and "ours" as used in this prospectus refer to Golden Sky DBS, its parent company, Golden Sky Holdings, Inc. (Holdings), and its subsidiaries as a combined entity, except where it is clear from the context that such terms refer only to Golden Sky DBS, the issuer of the notes. We also use other defined terms in this prospectus, including the following: "NRTC" refers to the National Rural Telecommunications Cooperative, an organization whose members are engaged in the distribution of telecommunications and other services in rural America and "Rural DIRECTV Markets" mean those areas in the United States in which the NRTC and some of its members and affiliates (including our company) have the exclusive right to provide DIRECTV services to residential customers. In addition, there are statements in this prospectus which include forward-looking statements that involve risks and uncertainties. See "Forward-Looking Statements." OUR COMPANY We are the second largest independent provider of DIRECTV. DIRECTV is the leading Direct Broadcast Satellite (DBS) company serving the continental United States. We market and provide DIRECTV programming on an exclusive basis to residential customers in our Rural DIRECTV Markets and on a non-exclusive basis to residents of multiple dwelling units and commercial customers. We have obtained the exclusive right to provide DIRECTV programming to homes in our Rural DIRECTV Markets under agreements with the NRTC. The NRTC and its DBS members and affiliates (including our company) provide DIRECTV programming in Rural DIRECTV Markets pursuant to an agreement between the NRTC and Hughes. We estimate that the Rural DIRECTV Markets comprise approximately 9.0 million households, or approximately 9% of total U.S. television households, but account for approximately 1.0 million or approximately 22%, of total DIRECTV customers. Since June 1996, when we were formed by management through March 31, 1999, we have - acquired 52 Rural DIRECTV Markets in 23 states with approximately 1.8 million households and 134,700 subscribers at the dates of acquisition, - increased our subscriber base in these markets by approximately 92% in the aggregate, to approximately 258,900, achieving a subscriber penetration rate of approximately 14% through aggressive marketing and a local, service-driven approach to our customers, - commenced marketing and distributing DIRECTV programming to approximately 4,600 commercial and multiple dwelling unit customers in five cities near our Rural DIRECTV Markets, with rights to provide such services on a non-exclusive basis nationwide, and - raised $87.4 million of equity capital from several institutional venture capital firms and our management, secured $150.0 million of senior bank financing, issued $195.0 million of Systems' senior subordinated notes and raised $100.0 million gross proceeds from the offering of the outstanding notes. Our revenue has increased rapidly due to internal subscriber growth and a low average annual subscriber disconnect (churn) rate (approximately 9% for the twelve months ended December 31, 1998). Net internal subscriber growth in our Rural DIRECTV Markets during 1998 totaled approximately 80,300. This represented approximately 7% of DIRECTV's net new subscribers nationwide for the period, although total households in our Rural DIRECTV Markets approximated just 1.5% of all television households in the continental United States. Although we incur substantial costs to add subscribers, we have relatively low recurring costs to service them. We believe these factors provide us an opportunity to increase our 4 7 operating leverage and provide strong growth in EBITDA. We had EBITDA (as defined in this summary under the heading "Summary Historical and Pro Forma Financial and Other Data") of approximately negative $5.4 million and negative $20.0 million for the years ended December 31, 1997 and 1998, respectively. We believe that our exclusive right to provide DIRECTV programming in our Rural DIRECTV Markets is attractive for the following reasons: - we believe that marketing DIRECTV, the country's leading DBS provider, gives us a competitive advantage over providers of other subscription television services; - competition from cable television providers in Rural DIRECTV Markets is often limited; - as a local provider of DIRECTV programming, we are supported by DIRECTV's national marketing campaigns and extensive retail distribution network. Additionally, three major consumer electronics manufacturers currently compete to provide our customers with satellite receivers and related equipment required to receive DIRECTV programming; and - we have had, and we continue to have, an opportunity to grow through acquisitions, rationalize operations and realize operating leverage because ownership of Rural DIRECTV Markets has historically been, and continues to be, fragmented. We intend to leverage our competitive strengths by - emphasizing direct sales and local customer service, which we believe generates rapid subscriber growth, higher customer satisfaction and lower churn, - acquiring additional Rural DIRECTV Markets to continue the expansion of our core business, and - developing related business opportunities that rely on our existing local sales and service organization. In addition to our business in Rural DIRECTV Markets under agreements with the NRTC, we have developed other business relationships with DIRECTV and its affiliated companies. For example, we were chosen in January 1998 by DIRECTV as a master system operator to market and provide DIRECTV programming nationally to residents of multiple dwelling units and commercial establishments. In February 1998, we began marketing and providing DIRECTV programming to residents of multiple dwelling units and commercial establishments in five major metropolitan areas near our rural territories. We intend to focus our multiple dwelling units and commercial activities in high-growth urban areas near our Rural DIRECTV Markets to create a larger universe of potential subscribers while maintaining our fixed cost base. Also during 1998 we began test marketing DirecPC, a satellite-based Internet access service. RECENT DEVELOPMENTS On December 14, 1998, Hughes announced that it will acquire United States Satellite Broadcasting Company (USSB) for approximately $1.3 billion. On January 22, 1999, DIRECTV announced that it will acquire certain of Primestar Inc.'s and one of its affiliates' assets for approximately $1.8 billion. The completion of each of these acquisitions is dependent upon the occurrence or non-occurrence of certain events and we cannot assure you that either will be completed. We are not yet able to assess the effect of either acquisition on our future business, financial position or results of operations. The information contained in this offering memorandum related to the number of households and subscribers in our Rural DIRECTV Markets does not reflect the impact, if any, of these announced acquisitions. We cannot yet determine whether and how these acquisitions, if consummated, would affect our rights in our Rural DIRECTV Markets or our capital requirements. Since December 31, 1998, we have acquired seven rural DIRECTV Markets. These territories include approximately 116,000 households and 17,200 subscribers. The aggregate purchase price for these recent 5 8 acquisitions was approximately $31.4 million. We are continually evaluating acquisition prospects and expect to enter into additional acquisition agreements and complete further acquisitions of Rural DIRECTV Markets consistent with our growth strategy. Golden Sky DBS was formed on February 2, 1999 for the purpose of issuing the outstanding notes. Immediately before the outstanding notes were issued, Golden Sky DBS became an intermediate holding company for our operating subsidiary, Systems. RISK FACTORS There are risks associated with owning the notes. Some of the risks of an investment in the notes are described below. - During our limited operating history we have generated net losses and negative EBITDA and we may continue to do so. - Our substantial indebtedness could have material adverse consequences to the holder of the notes. - Holders of the notes have no direct claim against our subsidiaries. - Restrictions on dividends in our subsidiaries' debt instruments may prevent them from providing us with adequate cash to make interest payments on the notes. - To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control. To make required payments on the notes, we may need to refinance the notes. - The restrictive terms of our debt instruments may impair our ability to pursue our business objectives. If we fail to comply with those terms, our debt can be accelerated and there may be insufficient assets to meet our obligations. - Our actual cash requirements may materially exceed our estimates of our capital requirements and our available capital. - We might not be able to realize the expected benefits of past and future acquisitions. Also, we may not be able to identify suitable future acquisition candidates. - We may be adversely affected by any material change in the assets, financial condition, programming, technological capabilities or services of DIRECTV or Hughes. - Our ability to offer DIRECTV programming depends upon agreements between the NRTC and Hughes. The NRTC's interests may differ from our interests. We rely on the NRTC in numerous ways in the conduct of our business. - We may not be able to acquire DBS services or sell our subscriber base after the expiration of our agreements with the NRTC. - We may not have the ability to improve our operational procedures and hire personnel capable of managing our rapid growth. Such inability may have a material adverse effect on our financial condition and results of operations. - The holders of the notes may suffer adverse tax consequences because the outstanding notes were issued at a discount from their principal amount at maturity. - Currently there is no active market for the outstanding notes and we cannot assure you that one will develop for the new notes. - Consummation of this exchange offer may have materially negative consequences for non-tendering holders of the outstanding notes. 6 9 You should consider carefully all of the information contained in this prospectus prior to tendering your outstanding notes for new notes in this exchange offer. In particular, you should carefully consider each of the factors set forth under "Risk Factors" beginning on page 17 of this prospectus. ------------------------ Our principal executive offices are located at 4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112. Our telephone number is (816) 753-5544. 7 10 THE OFFERING OF THE OUTSTANDING NOTES Outstanding Notes.......... We sold the outstanding notes on February 19, 1999 to Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation and Fleet Securities, Inc. as contemplated by a purchase agreement, dated February 11, 1999. These initial purchasers subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and pursuant to offers and sales that occurred outside the United States within the meaning of Regulation S under the Securities Act. Registration Rights Agreement.................. Pursuant to the February 11, 1999 purchase agreement, we and the initial purchasers of the outstanding notes entered into a registration rights agreement, dated February 19, 1999. The registration rights agreement grants certain exchange and registration rights to the holders of the outstanding notes. We are making this exchange offer to satisfy our obligations under the registration rights agreement. Upon the completion of this exchange offer, your exchange rights under such agreement will terminate. SUMMARY OF THE EXCHANGE OFFER The Exchange Offer......... We are offering to exchange up to $193,100,000 aggregate principal amount at maturity of our 13 1/2% Senior Discount Notes due 2007, Series B, for the same amount of our 13 1/2% Senior Discount Notes due 2007, Series A. The terms of the new notes are identical in all material respects (including principal amount, yield to maturity and maturity) to the terms of the outstanding notes. The new notes, however, do not contain the transfer restrictions or the registration rights relating to the outstanding notes. See "Description of the New Notes." The issuance of the new notes is intended to satisfy our obligations contained in the registration rights agreement relating to the outstanding notes. Expiration Date; Withdrawal of Tender.................. Unless we extend it, this exchange offer will expire at 5:00 p.m. New York City time, on , 1999. Any tender of outstanding notes pursuant to this exchange offer may be withdrawn at any time prior to such expiration. Accretion of the New Notes and the Outstanding Notes.................... Cash interest will not accrue or be payable on the new notes prior to March 1, 2004. Thereafter, interest will accrue at the rate of 13 1/2% per year, payable semi-annually on each March 1 and September 1 beginning September 1, 2004. Outstanding notes which are validly tendered and accepted for exchange will continue to accrete in principal amount at a rate of 13 1/2% per year to, but excluding, the date of issuance of the new notes. Any outstanding notes not tendered or accepted for exchange will continue to accrete in principal amount at the rate of 13 1/2% per year in accordance with their terms. The accreted value of the new notes upon issuance will be the same as the accreted value of the outstanding notes accepted for exchange immediately prior to the issuance of the new notes. 8 11 Procedures for Tendering... Each holder of outstanding notes wishing to accept this exchange offer must - complete, sign and date the letter of transmittal which accompanies this prospectus, or a facsimile of the letter of transmittal, in accordance with the instructions contained in the letter of transmittal and this prospectus, and - mail or otherwise deliver the letter of transmittal, or a facsimile of the letter of transmittal, together with any other required documentation, to United States Trust Company of New York, as exchange agent, at the address contained in the letter of transmittal and this prospectus. If you sign and return the letter of transmittal you will be making a representation that, among other things, (1) you are receiving the new notes in the exchange offer in the ordinary course of your business, (2) You have no arrangement with another person to participate in the distribution of the new notes received by you, (3) you are not an "affiliate" (as defined in Rule 405 under the Securities Act) of ours, and (4) if you are a broker or a dealer (as defined in the Exchange Act), you acquired your outstanding notes for your own account as a result of market-making or other trading activities, and that you have not entered into any arrangement with us or any of our affiliates to distribute the new notes to be received by you in the exchange offer. In the case of a broker-dealer that receives new notes for its own account in exchange for outstanding notes that were acquired by it as a result of market-making or other trading activities, the letter of transmittal will also include an acknowledgment that the broker-dealer will deliver a copy of this prospectus in connection with the resale by it of any new notes received pursuant to this exchange offer. See "Plan of Distribution." Guaranteed Delivery Procedures................. Holders of outstanding notes who wish to accept this exchange offer and cannot complete the procedures for tendering on a timely basis may effect a lender according to the guaranteed delivery procedures described in "The Exchange Offer -- Procedures for Tendering." Federal Income Tax Consequences............. The exchange of outstanding notes for new notes will not result in any income, gain or loss to you or us for Federal income tax purposes. See "Certain Federal Income Tax Considerations." Exchange Agent............. United States Trust Company of New York is serving as the exchange agent in connection with this exchange offer. The address and telephone number of the exchange agent are shown in "The Exchange Offer -- Exchange Agent." 9 12 Consequences of Exchanging Outstanding Notes Pursuant to the Exchange Offer.................... Based on interpretations by the staff of the Commission, we believe that new notes issued in this exchange offer may, in most circumstances, be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act. You will not, however, be free to resell or otherwise transfer the new notes if (1) you are an "affiliate" of our company (within the meaning of Rule 405 under the Securities Act), or (2) you did not acquire the outstanding notes in the ordinary course of your business, or (3) you have an arrangement with any person to participate in the distribution of such new notes. In addition, if you are a broker-dealer that receives new notes for your own account pursuant to this exchange offer, you must acknowledge that you will deliver a prospectus in connection with any resale of those new notes. The letter of transmittal which accompanies this prospectus states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for outstanding notes so long as such outstanding notes were acquired by the broker-dealer as a result of market-making or trading activities. See "Plan of Distribution." To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the new notes prior to offering or selling such new notes. We do not currently intend to register or qualify the sale of the new notes in any such jurisdictions. Outstanding Notes Which Are Not Tendered............. Following this exchange offer, holders of outstanding notes eligible to participate but who do not tender their outstanding notes will not have any further exchange rights. The transfer of outstanding notes which are not tendered will continue to be restricted. This could adversely affect the ability of holders of outstanding notes to transfer them later. Consequences of Failure to Exchange................. If you do not exchange your outstanding notes for new notes pursuant to this exchange offer, such outstanding notes will continue to be subject to the restrictions on transfer contained in the legend which appears on the outstanding notes. In general, they may not be offered or sold unless they are registered under the Securities Act. Offers or sales of the outstanding notes will only be allowed pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "The Exchange Offer -- Consequences of Failure to Exchange." Book Entry; Delivery and Form....................... The new notes will initially be available only in book-entry form. We expect that the new notes issued in this exchange offer will be issued 10 13 in the form of one or more global notes, which will be deposited with, or on behalf of, The Depository Trust Company (DTC) and registered in its name or in the name of Cede & Co., its nominee. Beneficial interests in the global note representing the new notes will be shown on, and transfers thereof will be effected through, records maintained by DTC and its participants. After the initial issuance of such global note, new notes in certified form will be issued in exchange for the global note only upon the terms described in the indenture governing the notes. See "Book Entry; Delivery and Form." 11 14 SUMMARY DESCRIPTION OF THE NEW NOTES The form and terms of the new notes will be identical in all material respects to the outstanding notes, except for transfer restrictions and registration rights relating to the outstanding notes. The indebtedness to be represented by the new notes is the indebtedness currently represented by the outstanding notes. The new notes will be governed by the same indenture as the outstanding notes. The new notes and the outstanding notes will be entitled to the same benefits under the indenture, which will treat all the notes as a single class of debt securities. See "Description of the New Notes." Issuer..................... Golden Sky DBS, Inc. 4700 Belleview Avenue, Suite 300 Kansas City, Missouri 64112 (816) 753-5544 Notes Offered.............. $193,100,000 aggregate principal amount at maturity of 13 1/2% Senior Discount Notes due 2007. Maturity Date.............. March 1, 2007. Yield and Interest......... 13 1/2% per year (calculated on a semi-annual bond equivalent basis) calculated from February 19, 1999. Cash interest will not accrue on the notes prior to March 1, 2004. Thereafter, cash interest on the notes will accrue at a rate of 13 1/2% per year and be payable on March 1 and September 1 of each year, commencing September 1, 2004. For United States federal income tax purposes, holders of the notes will be required to include amounts in gross income in advance of the receipt of cash payments to which the income is attributable. See "Certain Federal Income Tax Considerations." Ranking.................... The notes are unsecured and will effectively rank below all liabilities of our subsidiaries. Our ability to pay interest on these notes when interest becomes due and to redeem these notes at maturity will depend on whether our subsidiaries can pay dividends and other distributions to us under the terms of their indebtedness and applicable law. After giving effect to this offering and our use of the offering proceeds, at December 31, 1998, we would have had $346.3 million of consolidated indebtedness outstanding. On the same basis, at December 31, 1998, our subsidiaries would have had $246.2 million of indebtedness. Optional Redemption........ We may redeem the notes, in whole or in part, at any time, on or after March 1, 2004, at the redemption prices (expressed as percentages of principal amount at maturity) set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve-month period beginning on March 1 of the years indicated below:
REDEMPTION YEAR PRICE ---- ---------- 2004...................................... 106.750% 2005...................................... 103.375% 2006 and thereafter....................... 100.000%
Public Equity Offering Optional Redemption........ On or prior to March 1, 2002, we may redeem up to 35% of the originally issued aggregate principal amount at maturity of the notes 12 15 with the net proceeds of one or more public equity offerings that yields gross proceeds of at least $40 million, if at least 65% of the originally issued aggregate principal amount at maturity of the notes remains outstanding following such redemption. The redemption price would be equal to 113.5% of the then accreted value of the notes. See "Description of the New Notes -- Optional Redemption." Change of Control.......... Upon specific changes of control we must make an offer to repurchase all or a portion of the notes at a purchase price equal to 101% of the accreted value of the notes, plus accrued and unpaid interest, if any, to the purchase date. See "Description of the New Notes -- Change of Control." Original Issue Discount.... The notes bear original issue discount for United States federal income tax purposes. Thus, although cash interest will not be payable on the notes before September 1, 2004, the holders of the notes that are subject to U.S. federal income taxation (including holders that account for their taxable income on a cash basis) will be required to include such original issue discount in their income on a constant yield-to-maturity method basis, before they receive the cash payments to which such income is attributable. See "Certain Federal Income Tax Considerations." Certain Covenants.......... The indenture governing the notes contains covenants that, among other things, limits our ability and the ability of our subsidiaries to - incur additional indebtedness, - pay dividends on, redeem or repurchase our capital stock, - make investments, - issue or sell capital stock of restricted subsidiaries, - create specific types of liens, - sell assets, - engage in transactions with affiliates, and - consolidate, merge or transfer all or substantially all our assets and the assets of our subsidiaries on a consolidated basis. These covenants are subject to important exceptions and qualifications, which are described under the heading "Description of the New Notes" in this prospectus. For additional information regarding the new notes, see "Description of the New Notes." 13 16 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA The following table presents our financial and operating information for the periods indicated. The information presented below is taken from our audited consolidated financial statements for the periods ended December 31, 1996, 1997 and 1998. The financial and operating information for the businesses we have acquired was taken from the historical financial statements of the acquired entities. The following pro forma statement of operations data present our financial position adjusted for (1) acquisitions we have completed during or after the period presented and related financings, but excluding 11 acquisitions that are immaterial individually and in the aggregate, (2) System's offering of $195 million in aggregate principal amount of 12 3/8% Senior Subordinated Notes due 2006, (3) the amendment of our credit facility that became effective at the same time as the closing of the offering of the outstanding notes, and (4) the offering of the outstanding notes and the application of those offering proceeds. Such information is presented as if each of these events had occurred at the beginning of 1998. The following pro forma balance sheet data present our financial position adjusted for (1) the amendment of our credit facility that became effective at the same time as the closing of the offering of the outstanding notes, and (2) the offering of the outstanding notes and the application of those offering proceeds. Such information is presented as if each of these events had occurred as of December 31, 1998. These summary pro forma data do not present the results of operations that would have been achieved had such transactions been closed as of the assumed dates. In addition, this pro forma information is not intended to predict future results of operations. The following information should be read in conjunction with our consolidated financial statements and notes thereto, "Pro Forma Financial Statements" and notes thereto, "Management's Discussion and Analysis of Results of Operations and Financial Condition," and the individual financial statements and notes thereto of certain acquired businesses appearing elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, 1998 INCEPTION TO ------------------------ DECEMBER 31, YEAR ENDED PRO FORMA 1996 DECEMBER 31, 1997 HISTORICAL AS ADJUSTED ------------ ----------------- ---------- ----------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA Revenue: DBS services................................ $ 219 $ 16,452 $ 74,910 $ 86,786 Lease and other............................. 36 944 1,014 1,140 ------- -------- -------- -------- Total revenue................................. 255 17,396 75,924 87,926 Costs and expenses: Cost of DBS services........................ 130 9,304 45,291 52,861 System operations........................... 26 3,796 11,021 12,843 Sales and marketing......................... 73 7,316 32,201 32,600 General and administrative.................. 1,035 2,331 7,431 7,470 Depreciation and amortization............... 97 7,300 23,166 29,475 ------- -------- -------- -------- Total costs and expenses...................... 1,361 30,047 119,110 135,249 ------- -------- -------- -------- Operating loss................................ (1,106) (12,651) (43,186) (47,323) Net interest expense.......................... (61) (3,133) (18,964) (43,197) ------- -------- -------- -------- Net loss before extraordinary charge.......... $(1,167) $(15,784) $(62,150) $(90,520) ======= ======== ======== ========
14 17
DECEMBER 31, 1998 ------------------------ PRO FORMA DECEMBER 31, 1997 HISTORICAL AS ADJUSTED ----------------- ---------- ----------- (IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents.............................. $ 13,632 $ 4,460 $ 72,352 Restricted cash(1): Current.............................................. -- 28,083 22,741 Long-term............................................ -- 23,534 23,534 Working capital........................................ 3,827 15,204 77,754 Total assets........................................... 156,236 328,071 393,184 Total debt............................................. 69,113 278,204 346,253 Stockholder's equity................................... 70,449 15,922 12,986
YEAR ENDED DECEMBER 31, 1998 INCEPTION TO ----------------------- DECEMBER 31, YEAR ENDED PRO 1996 DECEMBER 31, 1997 HISTORICAL FORMA ------------ ----------------- ---------- ---------- (IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA) OTHER FINANCIAL DATA EBITDA(2)..................................... $(1,009) $ (5,351) $ (20,020) $ (17,578) Net cash used in operating activities......... (790) (3,099) (36,588) Net cash used in investing activities......... (3,231) (120,729) (159,921) Net cash provided by financing activities..... 4,500 136,981 187,337 Capital expenditures.......................... 105 998 3,317 3,317 Aggregate purchase price of acquisitions...... 5,256 129,725 124,844 135,729 OPERATING DATA Households at end of period(3)(4)............. 22,000 1,135,000 1,727,000 1,767,000 Subscribers acquired in acquisitions(4)....... 3,000 65,700 55,300 61,000 Subscribers added in existing Rural DIRECTV Markets(4).................................. 200 22,000 80,300 80,300 Subscribers at end of period(4)(5)............ 3,200 90,900 226,500 232,300 SAC per gross subscriber added(4)(6).......... $ 290 $ 280 $ 320 Penetration at end of period.................. 14.7% 8.0% 13.1% 13.1% Ratio of earnings to fixed charges(7)......... -- -- --
- --------------- (1) Represents the amount placed in escrow in connection with the offering of System's 12 3/8% notes to fund, together with the interest received thereon, the first four scheduled interest payments on such notes. Also includes $5.3 million deposited with the administrative agent under the credit facility to fund a contingent reduction of availability under the term loan facility that did not occur under the terms of our credit facility, as amended in connection with the offering of the outstanding notes. (2) EBITDA represents earnings before interest, taxes, depreciation and amortization, extraordinary items and non-recurring charges. EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income (loss) as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized measure of performance in the communications industry and is the basis for many of our financial covenants. Further, we believe that EBITDA provides useful information regarding an entity's ability to incur and/or service debt. Increases or decreases in EBITDA may indicate improvements or decreases, respectively, in our free cash flows available to incur and/or service debt and cover fixed charges. Notwithstanding the above, EBITDA is not intended to represent cash flows for the period and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. Management expects that, because EBITDA is commonly used in the communications industry as a measure of performance, investors may use this data to analyze and compare other communications companies with our company in terms of operating performance, leverage and 15 18 liquidity. EBITDA, as we calculate it is not necessarily comparable to similarly captioned amounts of other companies. (3) Pro forma households include all households acquired since our inception as of the later of December 31, 1998 or acquisition date. (4) Household and subscriber data reflect 100% of the households or subscribers comprising our Rural DIRECTV Markets, including two Rural DIRECTV Markets in which we acquired less than 100% ownership. We receive 100% of the revenue generated by all subscribers in our Rural DIRECTV Markets. (5) Pro forma subscriber data includes all subscribers acquired in acquisitions since our inception as of the later of December 31, 1998 or acquisition date. (6) Represents subscriber acquisition costs (SAC) on a per gross new subscriber activation basis (excludes acquired subscribers and does not net out disconnected subscribers). (7) The ratio of earnings to fixed charges is determined by dividing the sum of operating loss and a portion of rent expense representative of interest by the sum of interest expense and such portion of rent expense. For the periods ended December 31, 1996, 1997 and 1998, the deficiency of earnings to fixed charges was $1.2 million, $15.8 million, and $63.7 million, respectively. 16 19 RISK FACTORS You should carefully consider the following factors and other information in this prospectus before deciding to exchange outstanding notes for new notes in the exchange offer. NET LOSSES AND NEGATIVE EBITDA -- DURING OUR LIMITED OPERATING HISTORY WE HAVE GENERATED NET LOSSES AND NEGATIVE EBITDA AND WE MAY CONTINUE TO DO SO. We have operated for only a limited period of time. During this time we have generated both net losses and negative EBITDA. Such results are due primarily to the costs we have incurred to - acquire additional Rural DIRECTV Markets, - integrate acquired operations into existing operations, and - expand our sales and marketing activities, including the creation of our direct sales force. We had a net loss of approximately $15.8 million for the year ended December 31, 1997 and a net loss of approximately $64.7 million for the year ended December 31, 1998. We also reported EBITDA of approximately negative $5.4 million for the year ended December 31, 1997 and negative $20.0 million for the year ended December 31, 1998. The extent to which we actually experience positive EBITDA or generate net income in the future will depend upon a number of factors, including - our ability to acquire new Rural DIRECTV Markets, - limiting the time and expense required to integrate new operations and implement adequate systems and controls, - our ability to generate internal subscriber growth and introduce new products and services, - the degree of competition we encounter, - limiting the time it takes us to train direct sales and other personnel, - limiting the cost of programming services, and - general economic conditions. Given these factors, we cannot assure you that we will be able to generate or sustain positive EBITDA or net income in the future, or if so, when. SUBSTANTIAL INDEBTEDNESS -- OUR SUBSTANTIAL INDEBTEDNESS COULD HAVE MATERIAL ADVERSE CONSEQUENCES TO THE HOLDERS OF THE NOTES. We have a significant amount of indebtedness. We expect to increase our indebtedness as we pursue further acquisitions. The degree to which we are indebted could have adverse consequences to you, including - limiting our ability to internally fund or obtain financing for future acquisitions, working capital, operating losses, capital expenditures and other general corporate purposes, - limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, - placing us at a disadvantage compared to our competitors that have less debt, - increasing our vulnerability to general adverse economic and industry conditions, and - reducing the cash flow available from our subsidiaries to service interest payments on the notes. In addition, borrowings under our credit facility bear interest at variable rates. This makes us vulnerable to increases in interest rates generally. See "Management's Discussion and Analysis of Results of Operations 17 20 and Financial Condition -- Liquidity and Capital Resources" and "Description of Other Indebtedness -- Credit Facility." The following are important credit statistics that we are presenting to you assuming we had completed the offering of the outstanding notes and applied the net proceeds from that offering as of December 31, 1998: Total consolidated long-term indebtedness (including the current portion thereof).................................. $346.3 million Consolidated long-term indebtedness (including the current portion thereof) as a percentage of total capitalization............................................ 96%
On such an adjusted basis, our earnings for the year ended December 31, 1998 would have been insufficient to cover our fixed charges by approximately $63.7 million. Also, we would have had the ability to incur additional borrowings under our revolving credit facility. We expect to use such additional borrowings principally to fund acquisitions of Rural DIRECTV Markets. HOLDING COMPANY STRUCTURE -- HOLDERS OF THE NOTES WILL HAVE NO DIRECT CLAIM AGAINST OUR SUBSIDIARIES. Golden Sky DBS, the issuer of the notes, is a newly-formed holding company. We derive all of our operating income from our wholly-owned operating subsidiary, Systems, and its subsidiaries. The notes will be our obligation alone and will not be guaranteed by our parent company or our operating subsidiary. You will have no direct claim against any of our subsidiaries and, under the indenture, you will waive any right to assert a substantive consolidation in a bankruptcy proceeding involving us and/or Systems. Our recourse to the assets of our subsidiaries derives solely from our equity interest in such companies. In the event that any of our subsidiaries become insolvent, liquidates, reorganizes, dissolves or otherwise winds up, the assets of that subsidiary will be used first to satisfy the claims of its creditors, including its trade creditors. Our equity interests in Systems have been pledged to secure our guarantee obligations to the lenders under our credit facility. Consequently, to the extent that any funds are available to Golden Sky DBS following any reorganization, bankruptcy or insolvency proceeding involving Systems and all amounts under the credit facility have not been repaid, any amounts received in respect of such equity interests will first satisfy remaining obligations under our credit facility. Consequently, your claims will effectively rank below all of the indebtedness of our subsidiaries. IMPACT OF SUBSIDIARY DEBT INSTRUMENTS ON OUR ABILITY TO SERVICE THE NOTES -- RESTRICTIONS ON DIVIDENDS IN OUR SUBSIDIARIES' DEBT INSTRUMENTS MAY PREVENT THEM FROM PROVIDING US WITH ADEQUATE CASH TO MAKE INTEREST PAYMENTS ON THE NOTES. As a holding company, we must rely on dividends and other payments from our subsidiaries to generate the funds necessary to meet our obligations, including our obligations on the notes. The ability of our subsidiaries to pay dividends and make other distributions and advances to us will be dependent upon, among other things, the terms of their debt instruments and applicable law. Our credit facility does not permit Systems to pay dividends to us if a default or event of default has occurred and is continuing under the credit facility. The credit facility contains numerous financial and other restrictive covenants, including a maximum leverage ratio, minimum interest coverage ratio and minimum subscriber levels, that must be complied with in order for Systems to pay a dividend. We cannot assure you that we will be in compliance with these covenants at the time of a required interest payment on the notes. Systems' 12 3/8% notes also include a limitation on Systems' ability to pay dividends to us that is substantially similar to the restricted payments covenant to be included in the indenture for the notes. We currently expect it may be difficult to generate the necessary dividend capacity under the indenture governing Systems' 12 3/8% notes to make the initial cash interest payments on the notes. Our ability to generate sufficient dividend capacity under the indenture governing Systems' 12 3/8% notes to service the notes and to comply with the financial and other covenants in our credit facility will depend upon the extent to which we pursue acquisitions, incur additional indebtedness (for which we will have substantial capacity under the notes indenture), incur operating expenses, make capital expenditures and generate adequate subscriber revenues, among other 18 21 things. To the extent these vary significantly from our current expectations, it is likely that we will not be able to make our initial interest payments absent consents from our lenders and existing bondholders. For example, if we determine to more aggressively grow our subscriber base or commit more capital to grow our business, we could delay the time at which we generate positive EBITDA (if at all) and/or increase our interest expense, which would reduce our dividend capacity. In addition, there are many factors affecting our future results that are beyond our control. It is inherently speculative to forecast whether or not we will be able to pay dividends at the time that cash interest payments become due on the notes. However, any significant adverse developments would likely preclude us from being able to access Systems' cash flow for these initial interest payments. If Systems is unable to make available to us the cash required to make payments on the notes, we will be required to seek a waiver or consent from the applicable creditors or to refinance some or all of our debt. Our ability to do so will be subject to factors beyond our control and may be unduly expensive. We cannot assure you that we will be successful. See "-- Restrictions Imposed by Terms of Indebtedness" for further risks associated with the restrictive covenants in our present and future debt instruments and "-- Ability to Service Indebtedness and Refinance Notes" for further factors affecting our ability to generate the cash flow to meet our debt obligations and to refinance our debt obligations. ABILITY TO SERVICE INDEBTEDNESS AND REFINANCE NOTES -- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. TO MAKE REQUIRED PAYMENTS ON THE NOTES, WE MAY NEED TO REFINANCE THE NOTES. Our ability to make payments on and to refinance our indebtedness, including our ability to pay interest on the notes when such interest becomes due and payable and to redeem the notes at maturity, will depend upon our ability to generate cash in the future. We may not be able to generate sufficient cash flow to service required interest and principal payments on or to redeem any of our indebtedness, including the notes, when such indebtedness becomes due. Our ability to generate such cash flow is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, such as future relations with the NRTC. Borrowings of revolving loans under our credit facility will be available to us until September 2005, but revolving loan commitments and outstanding revolving loans under our credit facility are subject to quarterly reductions commencing March 31, 2001. Outstanding term loans under our credit facility are required to be repaid in 16 consecutive quarterly installments commencing March 31, 2002, with the balance due December 31, 2005. In addition, Systems' 12 3/8% notes mature on August 1, 2006. To the extent we do not have sufficient available resources to repay indebtedness under our credit facility and Systems' 12 3/8% notes at such times as required, we may find it necessary to refinance such indebtedness. We cannot assure you that such refinancing would be available, or available on reasonable terms. Among the factors that will affect our ability to refinance the notes are financial market conditions and the value of our company and our performance at the time of such refinancing, which in turn may be affected by many factors, including economic and industry cycles. We cannot assure you that any such refinancing can be successfully completed. In the event such refinancing cannot be successfully completed, we would be required to consider alternative financing options in order to be able to repay the notes, such as renegotiating the covenants under the terms of our subsidiaries' existing indebtedness or selling assets. We cannot assure you that any such transactions could be arranged on a timely basis or on terms that would enable us to repay the notes. RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS -- THE RESTRICTIVE TERMS OF OUR DEBT INSTRUMENTS MAY IMPAIR OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVES. IF WE FAIL TO COMPLY WITH THOSE TERMS, OUR DEBT CAN BE ACCELERATED AND THERE MAY BE INSUFFICIENT ASSETS TO MEET OUR OBLIGATIONS. Our debt instruments (including our credit facility, Systems' 12 3/8% notes indenture and the indenture governing the notes) contain numerous restrictive covenants that limit our discretion with respect to 19 22 certain business matters. We may be unable to pursue attractive business opportunities due to these restrictive covenants. Moreover, our financial flexibility will be impaired by these requirements. Among other things, the covenants governing our indebtedness limit our ability to - incur substantial indebtedness, - pay dividends on, redeem or repurchase our capital stock, including for the purpose of making interest payments on the notes, - make investments, - issue or sell capital stock of restricted subsidiaries, - create specific types of liens, - sell assets, - engage in transactions with affiliates, and - consolidate, merge or transfer all or substantially all our assets and the assets of our subsidiaries on a consolidated basis. The covenants governing our indebtedness also require us to meet certain financial ratios and financial conditions. We must satisfy these covenants and maintain a minimum subscriber base in order to access the total amount of borrowings available to us under our credit facility. Our ability to meet these covenants and conditions can be affected by events beyond our control. We cannot assure you that we will meet such covenants and conditions. We may incur future indebtedness that contains financial or other covenants more restrictive than those currently applicable to our company. If we fail to comply with our obligations under these instruments, the holders of such indebtedness could elect to declare all amounts outstanding under those instruments to be immediately due and payable. Our assets may not be sufficient to repay such indebtedness, including the notes, if such holders elected to accelerate such indebtedness. SUBSTANTIAL CAPITAL REQUIREMENTS -- OUR ACTUAL CASH REQUIREMENTS MAY MATERIALLY EXCEED OUR ESTIMATES OF OUR CAPITAL REQUIREMENTS AND OUR AVAILABLE CAPITAL. Our operations require and will continue to require substantial capital to - finance acquisitions of Rural DIRECTV Markets, - finance the costs associated with integrating acquired operations into our existing operations, - expand our sales and marketing activities into new markets, and - meet our general working capital requirements and operating expenses. Our actual cash requirements may materially exceed our estimated capital requirements and available capital. Also, our ability to access the total availability of borrowings under our credit facility depends on our meeting specified financial and operating covenants. If we do not satisfy these covenants, we may be unable to draw funds under our credit facility and may be unable to finance planned acquisitions and to continue to develop our operations. The amount of capital we will require depends upon a number of factors, including - the cost of future acquisitions, - the necessity of future capital expenditures, and - the extent of our future negative cash flow. If we need additional financing to meet our capital requirements, we might not be able to obtain such financing on satisfactory terms or at all. In addition, we are not yet able to assess whether and to what extent the acquisitions by Hughes of USSB or by DIRECTV of Primestar may affect our future capital requirements. 20 23 RISKS ATTENDANT TO ACQUISITION STRATEGY -- WE MIGHT NOT BE ABLE TO REALIZE THE EXPECTED BENEFITS OF PAST OR FUTURE ACQUISITIONS. ALSO, WE MAY NOT BE ABLE TO IDENTIFY SUITABLE FUTURE ACQUISITION CANDIDATES. Acquiring additional Rural DIRECTV Markets is an essential part of our business strategy. We may not be able to realize the expected benefits of past or future acquisitions or identify suitable acquisition candidates. Our ability to consummate future acquisitions is dependent upon a number of factors, some of which are beyond our control, including the attractiveness of acquisition prices, the negotiation of acceptable definitive agreements governing such acquisitions and obtaining the necessary approvals, including the approval of Hughes and the NRTC. The price we pay to consummate acquisitions is a function of numerous factors, including - the demographics of the particular Rural DIRECTV Market, - the extent of market penetration by the prior operator and other pay television in such market, and - the extent of competition for the particular acquisition. We are aware of at least one other DIRECTV programming provider that is currently pursuing an acquisition strategy similar to ours that is targeted on Rural DIRECTV Markets. We may not have the financial resources to compete with such other provider in making additional acquisitions. Even if we consummate future acquisitions, the process of integrating acquired operations into our existing operations may - result in unforeseen operating difficulties, - divert managerial attention, and - require significant financial resources that could otherwise be used for the ongoing development or expansion of our existing operations. Each of our acquisitions is subject to the negotiation of a definitive agreement with the seller and the prior approval of Hughes and the NRTC. Such approvals are beyond our control. See "-- Our Reliance Upon the NRTC" for a discussion of the risks attendant to securing NRTC approval of acquisitions. In addition, each acquisition is subject to typical conditions, including conditions beyond our control. Future acquisitions may require us to incur additional debt and contingent liabilities. The incurrence of such additional debt and liabilities could have a material adverse effect on our financial condition and results of operations. DEPENDENCE UPON DIRECTV AND HUGHES -- WE MAY BE ADVERSELY AFFECTED BY ANY MATERIAL CHANGE IN THE ASSETS, FINANCIAL CONDITION, PROGRAMMING, TECHNOLOGICAL CAPABILITIES OR SERVICES OF DIRECTV OR HUGHES. We obtain substantially all of our revenue through the distribution of DIRECTV programming. As a result, we may be materially adversely affected by any material change in the assets, financial condition, programming, technological capabilities or services of DIRECTV or Hughes. Such material adverse effects could result from possible electronic, computer or other technical problems experienced by DIRECTV or from DIRECTV's failure to retain or renew its Federal Communications Commission licenses to transmit radio frequency signals from the orbital slots occupied by its satellites. Some of DIRECTV's FCC licenses expire and are subject to renewal in December 1999. We rely upon DIRECTV to continue to provide programming services on a basis consistent with its past practice. Any change in such past practice due to, for example, a failure to replace a satellite upon the expiration of its useful orbital life or a delay in launching a successor satellite may prevent us from continuing to provide DBS services and could have a material adverse effect on our financial condition and results of operations. 21 24 OUR RELIANCE UPON THE NRTC -- OUR ABILITY TO OFFER DIRECTV PROGRAMMING DEPENDS UPON AGREEMENTS BETWEEN THE NRTC AND HUGHES. THE NRTC'S INTERESTS MAY DIFFER FROM OUR INTERESTS. WE RELY ON THE NRTC IN NUMEROUS WAYS IN THE CONDUCT OF OUR BUSINESS. We depend greatly upon the NRTC for - maintaining valuable rights that it has with DIRECTV because our ability to offer DIRECTV programming derives from those rights, - providing us with accurate information concerning its relationship with DIRECTV because we do not have direct access to that information ourselves, and - providing us with certain essential services on a timely and effective basis. Our interests and those of the NRTC may conflict. The NRTC is a cooperative whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. We are not members of the NRTC. We are a non-voting affiliate. The NRTC may be expected to act solely in the interests of its members, whose interests may diverge from our own. Our Rights to Offer Programming are Based Solely Upon the NRTC Agreements. Virtually all of our business is comprised of the distribution of DIRECTV programming to residential households and commercial establishments in rural markets pursuant to the NRTC Agreements. The NRTC has obtained such rights pursuant to an agreement with Hughes (the "Hughes Agreement"). Under the NRTC Agreements, the NRTC has granted us the exclusive right to market, sell and retain revenue from most DIRECTV programming to identified geographic areas. We do not have a direct contractual relationship with Hughes, apart from our systems operator and commercial licenses (which have not generated material revenue to date). The NRTC has declined to make available to us a copy of the Hughes Agreement. We rely upon the NRTC to have accurately represented the scope and terms of its rights and obligations and to diligently perform all of its obligations under the Hughes Agreement, as well as pursue any rights and remedies which it may have against Hughes. The NRTC Agreements provide that, in general, upon a default or breach by the NRTC under the Hughes Agreement, we have the right to acquire DIRECTV programming directly from DIRECTV either, at Hughes' option, by the assumption by Hughes of the NRTC's obligations under the NRTC Agreements or under a new agreement between us and Hughes on terms no less favorable to us than those in the NRTC Agreements. We cannot assure you as to the existence or scope of such right under the Hughes Agreement or as to our ability to timely and successfully exercise such right. We cannot assure you that the NRTC will act in a manner that will preserve our ability to offer DIRECTV programming on a basis consistent with past practice. Although Hughes is contractually entitled to enforce the NRTC's rights under the NRTC's agreements with us, we are not entitled to enforce or preserve any rights that the NRTC may have under its agreement with Hughes. We would be materially and adversely affected by the termination of the NRTC Agreements prior to their expiration. The NRTC is permitted to terminate its agreements with us - as a result of the termination of the Hughes Agreement, - if we fail to make a payment due to the NRTC or otherwise breach a material obligation in such agreements, which failure or breach continues unremedied for more than 30 days after notice from the NRTC, and - if we fail to keep or maintain any letter of credit required to be provided to the NRTC in full force and effect or to adjust the amount of the letter of credit as required. If the NRTC Agreements are terminated by the NRTC, we would no longer have the right to provide DIRECTV programming in Rural DIRECTV Markets. We cannot assure you that we would be able to obtain similar DBS services from other sources. Changes in NRTC Policies May Adversely Affect Us. The NRTC Agreements also require us to comply with the policies of the NRTC adopted from time to time. We and other NRTC-affiliated 22 25 DIRECTV providers have disputed certain policies proposed by the NRTC in the past that we believed did not comply with the NRTC Agreements and applicable law. For example, in 1998, the NRTC proposed new conditions to securing its approval of acquisitions that included changes to all of the NRTC Agreements, which if adopted, could have had material adverse financial consequences on us. The dispute was resolved without any modifications to the NRTC Agreements and our then pending acquisitions were approved. In addition, the NRTC has adopted a policy regarding its own interests in the subscriber information of affiliated DIRECTV providers. The NRTC Agreements provide that NRTC affiliates, including us, have "substantial proprietary interests" in and rights to the information and data regarding their subscribers. We have differed with the NRTC, as have other affiliates, over the import of these rights and interests, which may have consequences in the event that our rights to offer DIRECTV programming through the NRTC are terminated or expire. We Rely Upon the NRTC for Certain Services and Information. Our agreements with the NRTC require that we use the NRTC for certain support services including subscriber information and data reporting capability, retail billing services and central office subscriber services. These services are critical to the operation and management of our business. The cost of the services the NRTC provides us may or may not be greater than other alternatives. In addition to the fees paid upon signing of the NRTC Agreements, we are required to pay the NRTC monthly operating fees, monthly security fees, monthly programming fees (based on accepted cable industry rate cards) and a "reasonable margin" on the cost of providing DBS services to us. If the NRTC is unable to provide these services for whatever reason, we would be required to acquire these services from other sources or provide them for ourselves. We cannot assure you that our cost of acquiring these services elsewhere or providing them internally would not exceed amounts payable under our agreements with the NRTC. Moreover, it is possible that we would be able to secure these services on a more economic basis from other persons while we remain obligated to secure them from the NRTC under the NRTC Agreements. The NRTC Agreements do not provide for direct or complete access to or control by us of the management information systems of the NRTC, including certain management information systems data concerning our individual subscribers. As a result, while we are entitled to verify the accuracy of individual customer financial accounts, we must rely upon the NRTC to accurately provide detailed general demographic and other information regarding subscribers. This information is critical to the growth and development of our ongoing sales and marketing strategy. OUR ABILITY TO ACQUIRE DBS SERVICES FROM THE NRTC AND DIRECTV AFTER EXPIRATION OF NRTC AGREEMENTS -- WE MAY NOT BE ABLE TO ACQUIRE DBS SERVICES OR SELL OUR SUBSCRIBER BASE AFTER THE EXPIRATION OF THE NRTC AGREEMENTS. The DIRECTV programming we offer is acquired pursuant to the NRTC Agreements. The NRTC, in turn, acquires the services pursuant to the Hughes Agreement. The NRTC Agreements (and presumably the Hughes Agreement) expire when Hughes removes its current satellite(s) from their assigned orbital locations. Although, according to Hughes and USSB, which owns five transponders on the first DIRECTV satellite, the three DIRECTV satellites have estimated orbital lives of approximately 15 years from their respective launches in December 1993, August 1994 and June 1995, we cannot assure you as to the longevity of the satellites and, therefore, as to how long we will be able to obtain DBS services pursuant to the NRTC Agreements. We are not certain whether the NRTC is entitled to services from all three DIRECTV satellites as a contractual matter and, therefore, whether it will receive services for the life of all three satellites. All of these uncertainties may render it more difficult to refinance the Notes and other indebtedness, if necessary, and affect our ability to secure additional financing, if necessary or desirable. We believe that the Hughes Agreement provides the NRTC with a right of first refusal to obtain DBS services (other than programming services) in substantially the same form as such DBS services are provided under the existing Hughes Agreement in the event that Hughes elects to launch one or more successor satellites upon the removal of the present satellites from their assigned orbital locations. The 23 26 NRTC Agreements do not expressly provide an equivalent right of first refusal for the NRTC members to acquire DBS services through the NRTC should the NRTC exercise any right of first refusal under the Hughes Agreement. The NRTC is not obligated to exercise any right of first refusal. We cannot assure you that, upon removal of the current satellites from their orbital locations at the end of their useful lives (estimated to be in 2008 or 2009), we would continue to have access to DIRECTV programming or the exclusive right to control or dispose of our interest in our subscriber base. See "-- Our Reliance Upon the NRTC -- Our Rights to Offer Programming are Based Solely Upon the NRTC Agreements." Any right of first refusal in the Hughes Agreement may not be available to the NRTC if Hughes does not launch a successor satellite, which may be the case, for example, if Hughes ceases to own the FCC licenses necessary to transmit from its existing orbital locations. Such right of first refusal also may not be available to the NRTC if the NRTC is in default under the Hughes Agreement or if the NRTC is unable to raise sufficient funds from its then existing members or others to purchase rights in any successor Hughes satellite. Whether or not a right of first refusal exists, the terms and conditions, including the financial terms, of any continuing relationship between the NRTC and Hughes following the expiration of the NRTC Agreements cannot be predicted. Moreover, the terms and conditions, including the financial terms under which the NRTC may make available such rights to us and other NRTC members and affiliates is unknown, which may impact the economics of our business and our ability to meet our obligations, including in respect of the Notes. In the event we are unable to acquire DIRECTV programming through Hughes and the NRTC after the expiration of the NRTC Agreements, we would be required to acquire DBS services from others, or to attempt to sell our subscriber base to one or more other DBS providers (which we may be unable to do for contractual or other reasons) and cease or fundamentally change our business operations. ABILITY TO MANAGE GROWTH EFFECTIVELY -- WE MAY NOT HAVE THE ABILITY TO IMPROVE OUR OPERATIONAL PROCEDURES AND HIRE PERSONNEL CAPABLE OF MANAGING OUR RAPID GROWTH. SUCH INABILITY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As the size of our operations grows, we will need to continue to improve our operational systems and procedures and to hire and retain additional qualified personnel. If we are unable to do so, our financial condition and results of operations could be materially adversely affected. We have experienced a period of rapid growth, primarily as a result of acquisitions. In order to achieve our business objectives, we expect to continue to expand largely through acquisitions of additional Rural DIRECTV Markets. Such acquisitions have placed and will continue to place a significant strain on our management, operating systems and procedures, financial resources, employees and other resources. Our rapid growth affected the preparation of financial and operating information in the past. To address this concern we have hired additional personnel and implemented additional accounting practices and procedures. DEPENDENCE ON KEY PERSONNEL -- IF WE ARE UNABLE TO RETAIN KEY PERSONNEL, INCLUDING RODNEY A. WEARY, SUCH INABILITY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our future success may depend to a significant extent upon the performance of a number of our key personnel, including Mr. Rodney A. Weary, our Chief Executive Officer. The loss of Mr. Weary or other key management personnel or the failure to recruit and retain additional qualified personnel could have a material adverse effect on our financial condition and results of operations. We have employment and non-competition agreements with Mr. Weary and seven other executives. We maintain "key-man" insurance on the life of Mr. Weary. RELIANCE ON SATELLITE TRANSMISSION TECHNOLOGY -- WE MAY BE FORCED TO BEAR THE COSTS OF CHANGES IN DIGITAL COMPRESSION TECHNOLOGY. ANY LOSS OF OR DAMAGE TO THE SATELLITES UPON WHICH WE RELY MAY RESULT IN A MATERIAL ADVERSE EFFECT. Loss of, damage to, changes in or reductions in the longevity of satellites as a result of acts of war, anti-satellite devices, electrostatic storms or collisions with space debris could have a material adverse effect on our business, financial condition and results of operations. While we do not believe that the loss of a single satellite would adversely affect our operations, the loss or two or more satellites could have a 24 27 material adverse effect on DIRECTV and on us. Furthermore, the digital compression technology used by DBS providers is not standardized and is undergoing rapid change. Such changes or other technological changes or innovations may require modifications to ground station programming uplink facilities, satellites and subscriber equipment. Such modifications could be costly. These costs would likely be passed through by DIRECTV or the NRTC to us and would be borne by us to the extent we could not pass such costs through to our subscribers in the form of higher fees. There are numerous risks associated with satellite transmission technology, in general, and DIRECTV's delivery of DBS services, in particular. Satellite transmission of video, audio and other data is highly complex and requires the manufacture and integration of diverse and advanced components that may not function as expected. Although the DIRECTV satellites used to provide its DBS services have estimated orbital lives of approximately 15 years from their respective launches in December 1993, August 1994 and June 1995, we cannot assure you as to the longevity of the satellites. RISK OF SIGNAL THEFT -- OUR REVENUE COULD BE ADVERSELY AFFECTED IF DIRECTV'S SIGNAL ENCRYPTION TECHNOLOGY IS COMPROMISED IN A MANNER THAT IS NOT PROMPTLY CORRECTED. The delivery of subscription programming requires the use of encryption technology. Signal theft or "piracy" in the C-band DTH, cable television and European DBS industries has been widely reported. The encryption technology used by the DBS equipment may not remain totally effective. COMPETITION AND TECHNOLOGICAL CHANGE -- WE COMPETE AGAINST A BROAD RANGE OF COMMUNICATION AND ENTERTAINMENT COMPANIES. SOME OF THESE COMPETITORS HAVE SIGNIFICANTLY MORE FINANCIAL AND MARKETING RESOURCES THAN WE DO. THEIR ABILITY TO UTILIZE AND INTEGRATE VARIOUS TECHNOLOGIES UNDER DEVELOPMENT COULD RESULT IN INCREASED COMPETITION. We operate in a highly competitive industry and we expect intense competition in the future. Our competitors include a broad range of companies engaged in providing communications and entertainment services, including cable operators, other direct-to-home (DTH) programming providers, wireless cable operators, broadcast television networks and home video products companies, as well as companies developing new technologies. Certain of these competitors and potential competitors are well established companies and have significantly greater financial and marketing resources than we do. Cable operators generally have large installed customer bases, and many cable television operators have significant investments in, and access to, programming. We anticipate that many cable systems in the United States will be upgraded to provide better quality programming and a better signal than are currently available through cable, but that cable's programming and signal will remain inferior to those available through DBS services. We believe that due to the expense of upgrading less densely populated areas such as those within the Rural DIRECTV Markets, cable systems in Rural DIRECTV Markets in general will be upgraded more slowly (if at all) than those in more densely populated areas. However, in order to substantially increase our subscriber base, we may find it necessary to attract customers who currently subscribe to cable. We also compete with companies offering DTH programming through various satellite broadcasting systems. Currently, DIRECTV, USSB and EchoStar are the only domestic DBS operators. On December 14, 1998, Hughes announced that it will acquire USSB for approximately $1.3 billion. On January 22, 1999, DIRECTV announced that it will acquire certain of Primestar's and one of its affiliates' assets for approximately $1.8 billion. Each of these acquisitions is subject to conditions and we cannot assure you that either will be consummated. We are not yet able to assess the effect of either acquisition on our ability to compete in the future. Primestar and all other domestic DTH operators currently transmit from low power or medium power satellites, which generally require the use of larger and, in the case of low power DTH broadcasting, more expensive dishes. Certain regional telephone operators have also expressed an interest in becoming subscription television providers. The entry of these competitors into the subscription television market could increase competition substantially and may have a material adverse effect on our financial condition and results of operations. 25 28 In addition, changes in technology, including, among others, the expansion of the Internet to include and use developing video and audio compression technologies to develop the "information superhighway," may force us to make significant changes in our business strategy. For example, such technological changes could lower the cost of competitive services to a level where our services will become less competitive or force us to reduce our service prices in order to remain competitive. PRIMETIME 24 LITIGATION -- THE OUTCOME OF THE PRIMETIME 24 LITIGATION COULD AFFECT THE ABILITY OF OUR SATELLITE PROVIDERS TO CONTINUE TO SERVICE US AND, THEREFORE, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. The Satellite Home Viewer Act of 1994 (the "SHVA") establishes the terms and conditions under which a DTH operator, for a statutorily-mandated fee, may claim a "compulsory" copyright license to retransmit "superstations" and broadcast network programming to subscribers for private home viewing. In the case of broadcast network programming, the compulsory license established by the SHVA is applicable only to DTH retransmission to persons in unserved households. In general, an "unserved household" is one that cannot receive, through the use of a conventional outdoor rooftop antenna, a sufficient over-the-air network signal, and has not, within 90 days prior to subscribing to the DTH service, subscribed to a cable service that provides that network signal. Until recently, a number of satellite providers, including DIRECTV (and its distributors, including NRTC members and affiliates like us) received ABC, CBS, NBC and Fox network programming from PrimeTime 24 Joint Venture. Certain television broadcast networks and their affiliates have commenced litigation against PrimeTime 24 alleging that the network programming offered by PrimeTime 24 has been retransmitted in violation of the "unserved households" limitation of the SHVA. While we believe that we have complied to date with the SHVA in providing network programming only to "unserved households" and we do not believe that the interpretations of the SHVA applied by the Florida and North Carolina federal courts (discussed below) will have a material adverse effect on our financial results or our ability to attract new subscribers, we cannot assure you that our inability to provide network services to certain subscribers will not have such effects. In addition, the costs of compliance with those interpretations could be material should we elect to continue to offer network services. Our inability, along with that of DIRECTV, to provide network programming to subscribers in Rural DIRECTV Markets could adversely affect our average revenue per subscriber and subscriber growth and churn. See "Business -- Regulation." The litigation commenced against PrimeTime 24 has resulted in the issuance of permanent injunctions by courts in North Carolina and Florida prohibiting PrimeTime 24 from providing the programming of certain broadcast networks to subscribers in certain designated geographic areas. In North Carolina, the court issued a permanent injunction restraining DIRECTV (and its distributors) from providing retransmissions of any television station affiliated with ABC to any household located within 75 miles of the transmission tower of WTVD, the ABC affiliate serving the Raleigh-Durham market. The Florida injunction applies nationwide and requires PrimeTime 24 to disconnect those customers for CBS and Fox programming that are able to receive "a signal of Grade B intensity" (based on Longley-Rice signal strength propagation maps) unless the local network consents to continued service or a signal-strength test proves that a certain quality of off-air service is unavailable to the customer. The Florida court established February 28, 1999 as the deadline for compliance with the injunction with respect to customers who first began receiving PrimeTime 24's network programming after March 11, 1997; for customers who first received service before that date, the compliance deadline is April 30, 1999. Additional litigation against PrimeTime 24 alleging violations of the 'unserved households' limitation, brought in Texas by an NBC affiliate, is currently pending. In February 1999, DIRECTV announced that it was discontinuing retransmission of the four broadcast networks received from PrimeTime 24 and would instead distribute a different package of network affiliates to its existing subscribers. On February 24, 1999 CBS, NBC, ABC and Fox asked the same Federal District Court in Florida that had issued an injunction against PrimeTime 24 to grant a temporary restraining order, preliminary injunction, and contempt finding against DIRECTV for violating 26 29 the SHVA. On February 25, 1999, the court granted the requested temporary restraining order requiring DIRECTV (and its agents and those who act in active concert or participation with DIRECTV) not to deliver CBS or Fox programming to subscribers who do not live in "unserved households." (For purposes of determining whether a subscriber is "unserved," the court referred to a modified version of the Longley-Rice signal propagation model; the modifications reflect an order adopted by the FCC on February 2, 1999 (see below)). On March 12, 1999, DIRECTV and the broadcast networks announced that a settlement of this litigation had been reached whereby DIRECTV agreed to terminate its retransmission of NBC, CBS, ABC and Fox programming to ineligible subscribers that are located with a local network affiliate's "Grade A" signal strength contour as of June 30, 1999 and to terminate retransmission of such network programming to ineligible subscribers in the "Grade B" signal strength contour as of December 31, 1999. In addition, DIRECTV agreed to provide discounted antennas to subscribers whose network programming service is terminated. A subscriber's eligibility to continue to receive network programming from DIRECTV will be determined using the Individual Location Longley-Rice technology approved by the FCC in a rulemaking order adopted on February 2, 1999. The FCC's rulemaking order was adopted in a proceeding commenced in response to petitions for rulemaking filed by the NRTC and other satellite providers. Although the FCC declined to changed the definition of a signal of Grade B intensity, the agency did adopt a standardized method for predicting signal strength at individual locations that could be used in place of taking actual measurements. EchoStar has filed a petition for reconsideration of the FCC's order. In October 1998, EchoStar filed a lawsuit in the United States District Court of Colorado seeking a declaratory ruling establishing a predictive model for determining whether a household is "unserved" for purposes of the SHVA based on a "Longley-Rice" predictive model that applies a criteria of 95% of the locations receiving a Grade-B signal 95% of the time with a 50% degree of confidence. The lawsuit, which was transferred on March 24, 1999 to the same Florida court which is hearing the PrimeTime 24 and DIRECTV litigations, also asks the court to clarify the particular means (e.g., antenna height and orientation) for measuring signal strength. The effect of the FCC's February 2, 1999 rulemaking on this litigation cannot be predicted. REGULATION -- DIRECTV IS SUBJECT TO REGULATIONS THAT COULD RESULT IN A MATERIAL INCREASE IN THE FEES THAT WE WOULD HAVE TO PAY IN ORDER TO CONTINUE TO PROVIDE SERVICES TO OUR CUSTOMERS. The SHVA currently is scheduled to expire on December 31, 1999, in which case DTH operators would be required to negotiate in the marketplace to obtain the necessary copyright clearances to retransmit superstations and broadcast network programming. Legislation to extend the SHVA has been introduced in Congress. We cannot assure you that any such legislation will be passed. This legislation also provides for a reduction in the royalty rates payable under the SHVA and establishes new rules regarding the retransmission of distant and local broadcast television stations by satellite carriers. Unlike cable operators, DBS operators such as DIRECTV are free to set prices and serve customers according to their business judgment, without rate of return and other regulation. However, there are laws and regulations that affect DIRECTV and, therefore indirectly, us. As an operator of a privately owned United States satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with respect to - licensing of satellites, - avoidance of interference with other broadcasting signals, and - compliance with rules that the FCC has established specifically for DBS satellite licenses. WE COULD LOSE REVENUES IF WE HAVE OUT-OF-TERRITORY SUBSCRIBERS -- WE ARE NOT ALLOWED TO HAVE CUSTOMERS OUTSIDE OUR TERRITORIES. IF WE DO, WE COULD BE REQUIRED TO DISCONNECT SUBSCRIBERS. Just as we have exclusive DIRECTV distribution rights in our territories, we are not allowed to have customers outside our territories. In addition, DIRECTV and our company are prohibited by law from providing DIRECTV programming outside the United States. Despite our subscribers' assurance that they 27 30 receive programming within one of our Rural DIRECTV Markets, a portion of our subscribers may, in fact, be receiving DIRECTV programming outside our markets. If we must disconnect a significant portion of our subscribers because they receive services outside our Rural DIRECTV Markets, our financial condition and results of operations could be adversely affected. DEPENDENCE ON THIRD PARTY PROGRAMMERS -- WE ARE DEPENDENT ON THIRD PARTIES TO PROVIDE HIGH-QUALITY PROGRAMMING THAT APPEALS TO MASS AUDIENCES. DIRECTV's programming agreements have terms that expire on various dates with different renewal and cancellation provisions. Such agreements may not be renewed or may be canceled prior to expiration of their original term. In the event any such agreements are not renewed or are canceled, DIRECTV may not be able to obtain or develop substitute programming, or that such substitute programming would be comparable in quality, marketability or cost to our existing programming. Our ability to compete successfully will depend on DIRECTV's ability to continue to obtain desirable programming and attractively package it to its customers at competitive prices. See "Business -- DIRECTV." Pursuant to the Cable Television Consumer Protection and Competition Act of 1992 (the "Cable Act") and the FCC's rules, programming developed by vertically integrated cable-affiliated programmers generally must be offered to all multi-channel video programming distributors on nondiscriminatory terms and conditions. The Cable Act and the FCC's rules also prohibit certain exclusive programming contracts. We anticipate that DIRECTV will continue to purchase a substantial percentage of its programming from cable-affiliated programmers. Certain of the restrictions on cable-affiliated programmers will expire in 2002 unless extended by the FCC or Congress. As a result, any expiration of, amendment to, or interpretation of, the Cable Act and the FCC's rules that permits the cable industry or programmers to discriminate in the sale of programming against competing businesses, such as that of DIRECTV, could adversely affect DIRECTV's ability, and therefore our ability, to acquire programming or acquire programming on a cost-effective basis. LIMITED CONSUMER ADOPTION OF SATELLITE TELEVISION -- THE COST OF THE EQUIPMENT REQUIRED TO RECEIVE DIRECTV PROGRAMMING MAY DELAY GROWTH OF OUR SUBSCRIBER BASE. We believe that one of the largest hurdles to the mass market adoption of DBS has been the cost to the subscriber of purchasing the DBS equipment. This equipment generally costs between $99 to $299, depending upon the level of features desired and number of television sets to be connected. While the cost of such equipment has decreased over time, and we believe that the suppliers of the subscriber equipment have strong incentives to supply equipment at affordable prices as the subscriber base expands and as competition increases among equipment vendors, such costs may not continue to decrease. We believe that if the cost of the equipment remains an obstacle to increased demand for our satellite services, the growth of our subscriber base could be delayed, which could have an adverse effect on our financial condition and results of operations. Another potential hurdle to widespread adoption of DBS is that subscribers do not receive local news and sports as part of DIRECTV's programming. In order to make such programming available to our subscribers, we can install an off-air antenna upon request by the subscriber. While all of the major DBS providers, including DIRECTV, offer broadcast network channels on an a la carte or package basis, it is unclear whether FCC regulations prohibit satellite providers from selling network programming to households that can receive a signal from that network's local affiliate station using traditional off-air antennae. Certain subscribers may not be willing to purchase DBS because of this uncertainty. See "-- PrimeTime 24 Litigation." ORIGINAL ISSUE DISCOUNT -- THE HOLDERS OF THE NEW NOTES MAY SUFFER ADVERSE TAX CONSEQUENCES BECAUSE THE OUTSTANDING NOTES WERE ISSUED AT A DISCOUNT FROM THEIR PRINCIPAL AMOUNT AT MATURITY. The outstanding notes were issued at a substantial discount from their principal amount at maturity. The new notes will accrete in value on terms which are identical to those of the outstanding notes. Consequently, the holders of the new notes generally will be required to include amounts in gross income for federal income tax purposes before receiving the cash payments to which such income is attributable. 28 31 See "Certain Federal Income Tax Considerations" for a more detailed discussion of the U.S. federal income tax consequences to the holders of the new notes of the ownership and disposition of such notes. If a bankruptcy case is commenced by or against us under the U.S. Bankruptcy Code after the issuance of the notes, the claim of a holder of the notes with respect to the principal amount at maturity thereof may be limited to an amount equal to the sum of the initial offering price of the outstanding notes and that portion of the original issue discount that is not deemed to constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any original issue discount that was not amortized as of any such bankruptcy filing would constitute "unmatured interest." To the extent that the U.S. Bankruptcy Code differs from the Internal Revenue Code in determining the method of amortization of original issue discount, a holder of the notes may realize taxable gain or loss upon payment of such holder's claim in bankruptcy. YEAR 2000 COMPLIANCE -- THE SOFTWARE PRODUCTS WE CURRENTLY USE MAY NOT CONTAIN ALL NECESSARY DATA CODE CHANGES. We are in the process of assessing the impact of the Year 2000 issue on our computer systems and operations. Many existing computer systems and applications currently use two-digit date fields to designate a year. Date sensitive systems and applications may recognize the year 2000 as 1900 or not at all. The inability to recognize or properly treat the Year 2000 issue may cause computer systems and applications to fail to process critical financial and operational information correctly. This issue affects virtually all organizations and can be very costly and time consuming to correct. We have reviewed Year 2000 compliance of our internal systems and believe that such systems are Year 2000 compliant. However, we cannot assure you that all of the software products currently used by us are in fact Year 2000 compliant. We have engaged the services of a consultant to assist in our assessment of the impact of the Year 2000 issue on our computerized systems and operations. Currently, we believe our costs to successfully mitigate the Year 2000 issue will approximate $200,000. Additionally, we are in the process of conducting surveys of all of our significant vendors and other pertinent relationships to assess their readiness for Year 2000 processing. We are significantly reliant on contracted data processing services from the NRTC and DIRECTV for customer service, billing and remittance processing pursuant to our contractual relationship with the NRTC. The NRTC has informed us that the computer systems that provide such services are not currently Year 2000 compliant, but that the majority of such systems will be compliant by September 1999. With respect to the NRTC's billing and authorization systems, the NRTC has informed us that a small number of Year 2000 issues exist, and that the appropriate changes have been requested and scheduled for development action. We are reliant on DIRECTV for distribution of our DBS programming services. The NRTC has informed us that DIRECTV expects to establish Year 2000 compliance for its billing and authorization systems by the end of the second calendar quarter of 1999. In addition to the NRTC and DIRECTV, we are significantly reliant on other parties (such as its suppliers of DBS equipment) for the successful conduct of our business. As previously described, we are in the process of ascertaining the Year 2000 readiness of these third-parties. If our plan is not successful or is not completed in a timely manner, the Year 2000 issue could significantly disrupt our ability to transact business with our customers and suppliers, and could have a material impact on our operations. There can be no assurance that the systems of the NRTC, DIRECTV and other companies with which our systems interact or depend will be compliant by the end of 1999, or that any such third party failure would not have an adverse effect on our business or our operations. To date, we have not implemented a Year 2000 contingency plan. Contingency plans for mission critical systems primarily involve development and testing of manual procedures or the use of alternate systems. Viable contingency plans are difficult to develop for certain third party failures, especially in high- technology industries such as the DBS industry, due to the lack of alternate suppliers. However, we will continue to monitor the progress of third party remediation efforts and contingency plans. Substantial completion of our Year 2000 contingency plan is expected in mid-1999. There can be no assurance that 29 32 such contingency plans will successfully mitigate any adverse effects that the Year 2000 issue may have on our operations. LACK OF PUBLIC MARKET -- CURRENTLY THERE IS NO ACTIVE MARKET FOR THE OUTSTANDING NOTES AND WE CANNOT ASSURE YOU THAT ONE WILL DEVELOP FOR THE NEW NOTES. The new notes are being offered in exchange for the outstanding notes. The outstanding notes were sold to their initial purchasers on February 19, 1999. Those initial purchasers resold the outstanding notes to Qualified Institutional Buyers (as defined in Rule 144A under the Securities Act) and pursuant to offers and sales outside the United States within the meaning of Regulation S under the Securities Act. The outstanding notes are eligible for trading in the Private Offerings, Resale and Trading through Automated Linkages (PORTAL) market. The new notes are securities for which there is currently no trading market. If the new notes were to trade, they may trade at prices that may be lower than their then accreted value depending on many factors, including prevailing interest rates and the markets for similar securities, general economic conditions and our financial condition, performance and prospects. We do not intend to apply for listing of the new notes on any securities exchange or the Nasdaq National Market. Accordingly, we cannot assure you that a liquid trading market will develop for the new notes. CONSEQUENCES OF THE EXCHANGE OFFER TO HOLDERS OF THE OUTSTANDING NOTES -- CONSUMMATION OF THE EXCHANGE OFFER MAY HAVE AN ADVERSE EFFECT ON YOUR ABILITY TO TRANSFER YOUR OUTSTANDING NOTES TO THE EXTENT THAT THEY REMAIN OUTSTANDING. When we issued the outstanding notes we entered into a registration rights agreement pursuant to which we agreed to register the outstanding notes under the Securities Act. If this exchange offer is completed, we will have fulfilled such obligation and we will no longer be required to register any remaining outstanding notes. To the extent that you are a holder of outstanding notes that remain outstanding after this exchange offer, you will have to rely on exemptions from the registration requirements of applicable securities laws to resell such outstanding notes. In addition, after this exchange offer, the new notes and the outstanding notes will contain identical terms, except that the outstanding notes will continue to be subject to the existing transfer restrictions. Therefore, if you do not tender your outstanding notes in this exchange offer, your ability transfer such outstanding notes in the future may be diminished. 30 33 USE OF PROCEEDS We will not receive any proceeds from the issuance of the new notes. We did, however, receive proceeds, after deducting the initial purchasers' discount and fees and expenses of such offering, of $95.3 million from the February 19, 1999 issuance of the outstanding notes. Approximately $53.0 million of such net proceeds were used on February 19, 1999 to repay outstanding indebtedness under our credit facility. The remainder of such net proceeds will be used to: - to finance the acquisition of Rural DIRECTV Markets and related costs and expenses, and - for our general corporate purposes and working capital needs. Pending such use, the offering proceeds will be invested in short-term money market instruments and other similar investments. THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER Holders of the outstanding notes are entitled to registration rights under the registration rights agreement that we entered into in connection with the issuance of those notes. Pursuant to that registration rights agreement, we must file with the Commission a registration statement covering an offer by us to exchange new registered notes for the outstanding notes. This exchange offer, if completed, will satisfy our obligations under the registration rights agreement. Upon the terms and conditions described in this prospectus and in the accompanying letter of transmittal, we will accept all outstanding notes properly tendered for exchange and not withdrawn prior to 5:00 p.m., New York City time, on the , 1999, or a later date to which we extend our offer. We will issue $1,000 principal amount at maturity of new notes in exchange for each $1,000 principal amount at maturity of outstanding notes accepted in this exchange offer. Holders may tender some or all of their outstanding notes under this exchange offer. Based on an interpretation by the staff of the Commission that is set forth in no-action letters issued by the staff to third parties, we believe that the new notes may, in most circumstances, be offered for resale, resold and otherwise transferred by their holders without compliance with the registration and prospectus delivery provisions of the Securities Act. A holder of new notes must, however, comply with the registration and prospectus delivery provisions of the Securities Act in order to offer for resale, resell or otherwise transfer its new notes if: (1) that holder is an "affiliate" (within the meaning of Rule 405 under the Securities Act) of ours; (2) that holder's new notes are acquired outside the ordinary course of its business; or (3) that holder has any arrangement with any person to participate in the distribution of its new notes. See Morgan Stanley & Co., Inc., SEC No-Action Letter (available June 5, 1991), Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13, 1988), and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993). If any person were to participate in this exchange offer for the purpose of distributing securities in a manner not permitted by the Commission's interpretation, that person - could not rely on the position of the staff of the Commission enunciated in Exxon Capital Holdings Corporation or similar interpretive letters, and - must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a resale transaction. 31 34 Each broker-dealer that receives new notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of new notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for outstanding notes where the outstanding notes were acquired by a broker-dealer as a result of market-making activities or other trading activities. See "Plan of Distribution." On the date of this prospectus, there was $193,100,000 aggregate principal amount at maturity of outstanding notes outstanding. This prospectus, together with the letter of transmittal, is being sent to all registered holders of outstanding notes on the date of this prospectus. We shall be deemed to have accepted validly tendered outstanding notes when, as and if we have given written notice of acceptance to the exchange agent under the indenture. The exchange agent will act as agent for the tendering holders of outstanding notes for the purposes of receiving the new notes from us and delivering those new notes to the exchanging holders. If any tendered outstanding notes are not accepted for exchange because of an invalid tender, certificates for any unaccepted outstanding notes will be returned, without expense, to the tendering holder as promptly as practicable after the expiration date of this exchange offer. If outstanding notes are not tendered, they shall remain outstanding and shall continue to accrete in value from their date of issue, February 19, 1999, at a rate of 13 1/2% per year. If the exchange offer is completed, we will no longer be required to register the outstanding notes. If so, holders of outstanding notes seeking to sell them would have to rely on exemptions from the registration requirements of the securities laws, including the Securities Act. See "Risk Factors -- Consequences of the Exchange Offer to Non-Tendering Holders of the Outstanding Notes." To extend the expiration date of this exchange offer, we will notify the exchange agent of any extension by written notice and will mail to the record holders of outstanding notes an announcement, prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. That announcement would state that we are extending the exchange offer for a specified period of time. In addition, we will issue notice of each extension by press release or other public announcement as contemplated by the provisions of Rule 14e-1 under the Exchange Act of 1934. ACCRETION OF THE NEW NOTES Cash interest will not accrue or be payable on the new notes until March 1, 2004. Prior to March 1, 2004, the new notes will accrete in value at a rate of 13 1/2% per year. Thereafter, cash interest on the new notes will be payable semiannually on March 1 and September 1 of each year, commencing September 1, 2004, at a rate of 13 1/2% per year. Outstanding notes which are validly tendered and accepted for exchange will continue to accrete in principal amount at a rate of 13 1/2% per year to, but excluding, the date of issuance of the new notes. Any outstanding notes not tendered or accepted for exchange will continue to accrete in principal amount at the rate of 13 1/2% per year in accordance with their terms. The accreted value of the new notes upon issuance will be the accreted value of the outstanding notes accepted for exchange immediately prior to issuance of the new notes. PROCEDURES FOR TENDERING Your tender to us of outstanding notes under one of the procedures described below will constitute an agreement between you and us for the exchange of outstanding notes for new notes on the terms and conditions set forth in this prospectus and in the letter of transmittal which accompanies this prospectus. 32 35 You may tender your outstanding notes by (1) properly completing and signing the letter of transmittal or a facsimile of it and delivering one of the two, together with the certificate or certificates representing the outstanding notes being tendered and any required signature guarantees, to the exchange agent at its address shown on the back cover of this prospectus on or before the expiration date for this offer (or complying with the procedure for book-entry transfer described below) or (2) complying with the guaranteed delivery procedures described below. If tendered outstanding notes are registered in the name of the signer of the letter of transmittal and the new notes to be issued in exchange for them are to be issued (and any untendered outstanding notes are to be reissued) in the name of the registered holder (which term, for the purposes described herein, shall include any participant in the Depository Trust Company whose name appears on a security listing as the owner of outstanding notes), the signature of such signer need not be guaranteed. In any other case, the tendered outstanding notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to us and duly executed by the registered holder. In addition, the signature on the endorsement or instrument of transfer must be guaranteed by one of the following (each an "Eligible Institution"): - a commercial bank or trust company located or having an office or correspondent in the United States, or - by a member firm of a national securities exchange or of the National Association of Securities Dealers, Inc., which firm must also be a member of or participant in the Securities Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion Program. If the new notes and/or outstanding notes not exchanged are to be delivered to an address other than that of the registered holder appearing on the note register for the outstanding notes, the signature in the letter of transmittal must be guaranteed by an Eligible Institution. The method of delivery of outstanding notes and all other documents is at the election and risk of the holder. If sent by mail, it is recommended that registered mail, return receipt requested, be used, proper insurance be obtained, and the mailing be made sufficiently far in advance of the expiration date to permit delivery to the exchange agent on or before the expiration date. The exchange agent will make a request promptly after the date of this prospectus to establish accounts with respect to the outstanding notes at DTC for the purpose of facilitating the exchange offer. Subject to the establishment of those accounts, any financial institution, that is a participant in DTC may make book-entry delivery of outstanding notes by causing that book-entry transfer facility to transfer outstanding notes into the exchange agent's account with respect to the outstanding notes in accordance with DTC's procedures for transfer. Although delivery of outstanding notes may be effected through book-entry transfer into the exchange agent's accounts at DTC, an appropriate letter of transmittal with any required signature guarantee and all other required documents must in each case be transmitted to and received or confirmed by the exchange agent. These documents should be sent to the exchange agent at its address set forth on the back cover page of this prospectus on or before the expiration date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided for those procedures. If a holder desires to accept the exchange offer, and time will not permit a letter of transmittal or outstanding notes to reach the exchange agent before the expiration of the exchange offer, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if the 33 36 exchange agent has received at its office shown on the back cover of this prospectus on or before expiration, a letter, telegram or facsimile transmission from an Eligible Institution setting forth: - the name and address of the tendering holder, - the names in which the outstanding notes are registered, and - if possible, the certificate numbers of the outstanding notes to be tendered. This letter, telegram or facsimile must state that the tender is being made by this means. In addition, the letter, telegram or facsimile must guarantee that within five New York Stock Exchange trading days after its transmission by the Eligible Institution, the outstanding notes, in proper form for transfer (or a confirmation of book-entry transfer of the outstanding notes into the exchange agent's account at the book-entry transfer facility), will be delivered by the Eligible Institution together with a properly completed and duly executed letter of transmittal (and any other required documents). Unless outstanding notes being tendered by the above-described method are deposited with the exchange agent within the time period described above (accompanied or preceded by a properly completed letter of transmittal and any other required documents), we may, at our option, reject the tender. Copies of a notice of guaranteed delivery which may be used by Eligible Institutions for the purposes described in this paragraph are available from the exchange agent. A tender will be deemed to have been received on the date that (1) the tendering holder's properly completed and duly signed letter of transmittal accompanied by the outstanding notes (or a confirmation of book-entry transfer of the outstanding notes into the exchange agent's account at the book-entry transfer facility) is received by the exchange agent, or (2) A notice of guaranteed delivery or letter, telegram or facsimile transmission to similar effect (as provided above) from an Eligible Institution is received by the exchange agent. Issuances of new notes in exchange for outstanding notes tendered pursuant to a notice of guaranteed delivery or letter, telegram or facsimile transmission to similar effect (as provided above) by an Eligible Institution will be made only against deposit of the letter of transmittal (and any other required documents) and the tendered outstanding notes. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of outstanding notes will be determined by us. Our determination will be final and binding. We reserve the absolute right to reject any or all tenders not in proper form or the acceptance for exchange of which may, in our counsel's opinion, be unlawful. We also reserve the absolute right to waive any of the conditions of this exchange offer or any defect or irregularity in the tender of any outstanding notes. None of our company, the exchange agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give such notification. By tendering, you will represent to us that, among other things, (1) the new notes acquired pursuant to the exchange offer are being obtained in the ordinary course of your business, (2) you have no arrangement with any person to participate in the distribution of such new notes, (3) you are not an "affiliate," as defined under Rule 405 of the Securities Act, of ours, and (4) if you are a broker or a dealer (as defined in the Exchange Act), that you acquired the outstanding notes for your own account as a result of market-making on other trading activities and that you have not entered into any arrangement or understanding with us or any affiliate of ours to distribute the new notes received in the exchange offer. 34 37 WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of outstanding notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date of this tender offer. To withdraw a tender of outstanding notes, a written transmission notice of withdrawal via telegram, telex, facsimile transmission or letter must be received by the exchange agent at its address set forth herein prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. Any notice of withdrawal must - specify the name of the person having deposited the outstanding notes to be withdrawn, - identify the outstanding notes to be withdrawn (including the certificate number or numbers and principal amount at maturity of such outstanding notes), - be signed by the person having deposited the outstanding notes to be withdrawn in the same manner as the original signature on the letter of transmittal by which those outstanding notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the trustee with respect to those outstanding notes register the transfer into the name of such depositor withdrawing the tender, and - specify the name in which those outstanding notes are to be registered, if different from that of such depositor. All questions as to the validity, form and eligibility (including time of receipt) of withdrawal notices will be determined by us. Our determination shall be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to have been validly tendered for purposes of the exchange offer. No new notes will be issued with respect to outstanding notes which are withdrawn unless the outstanding notes so withdrawn are validly retendered. Any outstanding notes that have been tendered but that are not accepted for exchange will be returned to the holder without cost to the holder as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the expiration of the exchange offer. CONDITIONS This exchange offer is not dependent upon the occurrence or non-occurrence of any events or conditions other than that the exchange offer does not violate applicable law or any applicable interpretation of the staff of the Commission. EXCHANGE AGENT United States Trust Company of New York has been appointed as exchange agent for this exchange offer. Questions and requests for assistance and requests for additional copies of this prospectus or of the letter of transmittal and deliveries of completed letters of transmittal with tendered outstanding notes should be directed to the exchange agent addressed as follows: By Overnight Courier and by Hand By Hand Delivery to 4:30 PM: By Registered or Certified delivery after 4:30 PM on United States Trust Company Mail: Expiration Date: of New York United States Trust Company United States Trust Company 111 Broadway, Lower Level of New York of New York Attn: Corporate Trust Window P.O. Box 844, Cooper Station 770 Broadway, 13th Floor New York, New York 10006 Attn: Corporate Trust Services Attn: Corporate Trust Services New York, New York 10276-0844 New York, New York 10003
35 38 FEES AND EXPENSE The expenses of soliciting tenders pursuant to this exchange offer will be borne by us. The principal solicitation for tenders contemplated by this exchange offer is being made by mail. Additional solicitations may be made by our officers and regular employees and affiliates in person, by telegraph or telephone. We will not make any payments to brokers, dealers, or other persons soliciting acceptances of this exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and will reimburse the exchange agent for its reasonable out-of-pocket expenses in connection with this exchange offer. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the outstanding notes, and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with this exchange offer, including fees and expenses of the exchange agent and trustee and accounting and legal fees, but not including transfer taxes, if any, relating to the sale or disposition of the outstanding notes by a holder of the outstanding notes, will be paid by us, and are estimated in the aggregate to be $200,000. 36 39 CAPITALIZATION The following table presents our cash and total capitalization as of December 31, 1998 (1) on a historical basis, (2) on a pro forma basis to give effect to the amendment to our credit facility effected in connection with the offering of the outstanding notes, and (3) on a pro forma as adjusted basis to give further effect to the offering of the outstanding notes and the application of those offering proceeds to repay amounts outstanding under our revolving credit facility. The information set forth below should be read in conjunction with our consolidated financial statements and notes related thereto, the financial statements related to certain of the acquisitions and the pro forma financial statements and notes related thereto included elsewhere in this prospectus. See "Use of Proceeds," "Pro Forma Financial Statements," "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Description of Other Indebtedness."
AS OF DECEMBER 31, 1998 ------------------------------------ PRO FORMA HISTORICAL PRO FORMA AS ADJUSTED ---------- --------- ----------- (IN THOUSANDS) Cash and cash equivalents................................... $ 4,460 $ 4,460 $ 72,352 ======== ======== ======== Restricted cash(1).......................................... $ 51,617 $ 51,617 $ 46,275 ======== ======== ======== Long-term debt (including current maturities): Bank debt................................................. $ 67,000 $ 77,789 $ 35,000 Seller notes payable...................................... 15,407 15,407 15,407 Other..................................................... 797 797 797 12 3/8% Notes............................................. 195,000 195,000 195,000 13 1/2% Notes............................................. -- -- 100,049 -------- -------- -------- Total long-term debt.............................. 278,204 288,993 346,253 Stockholder's equity: Common Stock, par value $.01; 1,000 shares authorized, 100 shares issued and outstanding.......................... -- -- -- Additional paid-in capital................................ 97,600 97,600 97,600 Accumulated deficit....................................... (81,678) (81,678) (84,614) -------- -------- -------- Total stockholder's equity........................ 15,922 15,922 12,986 -------- -------- -------- Total capitalization.............................. $294,126 $304,915 $359,239 ======== ======== ========
- --------------- (1) Includes the amount placed in escrow in connection with Systems' offering of 12 3/8% notes to fund, together with the interest received thereon, the first four scheduled interest payments on Systems' 12 3/8% notes. For the historical presentation, includes $5.3 million deposited with the administrative agent under our credit facility to fund a contingent reduction of availability under the term loan facility that did not occur under the terms of our credit facility, as amended in connection with the offering of the outstanding notes. 37 40 PRO FORMA FINANCIAL STATEMENTS GENERAL Golden Sky DBS was formed on February 2, 1999 for the purpose of issuing the outstanding notes. Upon formation, Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for $100 and all of the capital stock of Systems, Holdings' wholly-owned operating subsidiary. The following pro forma statement of operations data present our results of operations adjusted for - acquisitions completed during the applicable period (excluding 11 acquisitions that were immaterial individually and in the aggregate) and related financings, - Systems' offering of 12 3/8% notes, - the amendment to our credit facility that became effective at the same time as the closing of the offering of the outstanding notes, and - the offering of the outstanding notes and the application of those offering proceeds. These pro forma statements of operations data are presented as if such transactions had occurred at the beginning of 1998. The following pro forma balance sheet data present our financial position adjusted to reflect - the amendment to our credit facility that became effective at the same time as the closing of the offering of the outstanding notes, and - the offering of the outstanding notes and the application of those offering proceeds. The pro forma balance sheet data is presented as if such transactions had occurred as of December 31, 1998. Our historical information for the year ended December 31, 1998 was taken from our audited consolidated financial statements included elsewhere in this prospectus. The financial information for the businesses we have acquired was taken from the historical financial statements of those acquired businesses. These pro forma financial statements and notes thereto are provided for informational purposes only. They do not and cannot predict the actual or future results had such transactions been completed on the dates indicated. 38 41 GOLDEN SKY DBS, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
13 1/2% 1998 PRO FORMA NOTES PRO FORMA HISTORICAL ACQUISITIONS(1) ADJUSTMENTS(2) PRO FORMA OFFERING(3) AS ADJUSTED ---------- --------------- -------------- --------- ----------- ----------- (IN THOUSANDS) Revenue: DBS services...................... $ 74,910 $11,876 $ -- $ 86,786 $ -- $ 86,786 Lease and other................... 1,014 126 -- 1,140 -- 1,140 Other............................. -- 28 (28)(4) -- -- -- -------- ------- -------- -------- -------- -------- Total revenue....................... 75,924 12,030 (28) 87,926 -- 87,926 -------- ------- -------- -------- -------- -------- Costs and Expenses: Cost of DBS services.............. 45,291 7,570 -- 52,861 -- 52,861 Other costs of revenue............ -- 21 (21)(4) -- -- -- System operations................. 11,021 1,822 -- 12,843 -- 12,843 Sales and marketing............... 32,201 399 -- 32,600 -- 32,600 (12) General and administrative........ 7,431 39 -- 7,470 -- 7,470 Depreciation and amortization..... 23,166 490 (490)(5) 29,475 -- 29,475 6,309 (6) -------- ------- -------- -------- -------- -------- Total costs and expenses............ 119,110 10,341 5,798 135,249 -- 135,249 -------- ------- -------- -------- -------- -------- Operating income (loss)............. (43,186) 1,689 (5,826) (47,323) -- (47,323) Non-operating items: Interest and investment income.... 1,573 222 (222)(7) 1,573 -- 1,573 Interest expense.................. (20,537) (139) 139 (7) (33,963) (14,007)(10) (44,770) (13,426)(8) 3,200 (11) Gain on sale of wireless TV rights......................... -- 1,956 (1,956)(4) -- -- -- Net profit on asset disposal...... -- 8,421 (8,421)(4) -- -- -- -------- ------- -------- -------- -------- -------- Total non-operating items........... (18,964) 10,460 (23,886) (32,390) (10,807) (43,197) -------- ------- -------- -------- -------- -------- Net income (loss) before income taxes............................. (62,150) 12,149 (29,712) (79,713) (10,807) (90,520) -------- ------- -------- -------- -------- -------- Income taxes...................... -- (3,074) 3,074 (9) -- -- -- -------- ------- -------- -------- -------- -------- Net income (loss) before extraordinary charge.............. $(62,150) $ 9,075 $(26,638) $(79,713) $(10,807) $(90,520) ======== ======= ======== ======== ======== ========
39 42 - --------------- (1) Includes the operations of the 1998 acquisitions from January 1, 1998 through the acquisition dates. (2) Includes pro forma adjustments to effect the acquisitions and the amendment to our credit facility effected in February 1999. (3) Reflects the impact of the issuance of the outstanding notes as if such issuance had occurred at the beginning of the period. (4) To eliminate the results of operations not acquired. (5) To give effect to the elimination of historical amortization of intangible assets. (6) To give effect to the amortization of intangible assets recorded in purchase accounting. Intangible assets consist of non-compete agreements, customer lists, and DIRECTV distribution rights. The non-compete agreements are amortized over the contract period (three years), while customer lists are amortized over five years. DIRECTV distribution rights are amortized over the remaining useful life of satellites (expiring in 2008) generally 10-12 years depending upon the date of the acquisition. (7) To give effect to the elimination of interest income and expense related to operations not acquired. (8) To give effect to interest expense on borrowings under Systems' 12 3/8% notes, seller notes payable and our credit facility assumed to be incurred to finance acquisitions as if such borrowings had occurred at the beginning of the period at their respective historical interest rates. (9) To give effect to the elimination of historical income tax expense (benefit) of acquired entities. (10) Reflects aggregate interest expense and amortization of deferred financing costs associated with the offering of the outstanding notes. (11) To give effect to the reduction of interest expense as a result of the paydown of debt from the contribution of the proceeds from the offering of the outstanding notes. (12) Includes net equipment and installation subsidies of $15,059 (proceeds from the sale and installation of DBS equipment of $11,648, net of related costs of $26,707). 40 43 GOLDEN SKY DBS, INC. PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998
13 1/2% NOTES PRO FORMA HISTORICAL OFFERING AS ADJUSTED ---------- -------- ----------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.............................. $ 4,460 $ 63,300 (1) $ 72,352 (750)(2) 5,342 (3) Restricted cash, current portion....................... 28,083 (5,342)(3) 22,741 Subscriber receivables, net............................ 8,632 -- 8,632 Other receivables...................................... 2,465 -- 2,465 Inventory.............................................. 10,146 -- 10,146 Prepaid expenses and other............................. 1,859 -- 1,859 -------- -------- -------- Total current assets..................................... 55,645 62,550 118,195 Restricted cash, net of current portion.................. 23,534 -- 23,534 Property and equipment, net.............................. 4,994 -- 4,994 Intangible assets, net................................... 233,139 -- 233,139 Deferred financing costs................................. 10,541 (2,563)(2) 13,104 Other assets............................................. 218 -- 218 -------- -------- -------- Total assets............................................. $328,071 $ 65,113 $393,184 ======== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable................................. $ 13,539 $ -- $ 13,539 Current maturities of long-term obligations............ 8,916 -- 8,916 Unearned revenue....................................... 5,574 -- 5,574 Interest payable....................................... 11,009 -- 11,009 Accrued payroll and other.............................. 1,403 -- 1,403 -------- -------- -------- Total current liabilities................................ 40,441 -- 40,441 Long-term obligations, net of current maturities: 12 3/8% Notes.......................................... 195,000 -- 195,000 13 1/2% Notes.......................................... -- 100,049 (1) 100,049 Bank debt.............................................. 67,000 (32,000)(1) 35,000 Seller notes payable................................... 6,912 -- 6,912 Other notes payable and obligations under capital leases.............................................. 376 -- 376 Minority interest...................................... 2,420 -- 2,420 -------- -------- -------- Total long-term obligations, net of current maturities... 271,708 68,049 339,757 -------- -------- -------- Total liabilities........................................ 312,149 68,049 380,198 Total stockholder's equity............................... 15,922 (2,936)(2) 12,986 -------- -------- -------- Total liabilities and stockholder's equity............... $328,071 $ 65,113 $393,184 ======== ======== ========
41 44 - --------------- (1) To give effect to the offering of the outstanding notes. (2) To give effect to deferred financing costs of $4,749 associated with the offering of the outstanding notes and deferred financing costs of $750 associated with the February 1999 amendment to our credit facility, net of the write off of the unamortized balance of deferred financing costs of $2,936 associated with our credit facility prior to its amendment. (3) To reflect the release, upon effectiveness of the amendment of our credit facility in February 1999, of amounts deposited with the administrative agent to fund a contingent reduction of availability under the term loan facility that was not required under the terms of the amendment. 42 45 SELECTED CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data as of December 31, 1996, 1997 and 1998 and for the periods then ended presented below were taken from our audited consolidated financial statements included elsewhere in this prospectus. The following information should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and our consolidated financial statements and notes thereto included elsewhere in this prospectus.
INCEPTION TO YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------ ----------- ----------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA Revenue: DBS services.......................................... $ 219 $ 16,452 $ 74,910 Lease and other....................................... 36 944 1,014 ------- ---------- ---------- Total revenue........................................... 255 17,396 75,924 Costs and Expenses: Cost of DBS services.................................. 130 9,304 45,291 System operations..................................... 26 3,796 11,021 Sales and marketing................................... 73 7,316 32,201 General and administrative............................ 1,035 2,331 7,431 Depreciation and amortization......................... 97 7,300 23,166 ------- ---------- ---------- Total costs and expenses................................ 1,361 30,047 119,110 ------- ---------- ---------- Operating loss.......................................... (1,106) (12,651) (43,186) Net interest expense.................................... (61) (3,133) (18,964) ------- ---------- ---------- Net loss before extraordinary charge.................... $(1,167) $ (15,784) $ (62,150) ======= ========== ==========
DECEMBER 31, -------------------------------------- 1996 1997 1998 ------------ ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents............................... $ 479 $ 13,632 $ 4,460 Restricted cash(1): Current............................................... -- -- 28,083 Long-term............................................. -- -- 23,534 Working capital......................................... (1,948) 3,827 15,204 Total assets............................................ 6,383 156,236 328,071 Total debt.............................................. 4,450 69,113 278,204 Stockholder's equity (deficit).......................... (1,166) 70,449 15,922
INCEPTION TO YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------ ----------- ----------- (IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA) OTHER FINANCIAL DATA EBITDA(2)............................................... $(1,009) $ (5,351) $ (20,020) Net cash used in operating activities................... (790) (3,099) (36,588) Net cash used in investing activities................... (3,231) (120,729) (159,921) Net cash provided by financing activities............... 4,500 136,981 187,337 Capital expenditures.................................... 105 998 3,317 Aggregate purchase price of acquisitions................ 5,256 129,725 124,844
43 46
INCEPTION TO YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------ ----------- ----------- (IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA) OPERATING DATA Households at end of period(3)(4)....................... 22,000 1,135,000 1,727,000 Subscribers acquired in acquisitions(4)................. 3,000 65,700 55,300 Subscribers added in existing Rural DIRECTV Markets(4)............................................ 200 22,000 80,300 Subscribers at end of period(4)(5)...................... 3,200 90,900 226,500 SAC per gross subscriber added(4)(6).................... $ 290 $ 280 $ 320 Penetration at end of period............................ 14.7% 8.0% 13.1% Ratio of earnings to fixed charges(7)................... -- -- --
- --------------- (1) Represents the amount placed in escrow in connection with the offering of System's 12 3/8% notes to fund, together with the interest received thereon, the first four scheduled interest payments on such notes. Also includes $5.3 million deposited with the administrative agent under the credit facility to fund a contingent reduction of availability under the term loan facility that did not occur under the terms of our credit facility, as amended in connection with the offering of the outstanding notes. (2) EBITDA represents earnings before interest, taxes, depreciation and amortization, extraordinary items and non-recurring charges. EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income (loss) as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized measure of performance in the communications industry and is the basis for many of our financial covenants. Further, we believe that EBITDA provides useful information regarding an entity's ability to incur and/or service debt. Increases or decreases in EBITDA may indicate improvements or decreases, respectively, in our free cash flows available to incur and/or service debt and cover fixed charges. Notwithstanding the above, EBITDA is not intended to represent cash flows for the period and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. Management expects that, because EBITDA is commonly used in the communications industry as a measure of performance, investors may use this data to analyze and compare other communications companies with our company in terms of operating performance, leverage and liquidity. EBITDA, as we calculate it is not necessarily comparable to similarly captioned amounts of other companies. (3) Pro forma households include all households acquired since our inception as of the later of December 31, 1998 or acquisition date. (4) Household and subscriber data reflect 100% of the households or subscribers comprising our Rural DIRECTV Markets, including two Rural DIRECTV Markets in which we acquired less than 100% ownership. We receive 100% of the revenue generated by all subscribers in our Rural DIRECTV Markets. (5) Pro forma subscriber data includes all subscribers acquired in acquisitions since our inception as of the later of December 31, 1998 or acquisition date. (6) Represents subscriber acquisition costs (SAC) on a per gross new subscriber activation basis (excludes acquired subscribers and does not net out disconnected subscribers). (7) The ratio of earnings to fixed charges is determined by dividing the sum of operating loss and a portion of rent expense representative of interest by the sum of interest expense and such portion of rent expense. For the periods ended December 31, 1996, 1997 and 1998, the deficiency of earnings to fixed charges was $1.2 million, $15.8 million, and $63.7 million, respectively. 44 47 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is a discussion of our historical consolidated results of operations, liquidity and capital resources. This discussion should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus. OVERVIEW We were formed in June 1996 to acquire rights to distribute DIRECTV programming services in Rural DIRECTV Markets. We are a non-voting affiliate of the NRTC. We acquired our first Rural DIRECTV Market in November 1996. Since our inception, through March 31, 1999 we have acquired 52 Rural DIRECTV Markets serving approximately 1.8 million households. The aggregate purchase price for these acquisitions totaled approximately $267.1 million, or approximately $149 per household. Following each acquisition, we created a strong local presence in such Rural DIRECTV Market. We have established 71 offices in our territories and have established dealer relationships with over 350 local retailers of DBS equipment. We are continually evaluating acquisition prospects and we expect to continue to enter into acquisition agreements to purchase additional Rural DIRECTV Markets consistent with our growth strategy. In addition to growth by acquisitions, we have increased our subscriber base through increased penetration of our Rural DIRECTV Markets. We believe that there is a substantial opportunity to increase penetration through local marketing. Most of the NRTC members from which we acquire Rural DIRECTV Markets generally have not engaged in significant marketing efforts, but rather have relied primarily on the consumer to take the initiative to acquire service. We have experienced net losses as well as negative EBITDA and operating cash flows from operations since our inception. These operating shortfalls are primarily the result of our rapid subscriber growth and acquisitions of Rural DIRECTV Markets. In particular, we have incurred significant sales and marketing expense in our effort to rapidly build our subscriber base. Many of these expenses, which are expensed as incurred and include advertising and promotional expenses, sales commissions and DBS equipment and installation subsidies, are incurred at or before the time a new subscriber is activated. As a result, revenue attributable to new subscribers lags the expense incurred in acquiring them. The impact of this lag generally increases with the rate at which we add subscribers. Our rapid subscriber growth and related subscriber acquisition costs have been significant contributors to our net losses and negative EBITDA experienced to date. We believe that our subscriber acquisition costs will continue to negatively affect our operating results for at least the next year as we continue to add new subscribers. However, as long as a subscriber remains in service, future operating results benefit from a recurring monthly revenue stream with minimal additional sales and marketing expense. Because we have experienced a relatively low rate of churn (our 1998 annual churn rate was approximately 9%), we believe that our investment in building our subscriber base rapidly will enhance our EBITDA and operating results in the longer term. EBITDA represents earnings before interest, taxes, depreciation and amortization, extraordinary items and nonrecurring charges. EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income (loss) as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized measure of performance in the communications industry and is the basis for many of our financial covenants. Further, we believe that EBITDA provides useful information regarding an entity's ability to incur and/or service debt. Increases or decreases in EBITDA may indicate improvements or decreases, respectively, in our free cash flows available to incur and/or service debt and cover fixed charges. Notwithstanding the above, EBITDA is not intended to represent cash flows for the period and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. Management expects that, because EBITDA is commonly used in the communications industry as a measure of performance, investors may use this data to analyze and compare other communications companies with us in terms of operating performance, 45 48 leverage and liquidity. EBITDA as calculated by us is not necessarily comparable to similarly captioned amounts of other companies. During the year ended December 31, 1997: - we used net cash of $3.1 million in operating activities; - used net cash of $120.7 million in investing activities; and - provided net cash of $137.0 million from financing activities. During the year ended December 31, 1998: - we used net cash of $36.6 million in operating activities; - used net cash of $159.9 million in investing activities; and - provided net cash of $187.3 million from financing activities. As a result of our historical and anticipated significant growth rate, our historical operating results may not be comparable from period to period. RESULTS OF OPERATIONS The following table presents some of the items from our consolidated statements of operations as a percentage of total revenue for the periods noted.
YEARS ENDED INCEPTION TO DECEMBER 31, DECEMBER 31, --------------- 1996 1997 1998 ------------ ----- ----- Revenue: DBS services.............................................. 85.9% 94.6% 98.7% Lease and other........................................... 14.1 5.4 1.3 ------ ----- ----- Total revenue............................................... 100.0% 100.0% 100.0% Costs and Expenses: Costs of DBS services..................................... 51.0% 53.5% 59.7% System operations......................................... 10.2 21.8 14.5 Sales and marketing....................................... 28.6 42.0 42.4 General and administrative................................ 405.9 13.4 9.8 Depreciation and amortization............................. 38.0 42.0 30.5 ------ ----- ----- Total costs and expenses.................................... 533.7 172.7 156.9 ------ ----- ----- Net interest expense........................................ (23.9) (18.0) (25.0) Net loss.................................................... (457.6)% (90.7)% (81.9)% ====== ===== =====
Revenue. We earn revenue by providing DIRECTV programming services to subscribers within our Rural DIRECTV Markets. DBS services revenue includes any combination of various monthly program service plans, additional monthly premium channel program upgrades, seasonal sports programming packages, one-time event programming on a pay-per-view basis, and miscellaneous fee revenue related to providing programming to subscribers. Lease and other revenue principally is comprised of revenue from the rental of DBS equipment to subscribers. Costs of DBS Services. Our largest cost of providing service to our subscribers is the wholesale cost of DIRECTV programming and related services. The principal components of programming costs include miscellaneous service fees and programming costs paid to the NRTC, and a 5% royalty based on programming revenue paid to DIRECTV. System Operations. System operations expenses include costs of our national call center operations, field office operations and other subscriber service expenses. We expect that these expenses will increase as we continue to make acquisitions and open additional field offices. However, many of these costs are fixed in nature, and we do not expect that these expenses will increase in direct proportion to revenue. 46 49 Sales and Marketing. Sales and marketing expenses include such costs as advertising, promotional expenses, marketing personnel expenses, commission expenses to our employees and outside sales agents, net equipment and installation costs, and other marketing overhead costs. We subsidize the cost to the consumer of DBS equipment, as well as the cost of installation of DBS equipment. Equipment and installation revenues, and related expenses, are recognized upon delivery and installation of DBS equipment. Net transaction costs associated with the sale and installation of DBS equipment are reported as a component of sales and marketing expenses in our statement of operations. We invest significantly to develop our sales and distribution systems and to acquire new subscribers. A large part of sales and marketing expense is comprised of costs related to the addition of new subscribers. Although we anticipate continuing to incur such costs as we build our subscriber base, these costs are not expected to increase in direct proportion to revenue. General and Administrative. General and administrative expenses include corporate general office and administration expenses incurred primarily at our Kansas City corporate office. We expect that these expenses will increase as we grow and continue to expand our infrastructure. However, since many of these expenses are fixed in nature, general and administrative expenses are not expected to increase in direct proportion to increases in subscribers and revenue. Depreciation and Amortization. Depreciation and amortization includes amortization of intangible assets associated with acquisitions and depreciation of property and equipment. Income Taxes. Systems elected Subchapter S Corporation status in 1996. As an S Corporation, it was generally not directly subject to income taxation and recognized no income tax expense or benefit as an S corporation. On February 12, 1997, Systems terminated its Subchapter S Corporation status, and became subject to income taxation as a C Corporation under Subchapter "C" of the Internal Revenue Code. We have recognized no income tax benefits in any of the periods presented because we have incurred operating losses in all periods, and realization of future tax benefits is uncertain. Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997. Revenue. DBS services revenue for the year ended December 31, 1998 totaled $74.9 million, which represented a 355% increase as compared to the prior year. This increase was principally attributable to the increase in the number of subscribers. The average number of subscribers during 1998 increased to approximately 155,200, compared to approximately 33,600 during 1997. Average monthly programming revenue per subscriber approximated $40 and $41 during those same periods. Costs of DBS Services. Costs of DBS services increased $36.0 million, or 387%, during 1998, to $45.3 million. This increase is consistent with the increase in the average number of subscribers. As a percentage of DBS services revenue, the costs of DBS services increased to 60% during 1998, compared to 57% in 1997. This increase resulted largely from increased programming costs. System Operations. System operations costs totaled $11.0 million for the year ended December 31, 1998, a $7.2 million increase, or 190%, over 1997. These costs rose as a result of the increased number of field offices and related activity resulting from our continued acquisition of Rural DIRECTV Markets, as well as from subscriber growth. As a percentage of total revenue, system operations expenses declined to 14.5% for the year ended December 31, 1998, from 21.8% during the year ended December 31, 1997. The decrease in system operations expenses as a percentage of total revenues resulted from the increases in subscribers and revenues as previously described. Sales and Marketing. Sales and marketing expenses totaled $32.2 million during the year ended December 31, 1998, an increase of $24.9 million compared to the previous year. This increase principally resulted from the 265% increase in new subscriber activations during 1998, as compared to 1997. Sales and marketing costs per new subscriber activation approximated $320 and $280 during the years ended December 31, 1998 and 1997, respectively. 47 50 While there can be no assurance, during 1999 we expect that our subscriber acquisition costs, on a per new subscriber activation basis, generally will approximate 1998 levels. However, such costs may exceed historical levels to the extent that: - competition for new subscribers intensifies and we decide to increase our subscription acquisition costs as a result thereof; - we participate in DIRECTV national promotions that result in higher subscriber acquisition costs than those we typically experience; and - we opt to increase our subscriber acquisition costs in response to specific business opportunities (such as the conversion of Primestar subscribers -- see "-- Liquidity and Capital Resources"). Advertising expenses totaled $5.1 million during the year ended December 31, 1998, compared to $1.4 million during 1997. The increase in advertising expenses of $3.7 million resulted from our increased size and marketing activities. General and Administrative. During the year ended December 31, 1998, general and administrative expenses totaled $7.4 million, compared to $2.3 million during 1997. The increase in general and administrative expenses resulted from the addition of administrative resources necessary to support our growth. As a percentage of total revenue, general and administrative expenses decreased to 9.8% during the year ended December 31, 1998, from 13.4% during 1997. This decrease reflects the continued leveraging of these costs, which are partially fixed in nature, over increased subscribers and revenues. Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for the year ended December 31, 1998 totaled negative $20.0 million, compared to EBITDA of negative $5.4 million during the same period in 1997. This increase in negative EBITDA principally resulted from the increases in sales and marketing activities and related new subscriber activations previously described. During the year ended December 31, 1998: - we used net cash of $36.6 million in operating activities; - used net cash of $159.9 million in investing activities; and - provided net cash of $187.3 million from financing activities. During the year ended December 31, 1997: - we used net cash of $3.1 million in operating activities; - used net cash of $120.7 million in investing activities; and - provided net cash of $137.0 million from financing activities. Depreciation and Amortization. Depreciation and amortization expenses increased $15.9 million to $23.2 million during the year ended December 31, 1998, compared to $7.3 million during the year ended December 31, 1997. This increase resulted from higher intangible assets balances, which have resulted from our acquisition of additional Rural DIRECTV Markets. Interest Expense. Interest expense totaled $20.5 million during the year ended December 31, 1998 and $3.2 million during 1997. This increase of $17.3 million primarily resulted from higher outstanding debt balances and, to a lesser degree, from an increase in weighted-average interest costs. Year Ended December 31, 1997 Compared to Period from Inception to December 31, 1996 Revenue. DBS services revenue for the year ended December 31, 1997 increased to $16.5 million from $219,000 for the period from Inception to December 31, 1996 (the "1996 Period"). Equipment lease revenue was $944,000 for the year ended December 31, 1997, compared to $36,000 for the 1996 Period. These increases principally resulted from our operating for all of 1997 as opposed to only a portion of 48 51 1996, and from the increase in subscribers. The average number of subscribers during 1997 increased to approximately 33,600, compared to approximately 3,000 during the 1996 Period. Costs of DBS Services. Costs of DBS services totaled $9.3 million for the year ended December 31, 1997, compared to $130,000 for the 1996 Period. The increase in the costs of DBS services resulted from our operating for all of 1997 as opposed to only a portion of 1996 and corresponds to the large increase in subscribers we added in 1997. As a percentage of DBS services revenue, the costs of DBS services decreased to 57% for the year ended December 31, 1997, compared to 59% for the 1996 Period. This decrease was primarily due to a change in subscriber revenue mix toward packages with higher margins. System Operations. System operations expenses totaled $3.8 million for the year ended December 31, 1997 and $26,000 for the 1996 Period. These expenses rose as a result of our being operational during all of 1997 and from the increase in the number of field offices and related activity during 1997. We opened our first two field offices in November 1996 and had a total of 36 field offices as of December 31, 1997. Sales and Marketing. Sales and marketing expenses totaled $7.3 million for the year ended December 31, 1997 and $73,000 for the 1996 Period. The increase of $7.2 million in sales and marketing expenses resulted from our operating for all of 1997 and from the increase in the size and scope of our operations. Advertising expenses were $1.4 million for the year ended December 31, 1997, compared to $33,000 during the 1996 Period. General and Administrative. General and administrative expenses approximated $2.3 million for the year ended December 31, 1997 and $1.0 million for the 1996 Period. The increase of $1.3 million in general and administrative expenses resulted from our operating for all of 1997 and from our growth. Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for the year ended December 31, 1997 totaled negative $5.4 million, compared to EBITDA of negative $1.0 million during the 1996 Period. This increase in negative EBITDA principally resulted from our operating for all of 1997 and from the increases in sales and marketing activities and related new subscriber activations previously described. During the year ended December 31, 1997: - we used net cash of $3.1 million in operating activities; - used net cash of $120.7 million in investing activities; and - provided net cash of $137.0 million from financing activities. During the 1996 Period: - we used net cash of $790,000 in operating activities; - used net cash of $3.2 million in investing activities; and - provided net cash of $4.5 million from financing activities. Depreciation and Amortization. Depreciation and amortization totaled $7.3 million for the year ended December 31, 1997, compared to $97,000 during the 1996 Period. The increase in depreciation and amortization expense of $7.2 million primarily reflects increased amortization of intangible assets resulting from our acquisition activity during 1997, as well as our operating for all of 1997. Interest Expense. Interest expense amounted to $3.2 million for the year ended December 31, 1997 and $62,000 for the 1996 Period. The increase in interest expense of $3.1 million resulted primarily from our operating for all of 1997 and from increased borrowings. Bank borrowings at December 31, 1997 totaled approximately $60.0 million and were incurred to fund acquisitions and, to a lesser extent, working capital needs resulting from our growth during the year. 49 52 LIQUIDITY AND CAPITAL RESOURCES Our operations require substantial amounts of capital for - the acquisition of additional Rural DIRECTV Markets, - financing subscriber growth (including subsidizing DBS equipment and installation, marketing and selling expenses), - investments in, and maintenance of, field offices in our Rural DIRECTV Markets, - financing infrastructure development costs necessary to support the growth of our business, and - the funding of start-up losses and other working capital requirements. Our capital expenditures, inclusive of acquisitions of Rural DIRECTV Markets, totaled $128.2 million and $130.7 million during the years ended December 31, 1998 and 1997, respectively, and $5.4 million during the 1996 Period, respectively. During those same periods, net cash flows used in operations totaled $36.6 million, $3.1 million and $790,000, respectively. To date, our acquisitions, subscriber growth and operations have been financed from borrowings under our bank credit facilities, proceeds from Systems offering of 12 3/8% notes, proceeds from the issuance of capital stock, and, to a lesser extent, the issuance of promissory notes to sellers of Rural DIRECTV Markets. During the year ended December 31, 1998 net cash flows from financing activities totaled $187.3 million, which was comprised of: - net proceeds of $189.2 million from the offering of Systems' 12 3/8% notes; - net borrowings of $7.0 million under our bank credit facilities; - deferred financing costs of $5.2 million; and - $3.7 million of repayments on our other indebtedness. In 1997 net cash flows from financing activities totaled $137.0 million, comprised of: - $81.1 million from the issuance of preferred stock; - deferred financing costs of $3.3 million; and - $59.2 million of net borrowings under our bank credit facilities and other indebtedness. Credit Facility In May 1998, we entered into our credit facility, which provides for a $150.0 million line of credit to fund acquisitions and working capital requirements. Of this amount, $35.0 million is in the form of a term loan facility and $115.0 million is in the form of a revolving credit facility (including a letter of credit sub-limit of $40.0 million). In connection with our February 1999 13 1/2% notes offering, we entered into an amendment to such credit agreement. After completion of our 13 1/2% notes offering, we had (1) fully utilized the entire $35.0 million of term loan availability, (2) utilized approximately $12.9 million of the letter of credit sub-facility and (3) had no outstanding borrowings under the revolving credit line. The term loan amortizes in specified quarterly installments from March 31, 2002 through maturity on December 31, 2005. Availability of revolving loan borrowings reduces by specified amounts over the period from March 31, 2001 through maturity on September 30, 2005. Borrowings under our credit facility bear interest at variable rates calculated on a base rate, such as the prime rate or LIBOR, plus an applicable margin with reductions, under certain circumstances, based on leverage. See "Description of Other Indebtedness." 50 53 Our credit facility contains a number of significant covenants that, among other things, limit our ability to incur additional indebtedness and guaranty obligations, create liens and other encumbrances, make certain payments, investments, loans and advances, pay dividends or make other distributions in respect of our capital stock, sell or otherwise dispose of assets, make capital expenditures, merge or consolidate with another entity, create subsidiaries, make amendments to our organizational documents or transact with affiliates. Our credit facility also contains a number of financial covenants that will require us to meet certain financial ratios and financial condition tests. These financial covenants, in certain instances, become effective at different points in time and vary over time. The covenants include limitations on indebtedness per subscriber, limitations on subscriber acquisition costs, maintenance of a minimum fixed charge coverage ratio, maintenance of minimum interest coverage ratios, and limitations on indebtedness to pro forma EBITDA ratios. Availability under the revolving credit line of our credit facility depends upon satisfaction of the various covenants as well as minimum subscriber base requirements. As of December 31, 1998, we were in compliance with all of our covenants under our credit facility. For additional information regarding our credit facility, see "Description of Other Indebtedness." 12 3/8% Notes On July 31, 1998, Systems consummated an offering of 12 3/8% Senior Subordinated Notes, which mature on August 1, 2006. Interest on Systems' 12 3/8% notes is payable in cash semi-annually on February 1 and August 1 of each year, with the first interest payment due February 1, 1999. The offering of Systems' 12 3/8% notes resulted in net proceeds of approximately $189.2 million (after payment of underwriting discounts and other issuance costs aggregating approximately $5.8 million). Approximately $45.2 million of the net proceeds of the offering of Systems' 12 3/8% notes were placed in an interest reserve account to fund the first four semi-annual interest payments (through August 1, 2000) on Systems' 12 3/8% notes. The 12 3/8% notes are unsecured senior subordinated obligations of Systems and are subordinated in right of payment to all of its existing and future senior indebtedness. The 12 3/8% notes rank pari passu in right of payment with all other existing and future senior subordinated indebtedness, if any, of Systems and senior in right of payment to all existing and future subordinated indebtedness, if any, of Systems. The 12 3/8% notes are unconditionally guaranteed, on a senior subordinated basis, as to payment of principal, premium, if any, and interest, jointly and severally, by Systems' wholly-owned subsidiaries, Argos Support Services Company and PrimeWatch, Inc., and may, under certain circumstances, be guaranteed in the future by other subsidiaries of Systems. Systems' 12 3/8% notes are redeemable, in whole or in part, at our option on or after August 1, 2003, at redemption prices decreasing from 112% during the year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to August 1, 2001, we may, at our option, redeem up to 35% of the originally issued aggregate principal amount of Systems' 12 3/8% notes, at a redemption price equal to 112.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption solely with the net proceeds of a public equity offering of Holdings or Systems yielding gross proceeds of at least $40.0 million and any subsequent public equity offerings (provided that, in the case of any such offering or offerings by Holdings, all the net proceeds thereof are contributed to Systems); provided, further, that immediately after any such redemption the aggregate principal amount of Systems' 12 3/8% notes outstanding must equal at least 65% of the originally issued aggregate principal amount of the 12 3/8% notes. The indenture governing Systems' 12 3/8% notes contains restrictive covenants that, among other things, impose limitations on our ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 12 3/8% notes, incur liens, permit restrictions on the ability of our subsidiaries to pay dividends or make certain payments to us, merge or consolidate with any other person or sell, assign, 51 54 transfer, lease, convey or otherwise dispose of all or substantially all of our assets. In the event of a change of control, as defined in the indenture governing Systems' 12 3/8% notes, each holder of the 12 3/8% notes will have the right to require us to purchase all or a portion of such holder's 12 3/8% notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. See "Description of Other Indebtedness -- The 12 3/8% Notes." 13 1/2% Notes On February 19, 1999, Golden Sky DBS consummated the offering of our outstanding 13 1/2% Senior Discount Notes due 2007, Series A. This offering resulted in net proceeds of approximately $95.3 million. Approximately $53.0 million of such net proceeds were used to repay outstanding indebtedness under our credit facility. The remainder of these net proceeds will be used to finance the acquisition of additional Rural DIRECTV Markets and for our general corporate purposes and working capital needs. The terms of the outstanding notes are identical in all material respects (including principal amount at maturity, yield to maturity and maturity) to the terms of the new notes. However, the outstanding notes, to the extent they are not tendered in this exchange offer, will continue to be subject to the transfer restrictions contained in the legend that appears on each respective note. After the consummation of this exchange offer, the aggregate principal amount at maturity of any non-tendered outstanding notes and the new notes will be $193,100,000. See "Description of the New Notes." Future Capital Requirements Our future capital requirements will depend upon a number of factors, including the extent of our acquisition activities, the rate of our subscriber growth, and the working capital needs necessary to accommodate our anticipated growth. We expect that increased investments in our administrative and computer systems will be necessary to support our increased size and continued growth. We currently subsidize a portion of the cost of DBS equipment and subscriber installations. The extent of such future subsidies may materially affect our liquidity and capital requirements. In addition, our favorable working capital position relies, in part, upon the existing terms of our agreements with the NRTC and the timing of required payments thereto. Excluding costs associated with the acquisition of additional Rural DIRECTV Markets, we anticipate that our total capital expenditures, primarily related to expanding facilities and information systems for our corporate office, customer service operations and field offices, will approximate $5.0 million during the year ended December 31, 1999. During 1999, we expect to continue our acquisitions of Rural DIRECTV Markets and to expand our marketing efforts in our existing markets in order to increase our subscriber penetration. Since December 31, 1998, we have acquired seven Rural DIRECTV Markets. These territories include approximately 116,000 households and 17,200 subscribers. The aggregate purchase price for these recent acquisitions was approximately $31.4 million. We are continually evaluating acquisition prospects and expect to enter into additional acquisition agreements and complete further acquisitions of Rural DIRECTV Markets consistent with our growth strategy. We are not yet able to assess whether and to what extent the acquisition by Hughes of USSB or by DIRECTV of Primestar may affect our future capital requirements. We are not yet able to assess whether and to what extent the acquisition by Hughes of USSB or by DIRECTV of Primestar may affect our future capital requirements. Subsequent to DIRECTV's announcement of its proposed acquisition of Primestar, EchoStar began to offer increased promotional and other incentives to Primestar customers, as well as to EchoStar retailers, to entice the conversion of Primestar subscribers to EchoStar's competing DBS service, the DISH Network. Consequently, beginning in February 1999 we increased our marketing efforts with respect to Primestar subscribers. Our increased Primestar conversion efforts include, among other things, discounted equipment and installation prices and higher sales commissions. We estimate that our subscriber acquisition costs relative to converted Primestar subscribers may approximate as much as 52 55 $400 on a per converted subscriber basis. We are unable to estimate the number of Primestar subscribers we may be able to convert to our DIRECTV service. We are highly leveraged and expect to increase our leverage as we pursue further acquisitions of Rural DIRECTV Markets by borrowing additional funds under our credit facility or otherwise, and by the issuance of other acquisition-related notes payable. The approximately $15.4 million of seller notes payable outstanding at December 31, 1998 mature as follows: $8.5 million in 1999, $1.9 million in 2000, $2.0 million in 2001, $2.0 million in 2002 and $1.0 million in 2003. See "Description of Other Indebtedness." As a holding company, Golden Sky DBS must rely on dividends and other distributions from its subsidiaries to meet its obligations. The ability of our subsidiaries to pay dividends and make other distributions and advances to us is subject to, among other things, the terms of their debt instruments and applicable law. Our credit facility and the indenture governing Systems' 12 3/8% notes contain restrictive covenants that limit the ability of our subsidiaries to pay dividends or make distributions to us. We cannot assure you that we will be in compliance with these covenants at the time of a required interest payment on the notes. We currently expect it may be difficult to generate the requisite dividend capacity to make the initial cash interest payments on the notes. Our ability to generate sufficient dividend capacity under the indenture governing Systems' 12 3/8% notes to service the notes and to comply with the financial and other covenants in our credit facility will depend upon the extent to which we pursue acquisitions, incur additional indebtedness (for which we will have substantial capacity under the notes indenture), incur operating expenses, make capital expenditures and generate adequate subscriber revenue, among other things. To the extent these vary significantly from our current expectations, it is likely that we will not be able to make our initial interest payments absent consents from our lenders and existing bondholders. Moreover, any significant adverse developments would likely preclude us from being able to access Systems' cash flow for these initial interest payments. See "Risk Factors -- Impact of Subsidiary Debt Instruments on Our Ability to Service the Notes" for a discussion of this and other factors affecting our ability to do so. There may be a number of factors, some of which may be beyond our control or ability to predict, that could require us to raise additional capital. These factors include possible acquisitions of additional Rural DIRECTV Markets, increased costs associated with potential future acquisitions of Rural DIRECTV Markets, unexpected increases in operating costs and expenses, subscriber growth in excess of that currently expected, or an increase in the cost of acquiring subscribers due to increased DBS equipment and subscriber installation subsidies, as well as from additional competition, among other things. Additional financing also may be required to meet our debt service requirements. There can be no assurance that such additional financing would be available on terms acceptable to us, or at all, and if available, that the proceeds of such financing would be sufficient to enable us to meet our debt service requirements or completely execute our business plan. YEAR 2000 COMPLIANCE We are in the process of assessing the impact of the Year 2000 issue on our computer systems and operations. Many existing computer systems and applications currently use two-digit date fields to designate a year. Date sensitive systems and applications may recognize the year 2000 as 1900 or not at all. The inability to recognize or properly treat the Year 2000 issue may cause computer systems and applications to fail to process critical financial and operational information correctly. This issue affects virtually all organizations and can be very costly and time consuming to correct. We have reviewed Year 2000 compliance of our internal systems and believe that such systems are Year 2000 compliant. However, we cannot assure you that all of the software products currently used by us are in fact Year 2000 compliant. We have engaged the services of a consultant to assist in our assessment of the impact of the Year 2000 issue on our computerized systems and operations. Currently, we believe our costs to successfully mitigate the Year 2000 issue will approximate $200,000. Additionally, 53 56 we are in the process of conducting surveys of all of our significant vendors and other pertinent relationships to assess their readiness for Year 2000 processing. We are significantly reliant on contracted data processing services from the NRTC and DIRECTV for customer service, billing and remittance processing pursuant to our contractual relationship with the NRTC. The NRTC has informed us that such computer systems that provide such services are not currently Year 2000 compliant, but that the majority of such systems will be compliant by September 1999. With respect to the NRTC's billing and authorization systems, the NRTC has informed us that a small number of Year 2000 issues exist, and that the appropriate changes have been requested and scheduled for development action. We are reliant on DIRECTV for distribution of our DBS programming services. The NRTC has informed us that DIRECTV expects to establish Year 2000 compliance for its billing and authorization systems by the end of the second calendar quarter of 1999. In addition to the NRTC and DIRECTV, we are significantly reliant on other parties (such as its suppliers of DBS equipment) for the successful conduct of our business. As previously described, we are in the process of ascertaining the Year 2000 readiness of these third-parties. If our plan is not successful or is not completed in a timely manner, the Year 2000 issue could significantly disrupt our ability to transact business with our customers and suppliers, and could have a material impact on our operations. There can be no assurance that the systems of the NRTC, DIRECTV and other companies with which our systems interact or depend will be compliant by the end of 1999, or that any such third party failure would not have an adverse effect on our business or our operations. To date, we have not implemented a Year 2000 contingency plan. Contingency plans for mission critical systems primarily involve development and testing of manual procedures or the use of alternate systems. Viable contingency plans are difficult to develop for certain third party failures, especially in high- technology industries such as the DBS industry, due to the lack of alternate suppliers. However, we will continue to monitor the progress of third party remediation efforts and contingency plans. Substantial completion of our Year 2000 contingency plan is expected in mid-1999. There can be no assurance that such contingency plans will successfully mitigate any adverse effects that the Year 2000 issue may have on our operations. RECENT ACCOUNTING DEVELOPMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 is effective for fiscal years beginning after June 15, 1999. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, we have no derivative instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on our financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, defines costs related to start-up activities and requires that such costs be expensed as incurred. As we have previously expensed all such costs, the adoption of SOP 98-5 is not expected to have a material effect on our results of operations or financial position. 54 57 BUSINESS GENERAL We are the second largest independent provider of programming by DIRECTV. DIRECTV is the leading DBS company serving the continental United States. We market and provide DIRECTV programming on an exclusive basis to residential customers in certain Rural DIRECTV Markets and on a non-exclusive basis to residents of multiple dwelling units and commercial customers. We have obtained the exclusive right to provide DIRECTV programming to homes in our Rural DIRECTV Markets under agreements between the NRTC and our company. The NRTC and its DBS members and affiliates (including our company) provide DIRECTV programming in Rural DIRECTV Markets pursuant to an agreement between the NRTC and Hughes. We estimate that the Rural DIRECTV Markets comprise approximately 9.0 million households or approximately 9% of total U.S. television households, but account for approximately 1.0 million, or approximately 22%, of total DIRECTV customers. Since June 1996, when we were formed by management, through March 31, 1999, we have - acquired 52 Rural DIRECTV Markets in 23 states with approximately 1.8 million households and 134,700 subscribers at the dates of acquisition, - increased our subscriber base in these markets by approximately 92% in the aggregate, to approximately 258,900, achieving a subscriber penetration rate of approximately 14% through aggressive marketing and a local, service-driven approach to our customer, and - commenced marketing and distributing DIRECTV programming to approximately 4,600 commercial and MDU customers in five cities near its Rural DIRECTV Markets, with rights to provide such services on a non-exclusive basis nationwide. To date, we have raised an aggregate $87.4 million of equity capital in financings led by investment funds affiliated with Burr, Egan, Deleage & Co./Alta Communications, Spectrum Equity Investors, L.P., BancBoston Ventures Inc., Norwest Equity Partners and HarbourVest Partners LLC. and including an aggregate $2.5 million investment by our management. We have also secured $150.0 million of senior bank financing, $195.0 million gross proceeds from the offering of Systems' 12 3/8% notes and $100.0 million gross proceeds from the offering of our outstanding notes. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources" and "Certain Relationships and Related Transactions." Our revenue has increased rapidly due to internal subscriber growth and a low average annual churn rate (approximately 9% for the twelve months ended December 31, 1998). Net internal subscriber growth in our Rural DIRECTV Markets during 1998 totaled approximately 80,300. This represented approximately 7% of DIRECTV's net new subscribers nationwide for the period, although total households in our Rural DIRECTV Markets approximated just 1.5% of all television households in the continental United States. Although we incur substantial costs to add subscribers, we have relatively low recurring costs to service them. We believe these factors provide an opportunity to increase operating leverage and provide strong growth in EBITDA. We had EBITDA of approximately negative $5.4 million and negative $20.0 million for the years ended December 31, 1997 and 1998, respectively. We believe that our exclusive right to provide DIRECTV programming in our Rural DIRECTV Markets is attractive for the following reasons: - DIRECTV programming. We believe that marketing DIRECTV, the country's leading DBS provider, gives us a competitive advantage over providers of other subscription television services. DIRECTV offers more channels than competing services at a comparable price, including a wide variety of programming, exclusive sports packages (such as NFL SUNDAY TICKET) and a large selection of pay-per-view movies and events. We capitalize on the recognition of DIRECTV's brand name and on DIRECTV's programming advantages to broaden our subscriber base in our Rural DIRECTV Markets. DIRECTV currently has over 50% of all DBS subscribers nationwide. 55 58 - Limited Competition in Rural Markets. Competition from cable television providers in Rural DIRECTV Markets is often limited. Many households in rural markets are not passed by traditional cable systems or are served by analog systems with a small channel capacity (i.e., less than 40 channels) and poor quality signal relative to DBS service. Given the relatively low housing density in these markets, the build-out of new systems or upgrade of existing systems may not be cost-effective. Other entertainment options, such as theaters, movies and sporting events, may also be limited. We believe that this market environment contributes to a subscriber penetration rate within the Rural DIRECTV Markets that is currently nearly three times the penetration rate for DIRECTV in other U.S. markets. - National Marketing, Distribution and Manufacturing Support. DIRECTV supports local providers, such as our company, with a national marketing campaign, including television and print advertising, and through alliances with strategic partners such as Bell Atlantic and GTE. DIRECTV also supports its local providers with an extensive retail distribution network, offering more channels of distribution and more retail distribution points than competing services. Three major consumer electronics manufacturers currently compete to provide customers with DBS equipment. We believe that competition among DBS equipment providers results in greater availability, continued product innovation and lower equipment costs compared to single-source DBS equipment required for some competing services. - Consolidation Opportunity. Ownership of Rural DIRECTV Markets has historically been fragmented, creating an opportunity for us to grow through acquisitions, rationalize operations and create operating leverage. Because most of the operators from whom we have acquired or may acquire Rural DIRECTV Markets have not engaged in significant marketing efforts, we believe we have the potential to increase subscriber penetration significantly following such acquisitions. Pursuant to our agreements with the NRTC, we have the exclusive right to provide DIRECTV programming in our Rural DIRECTV Markets, and receive the monthly service revenue from all DIRECTV subscribers in such markets regardless of the subscribers' original point of purchase. In addition to our business in Rural DIRECTV Markets under agreements with the NRTC, we have developed other business relationships with DIRECTV and its affiliated companies. For example, we were chosen in January 1998 by DIRECTV to market and provide DIRECTV programming nationally to residents of MDUs and commercial establishments as a master system operator. In February 1998, we began marketing and providing DIRECTV programming to residents of multiple dwelling units and commercial establishments in five major metropolitan areas near our rural territories. We intend to focus our multiple dwelling units and commercial activities in high-growth urban areas near our Rural DIRECTV Markets to create a larger universe of potential subscribers while maintaining our fixed cost base. STRATEGY We intend to leverage our competitive strengths by pursuing the following strategies: - Emphasize Direct Sales and Local Customer Service. We believe a commitment to a strong local presence generates rapid subscriber growth, higher customer satisfaction and lower churn, and ultimately greater revenue and EBITDA. We have created a highly decentralized operating structure that permits managers to respond quickly and flexibly to local needs. We believe that local presence differentiates us from other major DIRECTV and DBS providers and is a key element in our strategy for attracting and retaining subscribers. Since inception, we have opened 63 offices in our Rural DIRECTV Markets. We provide sales, installation and customer service directly through these offices and in conjunction with more than 350 local dealers. We believe that focused local marketing significantly enhances the existing national marketing efforts of DIRECTV and our national distribution partners, and that local customer service increases customer satisfaction and is a major contributor to our low churn rate. We complement our local presence from our headquarters in Kansas City, Missouri with centralized sales, marketing, operational and 56 59 administrative support, including overflow and after-hours customer support from a national call center that operates 24 hours a day, seven days a week. - Acquire Additional Rural DIRECTV Markets. We are aggressively pursuing the acquisition of additional Rural DIRECTV Markets held by original NRTC licensees, a majority of which are owned by rural electric and television cooperatives for whom offering DIRECTV programming is an ancillary business. We are continually evaluating acquisition prospects and expect to continue to enter into acquisition agreements and complete acquisitions of additional Rural DIRECTV Markets consistent with our growth strategy. We are one of two companies actively consolidating Rural DIRECTV Markets. We estimate that approximately 100 Rural DIRECTV Markets, comprised of approximately 2.0 million households, are still owned by original NRTC members. - Develop Related Business Opportunities. We plan to leverage our local sales and support infrastructure by expanding our base of potential customers and product offerings. We have commenced marketing to MDUs and commercial establishments in five cities near our Rural DIRECTV Markets, including Dallas/Ft. Worth, Texas; Denver, Colorado; Ft. Myers, Florida; Kansas City, Missouri; and Las Vegas, Nevada. As of March 31, 1999, we had access to approximately 32,000 MDUs via "right of entry" agreements, with approximately 4,600 active subscribers. In addition, we are evaluating other telecommunications products and services that could be offered to customers using our existing marketing and distribution infrastructure. In May 1998, we commenced test marketing of DirecPC, a satellite-based Internet access service provided by a corporate affiliate of Hughes. SALES AND DISTRIBUTION We offer DIRECTV programming to consumer and business segments in our Rural DIRECTV Markets through two separate but complementary sales and distribution channels. Direct Sales Force We have established direct sales forces in all of our Rural DIRECTV Markets, and we own full service retail stores located in substantially all our Rural DIRECTV Markets. We currently have approximately 250 direct salespeople and support our direct sales staff and local offices with an advertising campaign that we believe is both creative and consistent. We also seek to develop close relationships with independent dealers of DBS equipment and provide marketing, subscriber authorization, installation and customer service support to enhance subscriber additions from such dealers. Wherever possible, our arrangements with dealers are exclusive. In connection with the sale of a DBS unit and a subscription to DIRECTV programming offered by us, a dealer retains the proceeds from the sale of the equipment and earns a one-time commission paid by us. We retain the ongoing monthly subscription revenue from the subscriber. For certain equipment sold through the indirect dealer network, we provide a subsidy, thus lowering the price of the equipment for the consumer. We believe that we can increase penetration more rapidly through our direct sales approach instead of relying, as some DTH providers have, upon the consumer to take the initiative to purchase our product and services. Other Distribution Channels In addition to our direct sales force, we utilize other distribution channels to offer DIRECTV programming to potential subscribers in our Rural DIRECTV Markets. These other distribution channels include - national retailers selected by DIRECTV, - consumer electronics dealers authorized by DIRECTV to sell DIRECTV programming, and - satellite dealers and consumer electronics dealers authorized by five regional sales management agents selected by DIRECTV. 57 60 In a similar fashion to our indirect dealer network, we pay a one-time commission to these distribution channels for the sale of DIRECTV programming to a subscriber located in our Rural DIRECTV Markets and we receive all monthly programming revenue associated therewith, regardless of what outlet originally sold DIRECTV programming to the subscriber. MARKETING We believe that DBS services can compete favorably with medium and low power DTH, cable and other subscription television services on the basis of superior signal quality, channel capacity, programming choice and price. We complement the extensive existing marketing effort of DIRECTV and its other national distribution partners through focused local marketing and sales, including local print and radio advertising to promote general market acceptance of DIRECTV programming. We believe that, to date, there has been no significant local presence to drive such local marketing and sales efforts. We also implement support advertising programs for our indirect distribution channels. Our marketing efforts emphasize the value of premium subscription plan offerings in order to maximize revenue per customer. We have implemented specific promotions, such as offering new subscribers an initial month's service at no charge, have been implemented to motivate customers to purchase such plans, and we have incentive-based sales compensation for both our direct and dealer sales forces to promote and sell premium subscription plans. A key element of our marketing strategy is to offer value-priced DBS equipment and installation through the use of subsidies on direct sales of DBS equipment and installations. We offer various types of DBS equipment and accessories through our direct sales force and retail locations. We are able to take advantage of volume discounts in purchasing this equipment from the NRTC and other vendors. In addition, dealers are motivated to lower the prices at which they offer DBS equipment and installation by our volume-based commission structure. CUSTOMER SERVICE We provide customer service from each of our local offices. Generally, our offices are staffed from 9 a.m. to 7 p.m., six days a week. Local managers are responsible for managing customer accounts receivable and churn. We believe we can sustain our historically low churn rate by providing local customer service and aggressively managing collections. Overflow and after hours assistance is provided 24 hours a day, seven days a week, by our national call center located in Kansas City, Missouri. We also provide professional installation services and technical assistance in each of our offices. OVERVIEW OF THE DTH INDUSTRY DTH services encompass all types of television transmission from satellites directly to the home. The FCC has authorized two types of satellite services for transmission of television programming: Direct Broadcast Satellite Services (commonly referred to as "DBS"), which operate at high power (120 to 240 watts per frequency channel) in the Ku-band, and Fixed Satellite Service (commonly referred to as low power and medium power DTH), which includes low power services transmitting in the C-band, as well as medium power (20 to 100 watts per frequency channel) services transmitting in the Ku-band. Both DBS and medium power DTH satellites are used for digital satellite television services. DBS provides high quality video and audio signals and can be received by an 18-inch dish. Medium and low power DTH signals require home satellite dishes of 27 inches to six feet in diameter (depending on the geographical location of the dish and wattage per frequency channel). See "-- DIRECTV." DIRECTV, USSB and EchoStar are the only current domestic providers of DBS services. All other DTH domestic satellite television providers currently provide medium or low power DTH services. See "-- Competition." A DBS system consists of an uplink center, one or more orbiting satellites and the subscriber's reception equipment. The uplink center collects programming from on-site video equipment and from the direct feeds of programmers. Through antennae located at the uplink center, the operator transmits, or uplinks, the programming to transponders located on its geostationary satellite. The transponders receive 58 61 and amplify the digital signal and transmit it to receiving dishes within the service area covered by the satellite. The digital signal is then transmitted via coaxial cable to the subscriber's receiver, where it is converted into an analog signal which allows it to be received by the subscriber's televisions. System security is maintained through the use of reprogrammable access cards that must be inserted into each subscriber's decoder box to unscramble programming signals. DBS providers are afforded technological and regulatory advantages over medium and low power DTH services. The FCC requires the satellites used to provide DBS services to be spaced at greater intervals than medium and low power DTH satellites (nine degree orbital spacing over North America compared to two degree orbital spacing). The greater orbital spacing is intended to ensure that the signals transmitted by DBS providers can be received by a small dish, free of interference from adjacent satellites. The closer medium and low power DTH satellite orbital spacing requires the use of a larger, 27-inch to six foot dish to eliminate interference from nearby satellites. See "-- Competition -- Other DTH Providers." In addition, DBS satellites are allowed to broadcast with much higher power levels than medium and low power DTH satellites. The combination of greater orbital spacing and higher power enables providers of DBS services to obtain a superior balance of small dish size, signal quality in adverse weather conditions and increased channel capacity. DIRECTV DIRECTV is a multichannel DBS programming service initially introduced to U.S. television households in 1994. DIRECTV currently offers in excess of 220 channels of near laser disc quality video and CD-quality audio programming, and transmits via three high-power Ku band satellites (only two are needed to support transmission of DIRECTV programming), each containing 16 transponders. As of March 31, 1999, there were approximately 4.8 million DIRECTV subscribers. We believe that DIRECTV services are superior to those provided by other DTH service providers and that DIRECTV's extensive programming, including up to 80 channels of pay-per-view movies and events, various sports packages and the exclusive NFL SUNDAY TICKET(TM), will continue to contribute to the growth of DIRECTV's subscriber base and DIRECTV's market share for DTH services in the future. In addition, we believe that DIRECTV's national marketing campaign provides us with significant marketing advantages over other DTH competitors. DIRECTV's share of current DBS and medium power DTH subscribers was approximately 51.1% as of February 28, 1999. DIRECTV added approximately 1.2 million new subscribers (net of churn) during the twelve months ended December 31, 1998, which was a greater increase than any other DBS or medium power DTH provider and accounted for approximately 48.1% of all new DBS and medium power DTH subscribers. Although DIRECTV's share of new subscribers can be expected to decline as existing and new DTH providers aggressively compete for new subscribers, we expect DIRECTV to remain the leading provider of DBS and medium power DTH services in an expanding market. The equipment required for reception of DIRECTV programming (DBS equipment) includes an 18-inch satellite antenna, a digital receiver approximately the size of a standard VCR and a remote control, all of which are used with standard television sets. Each digital receiver includes a "smart card" that is uniquely addressed to it. The smart card, which can be removed from the receiver, prevents unauthorized reception of DIRECTV services and retains billing information on pay-per-view usage, which information is sent at regular intervals from the DBS receiver telephonically to DIRECTV's authorization and billing system. The small size of the dish makes it more acceptable to housing communities and organizations that prohibit the installation of larger dishes due to their appearance. The digital receiver captures and translates the signal and interfaces with an easy to use on-screen electronic program guide which includes a parental locking/ratings control function. DBS equipment also enables subscribers to receive USSB programming. USSB is a DBS service providing 28 channels of video programming transmitted via five transponders it owns on DIRECTV's first satellite. USSB primarily offers Time Warner and Viacom premium satellite programming services, such as multiple channels of HBO and Showtime, which are not available through DIRECTV but which are 59 62 generally complementary to DIRECTV programming. As of March 31, 1999, approximately 50% of DIRECTV's 4.8 million subscribers received USSB programming. On December 14, 1998, Hughes announced that it will acquire USSB for approximately $1.3 billion. Hughes said it will combine its DIRECTV business with USSB's assets and satellite slots to expand its DBS programming lineup through the addition of premium multi-channel movie services such as HBO and Showtime. Hughes also announced that it plans to use certain of the DBS satellite frequencies to be acquired for the delivery of Spanish-language programming services. On January 22, 1999, DIRECTV announced that it will acquire certain of Primestar's and one of its affiliates' assets for approximately $1.8 billion. We are not yet able to assess the effect of either acquisition on our future business, financial position or results of operations. DBS equipment is now produced by major manufacturers under brand names including RCA, Sony, Hughes, and others. DBS equipment is currently sold at retail outlets throughout the U.S. for prices typically ranging from $99 to $299, depending upon the generation of the equipment, the level of features and the retail outlet. Prices for DBS equipment have declined consistently since introduction, further stimulating demand for DIRECTV services. Programming DIRECTV programming includes - cable networks, broadcast networks and audio services available for purchase in tiers for a monthly subscription fee, - premium services available a la carte or in tiers for a monthly subscription fee, - sports programming (major professional league sports packages, including the exclusive NFL SUNDAY TICKET, regional sports networks and seasonal college sports packages) available for a yearly, seasonal or monthly subscription fee, and - movies from all major Hollywood studios and special events available for purchase on a pay-per-view basis. Satellite and premium services available a la carte or for a monthly subscription are priced comparably to cable. Pay-per-view movies are available for viewing on multiple channels at staggered starting times so that a viewer does not have to wait more than 30 minutes to view a particular pay-per-view movie. DIRECTV periodically adjusts its programming packages to provide the best channel mix possible at various price points. The following is a summary of some of the more popular DIRECTV programming packages we currently offer: - Total Choice: Package of 60 video channels, including two Disney channels and an in-market regional sports network, 31 CD audio channels, and access to up to 55 channels of pay per view movies and events. Total Choice is DIRECTV's most popular offering. Total Choice Platinum, Gold, Silver and Plus Encore offer additional programming at higher retail prices. - Plus DIRECTV: Package of 16 video channels, 31 CD audio channels and access to up to 55 channels of pay per view movies and events. Plus DIRECTV consists of channels not typically offered on most cable systems and is intended to be sold to existing cable subscribers to augment their cable or other satellite services. - NFL SUNDAY TICKET: All out-of-market NFL Sunday games. NFL SUNDAY TICKET is exclusive to DIRECTV with respect to small dish providers through at least the end of the 1999-2000 football season. 60 63 Other sports programming packages include: - Sports Choice: Package of 24 channels (including over 18 regional sports networks) and five general sports networks (the Golf channel, NewSport, Speedvision, Classic Sports Network and Outdoor Life). - NHL CENTER ICE: Approximately 500 out-of-market NHL games. - MLB Extra Innings: Approximately 800 out-of-market major league baseball games. - ESPN Full Court: Hundreds of college basketball games. - ESPN Game Plan: Up to ten college football games every Saturday. DIRECTV generally does not provide local broadcast programming via satellite. However, seamless switching between satellite and broadcast programming provided by other sources is possible with all DBS units. In addition, DIRECTV provides programming from affiliates of the national broadcast networks to subscribers who are unable to receive networks over the air and do not subscribe to cable. RELATIONSHIP WITH THE NRTC AND DIRECTV The NRTC acquired the right to provide DIRECTV programming to residential households in 1992 and commercial establishments located in the Rural DIRECTV Markets in 1994, pursuant to the Hughes Agreement. The NRTC subdivided its rights to provide such services into approximately 250 geographically based Rural DIRECTV Markets, then sold a portion of its rights to the individual Rural DIRECTV Markets to NRTC members pursuant to the NRTC Agreements. We have acquired from the NRTC the exclusive right to provide DIRECTV programming in each of our Rural DIRECTV Markets pursuant to an NRTC Agreement. Each such Agreement was assigned to us with the consent of the NRTC and DIRECTV when we acquired such Rural DIRECTV Market. Pursuant to the NRTC Agreements, we are obligated to promote, market and sell DIRECTV programming in accordance with NRTC procedures and to take all reasonable steps to ensure that DIRECTV programming is not received at any unauthorized locations or in any unauthorized manner. We also purchase customer authorization, billing services and centralized remittance processing services from the NRTC pursuant to the NRTC Agreements. The NRTC Agreements also contain customary provisions regarding payment terms, compliance with laws and indemnification and provide that both the NRTC and DIRECTV must consent prior to the assignment or transfer by the NRTC member party thereto of its rights or obligations under the NRTC Agreements, which consent shall not be unreasonably withheld. The NRTC Agreements also contain termination provisions which allow the NRTC to terminate such agreements - as a result of termination of the Hughes Agreement, with the NRTC remaining responsible for paying to us its pro rata portion of any refunds that the NRTC receives from Hughes under the Hughes Agreement, - if we fail to make any payment due to the NRTC or otherwise breaches a material obligation of the NRTC Agreement and such failure or breach continues for more than 30 days after written notice from the NRTC, or - if we fail to keep and maintain any letter of credit required to be provided to the NRTC in full force and effect or to adjust the amount of the letter of credit as required by the NRTC Agreements. The NRTC Agreements also require us to comply with policies of the NRTC promulgated from time to time. We, along with other NRTC-affiliated DIRECTV providers, have disputed certain policies proposed by the NRTC in the past that we believed did not comply with the NRTC Agreements and applicable law. For example, in 1998, the NRTC proposed new conditions to securing its approval of acquisitions that included changes to all of the NRTC Agreements which, if adopted, could have had 61 64 material adverse financial consequences to our company. The dispute was resolved without any modifications to the NRTC Agreements and our then pending acquisitions were approved. In addition, the NRTC has adopted a policy regarding its own interests in the subscriber information of NRTC members and affiliates. The NRTC Agreements provide that NRTC members and affiliates, including our company, have "substantial proprietary interests" in and rights to the information and data with respect to their subscribers. The NRTC and its affiliates, including us, have differed over the import of these rights and interests, which may have consequences in the event that our rights to offer DIRECTV programming through the NRTC are terminated or expire. Pursuant to the NRTC Agreements, we have obtained from the NRTC the exclusive right in our Rural DIRECTV Markets to market, sell and retain all of the revenue from subscribers derived from the sale of most programming transmitted by the DIRECTV satellites over the 27 frequencies owned by Hughes. We pay the NRTC for the wholesale cost of such programming and a fee to DIRECTV based upon 5% of the programming revenue. The NRTC has the right to choose to provide certain non-select services, such as NFL SUNDAY TICKET, as DIRECTV and the content providers enter into new agreements. "Non-select services" are services not generally included in the DIRECTV programming we provide, because providers of such programming require minimum subscriber guarantees, advance payments or other similar commitments, which the NRTC declines to give. We retain 5% of the revenue from non-select services purchased by its subscribers and remits the balance to DIRECTV. The NRTC Agreements (and presumably the Hughes Agreement) expire when Hughes removes its current satellite(s) from their assigned orbital locations. According to Hughes and USSB, the DIRECTV satellites have estimated orbital lives of at least 15 years from their respective launches in December 1993 and 1994. We believe that the Hughes Agreement provides the NRTC with a right of first refusal to obtain DBS Services (other than programming services) in substantially the same form as such DBS Services are provided under the existing Hughes Agreement in the event that Hughes elects to launch one or more successor satellites upon the removal of the present satellites from their assigned orbital locations. The NRTC Agreements do not expressly provide an equivalent right of first refusal for the NRTC members to acquire DBS Services through the NRTC should the NRTC exercise any right of first refusal under the Hughes Agreement. We are an affiliate of the NRTC. See "Risk Factors -- Our Ability to Acquire DBS Services from the NRTC and DIRECTV after Expiration of NRTC Agreements." COMPETITION We face competition both for acquisitions of Rural DIRECTV Markets from one other company, and within our exclusive Rural DIRECTV Markets from a broad range of companies offering communications and entertainment services, including cable operators, other satellite service providers, wireless cable operators, telephone companies, television networks and home video product companies. Many of our competitors have greater financial and marketing resources than we do, and the business of providing subscription and pay television programming is highly competitive. We believe that quality and variety of programming, signal quality and service and cost will be the key bases of competition. See "Risk Factors -- Competition and Technological Change" and "Risk Factors -- Risks Attendant to Acquisition Strategy." Competition for Acquisition of Rural DIRECTV Markets We are aware that at least one other company, Pegasus Communications Corporation ("Pegasus") is currently pursuing the same goal as our company of consolidating Rural DIRECTV Markets. Pegasus is currently the largest independent provider of DIRECTV services and has substantially greater financial resources than we do. We cannot assure you that the marketing and sales efforts or competing acquisition strategies of Pegasus or other competitors will not have an adverse effect on our ability to execute our acquisition strategy. 62 65 Competing Subscription Television Providers CABLE TELEVISION PROVIDERS Cable operators in the United States serve approximately 65 million subscribers, representing over 65% penetration of television households passed by cable systems. Cable operators typically offer 30 to 80 channels of programming at an average monthly subscription price of approximately $35. While cable companies currently serve a majority of the U.S. television market, we believe many may not be able to provide the quality and variety of programming offered by DIRECTV until they significantly upgrade their coaxial systems. Many cable television providers are in the process of upgrading their systems, and other cable operators have announced their intentions to make significant upgrades. Many proposed upgrades, such as conversion to digital format, fiber optic cabling, advanced compression technology and other technological improvements, when fully completed, will permit cable companies to increase channel capacity, thereby increasing programming alternatives, and to deliver a better quality signal. However, although cable systems with adequate channel capacity may offer digital service without major rebuilds, we believe that other cable systems that have limited channel capacity like those in most of the Rural DIRECTV Markets will have to be upgraded to add bandwidth in order to provide digital service. We believe that such upgrades will require substantial investments of capital and time to complete industry-wide. As a result, we believe that there will be a substantial delay before cable systems in the Rural DIRECTV Markets can offer programming services equivalent to digital DBS providers and that some cable systems in those markets may never be upgraded, subject to advances in digital compression technology currently under development. We expect to encounter a number of challenges in competing with cable television providers. First, cable operators have an entrenched position in the marketplace. We believe that our current strategy of targeting the acquisition of Rural DIRECTV Markets which are not served by cable or are underserved by cable partially offsets the cable industry's position in the consumer marketplace. Second, the up-front costs to the consumer associated with purchasing and installing DBS equipment are higher than the up-front costs for installation of cable television. However, prices for DBS equipment have declined consistently since introduction, and we believe that competition among DBS equipment vendors and technological improvements will create continuing downward pressure on prices. Third, current DBS systems, unlike cable, do not provide local broadcast programming via satellite, although seamless switching between satellite and broadcast programming from other sources is possible with all DBS units. In addition, DIRECTV provides programming, from affiliates of the national broadcast networks to subscribers who are unable to receive networks over the air and do not subscribe to cable. We believe that the significant capital costs of upgrading cable systems to provide similar services, combined with the marketing strength of DBS providers such as DIRECTV, presents DBS providers with an opportunity to take substantial market share for pay television services from cable in the Rural DIRECTV Markets. OTHER DTH PROVIDERS EchoStar, the only other DBS provider, commenced national broadcasting of programming in March 1996 and currently broadcasts approximately 200 channels of digital television programming and CD quality audio programming services to the entire continental United States. EchoStar has 21 licensed channel frequencies at the 119 degrees W.L. full continental United States ("CONUS") orbital position and has 69 frequencies in other partial CONUS orbital locations. EchoStar reported approximately 2.3 million subscribers as of March 31, 1999. On November 30, 1998, EchoStar announced that it had entered into an agreement to acquire certain satellite-television assets from The News Corporation Limited and MCI Worldcom Inc. The satellite-television assets to be acquired by EchoStar include a license for 28 DBS frequencies at 110 degrees W.L. (a full CONUS orbital location), two satellites to be delivered in orbit, and a direct broadcast operations facility. Consummation of these asset purchases by EchoStar may enable it to significantly expand its DBS and other programming offerings, thereby potentially strengthening its competitive strength relative to DIRECTV and our company. We believe that we can successfully compete with EchoStar in the DBS market because of DIRECTV's brand name and its 63 66 significantly larger distribution networks and greater number of manufacturers of the equipment used to receive DTH services. Primestar, a medium-power DTH provider owned primarily by a consortium of cable companies including TCI, launched the first digital DTH satellite television service in 1994. As a result of the successful launch and operation of a new satellite in early 1997, Primestar increased its programming services to approximately 150 channels. As of February 28, 1999, Primestar had approximately 2.3 million subscribers. On January 22, 1999, DIRECTV announced that it had reached an agreement with Primestar to acquire all of Primestar's subscribers and related high-power satellite assets from Primestar and one of its affiliates in two transactions valued at approximately $1.8 billion. We are not yet able to assess the effect of DIRECTV's acquisition of Primestar on our future business, financial position, or results of operations. Low power C-band operators reported approximately 1.9 million subscribers as of February 28, 1999. The C-band/TVRO market has been built primarily on subscribers who live in markets not served by cable television. C-band equipment, including the six-to-eight-foot dish necessary to receive the low power signal, currently costs approximately $2,000 and is distributed by local TVRO satellite dealers. We believe that DBS has significant advantages over low power C-band service in equipment cost, dish size and range of programming packages. The number of C-band subscribers declined by approximately 164,000 during 1998. OTHER COMPETITORS Wireless cable systems (which are usually analog) typically offer only 20 to 40 channels of programming, which may include local programming. Wireless cable requires a direct line of sight from the receiver to the transmitter, which creates the potential for substantial interference from terrain, buildings and foliage in the line of sight. However, while it is expected that most large wireless operators (especially certain of those backed by local telephone companies) will upgrade to digital technology over the next several years, such upgrades will require the installation of new digital decoders in customers' homes and modifications to transmission facilities, at a potentially significant cost. Certain regional telephone companies and other long distance companies could become significant competitors in the future, as they have expressed an interest in becoming subscription multichannel video programming distributors. Furthermore, the Telecommunications Act of 1996 (the "1996 Act") removes barriers to entry which previously inhibited local telephone companies from competing, or made it more difficult for such telephone companies to compete, in the provision of video programming and information services. Certain telephone companies have received authorization to test market video and other services in certain geographic areas using fiber optic cable and digital compression over existing telephone lines. Estimates for the timing of wide-scale deployment of such multi-channel video service vary, as several telephone companies have pushed back or cancelled originally announced deployment schedules. As more telephone companies begin to provide multichannel video programming and other information and other communications services to their customers, additional significant competition for subscribers will develop. Among other things, telephone companies have an existing relationship with substantially every household in their service area, substantial financial resources, and an existing infrastructure and may be able to subsidize the delivery of programming through their position as the sole source of local wireline telephone service to the home. Most areas of the United States are covered by traditional territorial over-the-air VHF/UHF television broadcasters. Consumers can receive from three to ten channels of over-the-air programming in most markets. These stations provide local, network and syndicated programming free of charge, but each major market is generally limited in the number of programming channels. On August 5, 1997, Congress approved the release of additional digital spectra for use by VHF/UHF broadcasters. 64 67 REGULATION Unlike a cable operator, DBS operators such as DIRECTV are free to set prices and serve customers according to their business judgment, without rate of return or other regulation or the obligation not to discriminate among customers. However, there are laws and regulations that affect DIRECTV and, therefore, affect our company. As an operator of a privately owned United States satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with respect to - the licensing of individual satellites (i.e., the requirement that DIRECTV meet minimum financial, legal and technical standards), - avoidance of interference with radio stations, and - compliance with rules that the FCC has established specifically for DBS satellite licenses. As a distributor of television programming, DIRECTV is also affected by numerous other laws and regulations. The 1996 Act clarifies that the FCC has exclusive jurisdiction over DTH satellite services and that criminal penalties may be imposed for piracy of DTH satellite services. The 1996 Act also offers DTH operators relief from private and local government-imposed restrictions on the placement of receiving antennae. In some instances, DTH operators have been unable to serve areas due to laws, zoning ordinances, homeowner association rules, or restrictive property covenants banning the installation of antennae on or near homes. In August 1996, the FCC promulgated rules designed to implement Congress' intent by prohibiting any restriction, including zoning, land use or building regulation, or any private covenant, homeowners' association rule, or similar restriction on property within the exclusive use or control of the antenna user where the user has a direct or indirect ownership interest in the property, to the extent it impairs the installation, maintenance or use of a DBS receiving antenna that is one meter or less in diameter or diagonal measurement, except where such restriction is necessary to accomplish a clearly defined safety objective or to preserve a recognized historic district. Local governments and associations may apply to the FCC for a waiver of this rule based on local concerns of a highly specialized or unusual nature. In November 1998, the FCC amended its rules to extend these protections to rental property in those areas under the exclusive use or control of the renter. The 1996 Act also preempted local (but not state) governments from imposing taxes or fees on DTH services, including DBS. Finally, the 1996 Act required that multi-channel video programming distributors such as DTH operators fully scramble or block channels providing indecent or sexually explicit adult programming. If a multi-channel video programming distributor cannot fully scramble or block such programming, it must restrict transmission to those hours of the day when children are unlikely to view the programming (as determined by the FCC). On December 30, 1998, a three-judge federal court in Delaware held that this provision was unconstitutional. The government has filed a notice indicating its intent to appeal this decision to the United States Supreme Court. In addition to regulating pricing practices and competition within the franchise cable television industry, the Cable Act was intended to establish and support existing and new multi-channel video services, such as wireless cable and DTH, to provide subscription television services. DIRECTV and our company have benefitted from the programming access provisions of the Cable Act and implementing rules in that DIRECTV has been able to gain access to previously unavailable programming services and, in some circumstances, has obtained certain programming services at reduced cost. Any amendment to, or interpretation of, the Cable Act or the FCC's rules that would permit cable companies or entities affiliated with cable companies to discriminate against competitors such as DIRECTV in making programming available (or to discriminate in the terms and conditions of such programming) could adversely affect DIRECTV's ability to acquire programming on a cost-effective basis, which would have an adverse impact on our company. Certain of the restrictions on cable-affiliated programmers will expire in 2002 unless the FCC or Congress extends such restrictions. The Cable Act also requires the FCC to conduct a rule-making proceeding that will impose public interest requirements for providing video programming on DTH licensees. In November 1998, the FCC adopted rules requiring DTH licensees to provide reasonable and non-discriminatory access by qualified 65 68 candidates for elective office. These rules also require DTH licensees to set aside four percent of the licensee's channel capacity for non-commercial programming of an educational or informational nature. While DTH operators like DIRECTV currently are not subject to the "must carry" requirements of the Cable Act, the cable and broadcast television industries have argued that DTH operators should be subject to these requirements. In the event the "must carry" requirements of the Cable Act are revised to include DTH operators, or to the extent that new legislation of a similar nature is enacted, DIRECTV's future plans to provide local programming will be adversely affected, and such must-carry requirements could cause the displacement of possibly more attractive programming. The SHVA establishes the terms and conditions under which a DTH operator, for a statutorily-mandated fee, may claim a "compulsory" copyright license to retransmit "superstations" and broadcast network programming to subscribers for private home viewing. The SHVA currently is scheduled to expire on December 31, 1999, in which case DTH operators would be required to negotiate in the marketplace to obtain the necessary copyright clearances to retransmit superstations and broadcast network programming. Legislation to extend the SHVA has been introduced in Congress. This legislation also provides for a reduction in the royalty rates payable under the SHVA and establishes new rules regarding the retransmission of distant and local broadcast television stations by satellite carriers. With respect to the retransmission of broadcast network programming, the compulsory license established by the SHVA is limited to DTH retransmissions to persons in unserved households. In general, an "unserved household" is one that cannot receive, through the use of a conventional outdoor rooftop antenna, a sufficient over-the-air network signal, and has not, within 90 days prior to subscribing to the DTH service, subscribed to a cable service that provides that network signal. Until recently, a number of satellite providers, including DIRECTV (and its distributors, including NRTC members and affiliates like us) received ABC, CBS, NBC and Fox network programming from PrimeTime 24 Joint Venture. Certain television broadcast networks and their affiliates have commenced litigation against PrimeTime 24 alleging that the network programming offered by PrimeTime 24 has been retransmitted in violation of the "unserved households" limitation of the SHVA. The litigation commenced against PrimeTime 24 has resulted in the issuance of permanent injunctions by courts in North Carolina and Florida prohibiting PrimeTime 24 from providing the programming of certain broadcast networks to subscribers in certain designated geographic areas. In North Carolina, the court issued a permanent injunction restraining DIRECTV (and its distributors) from providing retransmissions of any television station affiliated with ABC to any household located within 75 miles of the transmission tower of WTVD, the ABC affiliate serving the Raleigh-Durham market. The Florida injunction applies nationwide and requires PrimeTime 24 to disconnect those customers for CBS and Fox programming that are able to receive "a signal of Grade B intensity" (based on Longley-Rice signal strength propagation maps) unless the local network consents to continued service or a signal-strength test proves that a certain quality of off-air service is unavailable to the customer. The Florida court established February 28, 1999 as the deadline for compliance with the injunction with respect to customers who first began receiving PrimeTime 24's network programming after March 11, 1997; for customers who first received service before that date, the compliance deadline is April 30, 1999. Additional litigation against PrimeTime 24 alleging violations of the 'unserved households' limitation, brought in Texas by an NBC affiliate, is currently pending. In February 1999, DIRECTV announced that it was discontinuing retransmission of the four broadcast networks received from PrimeTime 24 and would instead distribute a different package of network affiliates to its existing subscribers. On February 24, 1999 CBS, NBC, ABC and Fox asked the same Federal District Court in Florida that had issued an injunction against PrimeTime 24 to grant a temporary restraining order, preliminary injunction, and contempt finding against DIRECTV for violating the SHVA. On February 25, 1999, the court granted the requested temporary restraining order requiring DIRECTV (and its agents and those who act in active concert or participation with DIRECTV) not to deliver CBS or Fox programming to subscribers who do not live in "unserved households." (For purposes of determining whether a subscriber is "unserved," the court referred to a modified version of the Longley- 66 69 Rice signal propagation model; the modifications reflect an order adopted by the FCC on February 2, 1999 (see below)). On March 12, 1999, DIRECTV and the broadcast networks announced that a settlement of this litigation had been reached whereby DIRECTV agreed to terminate its retransmission of NBC, CBS, ABC and Fox programming to ineligible subscribers that are located with a local network affiliate's "Grade A" signal strength contour as of June 30, 1999 and to terminate retransmission of such network programming to ineligible subscribers in the "Grade B" signal strength contour as of December 31, 1999. In addition, DIRECTV agreed to provide discounted antennas to subscribers whose network programming service is terminated. A subscriber's eligibility to continue to receive network programming from DIRECTV will be determined using the Individual Location Longley-Rice technology approved by the FCC in a rulemaking order adopted on February 2, 1999. The FCC's rulemaking order was adopted in a proceeding commenced in response to petitions for rulemaking filed by the NRTC and other satellite providers. Although the FCC declined to changed the definition of a signal of Grade B intensity, the agency did adopt a standardized method for predicting signal strength at individual locations that could be used in place of taking actual measurements. EchoStar has filed a petition for reconsideration of the FCC's order. In addition, in October 1998, EchoStar filed a lawsuit in the United States District Court of Colorado seeking a declaratory ruling establishing a predictive model for determining whether a household is "unserved" for purposes of the SHVA based on a "Longley-Rice" predictive model that applies a criteria of 95% of the locations receiving a Grade B signal 95% of the time with a 50% degree of confidence. The lawsuit, which was transferred on March 24, 1999 to the same Florida court which is hearing the Prime Time 24 and DIRECTV litigations, also asks the court to clarify the particular means (e.g., antenna height and orientation) for measuring signal strength. While we believe that we have complied to date with the SHVA in providing network programming only to "unserved households" and we do not believe that the interpretations of the SHVA applied by the Florida and North Carolina federal courts will materially adversely affect our financial results or its ability to attract new subscribers, we cannot assure you that our inability to provide network services to certain subscribers will not have such effects. In addition, should we elect to continue to offer network services, we cannot assure you that the costs of compliance with those interpretations will not be material. The inability of DIRECTV and our company to provide network programming to subscribers in Rural DIRECTV Markets could adversely affect our average programming revenue per subscriber and subscriber growth and churn. In October 1997, the United States Copyright Office recommended that the compulsory copyright fees for the retransmission of television "superstations" and broadcast network affiliates by satellite providers be increased. The new rates took effect on January 1, 1998. Although an exact comparison between copyright fees payable by cable operators and by satellite providers is not possible, it has been estimated that the new rates would be approximately 300% and 900% of the rates applicable to cable providers in their provision of the superstation signals and network signals, respectively. The United States Court of Appeals for the District of Columbia Circuit has affirmed the decision to increase the rates. Under the terms of the NRTC Agreements, we may expect to have this cost passed along to us, unless the NRTC elects to absorb all or a portion of the increased rate into the margin that it earns on the provision of DIRECTV programming. YEAR 2000 COMPLIANCE Many existing computer systems and software products use only two character fields to identify dates. These programs were designed and developed without consideration of the upcoming turn of the century. Significant uncertainty exists in the software industry concerning the potential consequences of the Year 2000 phenomenon. If not corrected, these computer applications could fail or create erroneous information from the Year 2000 date change. This issue affects virtually all organizations and can be very costly and time consuming to correct. We have reviewed Year 2000 compliance of our internal systems and believe that such systems are Year 2000 compliant. However, we cannot assure you that all of the software 67 70 products we currently use are in fact Year 2000 compliant. We have engaged the services of a consultant to assist in our assessment of the impact of the Year 2000 issue on our computerized systems and operations. Currently, we believe our costs to successfully mitigate the Year 2000 issue will approximate $200,000. Additionally, we are currently conducting surveys of all of our vendors and other pertinent relationships to assess their readiness for Year 2000 processing. We are significantly reliant on contracted data processing services from the NRTC and DIRECTV for customer service, billing and remittance processing pursuant to our contractual relationship with the NRTC. The NRTC has informed us that the computer systems that provide such services are not currently Year 2000 compliant, but that the majority of such systems will be compliant by September 1999. With respect to the NRTC's billing and authorization systems, the NRTC has informed us that a small number of Year 2000 issues exist, and that appropriate changes have been requested and scheduled for development action. We are reliant on DIRECTV for distribution of its DBS programming services. The NRTC has informed us that DIRECTV expects to establish Year 2000 compliance for its billing and authorization systems by the end of the second calendar quarter of 1999. In addition to the NRTC and DIRECTV, we are significantly reliant on other parties (such as its suppliers of DBS equipment) for the successful conduct of our business. As previously described, we are in the process of ascertaining the Year 2000 readiness of these third-parties. If our plan is not successful or is not completed in a timely manner, the Year 2000 issue could significantly disrupt our ability to transact business with our customers and suppliers, and could have a material impact on our operations. We cannot assure you that the systems of the NRTC, DIRECTV and other companies with which our systems interact or depend will be compliant by the end of 1999, or that any such third party failure would not have an adverse effect on our business or our operations. Any adverse impact on subscribers in our Rural DIRECTV Markets could also have a material adverse effect on our business, financial condition and results of operations. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Year 2000 Compliance." FACILITIES On January 27, 1999, we entered into a lease with respect to approximately 35,000 square feet of office space in Kansas City, Missouri. Annual rent under this lease is $568,800, and the lease will terminate in August 2002. We moved our principal executive offices to this location in April 1999. We also have 71 offices and operations in 23 states. We expect these facilities to be adequate for our needs in the foreseeable future. We believe that we will be able to lease office and retail space in our Rural DIRECTV Markets as needed on acceptable terms. MANAGEMENT AND EMPLOYEES We have assembled an experienced management team to execute our business strategy. Certain members of our senior management team have significant experience working together. Our executive team has extensive business acquisition experience in the telecommunications industry, as well as experience in the sales and delivery of a full array of communications services to customers in rural America. As of March 31, 1999, we had approximately 840 employees. We are not a party to any collective bargaining agreement and consider our relations with our employees to be good. LEGAL PROCEEDINGS We are not currently party to any material legal proceedings. 68 71 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the executive officers and directors of our company as of March 30, 1999.
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 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 1996 to 1997, Mr. Gerski was Regional Director of Marketing and Sales at American Telecasting Incorporated. In 1996, Mr. Gerski was Vice President of Marketing and Sales of Bell Atlantic Video Services. From 1990 through 1995, Mr. Gerski was Corporate Director of Sales at Adelphia Cable Communications. He has served on the Executive Board of Directors of the Southern California Cable Association and the Los Angeles, Chicago, and Cleveland Cable Co-ops. Scott R. Brown. Mr. Brown has been our Vice President of Operations since February 1999. Mr. Brown held the position of Vice President of Fulfillment Operations with Primestar, Inc. from April 1998 to February 1999 and was the Vice President of Operations with TCI Satellite Entertainment, Inc. from November 1995 to March 1998. From May 1989 to November 1995 Mr. Brown held several 69 72 positions with Tele-Communications, Inc., including General Manager of TCI Cable at Westchester, General Manager of TCI Cablevision of Pinellas County, Business Manager of TCI Cablevision at Dade/Broward County, and Internal Auditor of TCI North Central Division. Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since our inception. From 1993 to 1996, Ms. Linn was General Counsel to Cable Video Management, Inc., a communications management company and the former Cable Video Enterprises, Inc., which owned and operated domestic cable television systems. Ms. Linn was a contract negotiator in the network real estate department of Sprint Communications from 1990 to 1992. From 1988 to 1990, Ms. Linn was Vice President and General Counsel of the cable brokerage firm Hardesty, Puckett & Company (now HPC Puckett & Company). Ms. Linn is licensed to practice law in Kansas and Texas. BACKGROUND OF DIRECTORS Robert F. Benbow. Mr. Benbow has been one of our Directors since February 1997. He is a Vice President of Burr, Egan, Deleage & Co. and a General Partner of Alta Communications VI, L.P. Prior to joining Burr, Egan Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New England N.A., where he was Senior Vice President responsible for special industries lending in the areas of media, project finance and energy. He serves as a Director of Teletrac, Inc., a major metropolitan wireless provider of location and two way messaging services for fleets of commercial vehicles, and Preferred Networks, Inc. William O. Charman. Mr. Charman has been one of our Directors since March 1997. He has served as a Vice President of BancBoston Capital since 1995. From 1993 to 1995, Mr. Charman was a Director and team leader for Bank of Boston's Media & Communications Group in London. Mr. Charman was a Director in Bank of Boston's Media & Communications Group in Boston from 1987 to 1993. Mr. Charman is a Director of Cambridge Communications, MultiTechnology Services and Prime Communications. William P. Collatos. Mr. Collatos has been one of our Directors since March 1997. He is a Managing General Partner of Spectrum Equity Investors, which he founded in 1993. Prior to the founding of Spectrum, he was an independent consultant from 1991 to 1993. Mr. Collatos was an Associate and then General Partner of funds managed by TA Associates from 1980 to 1990 and a founding General Partner of Media/Communications Partners. Prior to joining TA Associates, Mr. Collatos was in charge of the media lending group at Fleet National Bank in Providence, Rhode Island. He is a Director of Galaxy Telecom Systems, Inc., TSR Paging, Inc., Internet Network Services, Ltd. and ITXC, Inc. William A. Johnston. Mr. Johnston has been one of our Directors since November 1997. He is a Managing Director of HarbourVest Partners, LLC and has served in a variety of capacities for HarbourVest Partners, LLC and its predecessor, Hancock Venture Partners, Inc., since 1983. Prior to joining Hancock Venture Partners, Inc., Mr. Johnston was an assistant vice president at State Street Bank in Boston, Massachusetts. He is a Director of Adesemi Communications International, Inc., Epoch Internet, Inc., Formus Communications, Inc., The Marks Group, Inc. and V-I-A Internet, Inc. Robert B. Liepold. Mr. Liepold has been one of our Directors since our inception. Mr. Liepold has been President and Chief Executive Officer of KCWE-TV, an independent commercial television station operating in Kansas City, Missouri, since 1994. Since 1983, Mr. Liepold also has been a consultant to the telecommunications industry. From 1978 through 1983, he was Executive Vice President of Sprint/United Telecom. He is a Director of KCWE-TV, Com-21 and W.K. Communications. Erik M. Torgerson. Mr. Torgerson has been one of our Directors since November 1997. He is a Partner at Norwest Equity Partners. Prior to joining Norwest Equity Partners in 1993, Mr. Torgerson was with Arthur Anderson & Co.'s financial consulting and audit practice. Mr. Torgerson serves as a director of Command Tooling Systems, LLC, Seasonal Specialties, LLC, TelcoPlus Communications, Inc., InSTEP, LLC and Norwesco, Inc. 70 73 Each Director of our company has been elected pursuant to the terms of the Stockholders' Agreement. See "Certain Relationships and Related Transactions -- Stockholders' Agreement." All of our directors are elected annually and hold office until the next annual meeting of our stockholders and until their successors are duly elected and qualified. Directors do not receive an annual retainer or meeting attendance fees. However, we do reimburse non-management directors for expenses incurred in attending meetings of the Board of Directors. During 1998, our Board of Directors held 8 meetings. The only standing committees of the Board of Directors are the Audit Committee and the Compensation Committee. The current members of the Audit Committee are Messrs. Liepold, Johnston and Torgerson. The Audit Committee periodically consults with our management and independent public accountants on financial matters, including our internal financial controls and procedures. The Audit Committee was formed in February 1997. The current members of the Compensation Committee are Messrs. Benbow, Collatos and Johnston. The Compensation Committee approves compensation arrangements for our executive officers and administers our Stock Option Plan. The Compensation Committee was formed in February 1997. EXECUTIVE COMPENSATION The following table sets forth certain compensation information for the fiscal years ended December 31, 1997 and 1998 as to our Chief Executive Officer and the two other highest paid executive officers of our company whose total annual salary and bonus exceeded $100,000 for such year: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS --------------------------------- ANNUAL COMPENSATION SECURITIES -------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION($) - --------------------------- ----- --------- -------- --------------- --------------- Rodney A. Weary.................. 1998 $227,462 $90,000 21,884 $ 7,945(1) Chief Executive Officer, 1997 198,818 50,000 21,884 -- Chairman of the Board of Directors William J. Gerski................ 1998 $153,270 $80,000 15,000 $ -- Vice President, Sales and 1997 60,259 50,000 12,182 -- Marketing Jo Ellen Linn.................... 1998 $ 93,061 $32,500 2,501 $ -- Secretary and General 1997 80,926 25,000 2,501 -- Counsel
- --------------- (1) Represents compensation attributable to Mr. Weary's use of a company-owned car. 71 74 OPTION GRANTS The following table sets forth certain information concerning grants of stock options to the named executive officers during the fiscal year ended December 31, 1998: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------------------------- POTENTIAL PERCENT OF REALIZABLE VALUE TOTAL AT ASSUMED ANNUAL NUMBER OF OPTIONS/ RATES OF STOCK SECURITIES SARS GRANTED PRICE APPRECIATION UNDERLYING TO EMPLOYEES EXERCISE OF FOR OPTION TERM OPTION/SARS IN FISCAL BASE PRICE EXPIRATION ------------------- NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($) - ---- ----------- ------------ ----------- ---------- -------- -------- Rodney A. Weary.............. -- -- $ -- -- $ -- $ -- William J. Gerski............ 2,818 15.1 1.00 10/08/07 1,772 4,491 Jo Ellen Linn................ -- -- -- -- -- --
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS ACQUIRED ON VALUE YEAR-END(#) AT FISCAL YEAR-END($)(1) EXERCISE REALIZED --------------------------- --------------------------- (#) $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- -------- ----------- ------------- ----------- ------------- Rodney A. Weary........... 9,726 -- 1,823 10,335 -- -- William J. Gerski......... 5,414 -- 2,502 7,084 -- -- Jo Ellen Linn............. 1,111 -- 208 1,192 -- --
- --------------- (1) Based on a value of $1.00 per share, which is the fair value of the Common Stock as determined by the board of directors of Holdings for purposes of option grants. On this basis, the unexercised options are not in the money. EMPLOYMENT AGREEMENTS In January 1997, we entered into substantially similar non-competition agreements with Rodney A. Weary and Jo Ellen Linn, the terms of which preclude each of them from competing with us during their respective periods of employment and for two years thereafter in any market in North America in which we operate or intend to operate. In February 1997, our company and Mr. Weary entered into an agreement pursuant to which Mr. Weary agreed to serve as our President and Chief Executive Officer through February 2000. Such agreement may be extended according to its terms. Under the agreement, Mr. Weary is paid compensation in an amount not less than $200,000 per year and is eligible to participate in our Stock Option Plan. Also during 1997, we entered into substantially similar employment agreements with Ms. Linn and Mr. Gerski, pursuant to which each of them agreed to serve our company in their present capacity through February and November 2000, respectively. Such agreements may be extended according to their terms. Under these agreements, Ms. Linn is paid compensation in an amount not less than $82,500 per year. Mr. Gerski is paid compensation in an amount not less than $100,000 per year. Each is also eligible to participate in our Stock Option Plan. In August 1998, we entered into an employment agreement with Mr. Hager. Pursuant to the employment agreement, Mr. Hager agreed to serve our company in his current capacity through August 2001. The employment agreement may be extended in accordance with its terms. Mr. Hager is paid compensation under the employment agreement in an amount not less than $120,000 per year and is 72 75 eligible to participate in our Stock Option Plan. Our company and Mr. Hager also entered into a non-competition agreement and a confidentiality and proprietary rights agreement in August 1998. The terms of the non-competition agreement preclude Mr. Hager from competing with us during the term of his employment and for one year thereafter in any market in the United States in which we operate or intend to operate. The confidentiality and proprietary rights agreement requires Mr. Hager to maintain the confidentiality of our proprietary information during the period of his employment and thereafter. STOCK OPTION PLAN In July 1997, our Board of Directors adopted our Stock Option Plan pursuant to which we may, at the direction of the Compensation Committee of our Board of Directors, grant incentive stock options, non-qualified stock options or restricted stock options to officers, directors and employees. Our Stock Option Plan was approved by our stockholders on July 24, 1997. Our Stock Option Plan was assumed by Holdings and approved by its stockholders effective September 9, 1997. 401(K) PLAN We maintain a 401(k) Savings Plan for our full-time employees which permits employee contributions up to 15% of annual compensation to the plan on a pre-tax basis. In addition, we may make contributions on a discretionary basis as a percentage of each participating employee's annual compensation. We may also make additional discretionary contributions to this Plan in any plan year up to the annual 401(k) plan contribution limits as defined in the Internal Revenue Code. This Plan is administered by the Compensation Committee of our Board of Directors. 73 76 PRINCIPAL STOCKHOLDERS All of the issued and outstanding capital stock of Golden Sky DBS is owned by Holdings. The following table sets forth certain information as of March 30, 1999, regarding the ownership of Holdings' Common Stock ("Common Stock"), Series A Convertible Participating Preferred Stock, $.01 par value ("Series A Preferred Stock"), Series B Convertible Participating Preferred Stock, $.01 par value ("Series B Preferred Stock"), and Series C Senior Convertible Preferred Stock, $.01 par value ("Series C Preferred Stock"), by (i) certain stockholders or groups of related stockholders who, individually or as a group, are the beneficial owners of 5% or more of any class of Holdings' capital stock and (ii) the executive officers and directors of Holdings. Beneficial ownership percentages of the Common Stock presented below are significantly affected by the securities convertible into or exercisable for Common Stock held by each stockholder. Except as required by law, holders of the Common Stock do not vote as a separate class on matters presented for stockholder approval.
SHARES BENEFICIALLY OWNED ----------------------------------------------------------------------------------- SERIES A SERIES B SERIES C PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY- ------------------ ------------------ ----------------- --------------------- DILUTED % OF % OF % OF % OF VOTING NAME(1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES(2) CLASS(3) POWER(%) - ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- -------- PRINCIPAL STOCKHOLDERS: Alta Subordinated Debt Partners III, L.P.(4)....... 55,532.00 13.3 11,125.24 4.9 -- -- 2,116.00 7.8 9.2 Alta Communications VI, L.P.(4)..................... 92,365.00 22.1 18,504.38 8.1 -- -- 3,522.00 12.4 15.4 Alta-Comm S By S, LLC(4)...... 2,103.00 * 421.84 * -- -- 81.00 * * Spectrum Equity Investors L.P.(5)..................... 50,000.00 12.0 -- -- -- -- 12.00 * 6.7 Spectrum Equity Investors II L.P.(5)..................... 100,000.00 23.9 -- -- -- -- 25.00 * 13.4 BancBoston Ventures Inc.(6)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.8 Norwest Equity Partners VI, LP(7)....................... -- -- 50,083.75 21.9 -- -- -- -- 6.7 Norwest Venture Partners VI, LP(7)....................... -- -- 25,041.87 11.0 -- -- -- -- 3.4 HarbourVest Partners V-Direct Fund L.P.(8)................ -- -- 75,125.62 32.9 -- -- -- -- 10.1 Lion Investments Limited(9)... -- -- 5,010.76 2.2 -- -- -- -- * Westpool Investment Trust plc(9)...................... -- -- 15,031.27 6.6 -- -- -- -- 2.0 General Electric Capital Corporation(10)............. -- -- 15,000.00 6.6 -- -- -- -- 2.0 Harold Poulsen(11)............ 1,000.00 * -- -- 19,809.27 37.0 19,809.27 44.3 2.7 Jack S. Ramirez and Carol H. Ramirez(12)................. -- -- -- -- 8,413.18 15.7 8,413.18 25.2 1.1 Joyce Travis, Trustee of the Travis Living Trust Dated the 5th day of March, 1998(13).................... -- -- -- -- 4,952.31 9.3 4,952.31 16.6 * James and Constance R. Hertz(14)................... -- -- -- -- 5,047.91 9.4 5,047.91 16.8 * Maxon R. and Kristina Davis(15)................... -- -- -- -- 3,400.20 6.4 3,400.20 12.0 * Louise A. Davis(16)........... -- -- -- -- 3,322.66 6.2 3,322.66 11.8 * Jay and Maria Downen(17)...... -- -- -- -- 2,865.00 5.4 2,865.00 10.3 * Otis J. Downen as Trustee of the Otis J. Downen, June 1992 Trust and Frances Eileen Downen, Trustee of the Frances Eileen Downen June 1992 Trust as Tenants in Common(18)............... -- -- -- -- 2,862.44 5.3 2,862.44 10.3 * Chris J. Downen(19)........... -- -- -- -- 2,862.44 5.3 2,862.44 10.3 *
74 77
SHARES BENEFICIALLY OWNED ----------------------------------------------------------------------------------- SERIES A SERIES B SERIES C PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY- ------------------ ------------------ ----------------- --------------------- DILUTED % OF % OF % OF % OF VOTING NAME(1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES(2) CLASS(3) POWER(%) - ------- ---------- ----- ---------- ----- --------- ----- ---------- -------- -------- EXECUTIVE OFFICERS AND DIRECTORS: Rodney A. Weary(20)(21)....... 16,030.00 3.8 -- -- -- -- 13,377.00 46.8 3.9 John R. Hager(21)(22)......... -- -- -- -- -- -- 2,500.00 9.1 * William J. Gerski(21)(23)..... -- -- -- -- -- -- 9,166.00 32.0 1.2 Scott R. Brown(21)(24)........ -- -- -- -- -- -- 333 1.3 * Jo Ellen Linn(21)(25)......... 430.00 * -- -- -- -- 1,528.00 6.0 * Robert F. Benbow(26).......... 150,000.00 38.9 30,051.46 13.2 -- -- 5,719.00 20.5 24.8 William O. Charman(27)........ 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.7 William P. Collatos(28)....... 150,000.00 35.9 -- -- -- -- 37.00 * 20.1 William A. Johnston(29)....... -- -- 75,125.62 32.9 -- -- -- -- 10.1 Robert B. Liepold(21)(30)..... 1,000.00 * -- -- -- -- 2,113.00 8.2 * Erik M. Torgerson(31)......... -- -- 50,083.75 21.9 -- -- -- -- 6.7 All Executive Officers and Directors as a group (11 persons).................... 392,460.00 93.5 167,782.27 73.4 -- -- 34,792.00 100.0 79.5
- --------------- * Less than 1% (1) Except as otherwise noted below, the persons named in the table have sole voting power and investment power with respect to all shares set forth in the table. (2) Includes shares issuable upon exercise of warrants and options exercisable within 60 days of the date hereof, as well as shares of Common Stock issuable upon conversion of beneficially-owned shares of Series C Preferred Stock. (3) The percent of class beneficially owned by each listed holder of Common Stock appears unusually large, because there is a small number of shares of Common Stock outstanding relative to the number of shares of Common Stock owned and subject to options, warrants or conversion privileges held by such person. (4) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite 4050, San Francisco, California 94111, Attn: Robert Benbow. Alta Subordinated Debt Partners III, L.P. ("Alta Sub Debt III") is managed by Burr, Egan, Deleage & Co. Alta Communications VI, L.P. ("Alta VI") and Alta Comm S by S, LLC ("S by S") are managed by Alta Communications, Inc. The general partner of Alta Sub Debt III and the general partner of Alta VI exercise sole voting and investment powers with respect to the securities held by their respective fund. The general partners of Alta Subordinated Debt Management III, L.P., which is the general partner of Alta Sub Debt III, include Messrs. Craig Burr, William P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble, Jean Deleage and Jonathan Flint and Ms. Eileen McCarthy. Such general partners may be deemed to share voting and investment powers for the shares held by Alta Sub Debt III. The general partners of Alta Communications VI Management Partners, L.P., which is the general partner of Alta VI, include Messrs. William P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble and David Retik and Ms. Eileen McCarthy. Such general partners may be deemed to share voting and investment powers for the shares held by Alta VI. These general partners disclaim beneficial ownership of all such securities held by the funds except to the extent of their proportionate pecuniary interests therein. Certain principals of Burr, Egan, Deleage & Co. and Alta Communications, Inc. (including certain of the individuals identified above) are members of S by S, which invests alongside Alta VI. As members of S by S, they may be deemed to share voting and investment powers for the shares held by S by S. These principals disclaim beneficial ownership of all such shares except to the extent of their proportionate pecuniary interest therein. Common stock ownership includes warrants to purchase 2,103, 3,499 and 80 shares of Common Stock owned by Alta Sub Debt III, Alta VI and S by S, respectively. (5) The address is 125 High Street, Suite 2600, Boston, Massachusetts 02110, Attn: William P. Collatos. The sole general partner of Spectrum Equity Investors, L.P. is Spectrum Equity Advisors, LLC, a 75 78 limited liability company whose members are Messrs. Brion B. Applegate and William P. Collatos. The sole general partner of Spectrum Equity Investors II, L.P. is Spectrum Equity Advisors II, LLC, a limited liability company whose members are Messrs. Brion B. Applegate, William P. Collatos and Kevin J. Morroni. Messrs. Applegate and Collatos may be deemed to share beneficial ownership of the shares owned by Spectrum Equity Investors, L.P., and Messrs. Applegate, Collatos and Morroni may be deemed to share beneficial ownership of the shares owned by Spectrum Equity Investors II, L.P. Such individuals disclaim such beneficial ownership except to the extent of their respective pecuniary interests in such shares. (6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110, Attn: William O. Charman. The shares of Series A Preferred Stock and Series B Preferred Stock beneficially owned by BancBoston Ventures Inc. are controlled by its President, Frederick M. Fritz, and by its Managing Director, Sanford Anstey, and by William O. Charman, who is a director of the Company. (7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attn: Erik M. Torgerson. The shares of Series B Preferred Stock beneficially owned by Norwest Equity Partners VI, LP are controlled by its general partner, Itasca LBO Partners VI, LLP, which is controlled by John E. Lindahl, Managing Partner, and by John P. Whaley, Managing Administrative Partner. The shares of Series B Preferred Stock beneficially owned by Norwest Venture Partners VI, LP are controlled by its general partner, Itasca VC partners, LLP, which is controlled by its Managing Partner, George J. Still, Jr., and by John P. Whaley, Managing Administrative Partner. (8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole general partner of HarbourVest Partners V -- Direct Fund L.P. ("HarbourVest V") is a limited liability company whose managing member is HarbourVest Partners, LLC. The managing directors of HarbourVest Partners, LLC are Messrs. George Anson, John M. Begg, Philip M. Bilden, Theodore A. Clark, Kevin S. Delbridge, William A. Johnston, Edward W. Kane, Frederick C. Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D. Brooks Zug, and Ms. Martha D. Vorlicek. Such individuals may be deemed to share beneficial ownership of the shares held by HarbourVest V, and disclaim such beneficial ownership except to the extent of their respective pecuniary interest in such shares. (9) The address is c/o London Merchant Securities, Carlton House, 33 Robert Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion Investments Limited and Westpool Investment Trust plc is a wholly-owned subsidiary of London Merchant Supplies plc, a publicly traded company in the U.K. (10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut 06927, Attn: Peter Foley. General Electric Capital Corporation is a wholly-owned subsidiary of General Electric Corporation. (11) The address is P.O. Box 1376, Great Falls, Montana 59403. (12) The address is 2061 Norwich Ct., Glenview, Illinois 60025. (13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086. (14) The address is 7444 Molt Road, Billings, Montana 59106. (15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404. (16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128. (17) The address is 511 Fortress Circle, Leesburg, Virginia 21075. (18) The address is 2105 Noble Avenue, Springfield, Illinois 62704. (19) The address is 1617 Outer Park, Springfield, Illinois 62704. (20) 16,030 shares of Series A Preferred Stock and 9,730 shares of Common Stock are held by the Rodney A. Weary Revocable Trust Dated 10/25/95 and may be deemed to be beneficially owned by Mr. Weary. In addition, through the Stock Option Plan, Mr. Weary beneficially owns 3,647 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 21,884 shares available to him. 76 79 (21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112. (22) Through the Stock Option Plan, Mr. Hager beneficially owns 2,500 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 10,000 available to him. (23) Mr. Gerski beneficially owns 5,414 shares of Common Stock. In addition, through the Stock Option Plan, Mr. Gerski beneficially owns 3,752 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 15,000 shares available to him. (24) Through the Stock Option Plan, Mr. Brown beneficially owns 333 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 4,000 available to him. (25) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and 1,111 shares of Common Stock. In addition, through the Stock Option Plan, Ms. Linn beneficially owns 417 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 2,501 shares available to her. (26) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite 4050, San Francisco, California 94111. Shares held by Alta Subordinated Debt Partners III, L.P., Alta Communications VI, L.P. and Alta-Comm S By S, LLC. Mr. Benbow is a general partner of the respective general partners of Alta Subordinated Debt Partners III, L.P. and Alta Communications VI, L.P. As a general partner, he may be deemed to share voting and investment powers with respect to the shares held by the funds. Mr. Benbow disclaims beneficial ownership of the shares held by such funds except to the extent of his proportionate pecuniary interest therein. Mr. Benbow also disclaims beneficial ownership of all shares held by Alta Comm S by S, LLC, of which he is not a member. (27) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th Floor, Boston, Massachusetts 02110. Shares held by BancBoston Ventures Inc., which may be deemed to be beneficially owned by Mr. Charman. (28) The address is c/o Spectrum Equity Investors, 125 High Street, Suite 2600, Boston, Massachusetts 02110. Shares held by Spectrum Equity Investors L.P. and Spectrum Equity Investors II L.P., which may be deemed to be beneficially owned by Mr. Collatos. (29) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th Floor, Boston, Massachusetts 02111. Shares held by HarbourVest Partners V-Direct Fund L.P., which may be deemed to be beneficially owned by Mr. Johnston. (30) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock and 1,425 shares of Common Stock. In addition, through the Stock Option Plan, Mr. Liepold beneficially owns 688 shares of Common Stock as to which options have vested or will have vested within 60 days, out of a pool of 3,758 shares available to him. (31) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3388. Shares held by Norwest Equity Partners VI, LP, which may be deemed to be beneficially owned by Mr. Torgerson. 77 80 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS STOCK PURCHASE AGREEMENTS On February 12, 1997, pursuant to the Stock Purchase Agreement dated as of such date by and among Systems, Rodney A. Weary, and the investors named therein, Systems sold an aggregate 199,000 shares of Series A Preferred Stock and 75 shares of Common Stock to such investors. At a subsequent closing on February 28, 1997, Systems issued to certain of such investors an additional 207,000 shares of Series A Preferred Stock and 25 shares of Common Stock in the aggregate. Such transactions resulted in proceeds to Systems of approximately $40.6 million in the aggregate. Systems subsequently sold an aggregate 12,000 shares of Series A Preferred Stock to certain investors who had not previously purchased either Series A Preferred Stock or Common Stock. Such transactions resulted in proceeds to Systems of approximately $35.6 million, in addition to the conversion of approximately $2.4 million in stock subscriptions and $3.8 million in short term borrowings. Pursuant to an Agreement and Plan of Merger dated as of September 9, 1997 by and among Systems, GSS Mergersub Inc., a wholly-owned subsidiary of Holdings, and Holdings, GSS Mergersub Inc. merged with and into Systems, with Systems being the surviving corporation. Upon the consummation of such merger, each share of Series A Preferred Stock of Systems was converted into a share of Series A Preferred Stock of Holdings, each share of Common Stock of Systems was converted into a share of Common Stock of Holdings, and each share of capital stock of GSS Mergersub Inc. was converted into a share of Common Stock of Systems, thereby causing Systems to be a wholly-owned subsidiary of Holdings. Pursuant to a letter agreement dated as of September 9, 1997 by and between Systems and Holdings, Systems assigned and Holdings assumed all of the rights and obligations of Systems under the Series A Stock Purchase Agreement. Pursuant to a Note Purchase Agreement dated as of November 6, 1997 by and among Holdings, Systems and certain outside investors, Holdings issued and sold to such investors an aggregate $10.0 million principal amount of convertible promissory notes of Holdings ("Series B Convertible Notes"). Each Series B Convertible Note (together with accrued interest thereon, if any) was automatically convertible into a specified number of shares of Series B Preferred Stock upon the consummation of a qualified Series B Preferred Stock financing. On November 24, 1997, pursuant to the Stock Purchase Agreement dated as of such date by and among Holdings, Systems, Rodney A. Weary and the investors named therein, Holdings issued an aggregate 228,442 shares of Series B Preferred Stock at a purchase price of $200 per share to certain of such investors upon conversion of the Series B Convertible Notes. Such Stock Purchase Agreement provides that certain actions by Holdings, including the incurrence of indebtedness in excess of $1.0 million and the granting of liens securing indebtedness in excess of $1.0 million, require the approval of a supermajority of the members of Holdings' Board of Directors. Subject to certain exceptions, Holdings and its subsidiaries (including Systems) are prohibited under the terms of each of the Stock Purchase Agreements from paying any dividends or making any distributions of cash, property or securities of Holdings or any such subsidiary with respect to any shares of capital stock of any such company, or directly or indirectly redeeming, purchasing or otherwise acquiring for consideration any shares of capital stock of any such company. Such prohibitions could have the effect of limiting the cash available for Golden Sky DBS to service its indebtedness. On October 2, 1998, pursuant to an Agreement and Plan of Merger, dated as of September 1, 1998, among Holdings, Systems, Western Montana DBS, Inc. d/b/a Rocky Mountain DBS ("Western Montana DBS") and the then stockholders of Western Montana DBS, Holdings issued an aggregate 51,000 shares of Series C Senior Convertible Preferred Stock to such stockholders. On February 19, 1999, Holdings transferred all the outstanding capital stock of Systems (together with $100 in cash) to Golden Sky DBS in exchange for 100 shares of common stock, par value $.01, of Golden Sky DBS. 78 81 STOCKHOLDERS' AGREEMENT Holdings and its stockholders have entered into a stockholders' agreement dated as of November 24, 1997 (the "Stockholders' Agreement"). Under the Stockholders' Agreement, Holdings and certain of its stockholders were granted a right of first offer and a co-sale option with respect to shares of Holdings' capital stock offered in transactions not otherwise expressly permitted under the Stockholders' Agreement. In addition, certain of the holders of Series A and Series B Preferred Stock were granted the right, upon the affirmative vote of 58% of the outstanding shares of each such class, to cause the other holders to (i) dispose of all their shares of capital stock of Holdings in connection with a sale of all outstanding shares of Holdings' capital stock or (ii) vote for the merger or consolidation of Holdings with an unaffiliated acquiring entity or the sale of all or substantially all the assets of Holdings. Such rights shall terminate immediately upon an initial public offering of Holdings' Common Stock meeting certain criteria or a sale of Holdings. The election of directors is also established by the Stockholders' Agreement. Under the Stockholders' Agreement, Holdings has agreed, subject to certain conditions, to effect up to four demand registrations of the common stock held by its stockholders for a sale to the public under applicable federal and state securities laws. In addition, the stockholders have certain "piggy-back" registration rights and rights to registration on Form S-3, subject to certain conditions. In consideration for such registration rights, under the Stockholders' Agreement the stockholders have agreed not to sell or otherwise dispose of shares of Holdings' common stock for 180 days following any initial public offering by Holdings upon the request of Holdings or the underwriter for such offering. The obligations of Holdings to register shares of its common stock under the Stockholders' Agreement will terminate as to any party thereto (other than Holdings) seven years after an initial public offering of the Holdings' securities, or, as to any party holding less than 2% of Holdings' outstanding common stock, at such time after the first anniversary of an initial public offering when all such shares can be legally transferred in a three-month period under Rule 144 under the Securities Act (as defined herein), as reasonably determined by Holdings. FORMER CABLE-VIDEO MANAGEMENT, INC. ARRANGEMENT On July 1, 1996, Systems entered into a management agreement with Cable-Video Management, Inc. ("CVM"), which is owned by Rodney A. Weary, Systems' Chief Executive Officer, to administer Systems' first Acquisition. The management agreement was terminated effective September 30, 1996. During the term of the agreement, total management fees of $280,000 were paid to CVM, and Systems reimbursed CVM for salaries and other miscellaneous expenses totaling approximately $343,000. Upon termination of the management agreement, Systems purchased the assets of CVM for $44,000. CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD Systems has an oral consulting agreement with Robert B. Liepold, a vice president and director of Systems, to provide expertise on an "as needed" basis at the rate of $200 per hour in fiscal 1997 and at the rate of $7,000 per month in 1998. Systems paid an aggregate $77,000 and $84,000 to Mr. Liepold in 1997 and 1998, respectively, in connection with such services. In addition, Systems paid Mr. Liepold a commission of $75,000 in October 1998 in connection with a recent acquisition. PAYMENTS TO AFFILIATES OF RODNEY A. WEARY Systems utilizes the air transportation services of a company owned by Rodney A. Weary, Systems' Chief Executive Officer. Systems paid $506,000 in 1998, $109,000 in 1997 and $31,000 in 1996 in connection with such services. In October 1997, Systems entered into an agreement to lease an aircraft from Mr. Weary. The lease is cancelable with six months' notice and requires monthly payments equal to the greater of $20,000 or a fixed hourly operating charge based on prevailing market rates. In 1997, Mr. Weary loaned $150,000 to Systems at an interest rate of 10% per annum. In 1996, Mr. Weary made a short-term loan in the principal amount of $381,000 to Systems at an annual interest rate of 10%. All such amounts were repaid by Systems prior to December 31, 1997. 79 82 Also in 1997, Systems paid $66,000 to a company affiliated with Mr. Weary, which payment was reimbursement relating to consulting services rendered to Systems. In 1997, F.G. Weary, the father of Rodney A. Weary, loaned $215,000 to Systems at an interest rate of 10% per annum. Such loan, together with accrued interest, was repaid by Systems prior to December 31, 1997. 80 83 DESCRIPTION OF OTHER INDEBTEDNESS CREDIT FACILITY The Amended and Restated Credit Agreement, dated as of May 8, 1998, among Holdings, Systems, the banks party thereto from time to time, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National Bank, as administrative agent, and General Electric Capital Corporation, as documentation agent, which governs our Credit Facility was amended in connection with the offering of the outstanding notes. As amended, our Credit Facility provides for a $35.0 million term loan facility and a $115.0 million revolving credit facility, with a $40.0 million sublimit for letters of credit. We have fully utilized our term loan availability. All the proceeds of borrowings pursuant to the term loan facility ("Term Loans") were used to repay existing indebtedness and for working capital purposes. The proceeds of borrowings pursuant to the revolving credit facility ("Revolving Loans") may be used to effect acquisitions of Rural DIRECTV Markets and for general corporate, capital expenditure and working capital purposes. Capitalized terms used in this section but not defined herein have the meaning ascribed to such terms as the Credit Facility. The term loan facility is to be repaid in 16 consecutive quarterly installments commencing March 31, 2002, with the remaining balance due December 31, 2005. Each of the quarterly payments due from March 31, 2002 through September 30, 2005 shall be in the amount of approximately $88,000 with $33.7 million due as a bullet payment at maturity on December 31, 2005. Borrowings under the revolving credit facility will be available to us until September 30, 2005; however, the total revolving loan commitment will be reduced quarterly commencing March 31, 2001 by approximately $1.2 million at the end of each quarter from March 31, 2001 through December 31, 2001, by approximately $3.4 million at the end of each quarter from March 31, 2002 through December 31, 2002, by $6.9 million at the end of each quarter from March 31, 2003 through December 31, 2003, by approximately $8.6 million at the end of each quarter from March 31, 2004 through December 31, 2004, and by $11.5 million from March 31, 2005 through September 30, 2005. The making of each loan under the Credit Facility is subject to the satisfaction of certain conditions, which include not exceeding a certain "borrowing base" based on the number of paying subscribers within the Rural DIRECTV Markets served by us and in Rural DIRECTV Markets to be acquired by us. In addition, the Credit Facility provides that we will be required to make mandatory repayments of the Credit Facility from, subject to certain exceptions, the net proceeds of certain sales or other dispositions by us or any of our subsidiaries of capital stock or material assets, and with a percentage of any excess operating cash flow with respect to any fiscal year equal to 75%. Borrowings by Systems under the Credit Facility are unconditionally and irrevocably guaranteed by Holdings, Golden Sky DBS and each of our direct and indirect subsidiaries (excluding South Plains DBS Limited Partnership and DCE Satellite Entertainment, LLC), and such borrowings are secured by (i) a pledge by Holdings of all of the capital stock of Golden Sky DBS, (ii) a pledge by Golden Sky DBS, of all of the capital stock of Systems, (iii) an equal and ratable pledge of all of the capital stock of Systems' subsidiaries, (iv) a first priority security interest in all of such subsidiaries' assets, and (v) a collateral assignment of the our NRTC Agreements. The Credit Facility provides that we may elect that all or a portion of the borrowings under the Credit Facility bear interest at a rate per annum equal to either (i) the Base Rate plus the Applicable Margin or (ii) the Quoted Rate plus the Applicable Margin. When applying the Base Rate with respect to Revolving Loans, the Applicable Margin will be 2.50% per annum, less, in certain circumstances, a discount based on our then ratio of Net Adjusted Consolidated EBITDA to Annualized Consolidated EBITDA. When applying the Quoted Rate with respect to Revolving Loans, the Applicable Margin will be 3.75% per annum, less a discount based on leverage, if applicable. When applying the Base Rate with respect to Term Loans, the Applicable Margin will be 2.75% per annum, less a discount based on leverage, if applicable. When applying the Quoted Rate with respect to Term Loans, the Applicable Margin will be 4.00% per annum, less a discount based on leverage, if applicable. As used herein, the "Base Rate" means the higher of (i) 0.50% in excess of the Federal Funds rate and (ii) the prime lending rate. As used herein, the "Quoted Rate" means (a) the quotation offered to the Administrative Agent in the New York 81 84 interbank Eurodollar market for U.S. dollar deposits of amounts in immediately available funds comparable to the outstanding principal amount of the loan of the Administrative Agent for which an interest rate is then being determined with maturities comparable to the interest period applicable to such loan as determined by the Administrative Agent's Treasury Funding Management on the date which is two business days prior to the commencement of such interest period, divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (b) a percentage equal to the remainder of 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency funding or liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System (or any successor category of liabilities under such Regulation D). The Credit Facility contains a number of significant covenants that, among other things, limit our ability and the ability of our subsidiaries to incur additional indebtedness and guaranty obligations, create liens and other encumbrances, make certain payments, investments, loans and advances, pay dividends or make other distributions in respect of our capital stock, sell or otherwise dispose of assets, make capital expenditures, merge or consolidate with another entity, create subsidiaries, make amendments to our organizational documents or transact with affiliates. In addition, the Credit Facility requires the maintenance of certain specified financial and operating covenants, including minimum interest coverage ratios and limits on general and administrative expenses. We will pay commitment fees on the unused amounts under the revolving loan commitments. Such commitment fees, which shall be payable quarterly in arrears, shall range from 0.5% per annum to 1.25% per annum based on our utilization of such commitments. Pursuant to a recent amendment to the NRTC Agreements, our company and all other NRTC members whose monthly obligations to the NRTC have exceeded $500,000 in the past six months are required to keep and maintain in full force and effect a standby letter of credit in favor of the NRTC to secure their respective payment obligations to the NRTC under the NRTC Agreements. The initial amount of the letter of credit issued at our request pursuant to the Credit Facility is equal to three times our single largest monthly invoice from the NRTC, and must be increased as we make additional acquisitions of Rural DIRECTV Markets and when our obligations to the NRTC exceed the amount of the original letter of credit by 67%. THE 12 3/8% NOTES On July 31, 1998, Systems, our wholly-owned subsidiary consummated an offering of $195 million in aggregate principal amount of 12 3/8% Senior Subordinated Notes due 2006. Interest on the 12 3/8% notes is payable in cash semi-annually on February 1 and August 1 of each year, with the first interest payment due February 1, 1999. Systems' 12 3/8% notes mature on August 1, 2006. The 12 3/8% notes offering resulted in net proceeds of approximately $189.15 million (after payment of underwriting discounts and other issuance costs aggregating approximately $5.85 million). Approximately $45.2 million of the net proceeds of the 12 3/8% notes offering were placed in an interest reserve account to fund the first four semi-annual interest payments (through August 1, 2000) on the 12 3/8% notes. Systems' 12 3/8% notes are unsecured senior subordinated obligations of Systems and are subordinated in right of payment to all of its existing and future senior indebtedness. Systems' 12 3/8% notes rank equally in right of payment with all other existing and future senior subordinated indebtedness, if any, of our company and senior in right of payment to all existing and future subordinated indebtedness, if any, of our company. The 12 3/8% notes are redeemable, in whole or in part, at our option on or after August 1, 2003, at redemption prices decreasing from 112% during the year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to August 1, 2001, we may, at our option, redeem up to 35% of the originally issued aggregate principal amount of the 12 3/8% notes, at a redemption price equal to 112.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption solely with the net 82 85 proceeds of a public equity offering of our company, Holdings or Systems yielding gross proceeds of at least $40.0 million and any subsequent public equity offerings (provided that, in the case of any such offering or offerings by Holdings or Golden Sky DBS, all the net proceeds are therefore contributed to Systems); provided, further, that immediately after any such redemption the aggregate principal amount of the 12 3/8% notes outstanding must equal at least 65% of the originally issued aggregate principal amount of the 12 3/8% notes. The indenture governing the 12 3/8% notes contains restrictive covenants that, among other things, impose limitations on our ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 12 3/8% notes, incur liens, permit restrictions on the ability of our subsidiaries to pay dividends or make certain payments to us, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets. In the event of a change of control, as defined in the 12 3/8% notes indenture, each holder of the 12 3/8% notes will have the right to require us to purchase all or a portion of such holder's 12 3/8% notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. THE 13 1/2% NOTES To the extent that holders of the outstanding notes choose not tender their notes in the exchange offer, these non-tendered notes will remain outstanding after the consummation of the exchange offer. The terms of these notes will be identical in all material respects (including principal amount at maturity, yield to maturity and maturity) to the terms of the new notes. However, the outstanding notes will continue to be subject to the transfer restrictions contained in the legend which appears on each respective note. After the consummation of this exchange offer, the aggregate principal amount at maturity of any non-tendered outstanding notes and the new notes will be $193,100,000. See "Risk Factors -- Consequences of the Exchange Offer to Holders of the Outstanding Notes" and "Description of the New Notes." SELLER NOTES In connection with the acquisition of our Rural DIRECTV Market in Clark County, Nevada, we issued a promissory note in favor of TEG-DBS Services, Inc. Pursuant to the TEG-DBS note, we are obligated to pay to TEG-DBS the principal sum of $2.5 million, which amount is due and payable on June 12, 1999, together with interest accrued on the unpaid principal amount at the rate of 10% per annum, which interest is payable in quarterly installments. Our obligations pursuant to the TEG-DBS Note are secured by assets of TEG-DBS acquired by us, as described in the Security Agreement, dated June 12, 1997 between TEG-DBS and our company. As of December 31, 1998, the entire principal amount of the TEG-DBS note was outstanding. A failure by us to make a payment under the TEG-DBS note would entitle TEG-DBS, at its sole option to (i) a late payment penalty equal to 2% of the payment amount or (ii) to accelerate the payment by us of all amounts due pursuant to the TEG-DBS note. In connection with the acquisition of our Rural DIRECTV Market in Missoula, Montana, we issued a note payable in favor of Western Montana Entertainment Television, Inc. in the principal amount of $3.75 million, dated December 22, 1997. The Western Montana note bears interest at an annual rate of 7%. Four annual installments of principal and interest of $1,121,868 are payable commencing January 5, 1999. The Western Montana note is secured by a letter of credit. In connection with the acquisition of our Rural DIRECTV Market in Enfield, North Carolina, we issued a note payable in favor of Halifax Electric Membership Corporation in the principal amount of $5.0 million, dated May 8, 1998. The Halifax note bears interest at an annual rate of 7%. Interest is payable in quarterly installments. Principal is payable in equal annual installments of $1.0 million on January 1 of each year, commencing January 1, 1999. The installment payment due January 1, 1999 was paid by Systems at the end of December 1998. The Halifax note is secured by a letter of credit. 83 86 In connection with the acquisition of our Rural DIRECTV Market in Summerdale, Alabama, we issued a note payable in favor of Baldwin County Electric Membership Corporation in the principal amount of $5.16 million, dated June 29, 1998. The Alabama note bears interest at an annual rate of 8%. Principal and accrued interest was paid, in full, on January 15, 1999. The Alabama note is secured by a letter of credit. 84 87 DESCRIPTION OF THE NEW NOTES The outstanding notes were, and the new notes (the "Notes") will be, issued under the same indenture that governs the outstanding notes (the "Indenture"). The Indenture, which is dated as of February 19, 1999, is between Golden Sky DBS, Inc. and United States Trust Company of New York, as trustee (the "Trustee"). A copy of the form of the Indenture will be made available to holders of the outstanding new notes upon request. Upon the effectiveness of the shelf registration statement of which this prospectus is a part, the Indenture will be subject to and governed by the Trust Indenture Act of 1939, as that act may have been amended (the "Trust Indenture Act"). The summary of the material provisions of the Indenture in this "Description of the New Notes," is not complete and is qualified by reference to, the Trust Indenture Act, and to all of the provisions of the Indenture, including the definitions of some of the terms therein and those terms made a part of the Indenture by reference to the Trust Indenture Act, as in effect on the date of the Indenture. As used in this section, the "Issuer" refers to Golden Sky DBS, Inc. only. The definitions of many of the capitalized terms used in this section are set forth below under "-- Certain Definitions." GENERAL The Notes will be general senior unsecured obligations of the Issuer. The Notes are limited to $193,100,000 aggregate principal amount at maturity and will mature on March 1, 2007. The outstanding notes were issued at a substantial discount from their principal amount at maturity and generated gross proceeds to the Issuer of $100,048,972. Based on the issue price of the outstanding notes, the yield to maturity of the Notes is 13 1/2% (computed on a semi-annual bond equivalent basis), calculated from February 19, 1999. See "Certain Federal Income Tax Considerations." Cash interest will not accrue or be payable on the Notes prior to March 1, 2004. After that date, cash interest on the Notes will accrue at a rate of 13 1/2% per year and will be payable semi-annually in arrears on each March 1 and September 1, commencing on September 1, 2004, to the holders of record of the Notes at the close of business on the February 15 and August 15, immediately preceding such interest payment date. Cash interest will accrue from the most recent interest payment date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from March 1, 2004. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Notes will be issued only in fully registered form without coupons, in denominations of $1,000 principal amount at maturity and integral multiples thereof. The Principal of, premium, if any, and interest on the Notes will be payable, and the Notes will be exchangeable and transferable, at the office or agency of the Issuer in the City of New York maintained for such purposes. This office will initially be the corporate trust office of the Trustee. No service charge will be made for any registration of transfer, exchange or redemption of the Notes, but the Issuer may require payment to cover any tax or other governmental charge that may be imposed in connection therewith. OPTIONAL REDEMPTION Optional Redemption. The Issuer, at any time on or after March 1, 2004, may redeem all or part of the Notes at the redemption prices (expressed as percentages of principal amount at maturity) set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning on March 1 of the years indicated below:
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 85 88 maturity of the Notes, at a redemption price in cash equal to 113.5% of the Accreted Value of the Notes at the date of redemption solely with the net proceeds of a Public Equity Offering of the Issuer yielding gross proceeds of at least $40 million and any subsequent Public Equity Offerings. At least 65% of the originally issued aggregate principal amount of Notes must remain outstanding after each such redemption. The Issuer must give notice of its desire to make any such redemption within 60 days of the related Public Equity Offering. MANDATORY REDEMPTION The Issuer will not be required to make any mandatory sinking fund payments in respect of the Notes. However, (1) upon a Change of Control, the Issuer will be required to make an offer to purchase all outstanding Notes at a price equal to 101% of the Accreted Value thereof, or if the Change of Control occurs on or after March 1, 2004, the principal amount at maturity thereof (in each ease determined at the date of purchase), plus accrued interest thereon, if any, to the date of purchase and (2) upon an Asset Sale, the Issuer may be obligated to make an offer to purchase all or a portion of the Notes at a price equal to 100% of the Accreted Value thereof, or if the Asset Sale occurs on or after March 1, 2004, the principal amount at maturity thereof (determined at the date of purchase), plus accrued and unpaid interest, if any, to the date of purchase. See "-- Certain Covenants -- Disposition of Proceeds of Asset Sales." Selection; Effect of Redemption Notice. In the case of a partial redemption, the Trustee will select the notes for redemption on a pro rata, by lot or such other method. Any redemption relating to a Public Equity Offering must be made on a pro rata basis or on as nearly a basis as practicable (subject to DTC procedures). No Notes of a principal amount at maturity of $1,000 or less can be redeemed in part. The Issuer must be mail notice of redemption to the registered address of each holder of Notes by first-class mail at least 30 but not more than 60 days before the redemption date. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount at maturity thereof to be redeemed. A new note in a principal amount at maturity equal to the unredeemed portion of the partially redeemed Note, will be issued in the name of the holder thereof upon cancellation of the original Note. Upon giving of a redemption notice, interest on any Notes called for redemption will cease to accrue from and after the date fixed for redemption (unless the Issuer defaults in providing the funds for such redemption) and those Notes will cease to be outstanding. CHANGE OF CONTROL The Indenture provides that, following a Change of Control (the date of such Change of Control being the "Change of Control Date"), the Issuer will be obligated, within 30 days after the Change of Control Date, to make an offer to purchase (a "Change of Control Offer") on a business day not later than the 60th day following the Change of Control Date (the "Change of Control Payment Date") all of the then existing Notes at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the Accreted Value of the Notes on the Change of Control Payment Date. If the Change of Control Payment Date is on or after March 1, 2004, the Change of Control Purchase price must be equal to 101% of the principal amount at maturity of the Notes, plus accrued and unpaid interest thereon, if any, to the Change of Control Payment Date. The Issuer will be required to purchase all Notes properly tendered and not withdrawn pursuant to the Change of Control Offer. Within 30 days following any Change of Control and prior to mailing the notice referred to below, the Indenture provides that the Issuer covenants to either (1) repay in full and terminate all commitments under all Indebtedness under the Credit Facility or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Facility and to repay the Indebtedness owed to each lender which has accepted such offer or 86 89 (2) obtain the requisite consents under the Credit Facility to permit the repurchase of the Notes as provided below. The Company shall first comply with the covenant in (2) above before it shall be required to repurchase Notes as contemplated by the provisions described herein. The Company's failure to comply with (1) and (2) above constitute an Event of Default described in (4), but not (2) of "-- Events of Default" below. In order to effect such Change of Control Offer, the Issuer will, not later than the 30th day after the Change of Control Date, be obligated to mail to each holder of Notes notice of the Change of Control Offer, which notice will (1) govern the terms of the Change of Control Offer and (2) will state, among other things, the procedures that holders must follow to accept the Change of Control Offer. The Change of Control Offer must remain open for at least 20 business days. The occurrence of some of the events that would constitute a Change of Control would also constitute a "Change in Control" or other event of default under the Credit Facility and/or a "Change of Control" under the 12 3/8% Notes Indenture. The Credit Facility contains an event of default upon a "Change of Control" as defined therein and the 12 3/8% Notes Indenture obligates Systems to make an offer to repurchase the 12 3/8% Notes upon a "Change of Control" as defined therein. If a Change of Control Offer is made, there can be no assurance that the Issuer will have available funds sufficient to pay the purchase price for all of the Notes that might be tendered by holders of Notes seeking to accept the Change of Control Offer. If the Issuer fails to purchase all of the Notes tendered for purchase, such failure will constitute an Event of Default under the Indenture. See "-- Events of Default" below. The Issuer must comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act, and any other securities laws or regulations and any applicable requirements of any securities exchange on which the Notes are listed, in connection with the repurchase of Notes pursuant to a Change of Control Offer. Any violation of the provisions of the Indenture relating to such Change of Control Offer occurring as a result of such compliance will not be deemed a Default or an Event of Default under the Indenture. CERTAIN COVENANTS Set forth below are the material covenants that are contained in the Indenture. Limitation on Indebtedness of the Issuer. The Indenture provides that the Issuer will not directly or indirectly Incur, contingently or otherwise, any Indebtedness (including any Acquired Indebtedness), except that the Issuer may Incur (1) Indebtedness of the Issuer evidenced by the Notes and the Indenture, (2) Indebtedness represented by a guarantee of (a) the Issuer's obligations of amounts outstanding under the Credit Facility and (b) Indebtedness of a Restricted Subsidiary Incurred under clauses (b)(2), (e), (h) and (i) of the definition of "Permitted Indebtedness," and any refinancing thereof under clause (g) of such definition, pursuant to the covenant "Limitation on Additional Indebtedness of Subsidiaries of the Issuer," and 87 90 (3) Indebtedness of the Issuer the proceeds of which are used solely to refinance Indebtedness Incurred under clause (1) above; provided that (a) the principal amount of Indebtedness incurred pursuant to this clause (3) (or, if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness) shall not exceed the sum of (i) if prior to March 1, 2004, the total Accreted Value or, if on or after March 1, 2004, the aggregate principal amount at maturity of the Notes refinanced, plus (ii) the amount of any premium reasonably determined by the Issuer as necessary to accomplish such refinancing by means of a tender offer or privately negotiated purchase, plus (iii) the amount of expenses in connection therewith, (b) the new Indebtedness refinancing such Indebtedness shall have an Weighted Average Life to Stated Maturity that is equal to or greater than the remaining Weighted Average Life Stated Maturity of such Indebtedness and shall have no scheduled principal payment prior to the 91st day after the Stated Maturity for the final scheduled principal payment of such Indebtedness, and (c) in the case of any partial refinancing of the Notes, such new Indebtedness shall be unsecured. Limitation on Additional Indebtedness of Subsidiaries of the Issuer. The Indenture provides that the Issuer will not permit any Restricted Subsidiary to, directly or indirectly, Incur, contingently or otherwise, any Indebtedness (including any Acquired Indebtedness), other than Permitted Indebtedness. However, the Restricted Subsidiaries will be permitted to Incur Indebtedness (including Acquired Indebtedness), if, at the time of and immediately after giving pro forma effect to such Incurrence (including the application of the net proceeds therefrom), the Debt to Operating Cash Flow Ratio of the Issuer would be less than or equal to 6.5 to 1.0. Limitation on Restricted Payments. The Indenture provides that the Issuer will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment unless (1) no Default shall have occurred and be continuing at the time of or after giving effect to such Restricted Payment, (2) immediately after giving effect to such Restricted Payment, a Restricted Subsidiary would be able to Incur $1.00 of Indebtedness under the Debt to Operating Cash Flow Ratio set forth in the covenant "Limitation on Additional Indebtedness of Subsidiaries of the Issuer," and (3) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments and Designation Amounts declared or made on or after the Issue Date does not exceed an amount equal to the sum of, without duplication, (a) the difference between (i) the Cumulative Operating Cash Flow determined for the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of such Restricted Payment and (ii) 150% of Cumulative Consolidated Interest Expense determined for the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of such Restricted Payment, plus (b) the aggregate net cash proceeds received by the Issuer either (i) as capital contributions to the Issuer after the Issue Date or 88 91 (ii) from the issue and sale (other than to a Subsidiary of the Issuer) of its Qualified Equity Interests after the Issue Date, plus (c) the aggregate net cash proceeds received by the Issuer or any Restricted Subsidiary after the Issue Date upon the conversion of, or exchange for, Indebtedness of the Issuer or a Restricted Subsidiary that has been converted into or exchanged for Qualified Equity Interests of the Issuer, plus (d) in the case of the disposition or repayment of any Investment constituting a Restricted Payment (other than an Investment made pursuant to (4) of the following paragraph) made after the Issue Date, an amount (to the extent not included in the computation of Cumulative Operating Cash Flow) equal to the lesser of (i) the return of capital with respect to such Investment and (ii) the amount of such Investment that was treated as a Restricted Payment, plus (e) so long as the Designation thereof was treated as a Restricted Payment made after the Issue Date, with respect to any Unrestricted Subsidiary that has been redesignated as a Restricted Subsidiary after the Issue Date in accordance with "-- Designation of Unrestricted Subsidiaries" below, the Issuer's proportionate interest equal to the Fair Market Value of any Unrestricted Subsidiary that has been redesignated as a Restricted Subsidiary after the Issue Date in accordance with "-- Designation of Unrestricted Subsidiaries" below not to exceed in any case the Designation Amount with respect to such Restricted Subsidiary upon its Designation, minus (f) the greater of (i) $0 and (ii) the Designation Amount (measured as of the date of Designation) with respect to any Subsidiary of the Issuer that has been Designated as an Unrestricted Subsidiary after the Issue Date in accordance with "-- Designation of Unrestricted Subsidiaries" below and minus (g) 50% of the aggregate principal amount of outstanding Indebtedness included in the calculation of clause (c) of the definition of Permitted Indebtedness at the time of such Restricted Payment to the extent funded with the net cash proceeds received by the Issuer either (i) as capital contributions to the Issuer after the Issue Date or (ii) from the issue and sale (other than to a Subsidiary of the Issuer) of its Qualified Equity Interests after the Issue Date. For purposes of the (b) and (c) above and without duplication and for purposes of the definition of Total Incremental Invested Equity, the value of the aggregate net cash proceeds received by the Issuer upon the issuance of Qualified Equity Interests either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental cash received by the Issuer upon the conversion, exchange or exercise thereof. The provisions of this covenant shall not prohibit (1) the payment of any dividend or other distribution within 60 days after the date of declaration thereof, if at such date of declaration such payment would comply with the provisions of the Indenture, (2) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement or other acquisition of any Equity Interests of the Issuer 89 92 (a) in exchange for or conversion into or (b) out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Subsidiary of the Issuer) of Equity Interests of the Issuer (other than Disqualified Equity Interests); provided that any such net cash proceeds pursuant to the immediately preceding subclause (b) are excluded from clause (3)(b) of the preceding paragraph, (3) so long as no Default shall have occurred and be continuing, the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Indebtedness made by exchange for (including any such exchange pursuant to the exercise of a conversion right or privilege in which cash is paid in lieu of fractional shares or scrip), or out of the net cash proceeds of a substantially concurrent issue or sale (other than to a Subsidiary of the Issuer) of, (a) Equity Interests (other than Disqualified Equity Interests) of the Issuer; provided that any such net cash proceeds, to the extent so used, are excluded from clause (3) of the preceding paragraph, and/or (b) other Subordinated Indebtedness, having a Weighted Average Life to Maturity that is equal to or greater than the Weighted Average Life to Maturity of the Subordinated Indebtedness being purchased, redeemed, defeased or otherwise acquired or retired, (4) Investments constituting Restricted Payments in Persons engaged primarily in a Permitted Business in an amount not to exceed $10.0 million outstanding at any time, (5) the making of any Investment in or payment of any dividend or distribution by the Issuer to Holdings for bona fide costs and operating expenses of Holdings directly related to the operations of Holdings and its Subsidiaries, and (6) the payment of any dividend or distribution by the Issuer to Holdings to enable it to purchase, redeem, or otherwise acquire or retire for value Equity Interests of Holdings held by employees or former employees of the Issuer, or any Subsidiary of the Issuer (or their estates or beneficiaries under their estates) upon death, disability, retirement or termination of employment, not to exceed $1.0 million in any year or $3.0 million in the aggregate since the Issue Date plus, in each case, the amount of the net proceeds received by the Issuer or any such Subsidiary from life insurance policies on the life of the employee whose Equity Interests are being purchased, redeemed or otherwise acquired or retired for value. In no event shall a Restricted Payment made on the basis of consolidated financial statements prepared in good faith in accordance with GAAP be subject to rescission or constitute a Default by reason of any requisite subsequent restatement of such financial statements which would have made such Restricted Payment prohibited at the time that it was made. In determining the amount of Restricted Payments permissible under this covenant, amounts expended pursuant to clauses (1), (4) and (6) of the second preceding paragraph shall be included as Restricted Payments and amounts expended pursuant to clauses (2), (3) and (5) shall be excluded. The amount of any non-cash Restricted Payment shall be deemed to be equal to the Fair Market Value thereof at the date of the making of such Restricted Payment. Ownership of Systems. The Indenture provides that the Issuer will at all times be the legal and beneficial owner (as defined in the Indenture) of 100% of the Capital Stock of Systems. Limitation on Liens. The Indenture provides that the Issuer will not, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind upon any of its property or assets, whether now owned or acquired after the Issue Date, or any proceeds therefrom, or assign or convey any right to receive income therefrom to secure either (1) Subordinated Indebtedness, unless the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness, or 90 93 (2) any Indebtedness of the Issuer that is not Subordinated Indebtedness, unless the Notes are equally and ratably secured with the Liens securing such other Indebtedness, except, in either case for Liens to secure Indebtedness on cash representing the proceeds of such Indebtedness or Government Securities acquired with such cash and pledged for the purpose of providing for the payment of interest on such Indebtedness and except for Liens to secure the Issuer's guarantee of the Credit Facility and Interest Rate Protection Obligations of a Restricted Subsidiary. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture provides that the Issuer will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (1) pay dividends or make any other distributions to the Issuer or any other Restricted Subsidiary on its Equity Interests or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Issuer or any other Restricted Subsidiary, (2) make loans or advances to, or guarantee any Indebtedness or other obligations of, the Issuer or any other Restricted Subsidiary, or (3) transfer any of its properties or assets to the Issuer or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of (a) restrictions under the 12 3/8% Notes Indenture, as the same may from time to time be modified or amended and restrictions under agreements governing Indebtedness Incurred to refinance the 12 3/8% Notes (or refinancings thereof), in each case, so long as the restrictions as modified or amended or contained in such agreements governing such refinancing Indebtedness, as the case may be, are no less favorable to the holders of the Notes in any material respect than the restrictions under the 12 3/8% Notes Indenture on the Issue Date, (b) restrictions under the Credit Facility so long as such restrictions are no less favorable to the holders of the Notes in any material respect than the restrictions under the Credit Facility in effect on the Issue Date, (c) restrictions under other agreements governing Indebtedness Incurred in compliance with the Indenture, provided that any such restrictions permit the payment of dividends to the Issuer in amounts and at the times necessary to permit the payment of cash interest due on the Notes on and after September 1, 2004, but no such permission need apply when a default or event of default in respect of such Indebtedness has occurred and is continuing, (d) applicable law, (e) any instrument governing Indebtedness or Equity Interests of an Acquired Person acquired by the Issuer or any Restricted Subsidiary as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred by such Acquired Person in connection with, as a result of or in contemplation of such acquisition); provided, however, that such encumbrances and restrictions are not applicable to the Issuer or any Restricted Subsidiary, or the properties or assets of the Issuer or any Restricted Subsidiary, other than the Acquired Person, (f) customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices (including, without limitation, non-assignment provisions in agreements between the Issuer, Systems or any Restricted Subsidiary and the NRTC with respect to DBS services), (g) Purchase Money Indebtedness for property acquired in the ordinary course of business that only imposes encumbrances and restrictions on the property so acquired, and (h) any agreement for the sale or disposition of the Equity Interests or assets of any Restricted Subsidiary; provided, however, that such encumbrances and restrictions described in 91 94 this clause (h) are only applicable to such Restricted Subsidiary or assets, as applicable, and any such sale or disposition is made in compliance with "-- Disposition of Proceeds of Asset Sales" below to the extent applicable thereto. Disposition of Proceeds of Asset Sales. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (1) the Issuer or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold or otherwise disposed of and (2) at least 85% of such consideration consists of (a) cash or Cash Equivalents, (b) properties and capital assets to be used in a Permitted Business and/or (c) Equity Interests in one or more Persons that are primarily engaged in a Permitted Business so long as upon the consummation of any sale in accordance with this clause (c), such Person becomes a Wholly Owned Restricted Subsidiary. In the case of sales pursuant to clauses (b) and (c) above not involving solely an exchange of a Permitted Business and cash (if any), if the Fair Market Value of the assets sold or otherwise disposed of in a single transaction or series of transactions exceeds $5.0 million, the Issuer must obtain the written opinion from an Independent Financial Advisor (and file such opinion with the Trustee) stating that the terms of such Asset Sale are fair, from a financial point of view, to the Issuer or the Restricted Subsidiary involved in such Asset Sale. The amount of any (1) Indebtedness (other than any Subordinated Indebtedness) of the Issuer or any Restricted Subsidiary that is actually assumed by the transferee in such Asset Sale and from which the Issuer and the Restricted Subsidiaries are fully released shall be deemed to be cash for purposes of determining the percentage of cash consideration received by the Issuer or the Restricted Subsidiaries and (2) notes or other similar obligations received by the Issuer or the Restricted Subsidiaries from such transferee that are immediately converted, sold or exchanged (or are converted, sold or exchanged within thirty days of the related Asset Sale) by the Issuer or the Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal to the net cash proceeds realized upon such conversion, sale or exchange for purposes of determining the percentage of cash consideration received by the Issuer or the Restricted Subsidiaries. Notwithstanding the foregoing, during the term of the Notes, the Issuer and the Restricted Subsidiaries may engage in Asset Sales involving up to $10.0 million without complying with clause (2)(b) of the first sentence of this paragraph. Notwithstanding the foregoing, the Issuer or such Restricted Subsidiary, as the case may be, may (1) apply the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to repay or purchase or retire Indebtedness of Systems and permanently reduce any related commitment, (2) apply such Net Cash Proceeds to acquire, construct or improve properties and capital assets to be used on a Permitted Business within 365 days after the receipt thereof, or (3) any combination of the foregoing. To the extent that all or part of the Net Cash Proceeds of any Asset Sale are not applied (or, in the case of clause (1) above, an offer to purchase or retire such Indebtedness of Systems has not been made) within 365 days of such Asset Sale as described in clause (1) or (2) of the immediately preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Issuer shall, within 92 95 20 days after such 365th day, make an offer to purchase ("Offer to Purchase") all outstanding Notes, at a purchase price in cash equal to 100% of the Accreted Value of the Notes on the Purchase Date, unless the Purchase Date is on or after March 1, 2004, in which case such purchase price shall be an amount in cash equal to 100% of the principal amount at maturity thereof, plus accrued and unpaid interest (including Additional Interest, if any) thereon, if any, to the Purchase Date; provided, however, that the Offer to Purchase may be deferred until there are aggregate Unutilized Net Cash Proceeds equal to or in excess of $10.0 million, at which time the entire amount of such Unutilized Net Cash Proceeds, and not just the amount in excess of $10.0 million, shall be applied as required pursuant to this paragraph. With respect to any Offer to Purchase effected pursuant to this covenant, to the extent that the principal amount at maturity of the Notes tendered pursuant to such Offer to Purchase exceeds the Net Cash Proceeds to be applied to the purchase thereof, such Notes shall be purchased pro rata based on the principal amount at maturity of such Notes tendered by each holder. In the event that the Issuer makes an Offer to Purchase the Notes, the Issuer shall comply with any applicable securities laws and regulations, including any requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act, and any violation of the provisions of the Indenture relating to such Offer to Purchase occurring as a result of such compliance shall not be deemed an Event of Default or an event that with the passing of time or giving of notice, or both, would constitute an Event of Default. Each holder of Notes shall be entitled to tender all or any portion of the Notes owned by such holder pursuant to the Offer to Purchase, subject to the requirement that any portion of a Note tendered must be tendered in an integral multiple of $1,000 principal amount at maturity and subject to any proration among tendering holders as described above. Limitation on Issuances and Sales of Preferred Equity Interests by Restricted Subsidiaries. The Indenture provides that the Issuer (1) will not permit any Restricted Subsidiary to issue any Preferred Equity Interests (other than to the Issuer or a Restricted Subsidiary) and (2) will not permit any Person (other than the Issuer or a Restricted Subsidiary) to own any Preferred Equity Interests of any Restricted Subsidiary. Limitations on Conduct of Business of the Issuer and the Restricted Subsidiaries. The Indenture provides that the Issuer will not conduct any trade or business, other than through a Subsidiary and the ownership of Common Stock of Systems, and the Issuer will not permit any of the Restricted Subsidiaries to be primarily engaged in any business, except for a Permitted Business. Limitation on Transactions with Affiliates. The Indenture provides that the Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary to, conduct any business or enter into any transaction (or series of related transactions that are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial holder of 10% or more of the Common Stock of the Issuer or any officer or director of the Issuer (each, an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing, and are fair and reasonable to the Issuer or such Restricted Subsidiary, as the case may be. Each Affiliate Transaction involving aggregate payments or other Fair Market Value in excess of $5.0 million shall be approved by a majority of the Board of Directors, such approval to be evidenced by a board resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions. In addition to the foregoing, each Affiliate Transaction involving aggregate consideration of $10.0 million or more shall be approved by a majority of the Disinterested Directors. However, in lieu of such approval by the Disinterested Directors, the Issuer may obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction to the Issuer or the Restricted Subsidiary, as the case may be, are fair from a financial point of view. 93 96 Notwithstanding the foregoing, the restrictions set forth in this covenant shall not apply to (1) transactions with or among the Issuer and any Restricted Subsidiary or between or among Restricted Subsidiaries, (2) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, bonuses or employment agreements, compensation or employee benefit arrangements and incentive arrangements with any officer, director or employee of the Issuer entered into in the ordinary course of business (including customary benefits thereunder) and payments under any indemnification arrangements permitted by applicable law, (3) any transactions undertaken pursuant to any other contractual obligations in existence on the Issue Date (as in effect on the Issue Date), (4) any Restricted Payments made in compliance with "-- Limitation on Restricted Payments" above, (5) loans, advances and reimbursements to officers, directors and employees of the Issuer and the Restricted Subsidiaries for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business and consistent with past business practices, (6) the pledge of Equity Interests of Unrestricted Subsidiaries to support the Indebtedness thereof, (7) the sale of products or property by any Person to the Issuer or a Restricted Subsidiary, or by the Issuer or any Restricted Subsidiary to any Person, in the ordinary course of business and consistent with past practice and (8) the issuance and sale by Systems of Qualified Equity Interests. Reports. The Indenture provides that, whether or not the Issuer has a class of securities registered under the Exchange Act, the Issuer shall furnish without cost to each holder of Notes and file with the Trustee and, following the effectiveness of any Exchange Offer Registration Statement or a Shelf Registration Statement, file with the SEC (1) within the applicable time period required under the Exchange Act, after the end of each fiscal year of the Issuer, the information required by Form 10-K (or any successor form thereto) under the Exchange Act with respect to such period, (2) within the applicable time period required under the Exchange Act after the end of each of the first three fiscal quarters of each fiscal year of the Issuer, the information required by Form 10-Q (or any successor form thereto) under the Exchange Act with respect to such period and (3) any current reports on Form 8-K (or any successor forms) required to be filed under the Exchange Act. Designation of Unrestricted Subsidiaries. (1) The Issuer may designate after the Issue Date any Subsidiary of the Issuer (other than Systems) as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if (a) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Designation, (b) at the time of and after giving effect to such Designation, Systems could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the proviso in "-- Limitation on Additional Indebtedness of Subsidiaries of the Issuer" above, and (c) the Issuer would be permitted to make an Investment (other than a Permitted Investment) at the time of Designation (assuming the effectiveness of such Designation) as 94 97 contemplated by the first paragraph or subclause (4) of the second paragraph of "-- Limitation on Restricted Payments" above in an amount (the "Designation Amount") equal to the Fair Market Value of the Issuer's proportionate interest of the Issuer and the Restricted Subsidiaries in such Subsidiary on such date. Notwithstanding the above, no Subsidiary of the Issuer shall be designated an Unrestricted Subsidiary if such Subsidiary distributes, directly or indirectly, DIRECTV Services under an agreement with the NRTC or has any right, title or interest in the revenue or profits in, or holds any Lien in respect of, any such agreement. Neither the Issuer nor any Restricted Subsidiary shall at any time (i) provide credit support for, subject any of its property or assets (other than the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of, or guarantee, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness), (ii) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary, or (iii) be directly or indirectly liable for any Indebtedness that provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary, except, in the case of subclause (i) or (ii), to the extent otherwise permitted under the terms of the Indenture, including, without limitation, pursuant to "-- Limitation on Restricted Payments" above and "-- Disposition of Proceeds of Asset Sales" above. (2) The Issuer may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (a) no Default or Event of Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the Indenture. All Designations and Revocations must be evidenced by resolutions of the Board of Directors of the Issuer, delivered to the Trustee certifying compliance with the foregoing provisions. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. The Issuer shall not consolidate with or merge with or into (whether or not the Issuer is the Surviving Person) any other entity and the Issuer shall not, and shall not cause or permit any Restricted Subsidiary to, sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the Issuer's properties and assets (determined on a consolidated basis for the Issuer and the Restricted Subsidiaries) to any entity in a single transaction or series of related transactions, unless (1) either (a) the Issuer shall be the Surviving Person or (b) the Surviving Person (if other than the Issuer) shall be a corporation, partnership or limited liability company organized and validly existing under the laws of the United States of America or any State thereof or the District of Columbia, and shall expressly assume by a supplemental indenture the due and punctual payment of the principal of, premium, if any, and interest on all the Notes and the performance and observance of every covenant of the Indenture and the Registration Rights Agreement to be performed or observed on the part of the Issuer, 95 98 (2) immediately thereafter, no Default shall have occurred and be continuing, (3) immediately after giving effect to any such transaction involving the Incurrence by the Issuer or any Restricted Subsidiary, directly or indirectly, of additional Indebtedness (and treating any Indebtedness not previously an obligation of the Issuer or any Restricted Subsidiary in connection with or as a result of such transaction as having been Incurred at the time of such transaction), the Issuer or the Surviving Person, as applicable, could Incur, on a pro forma basis after giving effect to such transaction as if it had occurred at the beginning of the latest fiscal quarter for which consolidated financial statements of the Issuer are available, at least $1.00 of additional Indebtedness under the proviso in "-- Limitation on Additional Indebtedness of Subsidiaries of the Issuer" above, and (4) the Issuer has delivered to the Trustee an opinion of counsel to the effect that the holders of the Notes will not recognize gain or loss for federal income tax purposes as a result of such transaction; provided, however, that the Issuer may consolidate with or merge with or into Holdings without complying with clause (3) above. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all the properties and assets of one or more Restricted Subsidiaries the Equity Interests of which constitute all or substantially all the properties and assets of the Issuer shall be deemed to be the transfer of all or substantially all the properties and assets of the Issuer. In the event of any transaction (other than a lease) described in and complying with the conditions listed above in which the Issuer is not the Surviving Person and the Surviving Person is to assume all of the Obligations of the Issuer under the Notes, the Indenture and the Registration Rights Agreement under a supplemental indenture, such Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer and the Issuer shall be discharged from its Obligations under the Indenture and the Notes. The meaning of the phrase "all or substantially all" as used above varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under relevant law and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Issuer, and therefore it may be unclear whether the foregoing provisions are applicable. EVENTS OF DEFAULT The "Events of Default" under the Indenture include (1) default in the payment of interest on the Notes issued thereunder when it becomes due and payable and continuance of such default for a period of 30 days or more, (2) default in the payment of (a) if prior to March 1, 2004, the Accreted Value of, and (b) if on or after March 1, 2004, the principal amount at maturity of and premium, if any, on the Notes when due (including the failure to make a payment to purchase Notes pursuant to a Change of Control Offer), (3) default in the performance, or breach, of any covenant described under "-- Certain Covenants -- Disposition of Proceeds of Asset Sales" or "-- Consolidation, Merger, Sale of Assets, Etc.," (4) default in the performance, or breach, of any covenant in the Indenture (other than defaults specified in clause (1), (2) or (3) above), and continuance of such default or breach for a period of 30 days or more after written notice to the Issuer by the Trustee or to the Issuer and the Trustee by 96 99 the holders of at least 25% in aggregate principal amount at maturity of the outstanding Notes (in each case, when such notice is deemed received in accordance with the Indenture), (5) failure to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $15.0 million or more under which the Issuer or a Restricted Subsidiary is obligated, and either (a) such Indebtedness is already due and payable in full and has not been paid in full (and such failure continues for a period of 30 days or more) or (b) such failure results in the acceleration of the final maturity of such Indebtedness (which acceleration has not been rescinded prior to any declaration of acceleration of the Notes), (6) one or more judgments, orders or decrees, not subject to appeal, for the payment of money of $15.0 million or more, either individually or in the aggregate (in all cases net of amounts covered by insurance for which coverage is not being challenged or denied), shall be entered against the Issuer or any of the Issuer's Significant Restricted Subsidiaries or any of their respective properties and shall not be discharged, paid or stayed within 60 days after the right of appeal has expired, or (7) certain events of bankruptcy, insolvency, reorganization, administration or similar proceedings with respect to the Issuer or any of the Issuer's Significant Restricted Subsidiaries shall have occurred. If an Event of Default with respect to the Notes (other than an Event of Default with respect to the Issuer described in clause (7) of the preceding paragraph) occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount at maturity of the outstanding Notes by notice in writing to the Issuer may declare the Default Amount of all the outstanding Notes to be due and payable immediately and, upon any such declaration, such Default Amount will become immediately due and payable. If an Event of Default specified in clause (6) of the preceding paragraph with respect to the Issuer occurs under the Indenture, the outstanding Notes will, ipso facto, become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of the Notes. Notwithstanding the foregoing, in the event of a declaration of acceleration in respect of the Notes because an Event of Default specified in clause (5) above shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or paid or such Event of Default shall have been cured or waived by the holders of such Indebtedness and written notice of such discharge, cure or waiver, as the case may be, shall have been given to the Trustee by the Issuer or by the requisite holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the Notes and no other Event of Default shall have occurred which has not been cured or waived during such 30-day period. Any such declaration with respect to the Notes may be annulled as to past Events of Default and Defaults (except, unless theretofore cured, an Event of Default or a Default in payment of principal of (and premium, if any) or interest on the Notes) upon the conditions provided in the Indenture. For information as to waiver of defaults, see "-- Amendment and Waivers" below. The Indenture provides that the Trustee shall, within 30 days after the occurrence of any Default or Event of Default with respect to the outstanding Notes, give the holders of the Notes notice of all uncured Defaults or Events of Default known to it. However, except in the case of an Event of Default in payment with respect to such Notes or a Default or Event of Default in complying with "-- Consolidation, Merger, Sale of Assets, Etc." above, the Trustee shall be protected in withholding such notice if and so long as a committee of its trust officers in good faith determines that the withholding of such notice is in the interest of the holders of the Notes. 97 100 No holder of any Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless (1) such holder shall have previously given to the Trustee written notice of a continuing Event of Default thereunder, (2) the holders of at least 25% of the aggregate principal amount at maturity of the outstanding Notes under the Indenture shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee, and (3) the Trustee shall have not received from the holders of a majority in aggregate principal amount at maturity of outstanding Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 45 days. However, such limitations do not apply to a suit instituted by a holder of a Note for enforcement of payment of the Default Amount and premium, if any, on such Note on or after the respective due dates expressed in such Note. The Issuer will be required to furnish to the Trustee annually a statement as to the performance by it of certain of its obligations under the Indenture and as to any default in such performance. DEFEASANCE The Issuer may at any time terminate all of its obligations with respect to the Notes ("defeasance"), except for certain obligations, including those regarding any trust established for a defeasance and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes as required by the Indenture and to maintain agencies in respect of Notes. The Issuer may at any time terminate its obligations under some of the covenants set forth in the Indenture, some of which are described under "-- Certain Covenants" above, and any omission to comply with such obligations shall not constitute a Default with respect to the Notes ("covenant defeasance"). To exercise either defeasance or covenant defeasance, the Issuer must irrevocably deposit in trust, for the benefit of the holders of the Notes, with the Trustee money (in United States dollars) or U.S. government obligations (denominated in United States dollars), or a combination thereof, in such amounts as will be sufficient to pay the principal at maturity of, and premium, if any, and interest on the Notes to redemption or maturity and comply with certain other conditions, including the delivery of a legal opinion as to certain tax matters. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Notes) as to all outstanding Notes when either (1) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust) have been delivered to the Trustee for cancellation, or (2) (a) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal amount at maturity of, premium, if any, and accrued interest to the date of such deposit, (b) the Issuer has paid all sums payable by it under the Indenture, and (c) the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the redemption date, as the case may be. 98 101 In addition, the Issuer must deliver an officers' certificate and an opinion of counsel stating that all conditions precedent to satisfaction and discharge have been complied with. AMENDMENT AND WAIVERS From time to time, the Issuer, when authorized by resolutions of the Issuer's Board of Directors, and the Trustee, without the consent of the holders of the Notes, may amend, waive or supplement the Indenture or the Notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act or making any change that does not adversely affect the rights of any holder. Other amendments and modifications of the Indenture and the Notes may be made by the Issuer and the Trustee by supplemental indenture with the consent of the holders of not less than a majority of the aggregate principal amount at maturity of the outstanding Notes. However, no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby, (1) reduce the principal amount at maturity of, change the fixed maturity of, or alter the redemption provisions of, the Notes, (2) change the currency in which any Notes or amounts owing thereon are payable, (3) reduce the percentage of the aggregate principal amount at maturity outstanding of Notes which must consent to an amendment, supplement or waiver or consent to take any action under the Indenture or the Notes, (4) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes, (5) waive a default in payment with respect to the Notes, (6) following the occurrence of a Change of Control or an Asset Sale, alter the Issuer's obligation to purchase the Notes in accordance with the Indenture or waive any default in the performance thereof, (7) reduce or change the rate or time for payment of interest on the Notes or amend or modify the definition of Accreted Value or (8) affect the ranking of the Notes in a manner adverse to the holder of the Notes. REGARDING THE TRUSTEE United States Trust Company of New York will serve as Trustee under the Indenture. GOVERNING LAW The Indenture provides that the Indenture and the Notes will be governed by and construed in accordance with laws of the State of New York without giving effect to principles of conflicts of law. CERTAIN DEFINITIONS Set forth below is a summary of many of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other capitalized terms used herein for which no definition is provided. 99 102 "Accreted Value" as of any date (the "Specified Date") means, with respect to each $1,000 principal amount at maturity of Notes: (1) if the Specified Date is one of the following dates (each a "Semi-Annual Accreted Date"), the amount set forth opposite such date below:
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 such Person or (2) existing at the time such Person becomes a Restricted Subsidiary or is merged or consolidated with or into the Issuer or any Restricted Subsidiary. "Acquired Person" means, with respect to any specified Person, any other Person that merges with or into or becomes a Subsidiary of such specified Person. "Acquisition" means (1) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) by the Issuer or any Restricted Subsidiary to any other Person, or any acquisition or purchase of Equity Interests of any other Person by the Issuer or any Restricted Subsidiary, in either case pursuant to which such Person shall become a Restricted Subsidiary or shall be consolidated or merged with or into the Issuer or any Restricted Subsidiary or (2) any acquisition by the Issuer or any Restricted Subsidiary of the assets of any Person which constitute substantially all of an operating unit or line of business of such Person or which is otherwise outside of the ordinary course of business. "Additional Interest" has the meaning provided in the Registration Rights Agreement. 100 103 "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that (1) beneficial ownership of 10.0% or more of the voting power of the then outstanding voting securities of a Person shall be deemed to be control; and (2) no individual, other than a director of the Issuer or an officer of the Issuer with a policy making function, shall be deemed an Affiliate of the Issuer or any of the Issuer's Subsidiaries solely by reason of such individual's employment, position or responsibilities by or with respect to the Issuer or any of the Issuer's Subsidiaries. "Asset Sale" means any direct or indirect sale, conveyance, transfer, lease (that has the effect of a disposition) or other disposition (including, without limitation, any merger, consolidation or sale-leaseback transaction) to any Person other than the Issuer or a Restricted Subsidiary, in one transaction or a series of related transactions, of (1) any Equity Interest of any Restricted Subsidiary, (2) any material license, franchise or other authorization of the Issuer or any Restricted Subsidiary, (3) any assets of the Issuer or any Restricted Subsidiary that constitute substantially all of an operating unit or line of business of the Issuer or any Restricted Subsidiary, or (4) any other property or asset of the Issuer or any Restricted Subsidiary outside of the ordinary course of business (including the receipt of proceeds paid on account of the loss of or damage to any property or asset, except to the extent used to repurchase or repair such property or asset, and awards of compensation for any asset taken by condemnation, eminent domain or similar proceedings). The term "Asset Sale" shall not include (1) any transaction consummated in compliance with "-- Consolidation, Merger, Sale of Assets, Etc." above and the creation of any Lien not prohibited by "-- Certain Covenants -- Limitation on Liens" above; provided, however, that any transaction consummated in compliance with "-- Consolidation, Merger, Sale of Assets, Etc." above involving a sale, conveyance, assignment, transfer, lease or other disposal of less than all of the properties or assets of the Issuer and the Restricted Subsidiaries shall be deemed to be an Asset Sale with respect to the properties or assets of the Issuer and Restricted Subsidiaries that are not so sold, conveyed, assigned, transferred, leased or otherwise disposed of in such transaction, (2) sales of property or equipment that has become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Issuer or any Restricted Subsidiary, as the case may be, and (3) any transaction consummated in compliance with "-- Certain Covenants -- Limitation on Restricted Payments" above. "Board of Directors" means (1) in the case of a Person that is a corporation, the board of directors of such Person and (2) in the case of any other Person, the board of directors, board of managers, management committee or similar governing body of such Person (or in the case of a limited partnership, of such 101 104 Person's general partner, or in the case of a limited liability company, of such Person's manager), or any authorized committee thereof responsible for the management of the business and affairs of such Person. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be so required to be capitalized on the balance sheet in accordance with GAAP. "Cash Equivalents" means (1) any evidence of Indebtedness (with, for purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less) issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof that (provided that the full faith and credit of the United States is pledged in support thereof or such Indebtedness constitutes a general obligation of such country) have maturities of not more than six months from the date of acquisition, (2) time deposits, certificates of deposit or acceptances (with, for purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less) of any financial institution that is a member of the Federal Reserve System, in each case having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $200.0 million and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's, (3) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Issuer) organized under the laws of the United States or any State thereof and rated at least "A-1" by S&P or "P-1" by Moody's and in each case maturing not more than six months after the date of acquisition, (4) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (1) above and entered into with any bank meeting the qualifications specified in clause (2) above, and (5) money market funds that invest substantially all of their assets in securities described in the preceding clauses (1) through (4). "Change of Control" is defined to mean the occurrence of (1) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Equity Interests of the Issuer, (2) the Issuer consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Issuer, in any such event pursuant to a transaction in which the outstanding Voting Equity Interests of the Issuer are converted into or exchanged for cash, securities or other property, other than any such transaction where (a) the outstanding Voting Equity Interests of the Issuer are converted into or exchanged for (i) Voting Equity Interests (other than Disqualified Equity Interests) of the surviving or transferee corporation or its parent corporation and/or (ii) cash, securities and other property in an amount that could be paid by the Issuer as a Restricted Payment under the Indenture and (ii) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange 102 105 Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Equity Interests of the surviving or transferee corporation or its parent corporation, as applicable, (3) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Issuer was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board of Directors then in office, or (4) the approval by stockholders of the Issuer of any liquidation or dissolution of the Issuer. "Change of Control Date" has the meaning set forth under "-- Change of Control" above. "Common Stock" means, with respect to any Person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such Person's common stock whether outstanding at the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated Income Tax Expense" means, with respect to the Issuer for any period, the provision for federal, state, local and foreign income taxes payable by the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to the Issuer for any period, without duplication, the sum of (1) the interest expense of the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount, (b) the net cost under Interest Rate Protection Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, and (e) all capitalized interest and all accrued interest, (2) the interest component of Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Issuer and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP, and (3) dividends and distributions in respect of Disqualified Equity Interests actually paid in cash by the Issuer during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to any period, the net income of the Issuer and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, adjusted, to the extent included in calculating such net income, by excluding, without duplication, (1) all extraordinary gains or losses and all gains and losses from the sales or other dispositions of assets out of the ordinary course of business (net of taxes, fees and expenses relating to the transaction giving rise thereto) for such period, 103 106 (2) that portion of such net income derived from or in respect of investments in Persons other than Restricted Subsidiaries, except to the extent actually received in cash by the Issuer or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (5) of this definition), (3) the portion of such net income (or loss) allocable to minority interests in any Person (other than a Restricted Subsidiary) for such period, except to the extent actually received in cash by the Issuer or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (5) of this definition), (4) net income (or loss) of any other Person combined with the Issuer or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, and (5) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time (regardless of any waiver) permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its Equity Interest holders, except, solely for the purposes of the "Limitation on Additional Indebtedness of Subsidiaries of the Issuer" covenant and for determining the amount available under clause (3) of the "Limitation on Restricted Payments" covenant for a proposed Restricted Payment constituting an Investment, for any restriction in any agreement or instrument governing Indebtedness outstanding on the Issue Date or Incurred in compliance with the Indenture. "Consolidated Operating Cash Flow" means, with respect to any period, Consolidated Net Income for such period increased (without duplication) by the sum of (1) Consolidated Income Tax Expense for such period to the extent deducted in determining Consolidated Net Income for such period, (2) Consolidated Interest Expense for such period to the extent deducted in determining Consolidated Net Income for such period, (3) all dividends on Preferred Equity Interests to the extent not taken into account for computing Consolidated Net Income for that period, and (4) depreciation, amortization and any other non-cash items for such period to the extent deducted in determining Consolidated Net Income for such period (other than any non-cash item that requires the accrual of, or a reserve for, cash charges for any future period) of the Issuer and the Restricted Subsidiaries, including, without limitation, amortization of capitalized debt issuance costs for such period, all of the foregoing determined on a consolidated basis in accordance with GAAP minus non-cash items to the extent they increase Consolidated Net Income (including the partial or entire reversal of reserves taken in prior periods, except to the extent any such reserves were not permitted to be added back in the calculation of Consolidated Operating Cash Flow for a prior period pursuant to clause (4) above) for such period. "Credit Facility" means the Amended and Restated Credit Agreement dated as of July 7, 1997, amended and restated as of May 8, 1998, among Holdings, Systems, the banks party thereto from time to time, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent, and General Electric Capital Corporation, as Documentation Agent, including any deferrals, renewals, extensions, replacements, refinancings or refundings thereof, or amendments, modifications or supplements thereto (including, without limitation, any such deferrals, renewals, extensions, replacements, refinancings, refundings, amendments, modifications or supplements that increase the aggregate amount of commitments or borrowings thereunder or add Subsidiaries of the Issuer as additional borrower or guarantor thereunder), and any agreements providing therefor, whether by or with 104 107 the same or any other lender, creditor or group of lenders or creditors, and including related notes, guarantees, security agreements, pledge agreements, mortgages, note agreements, other collateral documents and note agreements and other instruments and agreements executed in connection therewith. "Cumulative Operating Cash Flow" means, as at any date of determination, the positive cumulative Consolidated Operating Cash Flow realized during the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of determination for which consolidated financial information of the Issuer is available or, if such cumulative Consolidated Operating Cash Flow for such period is negative, the negative amount by which cumulative Consolidated Operating Cash Flow is less than zero. "DBS" means direct broadcast satellite. "Debt to Operating Cash Flow Ratio" means the ratio of (1) an amount equal to the Total Consolidated Indebtedness as of the date of calculation (the "Determination Date") to (2) four times the Consolidated Operating Cash Flow for the latest fiscal quarter for which financial information is available immediately preceding such Determination Date (the "Measurement Period"). For purposes of calculating Consolidated Operating Cash Flow for the Measurement Period immediately prior to the relevant Determination Date, (a) any Person that is a Restricted Subsidiary on the Determination Date (or would become a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Consolidated Operating Cash Flow) will be deemed to have been a Restricted Subsidiary at all times during such Measurement Period, (b) any Person that is not a Restricted Subsidiary on such Determination Date (or would cease to be a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Consolidated Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time during such Measurement Period, and (c) if the Issuer or any Restricted Subsidiary shall have in any manner (i) acquired (including through an Acquisition or the commencement of activities constituting such operating business) or (ii) disposed of (including by way of an Asset Sale or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement Period or after the end of such period and on or prior to such Determination Date, such calculation will be made on a pro forma basis in accordance with GAAP as if, in the case of an Acquisition or the commencement of activities constituting such operating business, all such transactions had been consummated on the first day of such Measurement Period and, in the case of an Asset Sale or termination or discontinuance of activities constituting such operating business, all such transactions had been consummated prior to the first day of such Measurement Period; provided, however, that such pro forma adjustment shall not give effect to the Operating Cash Flow of any Acquired Person to the extent that such Person's net income would be excluded pursuant to clause (5) of the definition of Consolidated Net Income. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Default Amount" means, (1) prior to March 1, 2004, the Accreted Value of the Notes as of the payment date, and 105 108 (2) after March 1, 2004, the principal amount at maturity thereof, plus, in the case of clause accrued and unpaid interest thereon, if any, to the payment date. "Designation" has the meaning set forth in "-- Certain Covenants -- Designation of Unrestricted Subsidiaries" above. "Designation Amount" has the meaning set forth in "-- Certain Covenants -- Designation of Unrestricted Subsidiaries" above. "DIRECTV Services" means DBS television services and all other video, audio, data packages, "a la carte" programming services and other services offered by DIRECTV, Inc., the predecessor-in-interest of Hughes Communications Galaxy, Inc., or its successors or assigns. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Issuer's Board of Directors other than a director who (1) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (2) is an employee or officer of the Issuer or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party to such transactions or series of related transactions. "Disposition" means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets. "Disqualified Equity Interest" means any Equity Interest which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event (other than a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable, at the option of the holder thereof, in whole or in part, or exchangeable into Indebtedness on or prior to the earlier of the maturity date of the Notes or the date on which no Notes remain outstanding. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated Investment Grade at the time as of which any investment or rollover therein is made. "Equity Interest" in any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock or other equity participations, including partnership interests, whether general or limited, or member interests in such Person, including any Preferred Equity Interests. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Existing Indebtedness" means any Indebtedness of the Issuer and the Restricted Subsidiaries in existence on the Issue Date until such amounts are repaid. "Fair Market Value" means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction. However, the Fair Market Value of any such asset or assets shall be determined conclusively by the Board of Directors of the Issuer acting in good faith, and shall be evidenced by resolutions of the Board of Directors of the Issuer delivered to the Trustee. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States that are applicable at the date of determination and that are consistently applied for all applicable periods. 106 109 "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States are pledged. "guarantee" means, as applied to any obligation, (1) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (2) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. A guarantee shall include, without limitation, any agreement to maintain or preserve any other Person's financial condition or to cause any other Person to achieve certain levels of operating results. "High Power Satellite Transmission Business" means the business of the acquisition, transmission or sale of programming in the high power DBS business utilizing broadcast satellite service (including any provision of such services to cable operators or other media providers), which may utilize all or part of satellites owned by DIRECTV, Inc. and all other activities relating thereto or arising therefrom. "Holdings" means Golden Sky Holdings, Inc. or any successor or assign thereof that owns 100% of the Equity Interests of the Issuer. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (including by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to the foregoing). "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (1) every obligation of such Person for money borrowed, (2) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses, (3) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (4) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable incurred in the ordinary course of business and payable in accordance with industry practices, or other accrued liabilities arising in the ordinary course of business that are not overdue or that are being contested in good faith), (5) every Capital Lease Obligation of such Person, (6) every net obligation under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and other agreements or arrangements designed to protect such Person against fluctuations in interest rates, (7) every obligation of the type referred to in clauses (1) through (6) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise, and 107 110 (8) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (1) through (7) above. The term "Indebtedness' (1) shall never be calculated taking into account any cash and Cash Equivalents held by such Person, (2) shall not include obligations of any Person (a) arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business, provided that such obligations are extinguished within two Business Days of their incurrence unless covered by an overdraft line, (b) resulting from the endorsement of negotiable instruments for collection in the ordinary course of business and consistent with past business practices and (c) under standby letters of credit to the extent collateralized by cash or Cash Equivalents, (3) to the extent that it provides that an amount less than the principal amount thereof shall be due upon any declaration of acceleration thereof shall be deemed to be incurred or outstanding in an amount equal to the accreted value thereof at the date of determination, (4) shall include the liquidation preference and any mandatory redemption payment obligations in respect of any Disqualified Equity Interests of the Issuer or any Restricted Subsidiary, and (5) shall not include obligations under performance bonds, performance guarantees, surety bonds and appeal bonds, letters of credit or similar obligations, Incurred in the ordinary course of business (including standby letters of credit securing obligations to the NRTC Incurred in the ordinary course of business that are not overdue or that are being contested in good faith by appropriate proceedings) (other than obligations under or in respect of any direct or indirect credit support for obligations of any Unrestricted Subsidiary). "Independent Financial Advisor" means a nationally recognized accounting, appraisal or investment banking firm or consultant with experience advising DBS businesses that is, in the judgment of the Issuer's Board of Directors, qualified to perform the task for which it has been engaged (1) that does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Issuer and (2) that, in the judgment of the Board of Directors of the Issuer, is otherwise independent and qualified to perform the task for which it is to be engaged. "Insolvency or Liquidation Proceeding" means, with respect to any Person, any liquidation, dissolution or winding up of such Person, or any bankruptcy, reorganization, insolvency, receivership or similar proceeding with respect to such Person, whether voluntary or involuntary. "Interest Rate Protection Obligations" means, with respect to any Person, the Obligations of such Person under (1) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and (2) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect loan, advance, guarantee or other extension of credit or capital contribution to (by means of transfers of cash or other property or 108 111 assets to others or payments for property or services for the account or use of others, or otherwise), or purchase or acquisition of capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. In no event will the issuance by the Issuer of Qualified Equity Interests of the Issuer in exchange for any such capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness constitute an Investment. The amount of any Investment shall be (1) the original cost of such Investment, plus (2) the cost of all additions thereto, and minus (3) the amount of any portion of such Investment repaid to such Person in cash or other property or assets that would not otherwise constitute an Investment as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. In determining the amount of any Investment or any repayment in respect of an Investment involving a transfer of any property or asset other than cash, such property shall be valued at its Fair Market Value at the time of such transfer, as determined in good faith by the Board of Directors (or comparable body) of the Person making such transfer or receiving such repayment. "Investment Grade" means, with respect to a security, that such security is rated by at least two nationally recognized statistical rating organizations in one of each such organization's four highest generic rating categories. "Issue Date" means the original issue date of the outstanding notes. "Lien" means any lien, mortgage, charge, security interest, hypothecation, assignment for security or encumbrance of any kind (including any conditional sale or capital lease or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Marketable Securities" means (1) Government Securities, (2) any certificate of deposit maturing not more than 365 days after the date of acquisition issued by, or time deposit of, an Eligible Institution, (3) commercial paper maturing not more than 365 days after the date of acquisition issued by a corporation (other than an Affiliate of the Issuer) with an Investment Grade rating, at the time as of which any investment therein is made, issued or offered by an Eligible Institution, (4) any bankers' acceptances or money market deposit accounts issued or offered by an Eligible Institution, and (5) any fund investing substantially in investments of the types described in clauses (1) through (4) above. "Maturity Date" means the date, which is set forth on the face of the Notes, on which the Notes will mature. "Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash Equivalents received by the Issuer or any Restricted Subsidiary in respect of any Asset Sale, including all cash or Cash Equivalents received upon any sale, liquidation or other exchange of proceeds of Asset Sales received in a form other than cash or Cash Equivalents, net of (1) the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions) and any relocation expenses incurred as a result thereof, 109 112 (2) taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), (3) amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets that were the subject of such Asset Sale, (4) amounts deemed, in good faith, appropriate by the Board of Directors of the Issuer to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such assets that are the subject of such Asset Sale (provided that the amount of any such reserves shall be deemed to constitute Net Cash Proceeds at the time such reserves shall have been released or are not otherwise required to be retained as a reserve), and (5) with respect to Asset Sales by Restricted Subsidiaries, the portion of such cash payments attributable to Persons holding a minority interest in such Restricted Subsidiary. "NRTC" means the National Rural Telecommunications Cooperative and any successor entity to it. "Obligations" means any principal, interest (including, without limitation, Post-Petition Interest), premium, penalties, fees, indemnifications, reimbursement obligations, damages and other liabilities payable under the documentation governing any Indebtedness, including the Notes. "Offer" has the meaning set forth under "-- Certain Covenants -- Disposition of Proceeds of Asset Sales." "Permitted Acquisition Deposits" means any advance or payment of funds, whether as consideration for an option to purchase or as a deposit, binder or earnest money, whether or not refundable, and whether or not made into escrow, made pursuant to any written agreement, term sheet, letter of intent or other instrument providing for the Acquisition of any High Power Satellite Transmission Business. "Permitted Business" means those businesses in which the Issuer and the Restricted Subsidiaries are engaged on the Issue Date or business reasonably related thereto (including, without limitation, the High Power Satellite Transmission Business and the business of satellite data transmission). "Permitted Holders" any of (1) means Burr, Egan, Deleage & Co., Spectrum Equity Investors, L.P., BancBoston Ventures Inc., Norwest Equity Partners and HarbourVest Partners LLC and (2) their respective Affiliates. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (1) Indebtedness of any Restricted Subsidiary outstanding on the Issue Date; (2) (a) Indebtedness under the Credit Facility of any Restricted Subsidiary, and, without duplication, any guarantee thereof by any other Restricted Subsidiary, Incurred in an aggregate principal amount at any one time outstanding not to exceed $150.0 million, which amount shall be reduced by (i) any permanent reduction of commitments thereunder and (ii) any other repayment accompanied by a permanent reduction of commitments thereunder (other than in connection with any refinancing thereof where the aggregate principal amount outstanding and commitments thereunder immediately prior thereto are not greater than such amounts immediately thereafter), and (b) Indebtedness of any Restricted Subsidiary, and, without duplication, any guarantee thereof by any other Restricted Subsidiary, Incurred to fund Acquisitions of Permitted Businesses, Capital Lease Obligations, Investments permitted under the Indenture and working 110 113 capital to support a Permitted Business in an aggregate principal amount at any one time outstanding not to exceed $65.0 million, which amount shall be reduced by any permanent reduction of commitments thereunder, (3) Indebtedness of Systems such that, at the time of and after giving effect to the Incurrence thereof, the total aggregate principal amount of Indebtedness Incurred under this clause (3) and any refinancing thereof (whether initial or successive) Incurred pursuant to and otherwise Incurred in compliance with the Indenture would not exceed 200% of Total Incremental Invested Equity (which includes the contributed proceeds from the issuance of the Notes); (4) Indebtedness of any Restricted Subsidiary owed to and held by the Issuer or any Restricted Subsidiary; provided, however, that an Incurrence of Indebtedness that is not permitted by this clause (4) shall be deemed to have occurred upon (a) any sale or other disposition of any Indebtedness of any Restricted Subsidiary referred to in this clause (4) to a Person (other than the Issuer or any other Restricted Subsidiary) or (b) the Designation of a Restricted Subsidiary that holds Indebtedness of any other Restricted Subsidiary as an Unrestricted Subsidiary, (5) Interest Rate Protection Obligations of any Restricted Subsidiary relating to Indebtedness of a Restricted Subsidiary (which Indebtedness (a) bears interest at fluctuating interest rates and (b) is otherwise permitted to be Incurred under this covenant) and guarantees by any Restricted Subsidiary thereof; provided, however, that the notional principal amount of such Interest Rate Protection Obligations does not exceed the principal amount of the Indebtedness to which such Interest Rate Protection Obligations relate, (6) indemnification obligations of any Restricted Subsidiary and guarantees thereof under agreements providing for the disposition of assets or one or more businesses or Restricted Subsidiaries; provided, however, that such obligations do not exceed at any time the Fair Market Value of the gross proceeds received by the Restricted Subsidiaries for such disposition, (7) Indebtedness to the extent representing a replacement, renewal, refinancing or extension (collectively, a "refinancing") of outstanding Indebtedness Incurred in compliance with the Debt to Operating Cash Flow Ratio of the covenant "Limitation on Additional Indebtedness of Subsidiaries of the Issuer" or clause (1), (2)(b), (8) or (9) of this definition, provided, however, that (a) any such refinancing shall not exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof at the time of such refinancing, an amount no greater than such lesser amount) of the Indebtedness being refinanced, plus the amount of accrued interest or dividends thereon, plus the amount of an reasonably determined prepayment premium necessary to accomplish such refinancing and such reasonable fees and expenses incurred in connection therewith, (b) Indebtedness representing a refinancing of Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced, and (c) with respect to any refinancing of Indebtedness Incurred pursuant to subparagraph (8) or (9) of this definition, such refinancing pursuant to this clause (7) shall also be deemed to be Incurred pursuant to clause (8) or (9), as the case may be, of this paragraph (for the avoidance of doubt, the result of which is that a refinancing does not create new debt incurrence capacity under such clauses), (8) Indebtedness of any Restricted Subsidiary Incurred to finance the acquisition of the exclusive right to distribute DIRECTV Services within designated Rural DIRECTV Markets; provided, however, that such Indebtedness shall be Permitted Indebtedness under this subpara- 111 114 graph (8)in an amount not greater than the face amount of any letter of credit issued under the Credit Facility to support such Indebtedness, it being understood that the issuance of such letter of credit (but only for so long as such letter of credit remains outstanding) constitutes a reduction in the amount of Permitted Indebtedness available to be Incurred under clause (2) of this definition, and (9) in addition to the items referred to in subparagraphs (1) through (8) above, Indebtedness of any of the Restricted Subsidiaries (including any Indebtedness under the Credit Facility that utilizes this clause (9)) having an aggregate principal amount for the Restricted Subsidiaries not to exceed $25.0 million at any time outstanding. Indebtedness of any Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary (or is merged into or consolidated with the Issuer or any Restricted Subsidiary), whether or not such Indebtedness was Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary (or being merged into or consolidated with the Issuer or any Restricted Subsidiary), shall be deemed Incurred at the time any such Person becomes a Restricted Subsidiary or merges into or consolidates with the Issuer or any Restricted Subsidiary. "Permitted Investments" means (1) Cash Equivalents, (2) Investments by the Issuer or any Restricted Subsidiary in any Person that is or will become immediately after such Investment a Restricted Subsidiary or that will merge or consolidate into the Issuer or a Restricted Subsidiary, (3) Investments in the Issuer by any Restricted Subsidiary, (4) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits, (5) loans and advances to employees made in the ordinary course of business not to exceed $1.0 million in the aggregate at any one time outstanding, (6) Interest Rate Protection Obligations, (7) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under "-- Certain Covenants -- Disposition of Proceeds of Asset Sales" above not to exceed 25% of the total consideration for such Asset Sales (determined and computed as set forth under "-- Certain Covenants -- Disposition of Proceeds of Asset Sales"), (8) transactions with officers, directors and employees of the Issuer or any Restricted Subsidiary entered into in the ordinary course of business (including compensation or employee benefit arrangements with any such director or employee) and consistent with past business practices, (9) Investments existing as of the Issue Date and any amendment, extension, renewal or modification thereof to the extent that any such amendment, extension, renewal or modification does not require the Issuer or any Restricted Subsidiary to make any additional cash or non-cash payments or provide additional services in connection therewith, and (10) Permitted Acquisition Deposits. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, limited liability limited partnership, trust, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Equity Interest," in any Person, means an Equity Interest of any class or classes (however designated) that is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over Equity Interests of any other class in such Person. 112 115 "principal amount at maturity" means $1,000 per $1,000 face amount of the Notes. "Public Equity Offering" means an underwritten public offering of Equity Interests (other than Disqualified Equity Interests) of the Issuer made on a primary basis by the Issuer pursuant to a registration statement filed with and declared effective by the SEC in accordance with the Securities Act. "Purchase Money Indebtedness" means Indebtedness of any Restricted Subsidiary Incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of any property. However, the aggregate principal amount of such Indebtedness must not exceed the lesser of the Fair Market Value of such property or such purchase price or cost, including any refinancing of such Indebtedness that does not increase the aggregate principal amount (or accreted amount, if less) thereof as of the date of refinancing. "Qualified Equity Interest" in any Person means any Equity Interest in such Person other than any Disqualified Equity Interest. "Restricted Payment" means any of the following (1) the declaration or payment of any dividend or any other distribution on Equity Interests of the Issuer or any payment made to the direct or indirect holders (in their capacities as such) of Equity Interests of the Issuer (other than dividends or distributions payable solely in Equity Interests (other than Disqualified Equity Interests) of the Issuer) or in options, warrants or other rights to purchase Equity Interests (other than Disqualified Equity Interests) of the Issuer, (2) the purchase, redemption or other acquisition or retirement for value of any Equity Interests of the Issuer (other than any such Equity Interests owned by the Issuer or a Wholly Owned Restricted Subsidiary), (3) the purchase, redemption, defeasance or other acquisition or retirement for value prior to any scheduled repayment, sinking fund or maturity of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary), or (4) the making by the Issuer or any Restricted Subsidiary of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Issuer that has not been designated by the Board of Directors of the Issuer, by a resolution of the Board of Directors of the Issuer delivered to the Trustee, as an Unrestricted Subsidiary pursuant to "-- Certain Covenants -- Designation of Unrestricted Subsidiaries" above. Any such designation may be revoked by a resolution of the Board of Directors of the Issuer delivered to the Trustee, subject to the provisions of such covenant. "SEC" means the Securities and Exchange Commission. "Seller Notes" means any promissory notes issued by a Restricted Subsidiary to any Person selling any assets or properties to the Issuer or any Restricted Subsidiary in an Acquisition, including those outstanding on the Issue Date. "Significant Restricted Subsidiary" means, at any date of determination, (1) any Restricted Subsidiary that, together with its Subsidiaries that constitute Restricted Subsidiaries, (a) for the most recent fiscal year of the Issuer accounted for more than 5.0% of the consolidated revenues of the Issuer and the Restricted Subsidiaries or (b) as of the end of such fiscal year owned more than 5.0% of the consolidated assets of the Issuer and the Restricted Subsidiaries, all as set forth on the consolidated financial statements of the Issuer and the Restricted Subsidiaries for such year prepared in conformity with GAAP, and 113 116 (2) any Restricted Subsidiary that, when aggregated with all other Restricted Subsidiaries that are not otherwise Significant Restricted Subsidiaries and as to which any event described in clause (5), (7) or (8) of "-- Events of Default" above has occurred, would constitute a Significant Restricted Subsidiary under clause (1) of this definition. "Stated Maturity," when used with respect to any Note or any installment of interest thereon, means the date specified in such Note as the fixed date on which the principal of such Note or such installment of interest is due and payable. "Subordinated Indebtedness" means, with respect to the Issuer, Indebtedness of the Issuer that is expressly subordinated in right of payment to the Notes. "Subsidiary" means, with respect to any Person, (1) any corporation of which the outstanding Voting Equity Interests having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such Person, or (2) any other Person of which at least a majority of Voting Equity Interests are at the time, directly or indirectly, owned by such first named Person. "Systems" means Golden Sky Systems, Inc., a Wholly Owned Restricted Subsidiary. "Total Consolidated Indebtedness" means, as at any date of determination, an amount equal to the aggregate amount of all Indebtedness and Disqualified Equity Interests of the Issuer and the Restricted Subsidiaries outstanding as of such date of determination. "Total Incremental Invested Equity" means, at any date of determination, the sum of, without duplication, (1) the aggregate net cash proceeds received by Systems either (a) as capital contributions to Systems on or after the Issue Date, including any capital contributions made out of the proceeds from the issuance of the Notes, or (b) from the issue and sale (other than to a Subsidiary of Systems by Systems) of its Qualified Equity Interests after the Issue Date, plus (2) the aggregate net proceeds received by Systems or any other Restricted Subsidiary after the Issue Date from the issuance (other than to a Subsidiary of Systems) of Qualified Equity Interests upon the conversion of, or in exchange for, Indebtedness of Systems or another Restricted Subsidiary that has been converted into or exchanged for Qualified Equity Interests of Systems, minus (3) the aggregate amount of all Restricted Payments made on or after the Issue Date and all Designation Amounts arising after the Issue Date, but only to the extent the amount set forth in this clause (3) would exceed the amount determined under subclause (a) of clause (3) of the first paragraph under the "Limitation on Restricted Payments" covenant, plus (4) in the case of the disposition or repayment of any Investment which has been deducted pursuant to clause (3) of this definition, an amount equal to the lesser of the return of capital with respect to such Investment and the amount of such Investment which has been deducted pursuant to such clause (3), plus (5) in the case of any Revocation with respect to any Subsidiary that was made the subject of Designation after the Issue Date and as to which a Designation Amount has been deducted pursuant to clause (3) of this definition, an amount equal to the lesser of such Designation Amount or the Fair Market Value of the Investment of Systems and the other Restricted Subsidiaries in such Subsidiary at the time of Revocation. 114 117 "12 3/8% Notes" means the $195,000,000 aggregate principal amount of 12 3/8% Senior Subordinated Notes due 2006 of Systems. "12 3/8% Notes Indenture" means the indenture dated July 31, 1998 governing the 12 3/8% Notes. "Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as such pursuant to "-- Certain Covenants -- Designation of Unrestricted Subsidiaries" above. Any such designation may be revoked by a resolution of the Board of Directors of the Issuer delivered to the Trustee, subject to the provisions of "-- Certain Covenants -- Designation of Unrestricted Subsidiaries" above. "Voting Equity Interests" means Equity Interests in a corporation or other Person with voting power under ordinary circumstances entitling the holders thereof to elect the Board of Directors or other governing body of such corporation or such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (1) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal, including payment of final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (2) the then outstanding aggregate principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of the outstanding Voting Equity Interests (other than directors' qualifying shares) of which are owned, directly or indirectly, by the Issuer. 115 118 BOOK ENTRY; DELIVERY AND FORM The outstanding notes were initially issued in the form of (1) in the case of outstanding notes initially purchased by "qualified institutional buyers" (as this term is defined in Rule 144A under the Securities Act) two permanent global certificates in definitive, fully registered form, and (2) in the case of outstanding notes initially purchased by non-U.S. persons in reliance on Regulation S under the Securities Act, by a single permanent global certificate in definitive, fully registered form. On the closing date of the outstanding notes offering, we deposited these global certificates representing the outstanding notes with The Depository Trust Corporation (DTC). These global certificates were registered in the name of Cede & Co., as nominee of DTC. The new notes exchanged for the outstanding notes will be represented by two, permanent global certificates in definitive, fully registered form (collectively, the "Global Note"). Upon the completion of this exchange offer, the Global Note will be deposited with, or on behalf of, The Depository Trust Corporation (DTC) and registered in the name of Cede &Co., as nominee of DTC. The Global Note. Pursuant to procedures established by DTC, (1) upon the issuance of the Global Note, DTC or its custodian will credit, for the respective accounts of each holder of new notes who has an account with DTC ("DTC participants"), on its internal records, the principal amount at maturity of new notes beneficially owned by the DTC participant and represented by the Global Note, and (2) ownership of beneficial interests in the Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to the interests of DTC participants) and the records of DTC participants (with respect to interests of persons other than DTC participants who hold those interests through DTC participants). Initially, ownership of beneficial interests in the Global Note will be limited to persons who are DTC participants or persons who hold interests through DTC participants. So long as DTC, or its nominee, is the registered owner or holder of the new notes, DTC or its nominee, as the case may be, will be considered the sole owner or holder of the new notes represented by the Global Note for all purposes under the indenture. No beneficial owner of an interest in the Global Note will be able to transfer that interest except in accordance with DTC's procedures and the procedures provided for under the indenture. Payments of the principal of, premium (if any) and interest on, the Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the trustee, any paying agent under the indenture or our company has any responsibility or liability for any aspect of: - the records relating to beneficial ownership interests in the Global Note - payments made on account of beneficial ownership interests in the Global Note, or - maintaining, supervising or reviewing any records relating to that beneficial ownership interest. DTC or its nominee, upon receipt of any payment of principal, premium, if any, or interest in respect of the Global Note, will credit DTC participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount at maturity of the Global Note as shown on the records of DTC or its nominee. Payments by DTC participants to owners of beneficial interests in the Global Note held through DTC participants are governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for customers. These payments are the responsibility of the DTC participants. 116 119 Transfers between DTC participants will be effected in the ordinary way in accordance with DTC rules and will be settled in clearinghouse funds. If a holder requires physical delivery of a certificated note for any reason, including to sell notes to persons in states which require physical delivery of the notes, or to pledge these securities, the holder will need to transfer its interest in the Global Note, in accordance with the normal procedures of DTC and with the procedures described in the indenture. DTC has advised us that it will take action permitted to be taken by a holder of notes (including the presentation of notes for exchange as described below) only at the direction of one or more DTC participants to whose account the DTC interests in the Global Note are credited and only in respect of that portion of the aggregate principal amount at maturity of notes as to which the DTC participant or DTC participants has or have given that direction. However, if there is an event of default under the indenture, DTC will exchange the Global Note for certificated securities, which it will distribute to its participants. DTC has advised us that it: (1) is a limited purpose trust company organized under the laws of the State of New York, (2) is a member of the Federal Reserve System, (3) is a "clearing corporation" within the meaning of the Uniform Commercial Code, (4) is a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act, and (5) was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between DTC participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. DTC participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others including banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interest in the Global Note among DTC participants, it is under no obligation to perform these procedures, and these procedures may be discontinued at any time. Neither we nor the trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Certificated Securities. If DTC is at any time unwilling or unable to continue as a depositary for the Global Note and a successor depositary is not appointed by us within 90 days, certificated securities will be issued in exchange for the Global Note. SAME-DAY SETTLEMENT AND PAYMENT The indenture requires that payments in respect of the outstanding notes (including principal, premium, if any, and interest) be made in immediately available funds. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearing-house or next-day funds. In contrast, the new notes are expected to be eligible to trade in the PORTAL Market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in the new notes will therefore be required by the Depositary to be settled in immediately available funds. No assurance can be given as to the effect, if any, of settlement arrangements on trading activity in the new notes. 117 120 TRANSFER AND EXCHANGE A holder of new notes will be permitted to transfer or exchange its new notes in accordance with the indenture. The registrar under the indenture may require a holder, among other things, to furnish appropriate endorsements and transfer documents, and to pay any taxes and fees required by law or permitted by the indenture. The registrar is not required to transfer or exchange any new note selected for redemption. Also, the registrar is not required to transfer or exchange any new note for a period of 15 days before a selection of the new notes to be redeemed. The registered holder of a new note will be treated as the owner of it for all purposes. 118 121 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes, subject to the limitations set forth below, the material U.S. federal income tax consequences associated with this exchange offer and the acquisition, ownership and disposition of the new notes. The discussion is based upon provisions of the Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, judicial authority, current administrative rulings and practice, and existing and proposed Treasury Regulations, including regulations concerning the treatment of debt instruments issued with original issue discount (the "OID Regulations"), all as in effect and existing on the date hereof. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the validity of the statements and conclusions set forth below. Any such changes or interpretations may be retroactive and could adversely affect a holder of the outstanding notes or the new notes. This discussion assumes that the outstanding notes and the new notes are or will be held as capital assets (as defined in Section 1221 of the Code) by the holders thereof. Except as otherwise described herein, this discussion applies only to a holder who purchased notes for cash at the "issue price" (as defined below) and who is: (1) a citizen or resident of the United States for United States federal income tax purposes, (2) a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, (3) an estate the income of which is subject to United States federal income taxation regardless of its source, or (4) a trust that is subject to the primary supervision of a court within the United States and the control of one or more United States persons as described in Section 7701(a)(30) of the Code (a "U.S. Holder"). The following discussion does not purport to deal with all aspects of U.S. federal income taxation that might be relevant to particular holders in light of their personal investment circumstances or status (including non-U.S. holders who realize income or gain in respect of the new notes which is effectively connected with their conduct of a U.S. trade or business), nor does it discuss the U.S. federal income tax consequences to certain types of holders subject to special treatment under the U.S. federal income tax laws, such as certain financial institutions, insurance companies, dealers in securities, persons who hold the new notes through partnerships or other pass-through entities, tax-exempt organizations, or persons that hold new notes as part of a straddle or a hedging or conversion transaction. Moreover, the effect of any applicable state, local or foreign tax laws is not discussed. THE FOLLOWING DISCUSSION IS FOR YOUR GENERAL INFORMATION ONLY. YOU ARE STRONGLY URGED TO CONSULT WITH YOUR OWN TAX ADVISORS TO DETERMINE THE EFFECT OF YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THIS EXCHANGE OFFER AND THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NEW NOTES. EXCHANGE OF NOTES The exchange of outstanding notes for new notes pursuant to this exchange offer should not be treated as an "exchange" for federal income tax purposes, because the new notes should not be considered to differ materially in kind or extent from the outstanding notes. Rather, the new notes received by a holder of outstanding notes should be treated as a continuation of the outstanding notes in the hands of such holder. As a result, there will be no federal income tax consequences to a holder exchanging outstanding notes for new notes pursuant to this exchange offer. A holder shall have the same adjusted issue price, adjusted basis and holding period in the new notes as it had in the outstanding notes immediately before the exchange. 119 122 ORIGINAL ISSUE DISCOUNT General The new notes will be treated as issued with original issue discount ("OID"), and each U.S. Holder is required to include in income, in each year (regardless of whether such U.S. Holder is a cash or accrual basis taxpayer), in advance of the receipt of cash payments on such notes, that portion of the OID, computed on a constant yield-to-maturity basis, attributable to each day during such year on which the U.S. Holder held the notes. The Amount of Original Issue Discount The amount of OID with respect to each new note is equal to the excess of (1) its "stated redemption price at maturity" over (2) the "issue price" of the outstanding note exchanged therefor. Under the OID Regulations, the "issue price" is the initial offering price to the public (not including any bond house, broker or similar person or organization acting in the capacity of an underwriter, placement agent or wholesaler) at which a substantial amount of the outstanding notes were sold, and the "stated redemption price at maturity" of each new note is the sum of all cash payments (whether denominated as principal or interest) provided by the note. Taxation of Original Issue Discount Except as described below in the section entitled "High Yield Discount Obligations," a U.S. Holder of a debt instrument issued with OID is required to include in gross income (generally as ordinary interest income) for U.S. federal income tax purposes an amount equal to the sum of the "daily portions" of such OID for all days during the taxable year on which the holder holds the debt instrument. The daily portions of OID required to be included in a holder's gross income in a taxable year is determined upon a constant yield-to-maturity basis by allocating to each day during the taxable year on which the holder holds the debt instrument a pro rata portion of the OID on such debt instrument which is attributable to the "accrual period" (generally the period between interest payment or compounding dates) in which such day is included. The amount of the OID attributable to each "accrual period" is the product of (1) the "adjusted issue price" at the beginning of such accrual period and (2) the "yield to maturity" of the debt instrument (stated in a manner appropriately taking into account the length of the accrual period). The "adjusted issue price" of each new note at the beginning of an accrual period generally will be equal to the issue price of the outstanding note exchanged therefor plus the aggregate amount of OID that accrued in all prior accrual periods, less any cash payments that have been made on the outstanding note or the new note. Payments on the new notes are not separately included in a U.S. Holder's income as interest, but rather are treated first as payments of previously accrued and unpaid OID and then as payments of principal. Effect of Mandatory and Optional Redemptions on OID We do not intend to treat the possibility of an optional or mandatory redemption or repurchase of the new notes as giving rise to any additional accrual of OID or recognition of ordinary income upon redemption, sale or exchange of a new note. U.S. Holders may wish to consider the portion of the OID Regulations regarding the treatment of certain contingencies and may wish to consult their tax advisors in this regard. SALE, EXCHANGE OR REDEMPTION Unless a nonrecognition provision applies, the sale, exchange, redemption (including pursuant to an offer by us) or other disposition of a new note is a taxable event for U.S. federal income tax purposes. In such event, a U.S. Holder will recognize gain or loss equal to the difference between (1) the amount of cash plus the fair market value of any property received upon such sale, exchange, redemption or other taxable disposition and (2) the U.S. Holder's adjusted tax basis therein. A U.S. Holder's adjusted tax basis in a new note generally will equal the cost to the U.S. Holder of the outstanding note exchanged 120 123 therefor, increased by the amount of OID previously included in such U.S. Holder's income with respect to such new note and decreased by the amount of any principal or interest payments previously received by the U.S. Holder on such note. Gain or loss realized on a sale, exchange, redemption or other taxable disposition of the new note should be capital gain or loss and will be long-term capital gain or loss if the note has been held by the U.S. Holder for more than one year at the time of such sale, exchange, redemption or other taxable disposition. The maximum rate of tax on long-term capital gains on capital assets held by an individual for more than one year generally is 20%. The deductibility of capital losses is subject to limitations. HIGH-YIELD DISCOUNT OBLIGATIONS The new notes will constitute "applicable high yield discount obligations" ("AHYDOs") since the yield to maturity of such notes equals or exceeds the sum of the "applicable federal rate" in effect at the time of the issuance of the notes (the "AFR") plus five percentage points and the new notes are issued with "significant original issue discount." Accordingly, we generally may not deduct any portion of OID on the obligations until such portion is actually paid. In addition, since the yield-to-maturity of the new notes exceeds the sum of the AFR plus six percentage points, a portion of the OID on the notes, generally equal to the product of the total OID on the notes times the ratio of (1) the excess of the yield to maturity over the sum of the AFR plus six percentage points to (2) the yield to maturity, will not be deductible by us at any time (the "non-deductible portion"). To the extent that the non-deductible portion of OID would have been treated as a dividend if it had been distributed with respect to our stock, such portion will be treated as a dividend to holders of the new notes for purposes of the rules relating to the dividends received deduction for corporate holders. NON-U.S. HOLDERS Payments of principal, if any, and interest (including OID) by us or our agent (in its capacity as such) to any holder who is a beneficial owner of a new note and who holds the new note as a capital asset but who is not a U.S. Holder are not subject to U.S. federal income or withholding tax provided, in the case of interest (including OID) that: (1) such holder does not actually or constructively own 10% or more of the total combined voting power of all classes of our stock entitled to vote and, is not a controlled foreign corporation for U.S. federal income tax purposes that is related to us through stock ownership, and (2) such holder either (A) certifies to us or our agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address, or (B) is a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "financial institution") and certifies to us or our agent, under penalties of perjury, that the certification described in clause (A) hereof has been received from the beneficial owner by it or by another financial institution acting for the beneficial owner and furnishes us with a copy thereof. A holder of a new note who is not a U.S. Holder, and who does not meet the requirements of (1) or (2) above, would generally be subject to U.S. federal withholding tax at a flat rate of 30% (or a lower applicable treaty rate) on payments of interest (including OID) on the notes. Treasury Regulations recently issued by the IRS, which will be effective January 1, 2000, make modifications to the certification procedures applicable to non-U.S. Holders. In general, these regulations unify certification procedures and forms and clarify and modify reliance standards. A non-U.S. Holder should consult its own advisor regarding the effect of the new Treasury Regulations. Any capital gain realized upon the sale, exchange, redemption or other disposition of a new note by a holder who is not a U.S. Holder and who holds the note as a capital asset is not subject to U.S. federal income or withholding taxes unless, in the case of an individual, such holder is present in the United States for 183 days or more in the taxable year of the sale, exchange, redemption or other disposition and certain other conditions are met. 121 124 BACKUP WITHHOLDING AND INFORMATION REPORTING FOR U.S. AND NON-U.S. HOLDERS Certain noncorporate U.S. Holders may be subject to backup withholding at a rate of 31% on payments of principal and interest (including OID) on, and the proceeds of a disposition of, a new note. Backup withholding will apply only if the U.S. Holder (1) fails to furnish its Taxpayer Identification Number ("TIN") which, in the case of an individual, would be his or her Social Security number, (2) furnishes an incorrect TIN, (3) is notified by the IRS that it has failed to properly report payments of interest and dividends or (4) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding. U.S. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable. Treasury Regulations provide that backup withholding will not apply to payments on the new notes by us to a non-U.S. Holder if the holder certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption provided that neither we nor our paying agent has actual knowledge that the holder is a U.S. person or that the conditions of any other exception are not, in fact, satisfied. The payment of the proceeds from the disposition of new notes to or through the U.S. office of any broker, U.S. or foreign, will be subject to possible backup withholding unless the owner certifies as to its non-U.S. Holder status under penalty of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. Backup withholding will not apply to payments made through foreign offices of a broker that is not a U.S. person or a U.S. related person (absent actual knowledge that the payee is U.S. person). For purposes of this paragraph, a "U.S. related person" is (1) a "controlled foreign corporation" for U.S. federal income tax purposes, (2) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a U.S. trade or business, or (3) with respect to payments made after December 31, 1999, a foreign partnership that, at any time during its taxable year, is 50% or more (by income or capital interest) owned by U.S. persons or is engaged in the conduct of a U.S. trade or business. Treasury Regulations provide certain presumptions under which a non-U.S. Holder will be subject to backup withholding unless the non-U.S. Holder provides a certification as to its non-U.S. Holder status. The amount of any backup withholding from a payment to a U.S. Holder or a non-U.S. Holder will be allowed as a credit against such holder's United States federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. We will furnish annually to the IRS and to record holders of the new notes (other than with respect to certain exempt holders) information relating to the stated interest and the OID accruing during the calendar year. Such information will be based on the amount of OID that would have accrued to a holder who acquired the note on original issue. 122 125 PLAN OF DISTRIBUTION Each broker-dealer that receives new notes for its own account pursuant to this exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of those new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for outstanding notes if the outstanding notes were acquired by the broker-dealer as a result of market-making or other trading activities. We have agreed that, for a period of 90 days after the date of the expiration of this exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. In addition, for a period of 90 days after the expiration date, all dealers effecting transactions in the new notes may be required to deliver a prospectus. We will not receive any proceeds from any sale of new notes by broker-dealers. New notes received by broker-dealers for their own account pursuant to this exchange offer may be sold from time to time: - in one or more transactions in the over-the-counter market, - in negotiated transactions, - through the writing of options on the new notes, or - through a combination of these methods of resale. Resales of new notes may be at market prices prevailing at the time of resale, at prices related to the prevailing market prices or at negotiated prices. Any resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer and/or the purchasers of any these new notes. Any broker-dealer that resells new notes that were received by it for its own account pursuant to this exchange offer and any broker or dealer that participates in a distribution of new notes may be deemed to be an "underwriter" within the meaning of the Securities Act. If a broker or dealer is deemed to be an underwriter, any profit on any resale of new notes and any commissions or concessions received by that person may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal requires any broker-dealers who exchanges outstanding notes for new notes to acknowledge that it will deliver a prospectus. A broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act solely by virtue of making that acknowledgment. We have no arrangement or understanding with any broker or dealer to distribute the new notes issued in the exchange offer. For a period of 90 days after the expiration date of the exchange offer we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests those documents in its letter of transmittal. LEGAL MATTERS The validity of the new notes will be passed upon for us by Reboul, MacMurray, Hewitt, Maynard & Kristol, New York, New York. EXPERTS The following financial statements appearing in this prospectus have been audited by KPMG LLP, independent auditors, as stated in their reports, and are included herein in reliance upon the reports of such firm: (1) Golden Sky DBS's balance sheet as of February 2, 1999 (date of inception), (2) our consolidated financial statements for the period from inception (June 25, 1996) to December 31, 1996, and for the years ended December 31, 1997 and 1998, 123 126 (3) financial statements of Thunderbolt Systems, Inc. for the years ended December 31, 1996, 1995, and 1994, (4) financial statements of TEG DBS Systems, Inc. for the years ended December 31, 1996 and 1995, (5) financial statements of Direct Vision for the years ended December 31, 1996, 1995 and 1994, (6) financial statements of Satellite Entertainment, Inc. for the years ended December 31, 1996, 1995, and 1994, (7) financial statements of GVEC Rural TV, Inc. for the years ended December 31, 1996, 1995 and 1994, (8) financial statements of JECTV for the years ended December 31, 1996, 1995 and 1994, (9) financial statements of Argos Support Services Company for the years ended December 31, 1996 and 1995, (10) financial statements of Direct Broadcast Satellite (a segment of CTS Communication Corporation) for the years ended December 31, 1996, 1995 and 1994, (11) financial statements of DBS LC for the period from January 1, 1997 to November 17, 1997, (12) financial statements of Cal-Ore Digital TV, Inc. for the period from January 1, 1997 to December 8, 1997 and for the year ended December 31, 1996, (13) financial statements of NRTC System No. 0093, a segment of Cable and Communications Corporation, for each of the years in the three year period ended December 31, 1996, and (14) financial statements of Lakeland DBS, Inc. for the period from January 1, 1997 to December 24, 1997 and for the year ended December 31, 1996. The financial statements of Western Montana DBS, Inc. dba Rocky Mountain DBS for each of the years in the three-year period ended December 31, 1996 and for the year ended December 31, 1997 have been audited by Loucks & Glassley, pllp, independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. The financial statements of Gardonville Systems, Inc. (a wholly-owned subsidiary of Gardonville Cooperative Telephone Association) for the year ended December 31, 1997 have been audited by Olsen Thielen & Co., Ltd., independent auditors, as stated in their report, and are included herein in reliance upon the report if such firm. The financial statements of Western Montana Entertainment Television, Inc. for the year ended December 31, 1996 and for period ended December 22, 1997 have been audited by Summers, McNea and Company, P.C., independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. The financial statements of South Plains DBS Limited Partnership for each of the years in the two-year period ended December 31, 1996 and for the period ended December 22, 1997 have been audited by Bolinger, Segars, Gilbert & Moss, L.L.P., independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. The financial statements of Triangle Communication System, Inc. for each of the years in the three-year period ended December 31, 1997 have been audited by Eide Helmeke PLLP, independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. 124 127 The financial statements of Direct Broadcast Satellite (a segment of Nemont Communications Inc.) for the year ended December 31, 1997 have been audited by CHMS, P.C., independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. The financial statements of DBS Segment of Cumby Cellular, Inc. for the year ended December 31, 1997 have been audited by Curtis Blakely & Co., P.C., independent auditors, as stated in their report, and are included herein in reliance upon the report of such firm. The financial statements of Direct Broadcast Satellite (a segment of Volcano Vision, Inc.) for the year ended December 31, 1997 have been audited by Moss Adams LLP, independent auditors, as stated in their report and are included herein in reliance upon the reports of such firm. 125 128 INDEX TO FINANCIAL STATEMENTS
PAGE ----- GOLDEN SKY DBS, INC. Independent Auditors' Report.............................. F-2 Balance Sheet as of February 3, 1999...................... F-3 GOLDEN SKY SYSTEMS, INC. Independent Auditors' Report.............................. F-4 Consolidated Balance Sheets as of December 31, 1997 and 1998................................................... F-5 Consolidated Statements of Operations for the period from inception (June 25, 1996) through December 31, 1996, and for the years ended December 31, 1997 and 1998..... F-6 Consolidated Statements of Stockholder's Equity (Deficit) for the period from inception (June 25, 1996) through December 31, 1996, and for the years ended December 31, 1997 and 1998.......................................... F-7 Consolidated Statements of Cash Flows for the period from inception (June 25, 1996) through December 31, 1996, and for the years ended December 31, 1997 and 1998..... F-8 Notes to Consolidated Financial Statements................ F-9 FINANCIAL STATEMENTS OF COMPLETED ACQUISITIONS Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-29 Western Montana DBS, Inc. dba Rocky Mountain DBS (unaudited)............................................ F-37 TEG DBS Systems, Inc. .................................... F-44 TEG DBS Systems, Inc. (unaudited)......................... F-49 Direct Vision (a segment of Mankato Citizens Telephone Company)............................................... F-52 Direct Vision (a segment of Mankato Citizens Telephone Company) (unaudited)................................... F-60 Satellite Entertainment, Inc. (a wholly-owned subsidiary of Ace Telephone Association).......................... F-64 Satellite Entertainment, Inc. (a wholly-owned subsidiary of Ace Telephone Association) (unaudited).............. F-73 GVEC Rural TV, Inc. ...................................... F-77 GVEC Rural TV, Inc. (unaudited)........................... F-87 JECTV (a segment of Jackson Electric Cooperative)......... F-91 JECTV (a segment of Jackson Electric Cooperative) (unaudited)............................................ F-100 Argos Support Services Company............................ F-105 Argos Support Services Company (unaudited)................ F-114 Gardonville Systems, Inc. ................................ F-118 Direct Broadcast Satellite (a segment of CTS Communications Corporation)............................ F-125 Direct Broadcast Satellite (a segment of CTS Communications Corporation) (unaudited)................ F-133 Souris River Television, Inc. ............................ F-137 Souris River Television, Inc. (unaudited)................. F-146 DBS LC.................................................... F-151 Western Montana Entertainment Television, Inc. ........... F-156 South Plains DBS Limited Partnership...................... F-164 Cal-Ore Digital TV, Inc. ................................. F-184 NRTC System No. 0093 (a segment of Cable and Communications Corporation)............................ F-199 NRTC System No. 0093 (a segment of Cable and Communications Corporation) (unaudited)................ F-208 Lakeland DBS.............................................. F-212 Triangle Communications System, Inc. ..................... F-218 Direct Broadcast Satellite (a segment of Nemont Communications, Inc.).................................. F-228 DBS Segment of Cumby Cellular, Inc. ...................... F-237 DBS Segment of Cumby Cellular, Inc. (unaudited)........... F-245 Direct Broadcast Satellite (a segment of Volcano Vision, Inc.).................................................. F-251 Direct Broadcast Satellite (a segment of Volcano Vision, Inc.) (unaudited)...................................... F-260 Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-267 Western Montana DBS, Inc. dba Rocky Mountain DBS (unaudited)............................................ F-276
F-1 129 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky DBS, Inc. We have audited the accompanying balance sheet of Golden Sky DBS, Inc. (a wholly-owned subsidiary of Golden Sky Holdings, Inc.) as of February 2, 1999. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Golden Sky DBS, Inc. as of February 2, 1999 in conformity with generally accepted accounting principles. KPMG LLP February 3, 1999 Kansas City, Missouri F-2 130 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 will transfer to the Issuer all of the capital stock of its wholly-owned subsidiary Golden Sky Systems, Inc.("GSS"). GSS is Delaware corporation formed on June 25, 1996 for the purpose of acquiring, owning and operating rural direct broadcast satellite (DBS) television territories throughout the United States. The transfer will be reported at predecessor cost, which at December 31, 1998 was $15.9 million (unaudited). F-3 131 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky Systems, Inc.: We have audited the accompanying consolidated balance sheets of Golden Sky Systems, Inc. as of December 31, 1997 and 1998 and the related consolidated statements of operations, stockholder's equity and cash flows for the period from inception (June 25, 1996) through December 31, 1996, and for the years ended December 31, 1997 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Golden Sky Systems, Inc. as of December 31, 1997 and 1998 and the results of their operations and their cash flows for the period from inception (June 25, 1996) through December 31, 1996, and for the years ended December 31, 1997 and 1998, in conformity with generally accepted accounting principles. KPMG LLP February 22, 1999, except for paragraph seven of Note 5, which is as of March 22, 1999 Kansas City, Missouri F-4 132 GOLDEN SKY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ------------------- 1997 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 13,632 $ 4,460 Restricted cash, current portion.......................... -- 28,083 Subscriber receivables (net of allowance for uncollectible accounts of $138 and $293, respectively)............... 3,843 8,632 Other receivables......................................... 335 2,465 Inventory................................................. 2,174 10,146 Prepaid expenses and other................................ 127 1,859 -------- -------- Total current assets........................................ 20,111 55,645 Restricted cash, net of current portion..................... -- 23,534 Property and equipment (net of accumulated depreciation of $1,061 and $3,214, respectively).......................... 2,936 4,994 Intangible assets, net...................................... 129,896 233,139 Deferred financing costs.................................... 3,106 10,541 Other assets................................................ 187 218 -------- -------- Total assets...................................... $156,236 $328,071 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable.................................... $ 8,471 $ 13,539 Interest payable.......................................... 786 11,009 Current maturities of long-term obligations............... 2,538 8,916 Unearned revenue.......................................... 2,630 5,574 Accrued payroll and other................................. 1,859 1,403 -------- -------- Total current liabilities................................... 16,284 40,441 Long-term obligations, net of current maturities: 12 3/8% Notes............................................. -- 195,000 Bank debt................................................. 60,000 67,000 Seller notes payable...................................... 6,200 6,912 Other notes payable and obligations under capital leases................................................. 375 376 Minority interest......................................... 2,928 2,420 -------- -------- Total long-term obligations, net of current maturities...... 69,503 271,708 -------- -------- Total liabilities........................................... 85,787 312,149 Commitments and contingencies............................... -- -- Stockholder's Equity: Common Stock, par value $.01; 1,000 shares authorized, issued and outstanding................................. -- -- Additional paid-in capital................................ 87,400 97,600 Accumulated deficit....................................... (16,951) (81,678) -------- -------- Total stockholder's equity.................................. 70,449 15,922 -------- -------- Total liabilities and stockholder's equity........ $156,236 $328,071 ======== ========
See accompanying notes to consolidated financial statements. F-5 133 GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
INCEPTION THROUGH YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------ 1996 1997 1998 ------------ ---------- ---------- Revenue: DBS services........................................... $ 219 $ 16,452 $ 74,910 Lease and other........................................ 36 944 1,014 ------- -------- -------- Total revenue............................................ 255 17,396 75,924 Costs and Expenses: Costs of DBS services.................................. 130 9,304 45,291 System operations...................................... 26 3,796 11,021 Sales and marketing.................................... 73 7,316 32,201 General and administrative............................. 1,035 2,331 7,431 Depreciation and amortization.......................... 97 7,300 23,166 ------- -------- -------- Total costs and expenses................................. 1,361 30,047 119,110 ------- -------- -------- Operating loss........................................... (1,106) (12,651) (43,186) Non-operating items: Interest and investment income......................... 1 40 1,573 Interest expense....................................... (62) (3,173) (20,537) ------- -------- -------- Total non-operating items................................ (61) (3,133) (18,964) ------- -------- -------- Loss before income taxes................................. (1,167) (15,784) (62,150) Income taxes............................................. -- -- -- ------- -------- -------- Loss before extraordinary charge......................... (1,167) (15,784) (62,150) Extraordinary charge on early retirement of debt......... -- -- (2,577) ------- -------- -------- Net loss....................................... $(1,167) $(15,784) $(64,727) ======= ======== ========
See accompanying notes to consolidated financial statements. F-6 134 GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ------- Balance at inception (June 25, 1996)................ $ -- $ -- $ -- $ -- Issuance of 1,000 shares of Common Stock.......... -- 1 -- 1 Net loss.......................................... -- -- (1,167) (1,167) ---- ------- -------- ------- Balance at December 31, 1996........................ -- 1 (1,167) (1,166) Cancellation of originally issued Common Stock.... -- (1) -- (1) Issuance of 1,000 shares of new Common Stock...... -- -- -- -- Contribution from Golden Sky Holdings, Inc. ...... -- 87,400 -- 87,400 Net loss.......................................... -- -- (15,784) (15,784) ---- ------- -------- ------- Balance at December 31, 1997........................ -- 87,400 (16,951) 70,449 Contribution from Golden Sky Holdings, Inc. ...... -- 10,200 -- 10,200 Net loss.......................................... -- -- (64,727) (64,727) ---- ------- -------- ------- Balance at December 31, 1998........................ $ -- $97,600 $(81,678) $15,922 ==== ======= ======== =======
See accompanying notes to consolidated financial statements. F-7 135 GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
INCEPTION THROUGH YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------- 1996 1997 1998 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(1,167) $ (15,784) $ (64,727) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 97 7,300 23,166 Amortization of deferred financing costs.................. -- 215 977 Extraordinary charge on early retirement of debt.......... -- -- 2,577 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue......... (13) (2,501) (1,757) Other receivables....................................... (123) (161) (2,130) Inventory............................................... (31) (1,604) (8,049) Prepaid expenses and other.............................. (17) (203) (1,228) Trade accounts payable.................................. 372 7,515 5,068 Interest payable........................................ 53 733 10,223 Accrued payroll and other............................... 39 1,391 (708) ------- --------- --------- Net cash used in operating activities....................... (790) (3,099) (36,588) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets....................... (2,806) (120,051) (104,487) Offering proceeds and investment earnings placed in escrow.................................................... -- -- (51,617) Purchases of property and equipment......................... (105) (998) (3,317) Other....................................................... (320) 320 (500) ------- --------- --------- Net cash used in investing activities....................... (3,231) (120,729) (159,921) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from investors' subscriptions to purchase preferred stock..................................................... 2,499 -- -- Proceeds from issuance of Series A Convertible Participating Preferred Stock........................................... -- 34,289 -- Net proceeds from issuance of 12 3/8% Notes................. -- -- 189,150 Borrowings under the Credit Agreement....................... -- 75,000 28,000 Borrowings under the Credit Facility........................ -- -- 62,000 Principal payments on the Credit Agreement.................. -- (15,000) -- Principal payments on the Credit Facility................... -- -- (83,000) Proceeds from issuance of notes payable..................... 2,396 2,115 -- Principal payments on notes payable and obligations under capital leases............................................ (396) (2,902) (3,675) Proceeds from issuance of Common Stock...................... 1 -- -- Contribution from Golden Sky Holdings, Inc.................. -- 46,800 -- Increase in deferred financing costs........................ -- (3,321) (5,138) ------- --------- --------- Net cash provided by financing activities................... 4,500 136,981 187,337 ------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 479 13,153 (9,172) Cash and cash equivalents, beginning of period.............. -- 479 13,632 ------- --------- --------- Cash and cash equivalents, end of period.................... $ 479 $ 13,632 $ 4,460 ======= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest...................................... $ 9 $ 2,225 $ 9,337 Property and equipment acquired under capitalized lease obligations............................................... -- 554 609 Retirement of Credit Agreement from borrowings under the Credit Facility........................................... -- -- 88,000 Issuance of seller notes payable in acquisitions............ 2,450 8,600 10,157 Conversion of notes payable and subscriptions to Series A Convertible Participating Preferred Stock................. -- 6,311 -- Contribution from Golden Sky Holdings, Inc. resulting from issuance of its preferred stock in acquisitions......... -- -- 10,200
See accompanying notes to consolidated financial statements. F-8 136 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Principal Business Golden Sky Systems, Inc. ("Systems" or "the Company") is the second largest independent provider of DIRECTV subscription television services. DIRECTV is the leading direct broadcast satellite ("DBS") company serving the continental United States. Systems, a Delaware corporation formed on June 25, 1996 ("Inception"), is a non-voting affiliate of the National Rural Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with Hughes Communications Galaxy, Inc. ("Hughes") for the exclusive right to distribute DIRECTV programming to homes in certain rural territories of the United States ("Rural DIRECTV Markets"). As of December 31, 1998, Systems had acquired 48 Rural DIRECTV Markets in 22 states with approximately 1.7 million households. As of that same date, Systems served approximately 230,500 subscribers. Organization and Legal Structure Until February 1999, Systems was a wholly-owned subsidiary of Golden Sky Holdings, Inc. ("Holdings"). Holdings is a Delaware corporation formed on September 9, 1997 for the purpose of holding all the capital stock of Systems. Upon the formation of Holdings, Systems issued 1,000 shares of its common stock to Holdings and all the shareholders of the then outstanding preferred stock of Systems were issued equivalent shares of Holdings stock with identical features to Systems' preferred stock (the "Exchange"). The Exchange was accounted for as a reorganization of entities under common control and the historical cost basis of consolidated assets and liabilities was not affected by the transaction. Holdings has no significant assets or liabilities other than its investment in Systems. On February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for the purpose of effecting an offering of senior discount notes. Upon formation, Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for $100 and the subsequent transfer of all of the capital stock of Systems to Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became a wholly-owned subsidiary of Golden Sky DBS. Significant Risks and Uncertainties Substantial Leverage. Systems is highly leveraged, making it vulnerable to changes in general economic conditions and interest rates. As of December 31, 1998, Systems had outstanding long-term debt (including current portion) totaling approximately $278.2 million. Substantially all of Systems' and its subsidiaries' assets are pledged as collateral on its long-term debt. Further, the terms associated with Systems' long-term debt obligations significantly restrict its ability to incur additional indebtedness. Thus, it may be difficult for Systems and its subsidiaries to obtain additional debt financing if desired or required in order to further implement Systems' business strategy. Expected Operating Losses. Due to the substantial expenditures required to acquire Rural DIRECTV Markets and subscribers, Systems has sustained significant losses since Inception. Systems' operating losses were $1.1 million, $12.7 million and $43.2 million for the periods ended December 31, 1996, 1997 and 1998, respectively. Systems' net losses during those same periods aggregated $1.2 million, $15.8 million and $64.7 million, respectively. Improvement in Systems' results of operations is principally dependent upon its ability to cost effectively expand its subscriber base, control subscriber churn (i.e., the rate at which subscribers terminate service), and effectively manage its operating and overhead costs. No assurance can be given that Systems will be effective with regard to these matters. Systems incurs significant costs to acquire DIRECTV subscribers. The high cost of obtaining new subscribers magnifies the negative effects of subscriber churn. Systems anticipates that it will continue to experience operating losses through at least 1999. There can F-9 137 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED be no assurance that such operating losses will not continue beyond 1999 or that Systems' operations will generate sufficient cash flows to pay its obligations, including its obligations on its long-term debt. Restrictions on Dividends and Other Distributions. The ability of Systems and its subsidiaries to pay dividends and make other distributions and advances is subject to, among other things, the terms of its long-term debt obligations and applicable law. As a result, Systems may be limited in its ability to make dividend payments and other distributions to Golden Sky DBS at the time such distributions are needed by Golden Sky DBS to meet its obligations. Reliance on DIRECTV/NRTC. Systems obtains substantially all of its revenue from the distribution of DIRECTV programming services. As a result, Systems would be materially adversely affected by any material change in the assets, financial condition, programming, technological capabilities or services of DIRECTV or Hughes. Further, Systems relies upon DIRECTV to continue to provide programming services on a basis consistent with its past practice. Any change in such practice due to, for example, a failure to replace a satellite upon the expiration of its useful orbital life or a delay in launching a successor satellite may prevent Systems from continuing to provide DBS services and could have a material adverse effect on Systems' financial condition and results of operations. Additionally, Systems' ability to offer DIRECTV programming services depends upon agreements between the NRTC and Hughes and between Systems and the NRTC. The NRTC's interests may differ from Systems' interests. Systems would be materially and adversely affected by the termination of the NRTC's agreement with Hughes and/or the termination of Systems' agreements with the NRTC. Systems' agreements with the NRTC require that it use the NRTC for certain support services including subscriber information and data reporting capability, retail billing services and central office subscriber services. Such services are critical to the operation and management of Systems' business. Competition. The subscription television industry is highly competitive. Systems faces competition from companies offering video, audio, data, programming and entertainment services. Many of these competitors have substantially greater financial and marketing resources than Systems. Systems ability to effectively compete in the subscription television industry will depend on a number of factors, including competitive factors (such as the introduction of new technologies or the entry of additional strong competitors) and the level of consumer demand for such services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the financial statements of Systems and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Minority interest represents the cumulative earnings and losses, after capital contributions, attributable to minority partners and stockholders. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997 and 1998, cash and cash equivalents include cash on hand, demand deposits and money market accounts. F-10 138 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Restricted Cash Restricted cash, as reflected in the accompanying consolidated balance sheets, includes cash restricted by the indenture associated with the Company's 12 3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash, which is held in escrow, is invested in certain permitted debt and other marketable investment securities until disbursed for the express purposes identified in the indenture. As of December 31, 1998, restricted cash was composed entirely of U.S. treasury notes. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market and consists of receivers, satellite dishes and accessories ("DBS Equipment"). The Company subsidizes the cost to the consumer of such equipment, which is required to receive DIRECTV programming services. Additionally, the Company subsidizes the cost to the consumer of installation of DBS Equipment. Equipment and installation revenues and related expenses are recognized upon delivery and installation of DBS Equipment. Net transaction costs associated with the sale and installation of DBS Equipment are reported as a component of sales and marketing expenses in the accompanying consolidated statements of operations. During the periods ended December 31, 1996, 1997 and 1998, aggregate proceeds from the sale and installation of DBS Equipment totaled $57,000, $3.8 million and $11.0 million, respectively; related cost of sales totaled $68,000, $4.6 million and $25.8 million during those same periods. Long-lived Assets Systems reviews its long-lived assets (e.g., property and equipment) and certain identifiable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For assets which are held and used in operations, the asset would be impaired if the book value of the asset exceeded the undiscounted future cash flows related to the asset. For those assets which are to be disposed of, the assets would be impaired to the extent the fair value does not exceed the book value. Systems considers relevant cash flow, estimated future operating results, trends and other available information including the fair value of DIRECTV distribution rights owned, in assessing whether the carrying value of assets can be recovered. Property and Equipment Property and equipment, consisting of computer hardware and software, furniture, vehicles, and office and other equipment, is recorded at cost. Depreciation is recognized on a straight-line basis over the related estimated useful lives, which range from two to five years. DIRECTV Distribution Rights DIRECTV distribution rights, which represent the excess of the purchase price over the fair value of net assets acquired, are amortized on a straight-line basis over the periods expected to be benefited, generally up to 12 years. The expected period to be benefited corresponds to the remaining estimated orbital lives of the satellites used by Hughes for distribution of DIRECTV programming services. Hughes' satellites are estimated to have orbital lives of approximately 15 years from the respective launch dates in December 1993, August 1994 and June 1995. F-11 139 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying value approximates fair value as a result of the short maturity of these instruments. Receivables and payables: These assets are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. Long-term debt and notes payable: Fair value of the 12 3/8% Notes (as defined) is based on quoted market prices. As of December 31, 1998, the carrying value of the 12 3/8% Notes was $195.0 million; the fair value of the 12 3/8% Notes approximated $199.9 million as of that same date. The carrying value of Systems' Credit Facility (as defined) and other notes payable approximate fair value as interest rates are variable or approximate market rates. Revenue Recognition DBS services revenue is recognized in the month service is provided. Unearned revenue represents subscriber advance billings for one or more months and revenue recognition is deferred until service is provided. System Operations Expense System operations expense includes payroll and other administrative costs related to the Company's local offices and national call center. Advertising Costs Advertising costs are expensed as incurred. Such costs aggregated $33,000, $1.4 million and $5.1 million during the periods ended December 31, 1996, 1997 and 1998, respectively. Income Taxes Systems elected to be taxed as an S Corporation for federal income tax purposes in 1996. As an S Corporation, Systems was generally not directly subject to income taxation. On February 12, 1997, Systems terminated its S Corporation status, and thereafter is subject to income taxation as a C Corporation under Subchapter "C" of the Internal Revenue Code. Upon formation, Holdings elected to be taxed as a C Corporation for federal income tax purposes. Pro forma income taxes have not been presented because the Company has incurred operating losses in all periods. Effects of Recently Issued Accounting Pronouncements Systems adopted Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income" ("FAS No. 130") during the first quarter of 1998. FAS No. 130 established new rules for the reporting of comprehensive income and its components. FAS No. 130 has no impact on net income or stockholder's equity. Systems has no components of comprehensive income other than net loss and thus, adoption of FAS No. 130 had no effect on its financial statements. In June 1998, the Financial Accounting Standards Board (the "FASB") issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). FAS No. 133 is effective for fiscal years beginning after June 15, 1999. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, Systems has no derivative instruments or hedging F-12 140 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on Systems' financial position or results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years beginning after December 15, 1998, defines costs related to start-up activities and requires that such costs be expensed as incurred. As Systems previously has expensed all such costs, the adoption of SOP 98-5 is not expected to effect Systems' financial position or results of operations. Reclassifications Certain amounts from the prior years consolidated financial statements have been reclassified to conform with the current year presentation. 3. ACQUISITIONS The Company accounts for its acquisitions using the purchase method. The Company's consolidated statements of operations for the periods ended December 31, 1996, 1997 and 1998 include the results of operations of acquired Rural DIRECTV Markets from the respective acquisition dates. The aggregate purchase price (including direct acquisition costs) for the acquisitions completed during 1996, 1997 and 1998 were allocated as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1997 1998 ------ -------- -------- DIRECTV distribution rights............................ $4,664 $116,394 $114,747 Customer lists......................................... 453 9,450 7,114 Non-compete agreements................................. 35 4,879 2,587 Property and equipment................................. 135 1,953 204 Minority interest...................................... -- (2,931) -- Working capital, net................................... (31) (20) 192 ------ -------- -------- $5,256 $129,725 $124,844 ====== ======== ========
F-13 141 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The following summarizes the Company's acquisitions of Rural DIRECTV Markets consummated during 1996, 1997 and 1998 (dollars in thousands):
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-14 142 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
AGGREGATE SELLER ACQUISITION DATE STATE CONSIDERATION ------ ------------------ ------------------ ------------- Direct Broadcast Satellite, a segment of Nemont Communications, Inc. .......... January 14, 1998 Montana/Wyoming $ 8,284 Triangle Communications System, Inc. ... January 20, 1998 Montana 9,765 Wyoming Mutual Telephone................ January 21, 1998 Iowa 527 North Willamette Telephone.............. March 10, 1998 Oregon 6,015 Northwest Communications................ March 10, 1998 North Dakota 1,363 Beulahland Communications, Inc. ........ March 19, 1998 Colorado 835 Direct Broadcast Satellite, a segment of SCS Communications & Security, Inc. ................................. April 20, 1998 Oregon 5,386 PrimeWatch, Inc. ....................... May 8, 1998 North Carolina 7,988 Mega TV................................. May 11, 1998 Georgia 2,103 Direct Broadcast Satellite, a division of Baldwin County Electric Membership Corporation........................... June 29, 1998 Alabama 11,769 Frontier Corporation.................... July 8, 1998 Wisconsin 734 North Texas Communications.............. August 6, 1998 Texas 3,118 SEMO Communications Corporation......... August 26, 1998 Missouri 2,918 DBS Segment of Cumby Cellular, Inc. .... August 31, 1998 Texas 7,553 Minburn Telephone....................... September 18, 1998 Iowa 447 Western Montana DBS, Inc. dba Rocky Mountain DBS.......................... October 2, 1998 Idaho/Montana 20,740 Direct Broadcast Satellite, a segment of Volcano Vision, Inc. ................. October 9, 1998 California 31,425 North Central Missouri Electric Coop.... November 2, 1998 Missouri 1,745 Star Search Rural Television, Inc. ..... November 5, 1998 Oklahoma 2,129 -------- Total 1998 acquisitions....... $124,844 ========
The unaudited pro forma information presented below, excluding five acquisitions that are immaterial individually and in the aggregate, reflects the Company's acquisitions of Rural DIRECTV Markets consummated during 1997 and 1998 as if each such acquisition had occurred as of the beginning of the period presented. These results are not necessarily indicative of future operating results or of what would have occurred had the acquisitions been consummated at those times (dollars in thousands).
YEARS ENDED DECEMBER 31, ------------------------ 1997 1998 ---------- ---------- Total revenue............................................... $ 39,937 $ 87,857 Net loss before extraordinary charge........................ (26,654) (79,813)
Subsequent to December 31, 1998, the Company acquired the exclusive rights to provide DIRECTV programming in four additional Rural DIRECTV Markets. These Rural DIRECTV Markets served approximately 10,600 subscribers as of the respective acquisition dates. The aggregate purchase price of these acquisitions, which represent approximately 54,000 television households, totaled $19.9 million. During 1997, Systems acquired a controlling interest in DCE Satellite Entertainment, LLC ("DCE"). Systems has an option to purchase, for approximately $3.9 million, the remaining ownership interest in DCE that it does not own. Systems may exercise this option by delivering no earlier than April 8, 1999, and no later than April 23, 1999, written notice to DCE of its intention to exercise such option. Pursuant to the related operating agreement between Systems and DCE, closing shall occur no later than 30 days after the delivery of such notice. F-15 143 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 4. INTANGIBLE ASSETS Intangible assets, which are amortized using the straight-line method over the related estimated useful lives, consist of the following (dollars in thousands):
DECEMBER 31, ------------------- ESTIMATED 1997 1998 USEFUL LIFE -------- -------- ----------- DIRECTV distribution rights........................ $121,969 $236,531 10-12 years Customer lists..................................... 9,903 17,018 5 years Non-compete agreements............................. 4,914 7,501 3 years -------- -------- 136,786 261,050 Less accumulated amortization...................... (6,890) (27,911) -------- -------- Intangible assets, net........................... $129,896 $233,139 ======== ========
5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (dollars in thousands):
DECEMBER 31, ------------------ 1997 1998 ------- -------- 12 3/8% Notes............................................... $ -- $195,000 Bank debt................................................... 60,000 67,000 Seller notes payable........................................ 8,600 15,407 Other notes payable and obligations under capital leases.... 513 797 Minority interest........................................... 2,928 2,420 ------- -------- Total long-term obligations................................. 72,041 280,624 Less current maturities..................................... (2,538) (8,916) ------- -------- Long-term obligations, net of current maturities.......... $69,503 $271,708 ======= ========
12 3/8% Notes On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes"). Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on February 1 and August 1 of each year, with the first interest payment due February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net proceeds to the Company of approximately $189.2 million (after payment of underwriting discounts and other issuance costs aggregating approximately $5.8 million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes Offering were placed in escrow to fund the first four semi-annual interest payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3 million was reserved to fund a portion of a contingent reduction of the Company's availability under its Credit Facility. Such contingent reduction will not occur as a result of the February 1999 amendment to the Credit Facility (see Note 15). The 12 3/8% Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior indebtedness of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other existing and future senior subordinated indebtedness, if any, of Systems and senior in right of payment to all existing and future subordinated indebtedness, if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional, joint and several basis by Argos Support Services Company ("Argos") and PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned subsidiaries of the Company. F-16 144 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option on or after August 1, 2003, at redemption prices decreasing from 112% during the year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In addition, on or prior to August 1, 2001, Systems may, at its option, redeem up to 35% of the originally issued aggregate principal amount of the 12 3/8% Notes, at a redemption price equal to 112.375% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption solely with the net proceeds of a public equity offering of Systems or Holdings yielding gross proceeds of at least $40.0 million and any subsequent public equity offerings (provided that, in the case of any such offering or offerings by Holdings, all the net proceeds thereof are contributed to Systems); provided, further that immediately after any such redemption the aggregate principal amount of Notes outstanding must equal at least 65% of the originally issued aggregate principal amount of the 12 3/8% Notes. The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture") contains restrictive covenants that, among other things, impose limitations on Systems' ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any senior indebtedness and senior in right of payment to the 12 3/8% Notes, incur liens, permit restrictions on the ability of subsidiaries to pay dividends or make certain payments to Systems, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of Systems' assets. In the event of a change of control, as defined in the 12 3/8% Notes Indenture, each holder of 12 3/8% Notes will have the right to require Systems to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). During 1998, Systems filed a registration statement with the Securities and Exchange Commission (the "SEC") relating to the exchange of the privately issued notes for publicly registered notes with substantially identical terms (including principal amount, interest rate, maturity, security and ranking). Because the registration statement was not declared effective within the time period required under the registration rights agreement associated with the 12 3/8% Notes Offering, from December 29, 1998 through March 22, 1999 (the date the registration statement was declared effective). Systems was required to pay liquidated damages of $18,750 per week to holders of the 12 3/8% Notes. Bank Debt During 1997, Systems entered into a credit agreement (the "Credit Agreement") with a group of financial institutions, which provided for borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore interest at variable rates (prime rate or LIBOR plus an applicable margin). At December 31, 1997, the effective rates on these loans ranged from 9% to 11%. During May 1998, the Company entered into a seven-year, $150.0 million amended credit facility (the "Credit Facility") with a syndicate of lenders. The Credit Facility provides for a term loan commitment of $35.0 million and a revolving loan commitment of $115.0 million. Borrowings under the Credit Facility bear interest at variable rates (approximately 10% as of December 31, 1998) calculated on a base rate, such as the prime rate or LIBOR, plus an applicable margin. As of December 31, 1998, aggregate borrowings outstanding under the Credit Facility totaled $67.0 million, including $35.0 million borrowed pursuant to the Credit Facility's term loan commitment. Upon execution of the Credit Facility, Systems recognized an extraordinary charge of approximately $2.6 million to write-off unamortized deferred financing costs associated with the Credit Agreement. In February 1999, the Credit Facility was amended to permit, among other things, the offering of senior discount notes by Golden Sky DBS (see Note 15). As amended, the term loan commitment amortizes in F-17 145 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED specified quarterly installments from March 31, 2002 through maturity on December 31, 2005. Availability of revolving loan borrowings reduces by specified amounts over the period from March 31, 2001 through maturity on September 30, 2005. Borrowings under the Credit Facility are unconditionally and irrevocably guaranteed by Holdings, Golden Sky DBS, and two subsidiaries of Systems, Argos and PrimeWatch. Further, such borrowings are secured by (i) a pledge by Holdings of all of the capital stock of Golden Sky DBS, (ii) a pledge by Golden Sky DBS of all of the capital stock of Systems, (iii) an equal and ratable pledge of all of the capital stock of Systems' subsidiaries, (iv) a first priority security interest in all of such subsidiaries' assets, and (v) a collateral assignment of Systems' NRTC agreements. The Credit Facility contains a number of significant covenants that, among other things, limit Systems' ability to incur additional indebtedness and guaranty obligations, create liens and other encumbrances, make certain payments, investments, loans and advances, pay dividends or make other distributions in respect of Systems' capital stock, sell or otherwise dispose of assets, make capital expenditures, merge or consolidate with another entity, create subsidiaries, make amendments to its organizational documents or transact with affiliates. As of each of December 31, 1997 and 1998, no amounts were available for distribution to Holdings. The Credit Facility also contains a number of financial covenants that will require Systems to meet certain financial ratios and financial condition tests. These financial covenants, in certain instances, become effective at different points in time and vary over time. The covenants include limitations on indebtedness per subscriber, limitations on subscriber acquisition costs, maintenance of a minimum fixed charge coverage ratio, maintenance of minimum interest coverage ratios, and limitations on indebtedness to pro forma EBITDA (earnings before interest, taxes, depreciation and amortization) ratios. Revolving credit availability under the Credit Facility depends upon satisfaction of the various covenants as well as minimum subscriber base requirements. As of December 31, 1998, the Company was in compliance with all of the covenants under the Credit Facility. Commitment fees are payable on unused amounts available under the Credit Facility. Such commitment fees, which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per annum based on Systems' utilization of such commitments. Seller Notes Payable In connection with certain 1996 acquisitions, the Company issued seller notes payable totaling $2.5 million and bearing interest at an annual rate of 10%. These notes were repaid during 1997. The Company also issued seller notes payable totaling $8.6 million in connection with certain 1997 acquisitions and $10.2 million in connection with certain 1998 acquisitions. As of December 31, 1998, approximately $13.9 million of the outstanding seller notes payable were collateralized by bank letters of credit. The seller notes payable bear interest at rates ranging from 7% to 10%. Other Notes Payable In November 1996, the Company issued $2.0 million in promissory notes to a group of lenders under a bridge financing agreement. The notes bore interest at the rate of 10% per annum. In February 1997, these notes, along with $1.8 million in additional promissory notes issued in January 1997, were exchanged for Systems' Series A Convertible Participating Preferred Stock. In connection with the bridge agreement, Systems issued warrants exercisable for 5,682 shares of its Common Stock at an exercise price of $.01 per share. These warrants were immediately exercisable and expire on February 12, 2007. At the date of issuance, the fair value of the warrants was not material. These warrants were assumed by Holdings after its formation. F-18 146 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Future maturities of amounts outstanding under Systems' long-term obligations as of December 31, 1998 are summarized as follows (dollars in thousands, bank debt amounts reflect February 1999 amendment):
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-19 147 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED A summary of incentive stock option activity during 1997 and 1998 is as follows:
1997 1998 ------------------- ------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ------- --------- ------- --------- Options outstanding, beginning of year........ -- $ -- 62,525 $1.00 Granted....................................... 62,525 1.00 18,693 1.00 Exercised..................................... -- -- (24,831) 1.00 Forfeited..................................... -- -- (7,642) 1.00 ------ ----- ------- ----- Options outstanding, end of year.............. 62,525 $1.00 48,745 $1.00 ====== ===== ======= ===== Options exercisable, end of year.............. 8,684 $1.00 5,595 $1.00 ====== ===== ======= =====
Accounting for Stock-Based Compensation Systems has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for the Stock Incentive Plan. Under APB 25, because the exercise price of employee stock options granted pursuant to the Stock Incentive Plan is equal to or greater than the fair value of the underlying stock on the date of grant, no compensation expense is recognized. In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"), which established an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. Systems elected to not adopt FAS No. 123 for expense recognition purposes. Pro forma information regarding net income is required by FAS No. 123 and has been determined as if Systems had accounted for its stock-based compensation using the fair value method prescribed by that statement. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the corresponding vesting period. All options are initially assumed to vest. Compensation previously recognized is reversed to the extent applicable to forfeitures of unvested options. The fair value of each option grant was estimated at the date of the grant using a Black-Scholes option valuation model with the following weighted-average assumptions:
YEARS ENDED DECEMBER 31, ------------------------- 1997 1998 ---------- ---------- Risk-free interest rate..................................... 6.0% 6.0% Dividend yield.............................................. 0.0% 0.0% Volatility factor........................................... 0.0% 0.0% Expected term of options.................................... 10 years 10 years
The options granted during the years ended December 31, 1997 and 1998 had no net value using the preceding assumptions. Therefore, there was no pro forma effect on Systems' net loss. 8. 401(K) RETIREMENT PLAN Systems sponsors a 401(k) Retirement Plan (the "401(k) Plan") for eligible employees. Employer matching contributions to the 401(k) Plan, which became effective as of January 1, 1997, are discretionary. During the years ended December 31, 1997 and 1998, Systems made no discretionary employer matching contributions to the 401(k) Plan. Administrative expenses associated with the 401(k) Plan during those same periods were not material. F-20 148 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 9. INCOME TAXES The components of the (provision for) benefit from income taxes are as follows (in thousands):
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-21 149 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED The temporary differences that give rise to deferred tax assets and liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
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-22 150 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. COMMITMENTS AND CONTINGENCIES The Company has non-cancelable operating leases for office, warehouse and storage space that expire at various dates. Future minimum lease payments as of December 31, 1998 are summarized as follows (dollars in thousands): 1999........................................................ $1,522 2000........................................................ 1,186 2001........................................................ 733 2002........................................................ 443 2003........................................................ 121 ------ Total............................................. $4,005 ======
In November 1999, certain meteoroid events will occur as the earth's orbit passes through the particulate trail of Comet 55P (Tempel-Tuttle). These meteoroid events pose a potential threat to all in-orbit geosynchronous satellites, including DBS satellites. The Company is unable to determine the impact, if any, these meteoroid events could have on the DBS satellites used by Hughes for distribution of DIRECTV programming services. In the event the Hughes DBS satellites are adversely affected by these meteoroid or other events, the Company's business and results of operations could be adversely impacted. 11. RELATED PARTY TRANSACTIONS During 1996, Systems purchased the assets of Cable-Video Management, Inc. ("CVM"), an entity owned by Systems' president, for $44,000. Prior to the acquisition of CVM's assets, Systems obtained management and other services from CVM. Aggregate management fees paid to CVM approximated $280,000 during 1996 and are included in general and administrative expenses in the accompanying consolidated statements of operations. Also during 1996, Systems reimbursed CVM for salaries and other miscellaneous expenses aggregating $343,000. In 1997, Systems paid $66,000 to a company affiliated with Systems' president for consulting services received by Systems. Additionally, during 1996, 1997 and 1998, Systems paid $5,000, $77,000 and $159,000 (including $75,000 paid in connection with a 1998 acquisition), respectively, to one of its directors for consulting services. During 1996, the Company's president provided Systems with a short-term loan in the amount of $381,000. In 1997, the Company received an additional $150,000 short-term loan from its president and a $215,000 short-term loan from a shareholder. Each of these loans bore interest at an annual rate of 10% and were repaid during 1997. Systems has contracted with an entity owned by its president for air transportation services. Such services include the lease of an aircraft. This lease is cancelable with six months notice and requires monthly payments equal to the greater of $20,000 or an aggregate fixed hourly operating charge. The fixed hourly operating charge is based on prevailing market prices. The total cost of such services received by Systems approximated $31,000, $109,000 and $506,000 during 1996, 1997 and 1998, respectively. F-23 151 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 12. VALUATION AND QUALIFYING ACCOUNTS Systems' valuation and qualifying accounts as of December 31, 1996, 1997 and 1998 are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1996 1997 1998 ----- ------ -------- Allowance for doubtful accounts, beginning of period........ $ -- $ 4 $ 138 Charged to costs and expenses............................... 4 417 1,537 Deductions.................................................. -- (283) (1,382) ---- ----- ------- Allowance for doubtful accounts, end of period.............. $ 4 $ 138 $ 293 ==== ===== =======
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS Consolidating financial information for the Company, the Company's guarantor subsidiaries and the Company's non-guarantor subsidiaries is as follows (dollars in thousands): Consolidated Balance Sheet -- December 31, 1997
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------- ------------ ------------- --------------- ------------ ASSETS Current assets: Cash and cash equivalents........................ $ 12,146 $ 1,077 $ 409 $ -- $ 13,632 Subscriber receivables, net.................... 2,841 633 369 -- 3,843 Other receivables.............................. 307 28 -- -- 335 Intercompany receivables....................... 2,570 -- -- (2,570) -- Inventory...................................... 1,997 106 71 -- 2,174 Prepaid expenses and other..................... 127 -- -- -- 127 -------- ------- ------ -------- -------- Total current assets............................. 19,988 1,844 849 (2,570) 20,111 Property and equipment, net...................... 2,759 77 100 -- 2,936 Investment in subsidiaries....................... 26,735 -- -- (26,735) -- Intangible assets, net........................... 96,585 18,302 3,842 11,167 129,896 Deferred financing costs......................... 3,106 -- -- -- 3,106 Other assets..................................... 91 86 10 -- 187 -------- ------- ------ -------- -------- Total assets............................. $149,264 $20,309 $4,801 $(18,138) $156,236 ======== ======= ====== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable......................... $ 8,125 $ 194 $ 152 $ -- $ 8,471 Interest payable............................... 786 -- -- -- 786 Current maturities of long-term obligations.... 2,538 -- -- -- 2,538 Unearned revenue............................... 1,857 511 262 -- 2,630 Accrued payroll and other...................... 1,372 2,655 402 (2,570) 1,859 -------- ------- ------ -------- -------- Total current liabilities........................ 14,678 3,360 816 (2,570) 16,284 Long-term obligations, net of current maturities: Bank debt...................................... 60,000 -- -- -- 60,000 Seller notes payable........................... 6,200 -- -- -- 6,200 Other notes payable and obligations under capital leases............................... 331 44 -- -- 375 Minority interest.............................. -- -- -- 2,928 2,928 -------- ------- ------ -------- -------- Total long-term obligations, net of current maturities..................................... 66,531 44 -- 2,928 69,503 -------- ------- ------ -------- -------- Total liabilities................................ 81,209 3,404 816 358 85,787 Stockholder's Equity (Deficit): Common Stock................................... -- 6 -- (6) -- Additional paid-in capital..................... 87,400 1,967 -- (1,967) 87,400 Retained earnings (accumulated deficit)........ (19,345) 14,932 3,985 (16,523) (16,951) -------- ------- ------ -------- -------- Total stockholder's equity (deficit)............. 68,055 16,905 3,985 (18,496) 70,449 -------- ------- ------ -------- -------- Total liabilities and stockholder's equity (deficit)....................... $149,264 $20,309 $4,801 $(18,138) $156,236 ======== ======= ====== ======== ========
F-24 152 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Consolidated Statement of Operations -- Year Ended December 31, 1997
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------- ------------ ------------- --------------- ------------ Revenue: DBS services................................... $ 13,356 $2,787 $309 $ -- $ 16,452 Lease and other................................ 931 -- 13 -- 944 -------- ------ ---- ----- -------- Total revenue.................................... 14,287 2,787 322 -- 17,396 Costs and Expenses: Costs of DBS services.......................... 7,514 1,601 189 -- 9,304 System operations.............................. 2,830 876 100 (10) 3,796 Sales and marketing............................ 6,597 693 26 -- 7,316 General and administrative..................... 2,260 59 12 -- 2,331 Depreciation and amortization.................. 6,312 109 79 800 7,300 -------- ------ ---- ----- -------- Total costs and expenses......................... 25,513 3,338 406 790 30,047 -------- ------ ---- ----- -------- Operating loss................................... (11,226) (551) (84) (790) (12,651) Non-operating items: Interest and investment income................. 30 10 -- -- 40 Interest expense............................... (3,170) (3) -- -- (3,173) -------- ------ ---- ----- -------- Total non-operating items........................ (3,140) 7 -- -- (3,133) -------- ------ ---- ----- -------- Loss before income taxes......................... (14,366) (544) (84) (790) (15,784) Income taxes..................................... -- -- -- -- -- -------- ------ ---- ----- -------- Net loss................................. $(14,366) $ (544) $(84) $(790) $(15,784) ======== ====== ==== ===== ========
Consolidated Statement of Cash Flows -- Year Ended December 31, 1997
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED --------- ------------ ------------- --------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................ $ (14,366) $ (544) $(84) $(790) $ (15,784) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization................. 6,312 109 79 800 7,300 Amortization of deferred financing costs...... 215 -- -- -- 215 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue................................... (1,827) (615) (59) -- (2,501) Other receivables........................... (185) 24 -- -- (161) Inventory................................... (1,499) (34) (71) -- (1,604) Prepaid expenses and other.................. (201) 8 (10) -- (203) Trade accounts payable...................... 7,683 (320) 152 -- 7,515 Interest payable............................ 733 -- -- -- 733 Accrued payroll and other................... (1,461) 2,460 402 (10) 1,391 --------- ------ ---- ----- --------- Net cash used in operating activities........... (4,596) 1,088 409 -- (3,099) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets........... (120,051) -- -- -- (120,051) Other........................................... 320 -- -- -- 320 Purchases of property and equipment............. (992) (6) -- -- (998) --------- ------ ---- ----- --------- Net cash used in investing activities........... (120,723) (6) -- -- (120,729) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of Series A Preferred Stock......................................... 34,289 -- -- -- 34,289 Borrowings under the Credit Agreement........... 75,000 -- -- -- 75,000 Principal payments on the Credit Agreement...... (14,995) (5) -- -- (15,000) Proceeds from issuance of notes payable......... 2,115 -- -- -- 2,115 Principal payments on notes payable and obligations under capital leases.............. (2,902) -- -- -- (2,902) Contribution from Holdings...................... 46,800 -- -- -- 46,800 Increase in deferred financing costs............ (3,321) -- -- -- (3,321) --------- ------ ---- ----- --------- Net cash provided by (used in) financing activities.................................... 136,986 (5) -- -- 136,981 Net increase in cash and cash equivalents....... 11,667 1,077 409 -- 13,153 Cash and cash equivalents, beginning of period........................................ 479 -- -- -- 479 --------- ------ ---- ----- --------- Cash and cash equivalents, end of period........ $ 12,146 $1,077 $409 $ -- $ 13,632 ========= ====== ==== ===== =========
F-25 153 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Consolidated Balance Sheet -- December 31, 1998
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------- ------------ ------------- --------------- ------------ ASSETS Current assets: Cash and cash equivalents...................... $ 827 $ 1,189 $2,444 $ -- $ 4,460 Restricted cash, current portion............... 28,083 -- -- -- 28,083 Subscriber receivables, net.................... 6,815 1,043 774 -- 8,632 Other receivables.............................. 2,360 87 18 -- 2,465 Intercompany receivables....................... 11,521 -- -- (11,521) -- Inventory...................................... 9,255 583 308 -- 10,146 Prepaid expenses and other..................... 1,819 37 3 -- 1,859 -------- ------- ------ -------- -------- Total current assets............................. 60,680 2,939 3,547 (11,521) 55,645 Restricted cash, net of current portion.......... 23,534 -- -- -- 23,534 Property and equipment, net...................... 4,418 381 195 -- 4,994 Investment in subsidiaries....................... 34,200 -- -- (34,200) -- Intangible assets, net........................... 199,867 25,051 3,525 4,696 233,139 Deferred financing costs......................... 10,541 -- -- -- 10,541 Other assets..................................... 133 85 -- -- 218 -------- ------- ------ -------- -------- Total assets............................. $333,373 $28,456 $7,267 $(41,025) $328,071 ======== ======= ====== ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Trade accounts payable......................... $ 13,482 $ 49 $ 8 $ -- $ 13,539 Interest payable............................... 11,009 -- -- -- 11,009 Current maturities of long-term obligations.... 8,916 -- -- -- 8,916 Unearned revenue............................... 4,380 789 405 -- 5,574 Accrued payroll and other...................... 1,028 6,263 5,633 (11,521) 1,403 -------- ------- ------ -------- -------- Total current liabilities........................ 38,815 7,101 6,046 (11,521) 40,441 Long-term obligations, net of current maturities 12 3/8% Notes.................................. 195,000 -- -- -- 195,000 Bank debt...................................... 67,000 -- -- -- 67,000 Seller notes payable........................... 6,912 -- -- -- 6,912 Other notes payable and obligations under capital leases............................... 318 58 -- -- 376 Minority interest.............................. -- -- -- 2,420 2,420 -------- ------- ------ -------- -------- Total long-term obligations, net of current maturities..................................... 269,230 58 -- 2,420 271,708 -------- ------- ------ -------- -------- Total liabilities................................ 308,045 7,159 6,046 (9,101) 312,149 Stockholder's Equity (Deficit): Common Stock................................... -- 896 -- (896) -- Additional paid-in capital..................... 97,600 1,967 -- (1,967) 97,600 Retained earnings (accumulated deficit)........ (72,272) 18,434 1,221 (29,061) (81,678) -------- ------- ------ -------- -------- Total stockholder's equity (deficit)............. 25,328 21,297 1,221 (31,924) 15,922 -------- ------- ------ -------- -------- Total liabilities and stockholder's equity (deficit)....................... $333,373 $28,456 $7,267 $(41,025) $328,071 ======== ======= ====== ======== ========
F-26 154 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED Consolidated Statement of Operations -- Year Ended December 31, 1998
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------- ------------ ------------- --------------- ------------ Revenue: DBS services................................... $ 57,437 $11,172 $ 6,301 $ -- $ 74,910 Lease and other................................ 982 22 10 -- 1,014 -------- ------- ------- ------- -------- Total revenue.................................... 58,419 11,194 6,311 -- 75,924 Costs and Expenses: Costs of DBS services.......................... 34,640 6,813 3,838 -- 45,291 System operations.............................. 7,683 2,533 1,318 (513) 11,021 Sales and marketing............................ 23,753 5,045 3,403 -- 32,201 General and administrative..................... 7,000 267 164 -- 7,431 Depreciation and amortization.................. 19,336 996 340 2,494 23,166 -------- ------- ------- ------- -------- Total costs and expenses......................... 92,412 15,654 9,063 1,981 119,110 -------- ------- ------- ------- -------- Operating loss................................... (33,993) (4,460) (2,752) (1,981) (43,186) Non-operating items: Interest and investment income................. 1,571 2 -- -- 1,573 Interest expense............................... (20,497) (28) (12) -- (20,537) -------- ------- ------- ------- -------- Total non-operating items........................ (18,926) (26) (12) -- (18,964) -------- ------- ------- ------- -------- Loss before income taxes......................... (52,919) (4,486) (2,764) (1,981) (62,150) Income taxes..................................... -- -- -- -- -- -------- ------- ------- ------- -------- Loss before extraordinary charge................. (52,919) (4,486) (2,764) (1,981) (62,150) Extraordinary charge on early retirement of debt........................................... (2,577) -- -- -- (2,577) -------- ------- ------- ------- -------- Net loss................................. $(55,496) $(4,486) $(2,764) $(1,981) $(64,727) ======== ======= ======= ======= ========
Consolidated Statement of Cash Flows -- Year Ended December 31, 1998
CONSOLIDATING/ GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED --------- ------------ ------------- --------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................ $ (55,496) $(4,486) $(2,764) $(1,981) $ (64,727) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization................. 19,336 996 340 2,494 23,166 Amortization of deferred financing costs...... 977 -- -- -- 977 Extraordinary charge on early retirement of debt........................................ 2,577 -- -- -- 2,577 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue................................... (1,283) (222) (252) -- (1,757) Other receivables........................... (2,144) 32 (18) -- (2,130) Inventory................................... (7,335) (477) (237) -- (8,049) Prepaid expenses and other.................. (1,189) (36) (3) -- (1,228) Trade accounts payable...................... 5,357 (145) (144) -- 5,068 Interest payable............................ 10,223 -- -- -- 10,223 Accrued payroll and other................... (10,253) 4,827 5,231 (513) (708) --------- ------- ------- ------- --------- Net cash provided by (used in) operating activities.................................... (39,230) 489 2,153 -- (36,588) --------- ------- ------- ------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets........... (104,487) -- -- -- (104,487) Offering proceeds and investment earnings placed in escrow..................................... (51,617) -- -- -- (51,617) Purchases of property and equipment............. (2,858) (341) (118) -- (3,317) Other........................................... (500) -- -- -- (500) --------- ------- ------- ------- --------- Net cash used in investing activities........... (159,462) (341) (118) -- (159,921) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of 12 3/8% Notes..... 189,150 -- -- -- 189,150 Borrowings under the Credit Agreement........... 28,000 -- -- -- 28,000 Borrowings under the Credit Facility............ 62,000 -- -- -- 62,000 Principal payments on the Credit Facility....... (83,000) -- -- -- (83,000) Principal payments on notes payable and obligations under capital leases.............. (3,639) (36) -- -- (3,675) Increase in deferred financing costs............ (5,138) -- -- -- (5,138) --------- ------- ------- ------- --------- Net cash provided by (used in) financing activities.................................... 187,373 (36) -- -- 187,337 --------- ------- ------- ------- --------- Net increase (decrease) in cash and cash equivalents................................... (11,319) 112 2,035 -- (9,172) Cash and cash equivalents, beginning of period........................................ 12,146 1,077 409 -- 13,632 --------- ------- ------- ------- --------- Cash and cash equivalents, end of period........ $ 827 $ 1,189 $ 2,444 $ -- $ 4,460 ========= ======= ======= ======= =========
F-27 155 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Systems' quarterly results of operations are summarized as follows (in thousands):
THREE MONTHS ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- Period Ended December 31, 1997: Total revenue......................... $ 1,255 $ 2,248 $ 5,634 $ 8,259 Operating loss........................ (766) (1,966) (3,918) (6,001) Net loss.............................. (834) (2,024) (5,160) (7,766) Period Ended December 31, 1998: Total revenue......................... $14,129 $ 16,849 $ 19,912 $ 25,034 Operating loss........................ (6,034) (8,806) (11,462) (16,884) Loss before extraordinary charge...... (8,287) (11,761) (17,354) (24,748) Net loss.............................. (8,287) (14,338) (17,354) (24,748)
15. SUBSEQUENT EVENTS On February 19, 1999, Golden Sky DBS consummated an offering (the "13 1/2% Notes Offering") of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2% Notes"). The 13 1/2% Notes Offering resulted in net proceeds to Golden Sky DBS of approximately $96.8 million (after initial purchasers' discount but before other offering expenses). Golden Sky DBS intends to contribute the net proceeds of the 13 1/2% Notes Offering to Systems. Systems will use the contributed proceeds to repay existing revolving credit indebtedness outstanding under its Credit Facility, to finance the acquisition of Rural DIRECTV Markets and related costs and expenses, and for general corporate purposes. Interest on the 13 1/2% Notes will not accrue prior to March 1, 2004. Thereafter, cash interest on the 13 1/2% Notes will accrue at a rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1 of each year, commencing September 1, 2004. The 13 1/2% Notes will mature on March 1, 2007. The Company is not obligated for repayment of the 13 1/2% Notes and, as described in Note 5, is restricted as to its ability to make payments to Golden Sky DBS. However, Golden Sky DBS is dependent on the Company for dividends or other cash distributions in amounts sufficient to make the required payments. As previously described, in connection with the 13 1/2% Notes Offering, Systems' Credit Facility was amended. The amendment became effective on February 19, 1999. On that same date, Systems repaid balances outstanding under the revolving credit commitment of the Credit Facility (total of $53.0 million, which may be reborrowed for permitted purposes including to finance the acquisition of Rural DIRECTV Markets) with the proceeds of cash contributed to Systems by Golden Sky DBS. Systems expects that it will report an extraordinary charge on the early retirement of debt of approximately $2.7 million during the first quarter of 1999 as a result of the amendment. F-28 156 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 F-29 157 INDEPENDENT AUDITORS' REPORT The Board of Directors Western Montana DBS, Inc. dba Rocky Mountain DBS: We have audited the accompanying balance sheets of Western Montana DBS, Inc. dba Rocky Mountain DBS as of December 31, 1996 and 1995 and the related statements of earnings, accumulated deficit and cash flows for the years ended December 31, 1996 and 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Montana DBS, Inc. dba Rocky Mountain DBS at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996, 1995, and 1994, in conformity with generally accepted accounting principles. LOUCKS & GLASSLEY, PLLP September 12, 1997 Great Falls, Montana F-30 158 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-31 159 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-32 160 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-33 161 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-34 162 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations -- Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed in June 1993 for the purpose of acquiring and operating direct broadcast satellite television operating rights. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide, exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1996, 1995 and 1994, the Company had the operating rights for five counties in Montana, three counties in Idaho, and three counties in Colorado. The Colorado operating rights were sold in 1997. Revenue Recognition -- Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Coupons issued by NRTC may be used, with some restrictions, to pay a portion of a customer's account receivable. No provision is made for the subsequent use of these coupons. Inventories -- Inventories are stated at the lower of average cost or market and consist of receivers, satellite dishes, and satellite TV accessories. Use of Estimates -- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments -- Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Income Taxes -- Effective January 1, 1995, the Company elected to be taxed as a Subchapter S Corporation. As such, any income tax is payable by the shareholders and not the Company, therefore there is no income tax expense F-35 163 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) recorded. For the five months ended December 31, 1994, the company incurred a loss and no income taxes were due. Cash and Cash Equivalents -- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with and original maturity of three months or less to be cash equivalents. There were no cash equivalents at December 31, 1995 or 1996. Major Suppliers/Economic Dependency -- The Company's sole supplier is the NRTC. In addition, NRTC provides all computer services relative to customer service, accounts receivable billing and the determination of unearned revenue. Property, Plant, and Equipment -- Property, plant and equipment consists principally of office equipment and a vehicle. The assets are being depreciated over five to seven years using accelerated depreciation methods. Advertising -- Advertising costs are charged to expense as incurred. NOTE 2 -- ACCOUNTS RECEIVABLE Trade receivables consist of amounts due from subscribers for monthly programming fees. NOTE 3 -- RELATED PARTY TRANSACTIONS During 1994, a shareholder advanced $33,499 to the Company. This advance had no specific repayment terms and was repaid in 1995. NOTE 4 -- CONCENTRATION OF CREDIT RISK The company maintains cash balances at various banks. Cash accounts at the banks are insured by the FDIC for up to $100,000. Amounts in excess of the insured limits were approximately $73,370 at December 31, 1996. NOTE 5 -- NRTC PATRONAGE CAPITAL The company is a non-voting affiliate of NRTC and receives annual patronage capital credits which are recorded as income. These cumulative capital credits are not marketable and the value is dependent on the future financial position of NRTC. NOTE 6 -- COMMITMENTS AND CONTINGENCIES The company occupies its offices on a month to month to month rental arrangement. Rent expense was $3,224 in 1994, $12,090 in 1995, and $18,000 in 1996. NOTE 7 -- SUBSEQUENT EVENT In May of 1997, the Company contracted to sell its Colorado subscribers to Golden Sky Systems, Inc. The Company estimates these customers comprise some 21% of the customer base and account for some 31% of revenues. F-36 164 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS FINANCIAL STATEMENTS MARCH 31, 1997 AND 1996 (UNAUDITED) F-37 165 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-38 166 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-39 167 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS STATEMENTS OF RETAINED EARNINGS (DEFICIT) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (UNAUDITED)
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-40 168 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-41 169 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS SELECTED INFORMATION -- SUBSTANTIALLY ALL DISCLOSURES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ARE NOT INCLUDED MARCH 31, 1997 AND 1996 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations -- Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed in June 1993 for the purpose of acquiring and operating direct broadcast satellite television operating rights. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for five counties in Montana and three counties in Idaho. The operating rights for three counties in Colorado were sold in 1997. Revenue Recognition -- Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Coupons issued by NRTC may be used, with some restrictions, to pay a portion of a customer's account receivable. No provision is made for the subsequent use of these coupons. Use of Estimates -- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments -- Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Income Taxes -- Effective January 1, 1995, the Company elected to be taxed as a Subchapter S Corporation. As such, any income tax is payable by the shareholders and not the Company, therefore there is no income tax expense recorded. F-42 170 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS SELECTED INFORMATION -- (CONTINUED) Major Suppliers/Economic Dependency -- The Company's sole supplier is the NRTC. In addition, NRTC provides all computer services relative to customer service, accounts receivable billing, and the determination of unearned revenue. SUBSEQUENT EVENTS In May of 1997, the Company sold its Colorado subscribers to Golden Sky Systems, Inc. On October 2, 1998, the company was acquired by Golden Sky Systems, Inc. Company shareholders received both cash and shares in Golden Sky Holdings, Inc. in this latter transaction. F-43 171 TEG DBS SYSTEMS, INC. STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-44 172 INDEPENDENT AUDITORS' REPORT The Board of Directors TEG DBS Systems, Inc. We have audited the accompanying statements of operations and cash flows of TEG DBS Systems, Inc. (the Company) for the years ended December 31, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of TEG DBS Systems, Inc. for the years ended December 31, 1996 and 1995, in conformity with generally accepted accounting principles. KPMG LLP January 11, 1999 Kansas City, Missouri F-45 173 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-46 174 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-47 175 TEG DBS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations TEG DBS Systems, Inc. (the Company) is a limited liability company organized in California in 1994 for the purpose of supplying direct broadcast satellite services (DBS) to customers within its franchise areas, which include certain zip codes in Nevada. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. The Company discontinued selling equipment to customers in 1995. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes The Company is not a taxable entity for federal and state income tax purposes. Accordingly, no provision for income taxes is included in the accompanying financial statements. (2) SUBSEQUENT EVENTS On June 12, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-48 176 TEG DBS SYSTEMS, INC. (UNAUDITED) SPECIAL PURPOSE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 F-49 177 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-50 178 TEG DBS SYSTEMS, INC. NOTES TO SPECIAL PURPOSE STATEMENTS MARCH 31, 1997 AND 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF OPERATIONS TEG DBS Systems, Inc. (the Company) is a limited liability company organized in California in 1994 for the purpose of supplying direct broadcast satellite services (DBS) to customers within its franchise areas, which include certain zip codes in Nevada. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. REVENUE RECOGNITION Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. BASIS OF PRESENTATION The accompanying special purpose statements of operations present the revenue and expense directly attributable to the Company's DBS operations. These statements do not include other costs and expenses such as general and administrative, marketing and depreciation and amortization. Accordingly, had these costs and expenses been included in these special purpose statements, the results of operations would have been reduced. (2) SUBSEQUENT EVENTS On June 12, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-51 179 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-52 180 INDEPENDENT AUDITORS' REPORT The Board of Directors Mankato Citizens Telephone Company: We have audited the accompanying balance sheets of Direct Vision (the Segment), a segment of Mankato Citizens Telephone Company, as of December 31, 1996 and 1995 and the related statements of operations, segment equity and cash flows for the years ended December 31, 1996 and 1995 and the five-month period ended December 31, 1994. These financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Vision at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995 and the five-month period ended December 31, 1994, in conformity with generally accepted accounting principles. KPMG LLP May 30, 1997, except as to note 4, which is as of July 15, 1997 Kansas City, Missouri F-53 181 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-54 182 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-55 183 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) STATEMENTS OF SEGMENT EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-56 184 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-57 185 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Direct Vision (the Segment) is a segment of Mankato Citizens Telephone Company (the Company). The Company is a wholly-owned subsidiary of Hickory Tech Corporation (the Parent). The Segment was formed in August 1994 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1996, 1995 and 1994, the Company had the operating rights for seven counties in southern Minnesota. The financial statements presented represent the financial position and operations of the Segment, which operates as part of the Company. Accordingly, the Company funds the operations of the Segment. Were the Segment an independent entity, these funds would have to be obtained from other sources. Presentation The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists entirely of satellite receivers, dishes and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue F-58 186 DIRECT VISION (A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) stream of those services. Intangible assets also include a one-time membership fee paid to the NRTC, which is also being amortized on a straight-line basis over ten years. Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Income Taxes The Segment is not directly subjected to income taxes as it's net losses are consolidated with the Parent's operations for tax filing purposes. No income tax benefit has been provided in the accompanying statements of operations as such benefits are not recoverable from the Parent. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. (2) RELATED PARTY TRANSACTIONS As described in note 1, the operations of the Segment are closely related to those of the Company. As a result, substantially all cash transactions relating to the Segment's operations are processed at the Company level. Therefore, the Company is funding the cash operating losses and inventory purchases of the Segment. The Company also absorbs certain immaterial overhead costs such as rent and utilities. Intercompany payables as of December 31, 1996 and 1995 are as follows:
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-59 187 DIRECT VISION A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 F-60 188 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-61 189 DIRECT VISION A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
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-62 190 DIRECT VISION A SEGMENT OF MANKATO CITIZENS TELEPHONE COMPANY NOTES TO UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Direct Vision (the Segment) is a segment of Mankato Citizens Telephone Company (the Company). The Company is a wholly-owned subsidiary of Hickory Tech Corporation (the Parent). The Segment was formed in August 1994 for the purpose of acquiring, owning and operating direct broadcast satellite services (DBS) to customers within its franchise areas, which include seven counties in Minnesota. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. The financial statement presented represent the operations of the Segment, which operates as part of the Company. As a result, substantially all cash transactions relating to the Segment's operations are processed at the Company level. Therefore, the Company is funding the cash operating losses and inventory purchases of the Segment. The Company also absorbs certain immaterial overhead costs such as rent and utilities. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. The company ceased selling equipment during 1997. Use of Estimates Management of the Segment has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes The Segment is not directly subjected to income taxes as it's net losses are consolidated with the Parent's operations for tax filing purposes. No income tax benefit has been provided in the accompanying statements of operations as such benefits are not recoverable from the Parent. (2) SUBSEQUENT EVENTS On July 15, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-63 191 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-64 192 INDEPENDENT AUDITORS' REPORT The Board of Directors Ace Telephone Association: We have audited the accompanying balance sheets of Satellite Entertainment, Inc., a wholly-owned subsidiary of Ace Telephone Association, as of December 31, 1996 and 1995 and the related statements of operations, shareholder's equity and cash flows for the years ended December 31, 1996 and 1995 and the five-month period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Satellite Entertainment, Inc. at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995 and the five-month period ended December 31, 1994, in conformity with generally accepted accounting principles. KPMG LLP July 3, 1997, except as to note 6, which is as of July 14, 1997 Kansas City, Missouri F-65 193 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-66 194 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-67 195 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-68 196 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE FIVE-MONTH PERIOD ENDED DECEMBER 31, 1994
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-69 197 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Satellite Entertainment, Inc. (the Company) is a wholly-owned subsidiary of Ace Telephone Association (the Parent). The Company was formed in August 1994 for the purpose of owning and operating direct broadcast satellite (DBS) television systems previously purchased by the Parent. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellite that provides programming for DirecTV. At December 31, 1996, 1995 and 1994, the Company had the operating rights for three counties in Minnesota and five counties in Michigan. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings for one or more months and is deferred until the service is provided. Revenues for equipment sales are recognized when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists of DBS receivers, satellite dishes and accessories as well as retail inventory at a Radio Shack franchise owned and operated by the Company. Radio Shack inventory had a carrying value at December 31, 1996 and 1995 of $30,079 and $31,139, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of receivables, accounts payable and notes payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives, which range from five to thirty years. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over a period of ten years, which is the expected useful life of the revenue stream of those services. F-70 198 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Income Taxes The Company is not directly subjected to income taxes as its net losses are consolidated with the Parent's operations for tax filing purposes. (2) ACCOUNTS RECEIVABLE Trade receivables consist primarily of amounts due from subscribers for monthly programming fees and equipment purchases financed by the Company. Trade receivables as of December 31, 1996, 1995 and 1994 are as follows:
1996 1995 -------- -------- Accounts receivable: Programming............................................... $121,727 $ 65,884 Financed equipment sales.................................. 133,913 195,454 Other..................................................... 2,355 1,860 -------- -------- $257,995 $263,198 ======== ========
(3) INCOME TAXES The Company is not directly subjected to income taxes as it's net losses are consolidated with the Parent's operations for tax filing purposes. The Company records a receivable from the Parent for the tax benefits arising from the net losses of the Company. All tax benefits arise from losses from continuing operations. There are no significant differences between tax and book basis resulting in deferred tax assets or liabilities. Total income tax benefit differs from expected income tax benefit as follows:
1996 1995 1994 ------- ------- ------ Expected income tax benefit at 34%....................... $35,720 $72,003 $7,074 Difference due to income tax benefit allocation made by Parent................................................. (6,254) (1,039) 1,450 ------- ------- ------ Total income tax benefit....................... $29,466 $70,964 $8,524 ======= ======= ======
If the Company had filed income taxes on a separate return basis, any tax benefit and net operating loss carry-forward would not be recognizable due to the Company's recurring historical losses Pro forma net income would therefore be as follows:
1996 1995 1994 - ------- -------- ------- $88,545 $190,050 $20,806 ======= ======== =======
F-71 199 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (4) RELATED PARTY TRANSACTIONS The Company has a revolving line of credit with the Parent whereby the Parent will loan the Company cash for operating purposes up to $1,000,000. These borrowings carry interest at prime plus two percent and require quarterly interest-only payments, with the unpaid principal balance due on April 27, 1999. The unpaid balance of these borrowings totaled $350,000 and $600,000 at December 31, 1996 and 1995, respectively. The Company is also party to various intercompany transactions with the Parent and a subsidiary of the Parent, including interest accruals on the line of credit noted above, intercompany cash receipts and tax benefits arising from the Company's net losses. Net receivable balances due from the Parent offset against accounts payable at December 31, 1996 and 1995 were $43,323 and $34,486, respectively. (5) LEASES In addition to selling satellite television equipment, the Company also leases the equipment to customers for a minimum one-year period at a fixed monthly rental charge. After one year, the customer may continue to lease the equipment on a month-to-month basis. All minimum rents due under such leases at December 31, 1996, 1995 and 1994 are, therefore, due within the next calendar year. The above leases qualify for operating lease treatment and, accordingly, the leased units are transferred from inventory to furniture, fixtures and equipment at average cost when leased and depreciated on a straight-line basis over a five-year period. Rental income is recognized in the month earned. The carrying amount of leased equipment included in furniture, fixtures and equipment at December 31, 1996 and 1995 is as follows:
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-72 200 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 F-73 201 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
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-74 202 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
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-75 203 SATELLITE ENTERTAINMENT, INC. (A WHOLLY-OWNED SUBSIDIARY OF ACE TELEPHONE ASSOCIATION) NOTES TO UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Satellite Entertainment, Inc. (the Company) is a wholly-owned subsidiary of Ace Telephone Association (the Parent). The Company was formed in August 1994 for the purpose of owning and operating direct broadcast satellite (DBS) television systems previously purchased by the Parent. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in rural territories of the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At June 30, 1997 and 1996, the Company had the operating rights for three counties in Minnesota and five counties in Michigan. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings for one or more months and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes The Company is not directly subjected to income taxes as it's net losses are consolidated with the Parent's operations for tax filing purposes. The Company records a receivable from the Parent for the tax benefits arising from the net losses of the Company. All tax benefits arise from losses from continuing operations. There are no significant differences between tax and book basis resulting in deferred tax assets or liabilities. (2) SUBSEQUENT EVENTS On July 14, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-76 204 GVEC RURAL TV, INC. FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-77 205 INDEPENDENT AUDITORS' REPORT The Board of Directors GVEC Rural TV, Inc., Guadalupe Valley Electric Cooperative and Guadalupe Valley Development Corporation: We have audited the accompanying balance sheets of GVEC Rural TV, Inc. as of December 31, 1996 and 1995 and the related statements of operations, investors' capital and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GVEC Rural TV, Inc. at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP August 8, 1997 Kansas City, Missouri F-78 206 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-79 207 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-80 208 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-81 209 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-82 210 GVEC RURAL TV, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations GVEC Rural TV, Inc. (the Company) is a Texas Corporation organized for the purpose of owning and operating direct broadcast services (DBS) television systems to customers within its franchise areas which include four counties in central Texas. The Company is an affiliated associate member of the National Rural Television Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. The Company also provides C-Band satellite television services. The Company is owned by Guadalupe Valley Electric Cooperative (GVEC) and Guadalupe Valley Development Corporation (GVDC). Prior to January 1, 1996, the operations of the Company were reported as a segment of GVEC. On January 1, 1996, GVEC incorporated its rural television segment into a separate entity (the Company). This was achieved by GVEC's contribution of certain assets in exchange for Company stock. The financial statements presented as of and for the year ended December 31, 1996 present the financial position and operations of the Company. As of and for the years ended December 31, 1995 and 1994, the financial statements represent the financial position and operation of GVEC's rural television segment. This segment was not a separate subsidiary of GVEC nor was it operated as a separate entity in 1995 or 1994. The financial statements for 1995 and 1994 presented herein have been derived from the records of GVEC and have been prepared to present the segment's financial position, results of operations and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which were allocated to the segment by GVEC. Such allocated expenses may or may not be indicative of what such expenses would have been had the segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Other revenues consist primarily of the sale of C-Band equipment, G-Band program revenues and various DBS maintenance revenue. These revenues are recognized in the same manner as DBS programming and equipment sales. Cash Equivalents The Company considers all liquid investments purchased with a maturity of ninety days or less to be cash equivalents. Inventory Inventory is stated at the lower of average cost or market and consists primarily of receivers, satellite dishes and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of F-83 211 GVEC RURAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the financial reporting and tax basis of certain assets. Organizational Costs The cost of legal and other professional fees associated with the formation of GVEC Rural TV, Inc. on January 1, 1996 were capitalized and were being amortized over a five-year period. (2) ACCOUNTS RECEIVABLE Accounts receivable consist primarily of amounts due from subscribers for monthly programming fees and for rental charges on leased equipment. Accounts receivable as of December 31, 1996 and 1995 are as follows:
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-84 212 GVEC RURAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) NOTE RECEIVABLE In January 1995, the Company sold for $230,000 its rights to provide certain wireless television services to an unrelated party. An initial payment of $100,000 was received at the time of sale, and the buyer signed a note for the remaining $130,000. The note was paid in full in March 1997. (4) INCOME TAXES The Company's deferred tax assets relate principally to nondeductible reserves for bad debt and a net operating loss carryforward. A summary of deferred tax assets at December 31, 1996 follows: 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-85 213 GVEC RURAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (7) LEASES In addition to selling satellite television equipment, the Company also leases the equipment to customers for periods of three to seven years at a fixed monthly rental charge. These leases qualify as sales-type capital leases and are therefore recorded as sales of equipment. Future minimum rental payments to be received, less a monthly handling fee and an allowance for uncollectible accounts, are included in accounts receivable. At December 31, 1996, 1995 and 1994, the net lease receivable was $615,560, $688,969 and $202,500, respectively. The December 31, 1996 lease receivable is to be received in subsequent years as follows: 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-86 214 GVEC RURAL TV, INC. STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 F-87 215 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-88 216 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-89 217 GVEC RURAL TV, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations GVEC Rural TV, Inc. (the Company) is a Texas corporation organized for the purpose of owning and operating direct broadcast satellite services (DBS) to customers within its franchise areas, which include four counties in central Texas. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. The Company also provides C-Band satellite television services. The company is owned by Guadalupe Valley Electric Cooperative (GVEC) and Guadalupe Valley Development Corporation (GVDC). Prior to January 1, 1996, the operations of the Company were reported as a segment of GVEC. On January 1, 1996, GVEC incorporated its rural television segment into a separate entity (the Company). This was achieved by GVEC's contribution of certain assets in exchange for Company stock. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings and is deferred until the service is provided. equipment sales are recognized as revenue when the equipment is delivered to the customer. Other revenues consist primarily of the sale of C-Band equipment, G-Band program revenues and various DBS maintenance revenue. These revenues are recognized in the same manner as DBS programming and equipment sales. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes Due to outstanding net operating loss carryforwards, no provision for income taxes has been recorded as it is not recoverable. (2) SUBSEQUENT EVENTS On July 8, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-90 218 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 F-91 219 INDEPENDENT AUDITORS' REPORT The Board of Directors Jackson Electric Cooperative: We have audited the accompanying balance sheets JECTV (the Segment) as of December 31, 1996 and 1995 and the related statements of operations, segment equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JECTV as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG LLP August 15, 1997, except at to notes 6 and 7, which are as of September 2 and August 26, 1997 respectively Kansas City, Missouri F-92 220 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-93 221 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-94 222 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-95 223 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-96 224 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations JECTV (the Segment) is a segment of Jackson Electric Cooperative (the Company). The Segment was formed for the purpose of operating direct broadcast satellite (DBS) television systems purchased by the Company. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. At December 31, 1996, 1995 and 1994, the Company had the operating rights for seven counties in southeast Texas. The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations, and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists of satellite receivers, dishes, and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the company to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of accounts receivable, notes receivable, accounts payable, and long-term debt are carried at cost, which approximates fair value. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. F-97 225 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Income Taxes The Company, and thus the Segment, is not considered a taxable entity for federal and state income tax purposes, as it is a not-for-profit entity. Accordingly, no provision for income taxes is included in the accompanying financial statements. (2) ACCOUNTS RECEIVABLE Accounts receivable consists of amounts due from subscribers for monthly programming fees and for sales of satellite television equipment which have been delivered but not paid for. Accounts receivable as of December 31, 1996 and 1995 are as follows:
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-98 226 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (5) LEASES In addition to selling satellite television equipment, the Segment also leases the equipment to customers at fixed monthly rental charges. These leases have minimum lease terms of two years, which can be extended to up to seven years at the lessee's option. These leases qualify as operating leases and accordingly, the leased units are transferred from the Segment's inventory of existing units and included in furniture, fixtures and equipment at average cost along with related installation costs. Leased units are depreciated on a straight line basis over a five-year period, which approximates the average length of the rental term. Rental income is recognized in the month earned. The carrying amount of leased equipment included in furniture, fixtures and equipment at December 1, 1996 and 1995 is as follows:
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-99 227 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX-MONTHS ENDED JUNE 30, 1997 AND 1996 F-100 228 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-101 229 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-102 230 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) NOTES TO UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations JECTV (the Company) is a Segment of Jackson Electric Cooperative (the Parent). The Company was formed for the purpose of operating direct broadcast satellite (DBS) television systems purchased by the Parent. The Parent is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. The Company has the operating rights for seven counties in Texas. The Company is not a separate subsidiary of the Parent nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Parent and have been prepared to present the Company's results of operations and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Company by the Parent. Such allocated expenses may or may not be indicative of what such expenses would have been had the Company been operated as a separate entity. The Company is party to various intercompany transactions with the Parent. The Parent purchased the DBS franchise rights under which the Company provides DBS programming for $717,821 prior to the commencement of DBS operations in mid-1994. The Parent also has a revolving line of credit with a finance company under which it borrows funds which are used primarily to operate the Company. A percentage of the outstanding debt and a percentage of the interest paid under the line of credit is allocated to the Company. The line of credit carries interest at a variable rate which ranged from 7% to 6% in 1996 through June 30, 1997. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the period to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Notes Receivable The Company provides customers the option of purchasing DBS equipment on credit. These payment plans have terms of three years and carry interest at 7% to 12%. Upon default by a customer, the Company repossesses the equipment and transfers the resale value of the equipment to inventory and records an allowance for the balance of the unpaid note receivable. F-103 231 JECTV (A SEGMENT OF JACKSON ELECTRIC COOPERATIVE) NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes The Parent, and thus, the Company, is not considered a taxable entity for federal and state income tax purposes, as it is a not-for-profit entity. Accordingly, no provision for income taxes is included in the accompanying financial statements. (2) SUBSEQUENT EVENTS On August 26, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-104 232 ARGOS SUPPORT SERVICES COMPANY FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (WITH INDEPENDENT AUDITORS' REPORTS THEREON) F-105 233 INDEPENDENT AUDITORS' REPORT The Board of Directors Argos Support Services Company: We have audited the accompanying balance sheet of Argos Support Services Company (the Company) as of December 31, 1996 and 1995 and the related statements of operations, shareholder's deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Argos Support Services Company at December 31, 1996 and 1995, the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG LLP August 8, 1997 Kansas City, Missouri F-106 234 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-107 235 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-108 236 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-109 237 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-110 238 ARGOS SUPPORT SERVICES COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Argos Support Services Company (the Company) was formed in March 1993 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with the Company to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the license owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1996 and 1995, the Company has the operating rights for territories in Texas, Florida and Utah. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billings and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists entirely of Direct Satellite Systems which includes receivers, satellite dishes and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses during the period. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of trade receivables, trade payables and long-term liabilities are carried at cost, which approximates fair value, as a result of the shortterm nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Long-Lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. F-111 239 ARGOS SUPPORT SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NRTC Patronage Capital The NRTC declares and the Company receives a yearly patronage dividend based on the NRTC's profitability. Of the total dividend, 20% is received in cash and 80% is distributed in the form of NRTC patronage capital certificates, which will be redeemed in cash at a future date at the discretion of the NRTC. The Company has recorded an asset and an offsetting deferred income liability for the noncash portion of the patronage dividend. The deferred income will be recognized as revenue when cash distributions are declared by the NRTC. Deferred income included in other current liabilities was $48,107 and $10,804 at December 31, 1996 and 1995, respectively. Trade Receivables Trade receivables consist of amounts due from subscribers for monthly programming fees. Depreciation Depreciation on furniture, fixtures and equipment is computed on a straight-line basis over the estimated useful lives of the assets, which range from five to seven years. Cash and Cash Equivalents Money market investments are classified as cash and cash equivalents for balance sheet and statement of cash flow purposes. (2) RESTRICTED CASH The Company maintains a line of credit with a local bank for operating cash needs. As of December 31, 1996 and 1995, the Company had drawn $50,000 and $125,000, respectively, on this line of credit, which carries an interest rate of 8.5%, has a final maturity date of March 23, 1997 and is secured by certificates of deposit held by the bank. (3) NOTES PAYABLE AND LONG-TERM DEBT Debt consist primarily of a $275,000 debenture payable to the majority shareholder of the Company. The debenture requires semiannual interest-only payments at 8.75% until maturity at April 1, 1999, at which time the principal is due in full. The Company also has two notes payable to banks totaling $31,968 at December 31, 1996. Scheduled repayments of long-term debt and notes payable outstanding at December 31, 1996 are as follows: 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-112 240 ARGOS SUPPORT SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences, which relate primarily to allowances on receivables and the carrying value of fixed assets, are not significant to the financial statements. The Company has not recorded current or deferred tax benefits related to its taxable operating losses and temporary differences due to uncertainty as to the likelihood that the results of future operations will generate sufficient taxable income to realize net operating loss carryforwards and deferred tax assets. (5) MINORITY INTEREST During 1995, the Company sold revenue rights to investors in return for a cash investment of $842,091. These rights entitle investors to receive a percentage of any positive net revenues on certain zip codes based on programming revenues less programming costs related to the zip codes, less an allocation of marketing and selling, general and administrative expenses. No amounts were earned or paid on these revenue rights in 1995 or 1996. As part of the pending sale of the Company described in note 6, the Company has made offers to repurchase the revenue rights described above. Repurchase amounts exceeding the original proceeds from the sale of the rights are recorded as an intangible asset and amortized over the expected useful life of the franchise. During 1996, the Company paid $413,461 to repurchase certain revenue rights with a book value of $312,619. At December 31, 1996, the Company has offered a total of $1,182,307 to buy back the revenue rights of the three remaining investors having a book value of $529,472. In August 1997, the Company purchased the rights of one of these investors (book value of $250,000) for $600,000. As of August 9, 1997, the Company has outstanding offers to purchase the rights of the remaining two investors for $582,307. Ultimate amounts paid, if any, could exceed this amount. (6) SUBSEQUENT EVENTS On April 3, 1997, the Company's shareholders signed a letter of interest to sell substantially all its outstanding common stock to Golden Sky Systems, Inc. (GSS), which owned 20% of the outstanding common stock of the Company. The acquisition closed on August 8, 1997. F-113 241 ARGOS SUPPORT SERVICES COMPANY STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 F-114 242 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-115 243 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-116 244 ARGOS SUPPORT SERVICES COMPANY NOTES TO UNAUDITED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Argos Support Services Company (the Company) was formed in March 1993 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with the Company to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the license owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At June 30, 1997 and 1996, the Company has the operating rights for territories in Texas, Florida and Utah. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billings and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses during the period. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Depreciation Depreciation of furniture, fixtures and equipment is computed on a straight-line basis over the estimated useful lives of the assets, which range from five to seven years. (2) INCOME TAXES The Company accounts for income taxes under the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement's carrying amounts of existing assets and liabilities and their respective tax basis. Temporary differences, which relate primarily to allowances on receivables and the carrying value of fixed assets, are not significant to the financial statements. The Company has not recorded current or deferred tax benefits related to its taxable operating losses and temporary differences due to uncertainty as to the likelihood that the results of future operations will generate sufficient taxable income to realize net operating loss carryforwards and deferred tax assets. (3) SUBSEQUENT EVENTS On August 8, 1997, the Company's shareholders sold substantially all their outstanding common stock to Golden Sky Systems, Inc. (GSS), which owned 20% of the outstanding common stock of the Company. F-117 245 GARDONVILLE SYSTEMS, INC. FINANCIAL STATEMENTS DECEMBER 31, 1997 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-118 246 INDEPENDENT AUDITORS' REPORT Board of Directors Gardonville Systems, Inc. Brandon, Minnesota We have audited the accompanying balance sheet of Gardonville Systems, Inc. (a wholly-owned subsidiary of Gardonville Cooperative Telephone Association) as of December 31, 1997, and the related statements of income, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gardonville Systems, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. OLSEN THIELEN & CO., LTD. February 10, 1998 Eden Prairie, Minnesota F-119 247 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-120 248 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-121 249 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-122 250 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-123 251 GARDONVILLE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Nature of Operations -- The Company's principal line of business was providing direct broadcast satellite television service to residential customers in the Douglas County area (doing business as Lakes Area TV). B. Accounting Estimates -- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results could differ from those estimates. C. Revenue Recognition -- Revenues are recognized when earned, regardless of when they are billed. D. Property and Depreciation -- Property and equipment are recorded at original cost. Additions, improvements or major renewals are capitalized. Any gains or losses on property and equipment retirements or sales are reflected currently in operations. Depreciation was computed using the straight-line method based on estimated service or remaining useful lives of the assets. Estimated service lives were: 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-124 252 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-125 253 INDEPENDENT AUDITORS' REPORT The Board of Directors CTS Communications Corporation: We have audited the accompanying balance sheets of Direct Broadcast Satellite (the Segment), a segment of CTS Communications Corporation, as of December 31, 1996 and 1995 and the related statements of operations, segment equity and cash flows for the years ended December 31, 1996 and 1995 and the period from July 29, 1994 (inception) to December 31, 1994. These financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Broadcast Satellite at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995 and the period from July 29, 1994 (inception) to December 31, 1994, in conformity with generally accepted accounting principles. KPMG LLP October 10, 1997, except as to note 4, which is as of November 7, 1997 Kansas City, Missouri F-126 254 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-127 255 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
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-128 256 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) STATEMENTS OF SEGMENT EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
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-129 257 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM JULY 29, 1994 (INCEPTION) TO DECEMBER 31, 1994
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-130 258 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Direct Broadcast Satellite (the Segment) is a segment of CTS Communication Corporation (the Company). The Company is a wholly-owned subsidiary of Climax Telephone Company (the Parent). The Segment was formed in July 1994 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1996, 1995 and 1994, the Company had the operating rights for portions of two counties in southern Michigan. The financial statements presented represent the financial position and operations of the Segment, which operates as part of the Company. Accordingly, the Company funds the operations of the Segment. Were the Segment an independent entity, these funds would have to be obtained from other sources. Presentation The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. The Company periodically offers rebates and coupons to customers, principally in connection with prepayment plans; rebates are recorded when they are utilized. Inventory Inventory is stated at the lower of average cost or market and consists entirely of satellite receivers, dishes and accessories. Equipment Equipment has been recorded at cost and is depreciated over the estimated useful lives using the straight-line method. Estimated useful lives range from three to seven years. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Segment to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. F-131 259 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Intangible assets also include a one-time membership fee paid to the NRTC, which is also being amortized on a straight-line basis over ten years. Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Income Taxes The Segment's operating results are consolidated with the Parent's operations for tax filing purposes. No income tax benefit has been provided in the accompanying statements of operations as such benefits are not recoverable from the Parent. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. (2) ACCOUNTS RECEIVABLE Accounts receivable consist of amounts due from subscribers for monthly programming fees. (3) NRTC PATRONAGE CAPITAL The NRTC declares and the Segment receives a yearly patronage dividend based on the NRTC's profitability. Of the total dividend, 20% is received in cash and 80% is distributed in the form of NRTC patronage capital certificates, which will be redeemed in cash at a future date at the discretion of the NRTC. The Segment has recorded an asset and an offsetting deferred income liability for the noncash portion of the patronage dividend. The deferred income is recognized as revenue when cash distributions are declared by the NRTC. Deferred revenue included in other liabilities was $12,788 and $4,644 at December 31, 1996 and 1995, respectively. (4) SUBSEQUENT EVENTS On October 31, 1997, the Parent contracted to sell substantially all of the Segment's assets and liabilities to Golden Sky Systems, Inc. The acquisition closed on November 7, 1997. F-132 260 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATION CORPORATION) STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 F-133 261 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-134 262 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED FINANCIAL STATEMENT SEPTEMBER 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Direct Broadcast Satellite (the Segment) is a segment of CTS Communication Corporation (the Company). The Company is a wholly-owned subsidiary of Climax Telephone Company (the Parent). The Segment was formed in July 1994 for the purpose of acquiring, owning and operating direct broadcast satellite services (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At September 30, 1997 and 1996, the Company had the operating rights for portions of two counties in southern Michigan. The statements of operations presented represent the operations of the Segment, which operates as part of the Company. Accordingly, the Company funds the operations of the Segment. Were the Segment an independent entity, these funds would have to be obtained from other sources. Presentation The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The statements of operations presented herein have been derived from the records of the Company and have been prepared to present the Segment's results of operations on a stand-alone basis. Accordingly, the statements of operations include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. The Company periodically offers rebates and coupons to customers, principally in connection with prepayment plans; rebates are recorded when they are utilized. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the period in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. F-135 263 DIRECT BROADCAST SATELLITE (A SEGMENT OF CTS COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED FINANCIAL STATEMENT -- (CONTINUED) Income Taxes The Segment's operating results are consolidated with the Parent's operations for tax filing purposes. No income tax benefit has been provided in the accompanying statements of operations as such benefits are not recoverable from the Parent. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. (2) SUBSEQUENT EVENTS On November 7, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-136 264 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 F-137 265 INDEPENDENT AUDITORS' REPORT The Board of Directors Souris River Television, Inc. Minot, North Dakota We have audited the accompanying balance sheets of Souris River Television, Inc. as of December 31, 1996, and 1995 and the related statements of earnings, shareholder's equity and cash flows for the years ended December 31, 1996, and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Acquisition, Inc. at December 31, 1996, and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996, and 1995, in conformity with generally accepted accounting principles. EIDE HELMEKE PLLP October 23, 1997 Sioux Falls, South Dakota F-138 266 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-139 267 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-140 268 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-141 269 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-142 270 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations -- Souris River Television, Inc. (the Company) is a wholly-owned subsidiary of Souris River Telecommunications Cooperative (the Parent). The Company was formed in December 1994 for the purpose of owning and operating direct broadcast satellite (DBS) and cable television systems previously purchased by the Parent. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive right to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellite that provides programming for DirecTV. At December 31, 1996, and 1995, the Company had the operating rights for sixteen counties in North Dakota. Revenue Recognition -- Revenues are earned for monthly DBS and cable television and satellite services and are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Inventory -- Inventory is stated at the lower of average cost or market and consists of receivers, satellite dishes and satellite TV accessories. Use of Estimates -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare the balance sheets in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years which is the expected useful life of the revenue stream of those services. Income Taxes -- The Company is not directly subjected to income taxes as its net losses are consolidated with the Parent's operations for tax filing purposes. The Company records a receivable from the Parent for the tax benefits arising from the net losses of the Company. All tax benefits arise from losses from continuing operations. Investments and Other Assets -- Investments and other assets are stated at cost. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the following estimated useful lives. Cash and Cash Equivalents -- For purposes of reporting cash flows, the company considers all deposits with a maturity of three months or less to be cash equivalents. F-143 271 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- ACCOUNTS RECEIVABLE Trade receivables consist primarily of amounts due from subscribers for monthly programming fees from cable television and direct broadcast satellite services. Accounts receivables as of December 31, 1996, and 1995 are as follows:
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-144 272 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income tax benefit for the year ended December 31, 1996 and 1995, is comprised of the following:
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-145 273 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 F-146 274 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-147 275 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA STATEMENTS OF INCOME AND ACCUMULATED DEFICIT FOR THE NINE MONTHS PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
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-148 276 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-149 277 SOURIS RIVER TELEVISION, INC. MINOT, NORTH DAKOTA NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations -- Souris River Television, Inc. (the Company) is a wholly-owned subsidiary of Souris River Telecommunications Cooperative (the Parent). The Company was formed in December 1994 for the purpose of owning and operating direct broadcast satellite (DBS) and cable television systems previously purchased by the Parent. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive right to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellite that provides programming for DirecTV. At September 30, 1997 and 1996, the Company had the operating rights for sixteen counties in North Dakota. Revenue Recognition -- Revenues are earned for monthly DBS and cable television and satellite services and are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Inventory -- Inventory is stated at the lower of average cost or market and consists of receivers, satellite dishes, and satellite TV accessories. Use of Estimates -- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare the balance sheets in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Income Taxes -- The Company is not directly subject to income taxes as its net losses are consolidated with the Parent's operations for tax filing purposes. The Company records a receivable from the Parent for the tax benefits arising from the net losses of the company. All tax benefits arise from losses from continuing operations. Investments and Other Assets -- Investments and other assets are stated at cost. Property and Equipment -- Property and equipment are stated at cost. Depreciation is computed by the straight-line method over the following estimated useful lives. Cash and Cash Equivalents -- For purposes of reporting cash flows, the company considers all deposits with a maturity of three months or less to be cash equivalents. NOTE 2 -- SUBSEQUENT EVENT On October 16, 1997, the Company contracted to sell 69% of their DBS franchise area to Golden Sky DBS, Inc. The acquisition closed late in 1997. F-150 278 DBS LC STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO NOVEMBER 17, 1997 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-151 279 INDEPENDENT AUDITORS' REPORT The Board of Directors DBS LC: We have audited the accompanying statements of operations and cash flows of DBS LC (the Company) for the period from January 1, 1997 to November 17, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of DBS LC for the period from January 1, 1997 to November 17, 1997, in conformity with generally accepted accounting principles. KPMG LLP January 13, 1999 Kansas City, Missouri F-152 280 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-153 281 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-154 282 DBS LC NOTES TO FINANCIAL STATEMENTS NOVEMBER 17, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations DBS LC (the Company) is a limited-liability company organized in Iowa in 1994 for the purpose of supplying direct broadcast satellite services (DBS) to customers within its franchise areas, which include certain zip codes in Iowa. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities as well as the reported amounts of revenues and expenses during the period in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes DBS LC is a limited-liability company. All taxes are the responsibility of DBS LC's unit holders. Accordingly, no provision for income taxes is included in the accompanying financial statements. (2) SUBSEQUENT EVENTS On November 17, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-155 283 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. AUDITED FINANCIAL STATEMENTS AS OF DECEMBER 22, 1997 AND DECEMBER 31, 1996 F-156 284 INDEPENDENT AUDITORS' REPORT The Board of Directors Western Montana Entertainment Television, Inc. Missoula, Montana We have audited the accompanying balance sheets of Western Montana Entertainment Television, Inc., d.b.a. WMET, a wholly owned subsidiary of Missoula Electric Cooperative, Inc., as of December 22, 1997 and December 31, 1996, and the related statements of revenues and accumulated deficit, and cash flows for the period January 1, 1997 through December 22, 1997 and for the year then ended, respectively. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Montana Entertainment Television, Inc. as of December 22, 1997 and December 31, 1996, and the results of its operations and cash flows for the periods then ended, in conformity with generally accepted accounting principles. Summers, McNea and Company, P.C. Certified Public Accountants February 9, 1998 Missoula, Montana F-157 285 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-158 286 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. STATEMENTS OF INCOME AND ACCUMULATED DEFICIT FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 22, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996
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-159 287 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD JANUARY 1, 1997 THROUGH DECEMBER 22, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1996
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-160 288 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 22, 1997 AND DECEMBER 31, 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Activities On June 15, 1993, Missoula Electric Cooperative, Inc. (MEC) served as the incorporator for Western Montana Entertainment Television, Inc. (WMET), a taxable subsidiary of the Cooperative. WMET was incorporated under the laws of the State of Montana for the primary purpose of engaging in the general business of selling, leasing, installing, delivering, distributing and otherwise providing direct satellite broadcast television service, and programming therefore, in prescribed areas of the State of Montana. WMET was authorized to issue 50,000 shares of no par value, common stock. There are currently 10,000 shares of such stock issued and outstanding, all of which are owned by Missoula Electric Cooperative, Inc. Accounting Records The Company maintains its accounting records and prepares its financial statements on the accrual basis of accounting. Accordingly, revenues are recognized when earned and expenses are recorded when incurred. Organization Cost, Franchise Fees and Property and Equipment WMET acquired, from National Rural Telecommunications Cooperative (NRTC), the rights to market and distribute direct broadcast service (DBS) for the Montana counties of Missoula, Mineral, Granite and Powell. The franchise fee paid for areas in the counties already having access to cable television totaled $234,434. For "non-cabled" areas in those counties, the franchise fee totaled $175,026. The franchise agreement remains in effect until the applicable satellite is removed from its assigned orbital location. If such satellite expiration date is less than ten (10) years from the effective date of the franchise agreement, there was to be a partial refund of the franchise fees paid. Franchise fees were being amortized over a ten (10) year period. In addition to paying the franchise fees, WMET incurred organizational costs in the amount of $85,118, which are also being amortized over a ten (10) year period. Property and Equipment consists of office furniture and fixtures and computer equipment and is being depreciated using the straight-line method over estimated useful lives ranging from three (3) to five (5) years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment were capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. The Company has not established a dollar threshold amount in determining when an item is capitalized or expensed. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of less than three (3) months when purchased to be cash equivalents for purposes of the statements of cash flows. Inventories Inventories consists of direct digital satellite broadcast television equipment held for resale to its customers, and is stated at the lower of cost or market (determined on the first-in, first-out basis). Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the bases of certain assets and liabilities for financial and tax reporting. F-161 289 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. INVESTMENT IN ASSOCIATED ORGANIZATION: Represents patronage allocation from National Rural Telecommunications Cooperative. Capital Credits, net of patronage dividends, were allocated for the years ending December 31, as follows: 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-162 290 WESTERN MONTANA ENTERTAINMENT TELEVISION, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. CONCENTRATIONS OF CREDIT RISKS: The Company maintains its general checking account in one financial institution whose balances are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 22, 1997 and December 31, 1996, the general checking account balances in this financial institution aggregated $122,889 and $169,561, respectively. 6. RELATED PARTY TRANSACTIONS: Western Montana Entertainment Television, Inc. (WMET) and Missoula Electric Cooperative, Inc. (MEC) had entered into a Services Agreement dated October 17, 1996 which was to continue for perpetuity but could be terminated by ninety (90) days written notice by either party. The Services Agreement provided that MEC could provide, and WMET could purchase a variety of services provided by MEC. Such services were charged to WMET at MEC's actual costs incurred (i.e no profit was realized by MEC on services provided). Such services were billed by MEC to WMET through an intercompany payable/receivable account. In addition to costs incurred under the Services Agreement, the intercompany account has been charged for franchise fee costs, organizational costs, and equipment purchases. The balance owing to MEC as reflected in the accompanying balance sheets as due to affiliated cooperative as of December 22, 1997 and December 31, 1996 was $666,118 and $897,980, respectively. No definite terms of repayment have been provided for. 7. INCOME TAXES: The Company had net operating loss carryforwards, for tax purposes, in the amount of approximately $288,057 that were due to expire in the years 2009 through 2011. These tax net operating losses were used to offset federal and state income taxes upon filing the Company December 31, 1997 tax return due to the gain on sale of WMET assets to Golden Sky Systems, Inc. as discussed below. 8. SUBSEQUENT EVENT -- SALES AGREEMENT WITH GOLDEN SKY SYSTEMS, INC. On December 22, 1997 all operating assets and franchise agreements of WMRT were purchased by Golden Sky Systems, Inc. for $6,604,874. The allocation was as follows: 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-163 291 SOUTH PLAINS DBS LIMITED PARTNERSHIP TAHOKA, TEXAS FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996 AND 1995 AND REPORT OF CERTIFIED PUBLIC ACCOUNTANTS BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. CERTIFIED PUBLIC ACCOUNTANTS LUBBOCK, TEXAS F-164 292 INDEPENDENT AUDITORS' REPORT To the Partners South Plains DBS Limited Partnership Tahoka, Texas We have audited the accompanying balance sheets of South Plains DBS Limited Partnership as of December 31, 1996 and 1995, and the related statements of income, changes in partners' capital, and cash flows for the years then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Plains DBS Limited Partnership as of December 31, 1996 and 1995, and the results of its operations, changes in partners' capital and its cash flows for the years then ended in conformity with generally accepted accounting principles. BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. Certified Public Accountants Lubbock, Texas February 28, 1997 F-165 293 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-166 294 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-167 295 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-168 296 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-169 297 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations South Plains DBS Limited Partnership is a partnership among Poka Lambro Telecommunications, Inc., South Plains Development Corporation, S.P.A.C.E., Inc., L.E.C. Development, Inc., and Rural Vision Development Corporation. The partnership interests are as follows: 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-170 298 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Customer Billing and Collection of Digital Satellite TV (DSTV) Services The National Rural Telecommunications Cooperative (NRTC), under contractual arrangements with the partnership, performs the billing and collection for the DSTV services provided to customers. The arrangements require NRTC to remit monthly total revenue billed less applicable billing and service expenses and to remit subsequent collection of this revenue. The sales revenue and the customer receivables for the DSTV services, as reflected in the financial statements, are recorded from the monthly billing and collection reports provided by NRTC. Concentration of Credit Risk The partnership maintains its cash balances in federally insured financial institutions. At times during the year, these cash balances exceeded the insurance limit of $100,000. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. ASSETS PLEDGED All assets are pledged as security for the long-term debt due Rural Telephone Finance Corporation. NOTE 3. FRANCHISE LICENSE The franchise license represents the cost paid to extend direct broadcast satellite services to consumers located in the TVGSA. The partnership is amortizing the cost over the term of the franchise, which is ten years. Amortization of the license commenced during the calendar year ended December 31, 1994 as the satellite service began. Amortization for the years ended December 31, 1996 and 1995 amounted to $140,323 and $140,323, respectively. NOTE 4. FIXED ASSETS Fixed assets are stated at the original purchase cost. The major classes of fixed assets are as follows:
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-171 299 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense on the office furniture, fixtures and equipment for the years ended December 31, 1996 and 1995 was $14,767 and $9,331, respectively. The leasehold improvements relate to improvements made at the partnership's retail location and are being amortized over approximately a two year period. Amortization of leasehold improvements for the years ended December 31, 1996 and 1995 amounted to $4,352 and $4,486, respectively. NOTE 5. LINE OF CREDIT -- RTFC In 1995, the partnership executed two line-of-credit agreements with the Rural Telephone Finance Cooperative (RTFC). The partnership was approved for a line of credit of $3,000,000 and $600,000 for DBS inventory purchases and general operating expenses, respectively. For both loans the annual interest rate is 6.9 percent. At December 31, 1996, the partnership had $1,649,642 outstanding on the inventory purchases loan and $75,000 outstanding on the general operating expenses loan. Terms include quarterly interest payments at 6.9 percent, with the total principal outstanding due November 28, 1999. The notes are secured by the assets of the partnership and are guaranteed by the parent companies of the partners in proportion to each partner's ownership percentage. Total interest expense for the years ended December 31, 1996 and 1995, was $102,975 and $75,689, respectively. NOTE 6. EQUIPMENT DEPOSITS Equipment deposits represent amounts collected from subscribers for the purpose of reserving a satellite receiver. The deposits made by subscribers are applied as down payments on the receivers when purchased. Upon request, deposits are refunded and the reservations are withdrawn. NOTE 7. PARTNERS' CAPITAL ACCOUNTS Capital calls are recognized as receivables from the partner upon issuance of the call. If participating, the partners are required to fund the calls within the time frame specified in the calls. Requests for capital are issued as required by the operating partner. The capital accounts have been adjusted for each partner's proportionate share of the accumulated losses as reflected on the statement of changes in partners' capital. NOTE 8. COMMITMENTS AND CONTINGENCIES The partnership is liable to Poka Lambro Telecommunications, Inc., for all costs incurred by the corporation in its capacity as operating partner. If additional capital is necessary for the satisfaction of these commitments, this capital will be provided by the above referenced capital calls of each partner. The partnership has executed a non-cancelable operating lease for the use of retail office space in Lubbock, Texas. The lease term is for four years commencing on August 1, 1994. The minimum monthly rent requirements escalate on an annual basis over the term of the lease. Future minimum rental payments required under the terms of this lease are as follows at December 31, 1996: 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-172 300 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Amounts reflected in the financial statements related to revenues and billings from the National Rural Telecommunications Cooperative (NRTC) system may be subject to adjustment in a subsequent accounting period. Differences from these adjustments, if any, will normally be recorded in that accounting period, if not material. NOTE 9. INCOME TAXES The partnership is not a taxable entity and the results of its operations are includable in the tax returns of the partners. Accordingly, income taxes are not reflected in the accompanying financial statements. F-173 301 SOUTH PLAINS DBS LIMITED PARTNERSHIP TAHOKA, TEXAS FINANCIAL STATEMENTS FOR THE PERIODS ENDED DECEMBER 22, 1997 AND DECEMBER 31, 1996 AND REPORT OF CERTIFIED PUBLIC ACCOUNTANTS F-174 302 INDEPENDENT AUDITORS' REPORT To the Partners South Plains DBS Limited Partnership Tahoka, Texas We have audited the accompanying balance sheets of South Plains DBS Limited Partnership as of December 22, 1997 and December 31, 1996, and the related statements of income, changes in partners' capital, and cash flows for the periods then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As referenced in Note 10 to the financial statements, the Partnership effectively dissolved as of December 23, 1997. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of South Plains DBS Limited Partnership as of December 22, 1997 and December 31, 1996, and the results of its operations, changes in partners' capital and its cash flows for the periods then ended in conformity with generally accepted accounting principles. BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. Certified Public Accountants Lubbock, Texas March 3, 1998 F-175 303 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-176 304 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-177 305 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-178 306 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-179 307 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations South Plains DBS Limited Partnership was originally a partnership among Poka Lambro Telecommunications, Inc., South Plains Development Corporation, S.P.A.C.E., Inc., L.E.C. Development, Inc., and Rural Vision Development Corporation. The partnership interests were as follows: 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-180 308 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Recognition of Income Direct broadcast satellite television programming revenues are billed in advance and are recognized when earned. Unearned amounts are classified as advance billing on the balance sheet. All other revenues are recognized at the time of the sales and at the time a service is provided. Customer Billing and Collection of Digital Satellite TV (DSTV) Services The National Rural Telecommunications Cooperative (NRTC), under contractual arrangements with the partnership, performs the billing and collection for the DSTV services provided to customers. The arrangements require NRTC to remit monthly total revenue billed less applicable billing and service expenses and to remit subsequent collection of this revenue. The sales revenue and the customer receivables for the DSTV services, as reflected in the financial statements, are recorded from the monthly billing and collection reports provided by NRTC. Concentration of Credit Risk The partnership maintains its cash balances in federally insured financial institutions. At times during the year, these cash balances exceeded the insurance limit of $100,000. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. ASSETS PLEDGED All assets were pledged as security for the long-term debt due Rural Telephone Finance Corporation, which was paid in full during the period ended December 22, 1997. NOTE 3. FRANCHISE LICENSE The franchise license represents the cost paid to extend direct broadcast satellite services to consumers located in the TVGSA. The partnership is amortizing the cost over the term of the franchise, which is ten years. Amortization of the license commenced during the calendar year ended December 31, 1994 as the satellite service began. Amortization for the each of the periods amounted to $140,323. NOTE 4. FIXED ASSETS Fixed assets are stated at the original purchase cost. The major classes of fixed assets are as follows:
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-181 309 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Provision for the depreciation of fixed assets is computed using straight-line rates as follows: 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-182 310 SOUTH PLAINS DBS LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Lease expense recognized under this lease for the period ended December 22, 1997 and December 31, 1996, amounted to $33,993 and $32,982, respectively. Amounts reflected in the financial statements related to revenues and billings from the National Rural Telecommunications Cooperative (NRTC) system may be subject to adjustment in a subsequent accounting period. Differences from these adjustments, if any, will normally be recorded in that accounting period, if not material NOTE 9. INCOME TAXES The partnership is not a taxable entity and the results of its operations are includable in the tax returns of the partners. Accordingly, income taxes are not reflected in the accompanying financial statements. NOTE 10. SUBSEQUENT EVENTS/GOING CONCERN Effective December 23, 1997, Golden Sky Systems, Inc. purchased the existing 52.50% interest owned by Poka Lambro Telecommunications. As such, the partnership effectively dissolved as of that date. F-183 311 CAL-ORE DIGITAL TV, INC. FINANCIAL STATEMENTS DECEMBER 31, 1996 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-184 312 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky Systems, Inc.: We have audited the accompanying balance sheet of Cal-Ore Digital TV, Inc. (the Company) as of December 31, 1996 and the related statements of operations, shareholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cal-Ore Digital TV, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG LLP November 26, 1997, except as to note 5, which is as of December 8, 1997. Kansas City, Missouri F-185 313 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-186 314 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-187 315 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-188 316 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-189 317 CAL-ORE DIGITAL TV, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Cal-Ore Digital TV, Inc. (the Company) is a California corporation formed in November 1993 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is a wholly-owned subsidiary of California Oregon Telecommunications Company (the Parent), who has owned all 1,000 shares of the Company since the Company's inception. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1996, the Company had the operating rights for portions of four counties in California and Oregon. These rights were purchased by the parent in 1993 and transferred to the Company as a contribution of capital in 1994. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billings for one or more months and are deferred until the service is provided. Equipment and installation sales and related costs are recognized when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists of receivers, satellite dishes, and satellite TV accessories. Accounts Receivable Accounts receivable consist primarily of amounts due from subscribers for monthly programming and equipment lease billings. Cash and Cash Equivalents Cash and cash equivalents consists of cash in checking accounts and money market checking accounts. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over fifteen years, which is the expected useful life of the satellites providing DBS services. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. F-190 318 CAL-ORE DIGITAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which is practicable to estimate that value: Cash and Cash Equivalents -- The carrying amounts approximates fair value because of the short maturity of those instruments. Receivables and Accounts Payable -- These assets are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Furniture, Fixtures and Equipment Furniture, fixtures and equipment, consisting primarily of computer and office equipment and equipment leased to customers, is recorded at cost. Depreciation expense is recorded over the estimated useful lives which range from two to seven years. Income Taxes The Company is a C Corporation for federal and state income tax purposes and files its taxes on a consolidated basis with the Parent and its other wholly-owned subsidiaries. The Company's income tax expense or benefit is an allocation of the Parent's consolidated income tax expense or benefit and is recoverable from the Parent. (2) LEASING ARRANGEMENTS FOR SUBSCRIBER EQUIPMENT In addition to selling satellite television equipment, in 1995 the Company began leasing the equipment to customers under operating lease arrangements. These leases are at fixed monthly rental charges ranging from $15 to $19 per month, and are month-to-month leases which can be terminated at any time upon return of the DBS equipment to the Company. Accordingly, the Company accounts for these leases as operating leases. The cost of leased equipment is included as a component of furniture, fixtures, and equipment and depreciated over a two-year period. The net amount of leased equipment included in furniture, fixtures, and equipment at December 31, 1996 is as follows:
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-191 319 CAL-ORE DIGITAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) NRTC PATRONAGE DIVIDENDS The NRTC declares and the Company receives a yearly patronage dividend based on the NRTC's profitability. Of the total dividend, 20% is received in cash and 80% is distributed in the form of NRTC patronage capital certificates, which will redeemed in cash at a future date at the discretion of the NRTC. The Company has recorded an asset and an offsetting deferred income liability for the noncash portion of the patronage dividend. The deferred income will be recognized as revenue when cash distributions are declared by the NRTC. Deferred revenue included in other liabilities at December 31, 1996 was $17,323. (4) RELATED-PARTY TRANSACTIONS The Company was capitalized by the Parent in early 1994 through the transfer of $26,000 in cash and franchise rights with a cost of $522,174. In April 1994, the Company sold the franchise rights for a portion of one county in California to Siskiyou Ruralvision, a related party which has a common board member. These rights were sold at the Parent's cost of $153,823. The Company also had a $100,000 account payable to the Parent at December 31, 1995, as the result of a short-term loan made in June 1995 for operating cash needs. This payable carried interest at 7% and was repaid in full in 1996, along with $5,716 in accrued interest. Employees of the Parent provide various accounting and administrative duties for the Company. Accordingly, the Company's financial statements include allocated selling, general, and administrative expenses in the amount of $21,391, in 1996. (5) SUBSEQUENT EVENTS On September 24, 1997, the Company entered into a letter agreement to sell its franchise rights and related DBS assets and liabilities to Golden Sky Systems, Inc. The acquisition closed on December 8, 1997. F-192 320 CAL-ORE DIGITAL TV, INC. STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997 AND THE YEAR ENDED DECEMBER 31, 1996 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-193 321 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky Systems, Inc.: We have audited the accompanying statements of operations and cash flows of Cal-Ore Digital TV, Inc. (the Company) for the period from January 1, 1997 to December 8, 1997 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Cal-Ore Digital TV, Inc. for the period from January 1, 1997 to December 8, 1997 and the year ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG LLP January 13, 1999 Kansas City, Missouri F-194 322 CAL-ORE DIGITAL TV, INC. STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
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-195 323 CAL-ORE DIGITAL TV, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 8, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
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-196 324 CAL-ORE DIGITAL TV, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 8, 1997 AND DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Cal-Ore Digital TV, Inc. (the Company) is a California corporation formed in November 1993 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is a wholly-owned subsidiary of California Oregon Telecommunications Company (the Parent), who has owned all 1,000 shares of the Company since the Company's inception. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 9, 1997 and December 31, 1996, the Company had the operating rights for portions of four counties in California and Oregon. These rights were purchased by the parent in 1993 and transferred to the Company as a contribution of capital in 1994. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billings for one or more months and are deferred until the service is provided. Equipment and installation sales and related costs are recognized when the equipment is delivered to the customer. In addition to selling satellite television equipment, in 1995 the Company began leasing the equipment to customers under operating lease arrangements. These leases are at fixed monthly rental charges ranging form $15 to $19 per month, and are month-to-month leases which can be terminated at any time upon return of the DBS equipment to the Company. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over fifteen years, which is the expected useful life of the satellites providing DBS services. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Income Taxes The Company is a C Corporation for federal and state income tax purposes and files its taxes on a consolidated basis with the Parent and its other wholly-owned subsidiaries. The Company's income tax expense or benefit is an allocation of the Parent's consolidated income tax expense or benefit and is recoverable from or payable to the Parent. F-197 325 CAL-ORE DIGITAL TV, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (2) RELATED-PARTY TRANSACTIONS The Company had a $100,000 loan payable to the Parent at December 31, 1995, as the result of a short-term loan made in June 1995 for operating cash needs. This payable carried interest at 7% and was repaid in full in 1996, along with $5,716 in accrued interest. (3) SUBSEQUENT EVENTS On December 8, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-198 326 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-199 327 INDEPENDENT AUDITORS' REPORT The Board of Directors Cable and Communications Corporation: We have audited the accompanying balance sheets of NRTC System No. 0093, a segment of Cable and Communications Corporation, as of December 31, 1996 and 1995 and the related statements of operations, segment equity and cash flows for each of the years in the three year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NRTC System No. 0093, a segment of Cable and Communications Corporation, at December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP November 14, 1997 Kansas City, Missouri F-200 328 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-201 329 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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-202 330 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF SEGMENT EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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-203 331 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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-204 332 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations The NRTC System No. 0093 is a segment (the Segment) of Cable and Communications Corporation (C&CC) which provides rural direct broadcasting satellite (DBS) television service to customers within its franchise areas which includes fifteen counties in eastern Montana. C&CC is a wholly-owned subsidiary of Mid-Rivers Telephone Cooperative, Inc. (MRTC). MRTC is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV television programming in the rural territories of the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. The financial statements presented as of and for the years ended December 31, 1996, 1995 and 1994, represent the financial position and operation of the Segment. The Segment was not operated as a separate entity or a separate subsidiary of C&CC in 1996, 1995 or 1994. The financial statements presented herein have been derived from the records of C&CC and have been prepared to present the Segment's financial position, results of operations and cash flows on a stand-alone basis. The financial statements do not include certain costs and expenses which could be allocable to the segment by C&CC. Accordingly, costs and expenses presented may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings for one or more months and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Other revenues consist primarily of various DBS service and maintenance revenue. These revenues are recognized in the same manner as DBS programming and equipment sales. Cash Equivalents The Segment considers all liquid investments purchased with a maturity of ninety days or less to be cash equivalents. Inventory Inventory is stated at the lower of average cost (first-in, first-out) or market and consists primarily of receivers, satellite dishes and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. F-205 333 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Income Taxes The Segment is not directly subject to income taxes, as it is operated as a segment of C&CC. C&CC did not allocate tax expense to the segment and, accordingly, no provision for income taxes has been made. (2) ACCOUNTS RECEIVABLE Accounts receivable consist primarily of amounts due from subscribers for monthly programming fees. (3) NOTES RECEIVABLE The Segment finances DBS equipment sales to customers. These sales contracts are executed for periods varying from twelve to thirty-six months. These notes are amortized through monthly payments. The contracts are collateralized by security interests in the equipment purchased. Notes receivable as of December 30, 1996 and 1995 are as follows:
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-206 334 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) and equally offsetting deferred income liability have not been recorded as there is no financial statement impact. (5) RELATED PARTY TRANSACTIONS C&CC performs management and service and maintenance functions for the Segment and allocates such labor and benefit Segment. A related payable to C&CC of $13,050 and $6,165 exists at December 31, 1996, and 1995, respectively. (6) SUBSEQUENT EVENT The Segment contracted to sell certain of its DBS assets to Golden Sky Systems, Inc. The acquisition closed on December 17, 1997. F-207 335 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 F-208 336 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
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-209 337 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
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-210 338 NRTC SYSTEM NO. 0093 A SEGMENT OF CABLE AND COMMUNICATIONS CORPORATION NOTES TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations The NRTC System No. 0093 is a segment (the Segment) of Cable and Communications Corporation (the Company) which provides rural direct broadcast satellite services (DBS) to customers within its franchise areas, which include fifteen counties in eastern Montana. The Company is a wholly-owned subsidiary of Mid-Rivers Telephone Cooperative, Inc. (the Parent). The Parent is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in rural territories of the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. The Segment was not operated as a separate entity or a separate subsidiary of the Company. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's results of operations and cash flows on a stand-alone basis. The financial statements do not include certain costs and expenses which could be allocable to the Segment by the Company. Accordingly, costs and expenses presented may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advance billings for one or more months and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over the expected useful life of the revenue stream of those services, ten years. Income Taxes The Company is not directly subject to income taxes, as it is operated as a segment of the Parent. The Parent did not allocate tax expense to the Company and, accordingly, no provision for income taxes has been made. (2) SUBSEQUENT EVENTS On December 17, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-211 339 LAKELAND DBS, INC. STATEMENTS OF OPERATIONS AND STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997 AND THE YEAR ENDED DECEMBER 31, 1996 (WITH INDEPENDENT AUDITORS' REPORT THEREON) F-212 340 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky Systems, Inc.: We have audited the accompanying statements of operations and cash flows of Lakeland DBS, Inc. (the Company) for the period from January 1, 1997 to December 24, 1997 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Lakeland DBS, Inc. for the period from January 1, 1997 to December 24, 1997 and the year ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG LLP January 20, 1999 Kansas City, Missouri F-213 341 LAKELAND DBS, INC. STATEMENTS OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
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-214 342 LAKELAND DBS, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
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-215 343 LAKELAND DBS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1997 TO DECEMBER 24, 1997 AND THE YEAR ENDED DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Lakeland DBS, Inc. (the Company) is an Oklahoma S-corporation formed for the purpose of operating direct broadcast satellite (DBS) television systems and is owned Charles O. Smith, Betty R. Smith, and Orlean M. Smith (Stockholders). The Company is an affiliate of Canadian Valley Telephone Company (Canadian Valley). Canadian Valley owns the DBS rights for which the Company provides management services. Canadian Valley is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 24, 1997 and December 31, 1996, Canadian Valley had the operating rights for portions of six counties in Oklahoma and Colorado. Canadian Valley transferred the DBS rights to the Company on December 24, 1997. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billings for one or more months and are deferred until the service is provided. Equipment and installation sales and related costs are recognized when the equipment is delivered to the customer. In addition to selling satellite television equipment, in December of 1997 the Company began leasing the equipment to customers under operating lease arrangements. These leases are at fixed monthly rental charges ranging from $10 to $16 per month, and are month-to-month leases which can be terminated at any time upon return of the DBS equipment to the Company. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are amortized on a straight-line basis over ten years, which is the expected useful life of the satellites providing DBS services. Because, until December 24, 1997 Canadian Valley owned such rights, the intangible asset was maintained on Canadian Valley's accounts, therefore no amortization expense was recorded on the Company's books. Had the Company owned the marketing rights, they would have recorded additional amortization expense of $50,492 and $51,336 for the period from January 1, 1997 to December 24, 1997 and the year ended December 31, 1996, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make a number of estimates and assumptions which affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates. Income Taxes The Company is an S Corporation for federal and state income tax purposes and files its taxes on a consolidated basis with the Parent and its other wholly-owned subsidiaries. Accordingly, income taxes are the responsibility of the stockholders and are not reflected in the accompanying financial statements. F-216 344 LAKELAND DBS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (2) RELATED-PARTY TRANSACTIONS The Company had $631,298 and $174,628 of accounts payable to Canadian Valley at December 24, 1997 and December 31, 1996, respectively, as the result of a short-term loan made for operating cash needs and the transfer of DBS marketing rights. This payable carried no interest and was repaid in full in 1998. The Company also had an $29,800 account payable to Charles & Betty Smith at December 31, 1996. This account payable was paid in full in 1997. The Company also had an $23,100 account payable to Lakeland Cable TV at December 31, 1996. This account payable was paid in full in 1997. (3) SUBSEQUENT EVENTS On December 24, 1997, the Company sold all of its DBS rights to Golden Sky Systems, Inc. F-217 345 TRIANGLE COMMUNICATION SYSTEM, INC. HAVRE, MONTANA FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 F-218 346 INDEPENDENT AUDITORS' REPORT The Board of Directors Triangle Communication System, Inc. Havre, Montana We have audited the accompanying balance sheets of Triangle Communication System, Inc. as of December 31, 1997, 1996, and 1995, and the related statements of income, stockholder's equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Triangle Communication System, Inc. at December 31, 1997, 1996, and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. EIDE HELMEKE PLLP March 6, 1998 Sioux Falls, South Dakota F-219 347 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-220 348 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-221 349 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-222 350 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-223 351 TRIANGLE COMMUNICATION SYSTEM, INC. HAVRE, MONTANA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996, AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Triangle Communication System, Inc. is a rural telecommunications provider, whose purpose is to engage in the business of transmitting television impulses, and installing and maintaining television equipment. Triangle Communication System, Inc. is a wholly owned subsidiary of Triangle Telephone Cooperative Association, Inc. which was incorporated under Montana state statute in 1980. The company has four areas, of primary interest which include cable television operations, rural television programming service for large satellite dish owners, and a Direct Broadcast Satellite (DBS) franchise, which allows the company to receive a commission from all DBS programming sold to rural customers located throughout their franchise area. The company also receives commissions for the sales and service of cellular phones for Commnet Cellular. Property and Equipment -- These assets are stated at cost. The cost of additions to plant includes contracted work, direct labor and materials, and allocable overheads. When units of property are retired, sold, or otherwise disposed of in the ordinary of business, their average book cost less net salvage is charged to accumulated depreciation. Repairs and the replacement and renewal of items determined to be of less than units of property are charged to maintenance. Depreciation and Amortization -- Depreciation and amortization is computed using the straight-line method based upon the estimated useful lives of the various classes of property. Such provisions as a percentage of the average balance of plant in service were as follows:
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-224 352 TRIANGLE COMMUNICATION SYSTEM, INC. HAVRE, MONTANA NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- INVESTMENT IN MARKETABLE EQUITY SECURITY The cost and fair values of this marketable equity security available-for-sale at December 31, 1997, 1996, and 1995, were as follows:
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-225 353 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-226 354 TRIANGLE COMMUNICATION SYSTEM, INC. HAVRE, MONTANA NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Electric Cooperative, Inc. under this agreement in 1997 were approximately $157,000. At December 31, 1997, 1996, and 1995, Triangle Communication System, Inc. owed Hill County Electric Cooperative, Inc. $11,772, $14,935, and $11,691, respectively. The maintenance agreement may be terminated by either party by giving a six month notice in writing to the other party. NOTE 8 -- SUBSEQUENT EVENT In January 1998 the company entered into an agreement to sell its Direct Broadcast System (DBS) franchise rights to Golden Sky Systems, Inc. The sale for approximately $9.3 million will yield a net gain of approximately $8.6 million to the company in 1998. F-227 355 DIRECT BROADCAST SATELLITE (A SEGMENT OF NEMONT COMMUNICATIONS INC.) FINANCIAL STATEMENTS DECEMBER 31, 1997 F-228 356 INDEPENDENT AUDITORS' REPORT The Board of Directors We have audited the accompanying balance sheets of Direct Broadcast Satellite (the Segment), a segment of Nemont Communications Inc. (NCI), as of December 31, 1997, and the related statements of operations, segment equity, and cash flows for the year then ended. The financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Broadcast Satellite at December 31, 1997, and the results of its operations and its cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. CHMS, P.C. Certified Public Accountants Sidney, Montana July 31, 1998 F-229 357 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-230 358 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-231 359 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-232 360 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-233 361 DIRECT BROADCAST SATELLITE. (A SEGMENT OF NEMONT COMMUNICATIONS INC.) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Direct Broadcast Satellite (the Segment) is a segment of Nemont Communications, Inc. (the Company). The Company is a wholly-owned subsidiary of Nemont Telephone Cooperative (the Parent). The Segment was formed in 1994 for the purpose of acquiring, owning and operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communication Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for portions of four counties in northeastern Montana. The financial statements presented represent the financial position and operations of the Segment, which operates as part of the Company. Accordingly, the Company funds the operations of the Segment. Were the Segment an independent entity, these funds would have to be obtained from other sources. Presentation The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenue represents subscriber advances billings and is deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. The Company periodically offers rebates and coupons to customers, principally in connection with prepayment plans, rebates are recorded when they are utilized. Inventory Inventory is stated at the lower of average cost or market and consists entirely of satellite receivers, dishes and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Segment to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Fair value of financial instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. F-234 362 DIRECT BROADCAST SATELLITE. (A SEGMENT OF NEMONT COMMUNICATIONS INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Intangible The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Intangible assets also include a one-time membership fee paid to the NRTC, which is also being amortized on a straight-line basis over ten years. Long-lived Asset Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Income Taxes The Segment's operating results are consolidated with the Parent's operations for tax filing purposes. No income tax benefit has been provided in the accompanying statements of operations as such benefits are not recoverable from the Parent. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. NOTE B -- ACCOUNTS RECEIVABLE Accounts receivable consist of amounts due from subscribers for monthly programming fees. NOTE C -- NRTC PATRONAGE CAPITAL The NRTC declares and the Segment receives a yearly patronage dividend based on the NRTC's profitability. Of the total dividend, 20% is received in cash and 80% is distributed in the form of NRTC patronage capital certificates, which will be redeemed in cash at a future date at the discretion of the NRTC. The Segment has recorded an asset for the noncash portion of the patronage dividend. NOTE D -- INTANGIBLE ASSETS 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-235 363 DIRECT BROADCAST SATELLITE. (A SEGMENT OF NEMONT COMMUNICATIONS INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- NOTES PAYABLE Non-interest bearing notes with associated companies are as follows: 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-236 364 DBS SEGMENT OF CUMBY CELLULAR, INC. CUMBY, TEXAS FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION AS OF DECEMBER 31, 1997 WITH INDEPENDENT AUDITOR'S REPORT F-237 365 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of DBS Segment of Cumby Cellular, Inc. We have audited the accompanying balance sheet of DBS Segment of Cumby Cellular, Inc. (the Segment) as of December 31, 1997 and the related statement of income, segment equity, and cash flows for the year then ended. These financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DBS Segment of Cumby Cellular, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 9 to the financial statements, on June 10, 1998, the Segment signed a letter of intent to transfer its DirecTV Distribution Business and to sell substantially all of its assets and operations to a third party. Curtis Blakely & Co., P.C. Longview, Texas February 3, 1998 (except for Notes 8 and 9 as to which the date is July 23, 1998) F-238 366 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-239 367 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-240 368 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-241 369 DBS SEGMENT OF CUMBY CELLULAR, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Nature of Operations DBS Segment Cellular, Inc. (the Segment) is a Segment of Cumby Cellular, Inc. (CCI). CCI is a wholly owned subsidiary of Cumby Telephone Cooperative, Inc. (the Company). The Segment was formed for the purpose of operating direct broadcast satellite (DBS) television systems purchased by the Company. The Company is an affiliated member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for two counties in northeast Texas. The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of CCI and have been prepared to present the Segment's financial position, results of operations, and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists of satellite receivers, dishes, and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Segment to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Income Taxes The Segment's operating results are consolidated with CCI's for tax filing purposes. An income tax benefit has been provided in the accompanying statement of operations for taxes recoverable from CCI. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. F-242 370 DBS SEGMENT OF CUMBY CELLULAR, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- ACCOUNTS RECEIVABLE: Accounts receivable consists of amounts due from subscribers for monthly programming fees and for sales of satellite television equipment which have been delivered but not paid for. Accounts receivable as of December 31, 1997 are as follows: 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-243 371 DBS SEGMENT OF CUMBY CELLULAR, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) commencement of DBS operations in mid-1993. The franchise rights and debt were transferred by the Company to the Segment in 1993. The Company also allocates certain salary, benefits and overhead costs associated with operating the Segment to the Segment's expense accounts. These allocated costs totaled $100,810 for 1997. The Segment provided an income tax benefit to the Company of $29,613 in 1997. All other expenses are paid directly from the cash accounts of the Segment. Intercompany assets and liabilities included in the Segment's December 31, 1997 balance sheet are as follows: 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-244 372 DBS SEGMENT OF CUMBY CELLULAR, INC. CUMBY TEXAS FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1997 (UNAUDITED) F-245 373 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-246 374 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-247 375 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-248 376 DBS SEGMENT OF CUMBY CELLULAR, INC. SELECTED INFORMATION JUNE 30, 1998 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Nature of Operations DBS Segment of Cumby Cellular, Inc. (the Segment) is a Segment of Cumby Cellular, Inc. (CCI). CCI is a wholly owned subsidiary of Cumby Telephone Cooperative, Inc. (the Company). The Segment was formed for the purpose of operating direct broadcast satellite (DBS) television systems purchased by the Company. The Company is an affiliated associate member of the National Rural Telecommunications Cooperation (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. Hughes controls the satellites that provide programming for DirecTV. At June 30, 1998, the Company had the operating rights for two counties In northeast Texas. The Segment is not a separate subsidiary of the Company nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of CCI and have been prepared to present the Segment's financial position, results of operations, and cash flows on a stand-alone basis. Accordingly, the financial statements Include certain costs and expenses which have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Equipment sales are recognized as revenue when the equipment is delivered to the customer. Inventory Inventory is stated at the lower of average cost or market and consists of satellite receivers, dishes, and accessories. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Segment to make a number of estimates and assumptions which affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. F-249 377 DBS SEGMENT OF CUMBY CELLULAR, INC. SELECTED INFORMATION -- (CONTINUED) Income Taxes The Segment's operating results are consolidated with CCI's for tax filing purposes. An income tax (expense) benefit has been provided in the accompanying statement of operations for taxes (owed) recoverable (to) from CCI. There are no significant differences between book and tax basis which would result in deferred tax assets or liabilities. NOTE 2 -- SUBSEQUENT EVENTS: On June 10, 1998, the Company signed a letter of intent to sell substantially all of the Segment's assets to a third party. F-250 378 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) PINE GROVE, CALIFORNIA INDEPENDENT AUDITOR'S REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 1997 F-251 379 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Volcano Vision, Inc. We have audited the accompanying balance sheet of Direct Broadcast Satellite (the Segment), a segment of Volcano Vision, Inc., as of December 31, 1997, and the related statements of income, segment deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Segment's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Broadcast Satellite as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. MOSS ADAMS LLP Stockton, California July 24, 1998 F-252 380 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-253 381 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-254 382 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-255 383 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-256 384 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations -- Direct Broadcast Satellite (the Segment) is a segment of Volcano Vision, Inc. (the Company). The Company is a wholly-owned subsidiary of Volcano Communications Company (the Parent). The Segment was formed in August 1994 for the purpose of operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for five counties in California and four counties in Nevada. The financial statements presented represent the financial position and operations of the Segment, which operates as part of the Company. Presentation -- The Segment is not a separate subsidiary of the Company, nor has it been operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations, and cash flows on a stand-alone basis. Accordingly, the financial statements include certain costs and expenses that have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition -- Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billing and are deferred until the service is provided. Equipment and installation sales and related costs are recognized when the equipment is delivered to the customer. Inventory -- Inventory is stated at the lower of average cost or market and consists of satellite receivers, dishes, and accessories. Accounts Receivable -- Accounts receivable consist primarily of amounts due from subscribers for monthly programming and equipment lease billings. Customer Billing and Digital Satellite TV (DSTV) Services -- The National Rural Telecommunications Cooperative (NRTC), under contractual arrangements with the Company, performs the billing and national marketing functions for the DSTV service provided to customers. The sales revenue and the customer receivables for the DSTV services, as reflected in the financial statements, are recorded from the monthly billing reports provided by NRTC. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the satellites providing DBS services. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Fair Value of Financial Instruments -- As a result of their short-term nature, financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value. Long-lived Assets -- Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount F-257 385 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by that asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. Property and Equipment -- Property and equipment is recorded at cost and is depreciated over the estimated useful lives using the straight-line method. Estimated useful lives range from 5 to 32 years. Income taxes -- The Segment's operating results are included in the Company's operations and consolidated with the Parent's return for tax filing purposes. The Segment is not directly subject to income taxes, as it is operated as a segment of the Company. The Company did not allocate tax expense to the Segment and, accordingly, no provision for income taxes has been made. NOTE 2 -- LEASING ARRANGEMENT FOR SUBSCRIBER EQUIPMENT In addition to selling satellite television equipment, the Segment also leases the equipment to customers at fixed monthly rental charges. These leases are month-to-month without a minimum lease term in which the customer may return the equipment at any time. These leases qualify as operating leases and, accordingly, the leased units are either purchased direct or transferred from the Segment's inventory of existing units at average cost and included in property and equipment at cost. Leased units are depreciated on a straight-line basis over a five-year period. Rental income is recognized in the month earned. The carrying amount of leased equipment included in property and equipment at December 31, 1997, is as follows:
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-258 386 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4 -- RELATED-PARTY TRANSACTIONS The Segment is party to various intercompany transactions with the Parent and one of its subsidiaries, The Volcano Telephone Company, for payroll-related charges and administrative expenses. Accordingly, the financial statements include the following intercompany liabilities at December 31, 1997:
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-259 387 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) PINE GROVE, CALIFORNIA FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) F-260 388 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-261 389 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-262 390 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-263 391 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
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-264 392 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) NOTES TO UNAUDITED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the changes in financial position, results of operations, and cash flows for the interim periods reported. The results of operations for the nine months ended September 30, 1998 and 1997, are not necessarily indicative of the results to be expected for the full year. NOTE 2 -- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Operations -- Direct Broadcast Satellite (the Segment) is a segment of Volcano Vision, Inc. (the Company). The Company is a wholly-owned subsidiary of Volcano Communications Company (the Parent). The Segment was formed in August 1994 for the purpose of operating direct broadcast satellite (DBS) television systems. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of Direct satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for five counties in California and four counties in Nevada. The financial statements presented represent the financial position and operations of the Segment, which operates as part of the Company. Presentation -- The Segment is not a separate subsidiary of the Company, nor has it been of operated as a separate entity. The financial statements presented herein have been derived from the records of the Company and have been prepared to present the Segment's financial position, results of operations, and cash flows on a stand-alone basis. Accordingly, the financial statements include certain cost and expenses that have been allocated to the Segment by the Company. Such allocated expenses may or may not be indicative of what such expenses would have been had the Segment been operated as a separate entity. Revenue Recognition -- Programming revenue is recognized in the month the service is provided to the subscriber. Unearned revenues represent subscriber advance billing and are deferred until the service is provided. Equipment and installation sales and related costs are recognized when the equipment is delivered to the customer. Inventory -- Inventory is stated at the lower of average cost or market and consists of satellite receivers, dishes, and accessories. Accounts Receivable -- Accounts receivable consist primarily of amounts due from subscribers for monthly programming and equipment lease billings. Customer Billing and Digital Satellite TV (DSTV) Services -- The National Rural Telecommunications Cooperative (NRTC), under contractual arrangements with the Company, performs the billing and national marketing functions for the DSTV services provided to customers. The sales revenue and the customer receivables for the DSTV services, as reflected in the financial statements, are recorded from the monthly billing reports provided by NRTC. F-265 393 DIRECT BROADCAST SATELLITE (A SEGMENT OF VOLCANO VISION, INC.) NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED) Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the satellites providing DBS services. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Fair Value of Financial Instruments -- As a result of their short-term nature, financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value. Long-lived Assets -- Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by that asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Property and Equipment -- Property and equipment is recorded at cost and is depreciated over the estimated useful lives using the straight-line method. Estimated useful lives range from 5 to 32 years. Income taxes -- The Segment's operating results are included in the Company's operations and consolidated with the Parent's return for tax filing purposes. The Segment it is not directly subject to income taxes, as it is operated as a segment of the Company. The Company did not allocate tax expense to the Segment and, accordingly, no provision for income taxes has been made. NOTE 3 -- SUBSEQUENT EVENTS On July 10, 1998, the Company entered into an agreement to sell its franchise rights and related DBS assets and liabilities to Golden Sky Systems, The acquisition is expected to close no later than February 27, 1999. F-266 394 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS FINANCIAL STATEMENTS DECEMBER 31, 1997 F-267 395 INDEPENDENT AUDITORS' REPORT The Board of Directors Western Montana DBS, Inc. dba Rocky Mountain DBS: We have audited the accompanying balance sheet of Western Montana DBS, Inc. dba Rocky Mountain DBS as of December 31, 1997, and the related statements of income, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Montana DBS, Inc. dba Rocky Mountain DBS as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. LOUCKS & GLASSLEY, PLLP June 19, 1998 Great Falls, Montana F-268 396 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-269 397 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-270 398 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-271 399 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-272 400 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed in June 1993 for the purpose of acquiring and operating direct broadcast satellite television operating rights. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of DirecTV service within the contract area. In 1994, Hughes launched the satellites that provide programming for DirecTV. At December 31, 1997, the Company had the operating rights for five counties in Montana and three counties in Idaho. The operating rights for three counties in Colorado were sold in 1997 (Note 2). Revenue Recognition Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Coupons issued by NRTC may be used, with some restrictions, to pay a portion of a customer's account receivable. No provision is made for the subsequent use of these coupons. Inventories Inventories are stated at the lower of average cost or market and consist of receivers, satellite dishes, and satellite TV accessories. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. F-273 401 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes Effective January 1, 1995, the Company elected to be taxed as a Subchapter S Corporation. As such, any income tax is payable by the shareholders and not the Company, therefore there is no income tax expense recorded. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with and original maturity of three months or less to be cash equivalents. There were no cash equivalents at December 31, 1997. Major Suppliers/Economic Dependency The Company's sole supplier is the NRTC. In addition, NRTC provides all computer services relative to customer service, accounts receivable billing, and the determination of unearned revenue. Property, Plant and Equipment Property, plant and equipment consists principally of office equipment, computer equipment and a vehicle. The assets are being depreciated over five to seven years using accelerated depreciation methods. Depreciation expense for the year ended December 31, 1997 is $9,475. Marketing and Advertising Advertising costs are charged to expense as incurred. The Company often subsidizes the cost of equipment for new subscribers by providing such equipment at a sales price below the Company's cost. The Company records the cost of the equipment up to the amount of the sales price to the subscriber. Any excess cost over sales price is recorded in sales and marketing expense. NOTE 2 -- GAIN ON SALE OF COLORADO FRANCHISE TERRITORIES In May of 1997, the Company contracted to sell its Colorado subscribers to Golden Sky Systems, Inc. for $4,700,000. The Company estimates these customers comprise some 21% of the customer base and account for some 31% of total subscriber revenues ($402,000 from January 1, 1997, to May 1, 1997). Golden Sky purchased the accounts receivable for the Colorado subscribers as well as assuming the unearned revenue liability for those subscribers. Since the unearned revenues exceeded the accounts receivable, there was an effective increase in purchase price over the amount paid in cash. The Company had no other assets related to the Colorado operations. NOTE 3 -- ACCOUNTS RECEIVABLE Trade receivables consist of amounts due from subscribers for monthly programming fees. These unsecured receivables arise solely from customers in the franchise territories listed in Note 1. NOTE 4 -- CONCENTRATION OF CREDIT RISK The Company maintains cash balances at various banks. Cash accounts at the banks are insured by the FDIC for up to $100,000. Amounts in excess of the insured limits were approximately $342,012 at December 31, 1997. F-274 402 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- NRTC PATRONAGE CAPITAL The Company is a non-voting affiliate of NRTC and receives annual patronage capital credits which are recorded as income. These cumulative capital credits are not marketable and the value is dependent on the future financial position of NRTC. NOTE 6 -- COMMITMENTS AND CONTINGENCIES The Company occupies its offices on a month to month to month rental arrangement. Rent expense was $9,923. A shareholder has sued the Company, claiming a finders fee on the sale of the Colorado franchise territories to Golden Sky Systems, Inc. Management is vigorously contesting this action both as to liability and damages. No provision has been made in the financial statement for this claim. NOTE 7 -- SUBSEQUENT EVENT The Company has signed a letter of intent to be acquired by Golden Sky Systems, Inc. Company shareholders will receive both cash and shares in Golden Sky Holdings, Inc. in this transaction. F-275 403 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS FINANCIAL STATEMENTS SEPTEMBER 30, 1998 AND 1997 (UNAUDITED) F-276 404 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-277 405 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-278 406 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-279 407 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-280 408 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS SELECTED INFORMATION SEPTEMBER 30, 1998 AND 1997 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations -- Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed in June 1993 for the purpose of acquiring and operating direct broadcast satellite television operating rights. The Company is an affiliated associate member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing rights for distribution of DirecTV satellite television programming in the United States. The marketing rights give the owner exclusive rights to distribution of Direct service within the contract area. In 1994, Hughes launched the satellites that provided programming for DirecTV. At December 31, 1997, the Company had the operating rights for five counties in Montana and three counties in Idaho. The operating rights for three counties in Colorado were sold in 1997. Revenue Recognition -- Revenues are earned for monthly direct broadcast satellite services which are billed to subscribers in advance. Subscribers may elect to prepay their service charges for one or more months. Revenue is recognized in the month the service is provided to the subscriber. Subscriber advance billings represent unearned revenues and are deferred until the service is provided. Coupons issued by NRTC may be used, with some restrictions, to pay a portion of a customer's account receivable. No provision is made for the subsequent use of these coupons. Use of Estimates -- The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Fair Value of Financial Instruments -- Financial instruments consisting of receivables and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. Intangible Assets -- The cost of acquiring the rights to provide DirecTV satellite services are capitalized as intangible assets and are being amortized on a straight-line basis over ten years, which is the expected useful life of the revenue stream of those services. Income Taxes -- Effective January 1, 1995, the Company elected to be taxed as a Subchapter S Corporation. As such, any income tax is payable by the shareholders and not the Company, therefore there is no income tax expense recorded. F-281 409 WESTERN MONTANA DBS, INC. dba ROCKY MOUNTAIN DBS SELECTED INFORMATION -- (CONTINUED) Cash and Cash Equivalents -- For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with and original maturity of three months or less to be cash equivalents. There were no cash equivalents at September 30, 1998 or 1997. Major Suppliers/Economic Dependency -- The Company's sole supplier is the NRTC. In addition, NRTC provides all computer services relative to customer service, accounts receivable billing, and the determination of unearned revenue. Discontinued Operations -- In May of 1997, the Company sold its Colorado subscribers to Golden Sky Systems, Inc. for $4,700,000. The Company estimates these customers comprise some 21% of the customer base and accounted for some 31% of total subscriber revenues ($402,000 from January 1, 1997, to May 1, 1997). Subsequent Event -- On October 2, 1998, the Company was acquired by Golden Sky Systems, Inc. Company shareholders will receive both cash and shares in Golden Sky Holdings, Inc. in this transaction. F-282 410 ================================================================================ DEALER PROSPECTUS DELIVERY OBLIGATION UNTIL , 1999 ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS OBLIGATION IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. --------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL. IF ANY PERSON DOES GIVE SUCH INFORMATION OR MAKES SUCH A REPRESENTATION, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY US. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH TOGETHER CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NEW NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------- THE EXCHANGE AGENT FOR THIS EXCHANGE OFFER IS UNITED STATES TRUST COMPANY OF NEW YORK AND MAY BE CONTACTED AS FOLLOWS: BY OVERNIGHT COURIER AND BY HAND DELIVERY AFTER 4:30 PM ON EXPIRATION DATE: UNITED STATES TRUST COMPANY OF NEW YORK 770 BROADWAY, 13TH FLOOR ATTN: CORPORATE TRUST SERVICES NEW YORK, NEW YORK 10003 BY HAND DELIVERY TO 4:30 PM: UNITED STATES TRUST COMPANY OF NEW YORK 111 BROADWAY, LOWER LEVEL ATTN: CORPORATE TRUST WINDOW NEW YORK, NEW YORK 10006 BY REGISTERED OR CERTIFIED MAIL: UNITED STATES TRUST COMPANY OF NEW YORK P.O. BOX 844, COOPER STATION ATTN: CORPORATE TRUST SERVICES NEW YORK, NEW YORK 10276-0844 ================================================================================ ================================================================================ [GOLDEN SKY LOGO] GOLDEN SKY DBS, INC. OFFER TO EXCHANGE ITS 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES B, FOR ANY AND ALL OF ITS OUTSTANDING 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A --------------------------- PROSPECTUS --------------------------- , 1999 ================================================================================ 411 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware ("DGCL") empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. A corporation may indemnify such person against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses (including attorneys' fees) which he actually and reasonably incurred in connection therewith. The indemnification provided is not deemed to be exclusive of any other rights to which an officer or director may be entitled under any corporation's by-law, agreement, vote or otherwise. In accordance with Section 145 of the DGCL, the registrant has adopted a by-law that provides that, to the fullest extent permitted by DGCL, the registrant shall indemnify any person serving as a director or officer of the registrant and every such director or officer serving at the request of the registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for expenses incurred in the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative. Under Section 145 of the DGCL and the registrant's by-laws, such indemnification shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The registrant has purchased and maintains insurance to protect persons entitled to indemnification pursuant to its by-laws and the DGCL against expenses, judgments, fines and amounts paid in settlement, to the fullest extent permitted by the DGCL. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
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).*
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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).*
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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).*
II-3 414
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 -- Employment Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski (incorporated by reference to Exhibit 10.8 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.15 -- Employment Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.10 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.16 -- Non-Competition Agreement between Golden Sky Systems, Inc. and Rodney A. Weary (incorporated by reference to Exhibit 10.11 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.17 -- Non-Competition Agreement, between Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated by reference to Exhibit 10.12 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.18 -- Non-Competition Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.13 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.19 -- Form of Director Indemnification Agreement, dated February 12, 1997, between Golden Sky Holdings, Inc. and each of the members of Golden Sky Holdings' Board of Directors (incorporated by reference to Exhibit 10.14 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.20 -- Confidentiality and Proprietary Rights Agreements, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.15 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.21 -- Exchange Agency Agreement, dated as of November 24, 1998, between the registrant and State Street Bank and Trust Company of Missouri, N.A., as Exchange Agent (incorporated by reference to Exhibit 10.16 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.22 -- First Amendment to Amended and Restated Credit Agreement, dated as of February 10, 1999, among Golden Sky Holdings, Inc., the registrant, various banks, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent and General Electric Capital Corporation, as Documentation Agent (incorporated by reference to Exhibit 10.17 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.23 -- Office Building Lease, dated January 27, 1999, between Belletower Partners, L.L.C. and the registrant (incorporated by reference to Exhibit 10.18 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 12.1 -- Statements re Computation of Ratios. 21.1 -- Subsidiaries of the registrant.
II-4 415
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (included in their opinion filed as Exhibit 5.1). 23.2 -- Consent of KPMG Peat Marwick LLP. 23.3 -- Consent of Eide Bailly LLP (formerly known as Eide Helmeke PLLP). 23.4 -- Consent of Loucks & Glassley, pllp. 23.5 -- Consent of Bolinger, Segars, Gilbert & Moss, L.L.P. 23.6 -- Consent of Moss Adams LLP. 23.7 -- Consent of Curtis Blakely & Co., P.C. 23.8 -- Consent of CHMS P.C. 23.9 -- Consent of Anderson & Company. 23.10 -- Consent of Olsen Thielen & Co., LTD 23.11 -- Consent of Summers, McNea & Company, P.C. 24.1 -- Power of Attorney of the members of the Board of Directors of Golden Sky DBS, Inc. (included in the signature pages). 25.1 -- Statement on Form T-1 of Eligibility of Trustee. 27.1 -- Financial Data Schedule. 99.1 -- Form of Letter of Transmittal. 99.2 -- Form of Notice of Guaranteed Delivery. 99.3 -- Stock Purchase Agreement, dated as of February 12, 1997, among Golden Sky Systems, Inc., Rodney A. Weary and the investors named herein (incorporated by reference to Exhibit 99.3 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 99.4 -- Stock Purchase Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Rodney A. Weary, and the investors named therein (incorporated by reference to Exhibit 99.4 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 99.5 -- Stockholders Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc. and the investors and other stockholders named therein. (incorporated by reference to Exhibit 99.5 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).*
- --------------- * Previously filed. (b) Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts (included as Note 12 in the Consolidated Financial Statements of Golden Sky Systems, Inc.) II-5 416 ITEM 22. UNDERTAKINGS The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933: (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered could not exceed that which was registered) and any division from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement: (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) If the registrant is a foreign private issuer, to file a post-effective amendment to the registration statement to include any financial statements required by Rule 3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission II-6 417 such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-7 418 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Kansas City, state of Missouri, on April 16, 1999. GOLDEN SKY DBS, INC. By: /s/ JOHN R. HAGER ---------------------------------- John R. Hager Chief Financial Officer The undersigned directors and officers of Golden Sky DBS, Inc., hereby appoint Rodney A. Weary and John R. Hager, or either of them individually, as attorney-in-fact for the undersigned, with full power of substitution for, and in the name, place and stead of the undersigned, to sign and file with the Securities and Exchange Commission under the Securities Act of 1933, as amended, any and all amendments (including post-effective amendments) and exhibits to this registration statement on Form S-4 and any and all applications and other documents to be filed with the Securities and Exchange Commission pertaining to the registration of the securities covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary or desirable, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RODNEY A. WEARY Chairman of the Board, Chief April 16, 1999 - ----------------------------------------------------- Executive Officer and Director Rodney A. Weary (Principal Executive Officer) /s/ JOHN R. HAGER Chief Financial Officer (Principal April 16, 1999 - ----------------------------------------------------- Financial and Accounting John R. Hager Officer) /s/ ROBERT F. BENBOW Director April 16, 1999 - ----------------------------------------------------- Robert F. Benbow /s/ WILLIAM O. CHARMAN Director April 16, 1999 - ----------------------------------------------------- William O. Charman /s/ WILLIAM P. COLLATOS Director April 16, 1999 - ----------------------------------------------------- William P. Collatos /s/ WILLIAM A. JOHNSTON Director April 16, 1999 - ----------------------------------------------------- William A. Johnston
419
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT B. LIEPOLD Director April 16, 1999 - ----------------------------------------------------- Robert B. Liepold /s/ ERIK M. TORGERSON Director April 16, 1999 - ----------------------------------------------------- Erik M. Torgerson
420 INDEPENDENT AUDITORS' REPORT Board of Directors and Investors Golden Sky DBS, Inc.: The audits referred to in our report dated February 3, 1999 included the related financial statements schedule II, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set fourth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Kansas City, Missouri 421 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).* 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).*
422
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.4 -- Form of 12 3/8% Senior Subordinated Note due 2006, Series B of Golden Sky Systems, Inc., (included as Exhibit A-2 in Exhibit 10.3)(incorporated by reference to Exhibits 4.1 and 4.2 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.5 -- Registration Rights Agreement, dated as of July 31, 1998, by and among Golden Sky Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc Montgomery Securities LLC, as initial purchasers (incorporated by reference to Exhibit 4.3 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.6 -- Escrow Agreement, dated as of July 31, 1998, by and among State Street Bank and Trust Company of Missouri, N.A., as escrow Agent, and State Street Bank and Trust Company of Missouri, N.A., as trustee under the Indenture, and Golden Sky Systems, Inc. (incorporated by reference to Exhibit 4.4 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.7 -- Account Control Agreement, dated as of July 31, 1998, by and among Golden Sky Systems, Inc., State Street Bank and Trust Company of Missouri, N.A., as escrow agent, and State Street Bank and Trust Company, as custodian and securities intermediary (incorporated by reference to Exhibit 4.5 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.8 -- Guarantee of Argos Support Services Company, dated July 31, 1998 (incorporated by reference to Exhibit 4.6 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.9 -- Guaranty of PrimeWatch, Inc., dated July 31, 1998 (incorporated by reference to Exhibit 4.7 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 33-64367) which became effective on March 22, 1999).* 10.10 -- Amended and Restated Credit Agreement, dated as of July 7, 1997, amended and restated as of May 8, 1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.'s, various banks, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent, and General Electric Capital Corporation, as Documentation Agent (incorporated by reference to Exhibit 10.2 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.11 -- Form of NRTC/Member Agreement for Marketing and Distribution of DBS Services, as amended (incorporated by reference to Exhibit 10.3 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.12 -- Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Rodney A. Weary (incorporated by reference to Exhibit 10.6 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.13 -- Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated by reference to Exhibit 10.7 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).*
423
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 -- Employment Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski (incorporated by reference to Exhibit 10.8 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.15 -- Employment Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.10 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.16 -- Non-Competition Agreement between Golden Sky Systems, Inc. and Rodney A. Weary (incorporated by reference to Exhibit 10.11 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.17 -- Non-Competition Agreement, between Golden Sky Systems, Inc. and Jo Ellen Linn (incorporated by reference to Exhibit 10.12 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.18 -- Non-Competition Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.13 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.19 -- Form of Director Indemnification Agreement, dated February 12, 1997, between Golden Sky Holdings, Inc. and each of the members of Golden Sky Holdings' Board of Directors (incorporated by reference to Exhibit 10.14 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.20 -- Confidentiality and Proprietary Rights Agreements, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager (incorporated by reference to Exhibit 10.15 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.21 -- Exchange Agency Agreement, dated as of November 24, 1998, between the registrant and State Street Bank and Trust Company of Missouri, N.A., as Exchange Agent (incorporated by reference to Exhibit 10.16 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.22 -- First Amendment to Amended and Restated Credit Agreement, dated as of February 10, 1999, among Golden Sky Holdings, Inc., the registrant, various banks, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent and General Electric Capital Corporation, as Documentation Agent (incorporated by reference to Exhibit 10.17 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 10.23 -- Office Building Lease, dated January 27, 1999, between Belletower Partners, L.L.C. and the registrant (incorporated by reference to Exhibit 10.18 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 12.1 -- Statements re Computation of Ratios. 21.1 -- Subsidiaries of the registrant. 23.1 -- Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (included in their opinion filed as Exhibit 5.1). 23.2 -- Consent of KPMG Peat Marwick LLP. 23.3 -- Consent of Eide Bailly LLP (formerly known as Eide Helmeke PLLP).
424
EXHIBIT NUMBER DESCRIPTION ------- ----------- 23.4 -- Consent of Loucks & Glassley, pllp. 23.5 -- Consent of Bolinger, Segars, Gilbert & Moss, L.L.P. 23.6 -- Consent of Moss Adams LLP. 23.7 -- Consent of Curtis Blakely & Co., P.C. 23.8 -- Consent of CHMS P.C. 23.9 -- Consent of Anderson & Company. 23.10 -- Consent of Olsen Thielen & Co., LTD 23.11 -- Consent of Summers, McNea & Company, P.C. 24.1 -- Power of Attorney of the members of the Board of Directors of Golden Sky DBS, Inc. (included in the signature pages). 25.1 -- Statement on Form T-1 of Eligibility of Trustee. 27.1 -- Financial Data Schedule. 99.1 -- Form of Letter of Transmittal. 99.2 -- Form of Notice of Guaranteed Delivery. 99.3 -- Stock Purchase Agreement, dated as of February 12, 1997, among Golden Sky Systems, Inc., Rodney A. Weary and the investors named herein (incorporated by reference to Exhibit 99.3 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 99.4 -- Stock Purchase Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Rodney A. Weary, and the investors named therein (incorporated by reference to Exhibit 99.4 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).* 99.5 -- Stockholders Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc. and the investors and other stockholders named therein. (incorporated by reference to Exhibit 99.5 to Golden Sky Systems, Inc.'s Registration Statement filed on Form S-4 (Commission File No. 333-64367) which became effective on March 22, 1999).*
- --------------- * Previously filed. EX-3.1 2 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF GOLDEN SKY DBS, INC. --------------------- This Certificate of Incorporation has been duly adopted by the GOLDEN SKY DBS, INC. (the "Corporation") in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. FIRST: The name of the Corporation is Golden Sky DBS, Inc. SECOND: The address of the registered office of the Corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is Corporation Service Company. THIRD: The purposes for which the Corporation is formed are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 1,000 shares of the par value of $.01 per share. All such shares shall be of one class and shall be designated Common Stock. 2 FIFTH: The name and mailing address of the sole incorporator of the Corporation are as follows: Carl P. Marcellino 45 Rockefeller Plaza - 11th Floor New York, New York 10111 SIXTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors of the Corporation is expressly authorized and empowered to make, alter or repeal the By-laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any By-law made by the Board of Directors. SEVENTH: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained in this Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article. EIGHTH: No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or (iv) for any transaction 3 from which the director derived an improper personal benefit. If the General Corporation Law is subsequently amended to further eliminate or limit the liability of a director, then a director of the Corporation, in addition to the circumstances in which a director is not personally liable as set forth in the preceding sentence, shall not be liable to the fullest extent permitted by the amended General Corporation Law. For purposes of this Article EIGHTH, "fiduciary duty as a director" shall include any fiduciary duty arising out of serving at the Corporation's request as a director of another corporation, partnership, joint venture or other enterprise, and "personal liability to the Corporation or its stockholders" shall include any liability to such other corporation, partnership, joint venture, trust or other enterprise, and any liability to the Corporation in its capacity as a security holder, joint venturer, partner, beneficiary, creditor or investor of or in any such other corporation, partnership, joint venture, trust or other enterprise. NINTH: Elections of directors need not be by written ballot except to the extent required by the By-laws of the Corporation. IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this Certificate, hereby declaring, certifying and acknowledging under penalties of perjury that the facts herein stated are true and that this Certificate is his act and deed, and accordingly has hereunto set his hand, as of the 2nd day of February, 1999. /s/ CARL P. MARCELLINO ----------------------------- Carl P. Marcellino Sole Incorporator EX-3.2 3 BY-LAWS ADOPTED 2/2/99 1 EXHIBIT 3.2 =============================================================================== BY-LAWS OF GOLDEN SKY DBS, INC. ------------ Incorporated under the Laws of the State of Delaware ------------ Adopted as of February 2, 1999 =============================================================================== 2 TABLE OF CONTENTS
Page ---- ARTICLE I Offices............................................. 1 ARTICLE II Meetings of Stockholders............................ 1 Section 1 Place of Meetings........................................ 1 Section 2 Annual Meetings.......................................... 1 Section 3 Special Meetings......................................... 1 Section 4 Notice of Meetings....................................... 2 Section 5 List of Stockholders..................................... 2 Section 6 Quorum................................................... 2 Section 7 Voting................................................... 2 Section 8 Proxies.................................................. 3 Section 9 Action Without a Meeting................................. 3 ARTICLE III Board of Directors.................................. 3 Section 1 Powers................................................... 3 Section 2 Election and Term........................................ 3 Section 3 Number................................................... 3 Section 4 Quorum and Manner of Acting.............................. 4 Section 5 Organization Meeting..................................... 4 Section 6 Regular Meetings......................................... 4 Section 7 Special Meetings; Notice................................. 4 Section 8 Removal of Directors..................................... 4 Section 9 Resignations............................................. 5 Section 10 Vacancies................................................ 5 Section 11 Compensation of Directors................................ 5 Section 12 Action Without a Meeting................................. 5 Section 13 Telephonic Participation in Meetings..................... 5 ARTICLE IV Officers............................................ 5 Section 1 Principal Officers....................................... 5 Section 2 Election and Term of Office.............................. 6
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Page ---- Section 3 Other Officers........................................... 6 Section 4 Removal.................................................. 6 Section 5 Resignations............................................. 6 Section 6 Vacancies................................................ 6 Section 7 Chairman of the Board.................................... 6 Section 8 President................................................ 6 Section 9 Vice President........................................... 7 Section 10 Treasurer................................................ 7 Section 11 Secretary................................................ 7 Section 12 Salaries................................................. 7 ARTICLE V Indemnification of Officers and Directors........... 7 Section 1 Right of Indemnification................................. 7 Section 2 Expenses................................................. 7 Section 3 Other Rights of Indemnification.......................... 8 ARTICLE VI Shares and Their Transfer........................... 8 Section 1 Certificate for Stock.................................... 8 Section 2 Stock Certificate Signature.............................. 8 Section 3 Stock Ledger............................................. 8 Section 4 Cancellation............................................. 8 Section 5 Registrations of Transfers of Stock...................... 9 Section 6 Regulations.............................................. 9 Section 7 Lost, Stolen, Destroyed or Mutilated Certificates........ 9 Section 8 Record Dates............................................. 9 ARTICLE VII Miscellaneous Provisions............................ 9 Section 1 Corporate Seal........................................... 9 Section 2 Voting of Stocks Owned by the Corporation................ 10 Section 3 Dividends................................................ 10 ARTICLE VIII Amendments.......................................... 10
ii 4 BY-LAWS OF GOLDEN SKY DBS, INC. (a Delaware corporation) ----------- ARTICLE I OFFICES The registered office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle. The Corporation may establish or discontinue, from time to time, such other offices within or without the State of Delaware as may be deemed proper for the conduct of the Corporation's business. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of stockholders shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors, or as shall be specified in the respective notices, or waivers of notice, thereof. Section 2. Annual Meeting. The annual meeting of stockholders for the election of Directors and the transaction of other business shall be held on such date and at such place as may be designated by the Board of Directors. At each annual meeting the stockholders entitled to vote shall elect a Board of Directors and may transact such other proper business as may come before the meeting. Section 3. Special Meetings. A special meeting of the stockholders, or of any class thereof entitled to vote, for any purpose or purposes, may be called at any time by the Chairman of the Board, if any, or the President or by order of the Board of Directors and shall be called by the Secretary upon the written request of stockholders holding of record at least 50% of the outstanding shares of stock of the Corporation entitled to vote at such meeting. Such written request shall state the purpose or purposes for which such meeting is to be called. 5 Section 4. Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, stating the place, date and hour of the meeting shall be given not less than ten days or more than sixty days before the date on which the meeting is to be held to each stockholder of record entitled to vote thereat by delivering a notice thereof to him personally or by mailing such notice in a postage prepaid envelope directed to him at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices intended for him be directed to another address, in which case such notice shall be directed to him at the address designated in such request. Notice shall not be required to be given to any stockholder who shall waive such notice in writing, whether prior to or after such meeting, or who shall attend such meeting in person or by proxy unless such attendance is for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business because the meeting is not lawfully called or convened. Every notice of a special meeting of the stockholders, besides the time and place of the meeting, shall state briefly the objects or purposes thereof. Section 5. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of the stock ledger to prepare and make, at least ten days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in his name. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be kept and produced at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. The original or duplicate ledger shall be the only evidence as to who are the stockholders entitled to examine such list or the books of the Corporation or to vote in person or by proxy at such meeting. Section 6. Quorum. At each meeting of the stockholders, the holders of record of a majority of the issued and outstanding stock of the Corporation entitled to vote at such meeting, present in person or by proxy, shall constitute a quorum for the transaction of business, except where otherwise provided by law, the Certificate of Incorporation or these By-laws. In the absence of a quorum, any officer entitled to preside at, or act as Secretary of, such meeting shall have the power to adjourn the meeting from time to time until a quorum shall be constituted. Section 7. Voting. Every stockholder of record who is entitled to vote shall at every meeting of the stockholders be entitled to one vote for each share of stock held by him on the record date; except, however, that shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall neither be entitled to vote nor counted for quorum purposes. Nothing in this Section shall be construed as limiting the right of the Corporation to vote its own stock held by it in a fiduciary capacity. At all meetings of the stockholders, a 2 6 quorum being present, all matters shall be decided by majority vote of the shares of stock entitled to vote held by stockholders present in person or by proxy, except as otherwise required by law or the Certificate of Incorporation. Unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat or so directed by the chairman of the meeting or required by law, the vote thereat on any question need not be by written ballot. On a vote by written ballot, each ballot shall be signed by the stockholder voting, or in his name by his proxy, if there be such proxy, and shall state the number of shares voted by him and the number of votes to which each share is entitled. Section 8. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy. A proxy acting for any stockholder shall be duly appointed by an instrument in writing subscribed by such stockholder. No proxy shall be valid after the expiration of three years from the date thereof unless the proxy provides for a longer period. Section 9. Action Without a Meeting. Any action required to be taken at any annual or special meeting of stockholders or any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS Section 1. Powers. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Election and Term. Except as otherwise provided by law, Directors shall be elected at the annual meeting of stockholders and shall hold office until the next annual meeting of stockholders and until their successors are elected and qualify, or until they sooner die, resign or are removed. At each annual meeting of stockholders, at which a quorum is present, the persons receiving a plurality of the votes cast shall be the Directors. Acceptance of the office of Director may be expressed orally or in writing, and attendance at the organization meeting shall constitute such acceptance. Section 3. Number. The number of Directors shall be such number as shall be determined from time to time by the Board of Directors, but shall not be less than one nor more than seven and initially shall be five. 3 7 Section 4. Quorum and Manner of Acting. Unless otherwise provided by law, the presence of 50% of the whole Board of Directors shall be necessary to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of the Directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. At all meetings of Directors, a quorum being present, all matters shall be decided by the affirmative vote of a majority of the Directors present, except as otherwise required by law. The Board of Directors may hold its meetings at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine or as shall be specified in the respective notices, or waivers of notice, thereof. Section 5. Organization Meeting. Immediately after each annual meeting of stockholders for the election of Directors the Board of Directors shall meet at the place of the annual meeting of stockholders for the purpose of organization, the election of officers and the transaction of other business. Notice of such meeting need not be given. If such meeting is held at any other time or place, notice thereof must be given as hereinafter provided for special meetings of the Board of Directors, subject to the execution of a waiver of the notice thereof signed by, of the attendance at such meeting of, all Directors who may not have received such notice. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held at such place, within or without the State of Delaware, as shall from time to time be determined by the Board of Directors. After there has been such determination, and notice thereof has been once given to each member of the Board of Directors as hereinafter provided for special meetings, regular meetings may be held without further notice being given. Section 7. Special Meetings; Notice. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board, if any, the President or by a majority of the Directors. Notice of each such meeting shall be mailed to each Director, addressed to him at his residence or usual place of business, at least five days before the date on which the meeting is to be held, or shall be sent to him at such place by telex or facsimile, or be delivered personally or by telephone, not later than the day before the day on which such meeting is to be held. Each such notice shall state the time and place of the meeting and, as may be required, the purposes thereof. Notice of any meeting of the Board of Directors need not be given to any Director if he shall sign a written waiver thereof either before or after the time stated therein for such meeting, or if he shall be present at the meeting. Unless limited by law, the Certificate of Incorporation, these By-laws or the terms of the notice thereof, any and all business may be transacted at any meeting without the notice thereof having specifically identified the matters to be acted upon. Section 8. Removal of Directors. Any Director or the entire Board of Directors may be removed, with or without cause, at any time, by action of the holders of record of the majority of the issued and outstanding stock of the Corporation (a) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (b) by a consent in writing in the manner contemplated in Section 9 of Article II, and the vacancy or vacancies in the Board of Directors caused by any such removal may be filled by action of such a majority at such meeting or at any subsequent meeting or by consent. 4 8 Section 9. Resignations. Any Director of the Corporation may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Vice President or the Secretary of the Corporation. The resignation of any Director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 10. Vacancies. Any newly created directorships and vacancies occurring in the Board by reason of death, resignation, retirement, disqualification or removal, with or without cause, may be filled by the action of the holders of record of the majority of the issued and outstanding stock of the Corporation (a) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (b) by a consent in writing in the manner contemplated in Section 9 of Article II. The Director so chosen, whether selected to fill a vacancy or elected to a new directorship, shall hold office until the next meeting of stockholders at which the election of Directors is in the regular order of business, and until his successor has been elected and qualifies, or until he sooner dies, resigns or is removed. Section 11. Compensation of Directors. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the Board, a specific sum fixed by the Board plus expenses may be allowed for attendance at each regular or special meeting of the Board; provided, however, that nothing herein contained shall be construed to preclude any Director from serving the Corporation or any parent or subsidiary corporation thereof in any other capacity and receiving compensation therefor. Section 12. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a written consent thereto is signed by all members of the Board, and such written consent is filed with the minutes or proceedings of the Board. Section 13. Telephonic Participation in Meetings. Members of the Board of Directors may participate in a meeting of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. ARTICLE IV OFFICERS Section 1. Principal Officers. The Board of Directors shall elect a President, a Secretary and a Treasurer, and may in addition elect a Chairman of the Board, one or more Vice Presidents and such other officers as it deems fit; the President, the Secretary, the Treasurer, the Chairman of the Board (if any) and the Vice Presidents (if any) being the principal officers of the Corporation. One person may hold, and perform the duties of, any two or more of said offices. Section 2. Election and Term of Office. The principal officers of the Corporation shall be elected annually by the Board of Directors at the organization meeting thereof. Each such 5 9 officer shall hold office until his successor shall have been elected and shall qualify, or until his earlier death, resignation or removal. Section 3. Other Officers. In addition, the Board may elect, or the Chairman of the Board, if any, or the President may appoint, such other officers as they deem fit. Any such other officers chosen by the Board of Directors shall be subordinate officers and shall hold office for such period, have such authority and perform such duties as the Board of Directors, the Chairman of the Board, if any, or the President may from time to time determine. Section 4. Removal. Any officer may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at any regular meeting of the Board, or at any special meeting of the Board called for that purpose, at which a quorum is present. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Chairman of the Board, if any, the President, the Secretary of the Board of Directors. Any such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term in the manner prescribed in these By-laws for election or appointment to such office for such term. Section 7. Chairman of the Board. The Chairman of the Board of Directors, if one be elected, shall preside if present at all meetings of the Board of Directors, and he shall have and perform such other duties as from time to time may be assigned to him by the Board of Directors. Section 8. President. The President shall be the chief executive officer of the Corporation and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation. He shall preside at all meetings of the stockholders if present thereat, and in the absence or non-election of the Chairman of the Board of Directors, at all meetings of the Board of Directors and shall have general supervision, direction and control of the business of the Corporation. Except as the Board of Directors shall authorize the execution thereof in some other manner, he shall execute bonds, mortgages, and other contracts on behalf of the Corporation, and shall cause the seal to be affixed to any instrument requiring it and when so affixed the seal shall be attested by the signature of the Secretary or the Treasurer. Section 9. Vice President. Each Vice President, if such be elected, shall have such powers and shall perform such duties as shall be assigned to him by the President or the Board of Directors. Section 10. Treasurer. The Treasurer shall have charge and custody of, and be responsible for, all funds and securities of the Corporation. He shall exhibit at all reasonable times 6 10 his books of account and records to any of the Directors of the Corporation upon application during business hours at the office of the Corporation where such books and records shall be kept; when requested by the Board of Directors, he shall render a statement of the condition of the finances of the Corporation at any meeting of the Board or at the annual meeting of stockholders; he shall receive, and give receipt for, moneys due and payable to the Corporation from any source whatsoever; in general, he shall perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board of Directors, the President or the Board of Directors. The Treasurer shall give such bond, if any, for the faithful discharge of his duties as the Board of Directors may require. Section 11. Secretary. The Secretary, if present, shall act as secretary at all meetings of the Board of Directors and of the stockholders and keep the minutes thereof in a book or books to be provided for that purpose; he shall see that all notices required to be given by the Corporation are duly given and served; he shall have charge of the stock records of the Corporation; he shall see that all reports, statements and other documents required by law are properly kept and filed; and in general he shall perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or the Board of Directors. Section 12. Salaries. The salaries of the principal officers shall be fixed from time to time by the Board of Directors, and the salaries of any other officers may be fixed by the President. ARTICLE V INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 1. Right of Indemnification. Every person now or hereafter serving as a Director or officer of the Corporation and every such Director or officer serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified by the Corporation in accordance with and to the fullest extent permitted by law for the defense of, or in connection with, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. Section 2. Expenses. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of such Director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation as authorized in this Article V. Section 3. Other Rights of Indemnification. The right of indemnification herein provided shall not be deemed exclusive of any other rights to which any such Director or officer may now or hereafter be entitled under any by-law, agreement, vote of stockholders or 7 11 disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE VI SHARES AND THEIR TRANSFER Section 1. Certificate for Stock. Every stockholder of the Corporation shall be entitled to a certificate or certificates, to be in such form as the Board of Directors shall prescribe, certifying the number of shares of the capital stock of the Corporation owned by him. No certificate shall be issued for partly paid shares. Section 2. Stock Certificate Signature. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed by the Chairman of the Board, if any, or the President or any Vice President and by the Secretary or an Assistant Secretary or the Treasurer of the Corporation, and its seal shall be affixed thereto. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or, (2) by a registrar other than the Corporation or its employee, the signatures of such officers of the Corporation may be facsimiles. In case any officer of the Corporation who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. Section 3. Stock Ledger. A record shall be kept by the Secretary or by any other officer, employee or agent designated by the Board of Directors of the name of each person, firm or corporation holding capital stock of the Corporation, the number of shares represented by, and the respective dates of, each certificate for such capital stock, and in case of cancellation of any such certificate, the respective dates of cancellation. Section 4. Cancellation. Every certificate surrendered to the Corporation for exchange or registration of transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except, subject to Section 7 of this Article VI, in cases provided for by applicable law. Section 5. Registrations of Transfers of Stock. Registrations of transfers of shares of the capital stock of the Corporation shall be made on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the Corporation or with a transfer clerk or a transfer agent appointed as in Section 6 of this Article VI provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed 8 12 in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 6. Regulations. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with the Certificate of Incorporation or these By-laws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. It may appoint, or authorize any principal officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. Before any certificates for stock of the Corporation shall be issued in exchange for certificates which shall become mutilated or shall be lost, stolen or destroyed, proper evidence of such loss, theft, mutilation or destruction shall be procured for the Board of Directors, if it so requires. Section 8. Record Dates. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a date as a record date for any such determination of stockholders. Such record date shall not be more than sixty or less than ten days before the date of such meeting, or more than sixty days prior to any other action. ARTICLE VII MISCELLANEOUS PROVISIONS Section 1. Corporate Seal. The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware in the year 1999. The Secretary shall be the custodian of the seal. The Board of Directors may authorize a duplicate seal to be kept and used by any other officer. Section 2. Voting of Stocks Owned by the Corporation. The Board of Directors may authorize any person on behalf of the Corporation to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except the Corporation) in which the Corporation may hold stock. Section 3. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any funds of the 9 13 Corporation available for dividends such sum or sums as the Directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the Board of Directors shall deem conducive to the interests of the Corporation. ARTICLE VIII AMENDMENTS These By-laws of the Corporation may be altered, amended or repealed by the Board of Directors at any regular or special meeting of the Board of Directors or by the affirmative vote of the holders of record of a majority of the issued and outstanding stock of the Corporation (i) present in person or by proxy at a meeting of holders of such stock and entitled to vote thereon or (ii) by a consent in writing in the manner contemplated in Section 9 of Article II, provided, however, that notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting. By-laws, whether made or altered by the stockholders or by the Board of Directors, shall be subject to alteration or repeal by the stockholders as in this Article VIII above provided. 10 EX-4.1 4 INDENTURE DATED 2/2/1999 1 EXHIBIT 4.1 ================================================================================ GOLDEN SKY DBS, INC., as Issuer, and UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee --------------------- INDENTURE Dated as of February 19, 1999 -------------------- $193,100,000 Principal Amount at Maturity 13 1/2% Senior Discount Notes due 2007, Series A 13 1/2% Senior Discount Notes due 2007, Series B ================================================================================ 2
Trust Indenture Indenture Act Section Section - ----------------------- ---------------- Section 310 (a)(1)........................................................... 6.09 (a)(2)........................................................... 6.09 (a)(3)........................................................... Not Applicable (a)(4)........................................................... Not Applicable (b).............................................................. 6.08, 6.10 Section 311 (a).............................................................. 6.07 (b).............................................................. 6.07 (c).............................................................. Not Applicable Section 312 (a).............................................................. 7.01 (b).............................................................. 7.02 (c).............................................................. 7.02 Section 313 (a).............................................................. 7.03 (b).............................................................. 7.03 (c).............................................................. 7.03 (d).............................................................. 7.03 Section 314 (a).............................................................. 7.04, 10.09 (b).............................................................. Not Applicable (c)(1)........................................................... 1.04, 4.04 (c)(2)........................................................... 1.04, 4.04, (c)(3)........................................................... Not Applicable (d).............................................................. Not Applicable (e).............................................................. 1.04 Section 315 (a).............................................................. 6.01(a) (b).............................................................. 6.02 (c).............................................................. 6.01(b) (d).............................................................. 6.01(c) (e).............................................................. 5.14 Section 316 (a) (last sentence) ............................................. 3.14 (a)(1)(A)........................................................ 5.12 (a)(1)(B)........................................................ 5.13 (a)(2)........................................................... Not Applicable (b).............................................................. 5.08 Section 317 (a)(1)........................................................... 5.03 (a)(2)........................................................... 5.04 (b).............................................................. 10.03 Section 318 (a).............................................................. 1.08
- -------------------------- Note: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of this Indenture. 3 TABLE OF CONTENTS
Page ---- PARTIES......................................................................................1 RECITALS.....................................................................................1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions................................................................ 1 Section 1.02. Other Definitions......................................................... 29 Section 1.03. Rules of Construction..................................................... 30 Section 1.04. Form of Documents Delivered to Trustee............................................................. 31 Section 1.05. Acts of Holders........................................................... 31 Section 1.06. Notices, etc., to the Trustee and the Company............................. 32 Section 1.07. Notice to Holders; Waiver................................................. 33 Section 1.08. Conflict with Trust Indenture Act......................................... 33 Section 1.09. Effect of Headings and Table of Contents............................................................... 34 Section 1.10. Successors and Assigns.................................................... 34 Section 1.11. Separability Clause....................................................... 34 Section 1.12. Benefits of Indenture..................................................... 34 Section 1.13. GOVERNING LAW............................................................. 34 Section 1.14. No Recourse Against Others................................................ 34 Section 1.15. Independence of Covenants................................................. 35 Section 1.16. Exhibits.................................................................. 35 Section 1.17. Counterparts.............................................................. 35 Section 1.18. Duplicate Originals....................................................... 35 ARTICLE TWO SECURITY FORMS Section 2.01. Form and Dating........................................................... 35 ARTICLE THREE THE SECURITIES Section 3.01. Title and Terms........................................................... 36 Section 3.02. Registrar and Paying Agent................................................ 37
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Page ---- Section 3.03. Execution and Authentication.............................................. 37 Section 3.04. Temporary Securities...................................................... 40 Section 3.05. Transfer and Exchange..................................................... 40 Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities.......................... 41 Section 3.07. Payment of Interest; Interest Rights Preserved............................ 42 Section 3.08. Persons Deemed Owners..................................................... 43 Section 3.09. Cancellation.............................................................. 44 Section 3.10. Computation of Interest................................................... 44 Section 3.11. Legal Holidays............................................................ 44 Section 3.12. CUSIP Number.............................................................. 45 Section 3.13. Paying Agent To Hold Money in Trust....................................... 45 Section 3.14. Treasury Securities....................................................... 45 Section 3.15. Deposits of Monies........................................................ 46 Section 3.16. Book-Entry Provisions for Global Securities............................................................. 46 Section 3.17. Special Transfer Provisions............................................... 47 ARTICLE FOUR DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance.............. 50 Section 4.02. Defeasance and Discharge.................................................. 51 Section 4.03. Covenant Defeasance....................................................... 51 Section 4.04. Conditions to Defeasance or Covenant Defeasance........................... 52 Section 4.05. Deposited Money and Government Securities To Be Held in Trust; Other Miscellaneous Provisions............................................... 54 Section 4.06. Reinstatement............................................................. 55 ARTICLE FIVE REMEDIES Section 5.01. Events of Default......................................................... 56 Section 5.02. Acceleration of Maturity; Rescission and Annulment........................ 58 Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee........... 59 Section 5.04. Trustee May File Proofs of Claims......................................... 60 Section 5.05. Trustee May Enforce Claims Without Possession of Securities............... 61 Section 5.06. Application of Money Collected............................................ 61
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Page ---- Section 5.07. Limitation on Suits....................................................... 62 Section 5.08. Unconditional Right of Holders To Receive Principal, Premium and Interest............................................................... 63 Section 5.09. Restoration of Rights and Remedies........................................ 63 Section 5.10. Rights and Remedies Cumulative............................................ 63 Section 5.11. Delay or Omission Not Waiver.............................................. 63 Section 5.12. Control by Majority....................................................... 64 Section 5.13. Waiver of Past Defaults................................................... 64 Section 5.14. Undertaking for Costs..................................................... 64 Section 5.15. Waiver of Stay, Extension or Usury Laws................................... 65 Section 5.16. Unconditional Right of Holders To Institute Certain Suits................................................ 65 ARTICLE SIX THE TRUSTEE Section 6.01. Certain Duties and Responsibilities....................................... 66 Section 6.02. Notice of Defaults........................................................ 67 Section 6.03. Certain Rights of Trustee................................................. 67 Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof........................................ 69 Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc........................................... 69 Section 6.06. Money Held in Trust....................................................... 69 Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim........... 70 Section 6.08. Conflicting Interests..................................................... 70 Section 6.09. Corporate Trustee Required; Eligibility............................................................ 71 Section 6.10. Resignation and Removal; Appointment of Successor Trustee................. 71 Section 6.11. Acceptance of Appointment by Successor.............................................................. 73 Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business............................................................... 74 Section 6.13. Trustee's Application for Instructions from the Company....................................................... 74
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Page ---- ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation of Information; Company To Furnish Trustee Names and Addresses of Holders................................................... 75 Section 7.02. Communications of Holders................................................. 76 Section 7.03. Reports by Trustee........................................................ 76 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Section 8.01. Company May Consolidate, etc., Only on Certain Terms...................... 76 Section 8.02. Successor Substituted..................................................... 78 ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders................................. 78 Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders... 79 Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers.............. 81 Section 9.04. Effect of Supplemental Indentures......................................... 81 Section 9.05. Conformity with Trust Indenture Act....................................... 81 Section 9.06. Reference in Securities to Supplemental Indentures................................................ 81 Section 9.07. Record Date............................................................... 82 Section 9.08. Revocation and Effect of Consents......................................... 82 ARTICLE TEN COVENANTS Section 10.01. Payment of Principal, Premium and Interest............................................................... 82 Section 10.02. Maintenance of Office or Agency........................................... 83 Section 10.03. Money for Security Payments To Be Held in Trust........................... 83 Section 10.04. Corporate Existence....................................................... 85
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Page ---- Section 10.05. Payment of Taxes and Other Claims......................................... 85 Section 10.06. Maintenance of Properties................................................. 86 Section 10.07. Insurance................................................................. 86 Section 10.08. Books and Records......................................................... 86 Section 10.09. Reports................................................................... 86 Section 10.10. Change of Control......................................................... 87 Section 10.11. Limitation on Indebtedness of the Company................................. 90 Section 10.12. Limitation on Additional Indebtedness of Subsidiaries of the Company...... 91 Section 10.13. Statement by Officers as to Default....................................... 91 Section 10.14. Limitation on Liens....................................................... 92 Section 10.15. Designation of Unrestricted Subsidiaries.................................. 92 Section 10.16. Limitation on Restricted Payments......................................... 94 Section 10.17. Ownership of Systems...................................................... 97 Section 10.18. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries................................................ 97 Section 10.19. Disposition of Proceeds of Asset Sales.................................... 98 Section 10.20. Limitation on Issuances and Sales of Preferred Equity Interests by Restricted Subsidiaries................................................100 Section 10.21. Limitations on Conduct of Business of the Company and the Restricted Subsidiaries.........................101 Section 10.22. Limitation on Transactions with Affiliates.............................................................101 Section 10.23. Compliance Certificates and Opinions......................................102 ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 11.01. Right of Redemption.......................................................103 Section 11.02. Applicability of Article..................................................103 Section 11.03. Election To Redeem; Notice to Trustee.....................................103 Section 11.04. Selection by Trustee of Securities To Be Redeemed.........................104 Section 11.05. Notice of Redemption......................................................104 Section 11.06. Deposit of Redemption Price...............................................106 Section 11.07. Securities Payable on Redemption Date.....................................106 Section 11.08. Securities Redeemed or Purchased in Part..................................106
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Page ---- ARTICLE TWELVE SATISFACTION AND DISCHARGE Section 12.01. Satisfaction and Discharge of Indenture................................................................107 Section 12.02. Application of Trust Money................................................108
Exhibit A-1 - Form of Initial Security Exhibit A-2 - Form of Exchange Security Exhibit B - Form of Legend for Book-Entry Securities Exhibit C - Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors Exhibit D - Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S -vii- 9 INDENTURE, dated as of February 19, 1999, between Golden Sky DBS, Inc., a corporation incorporated under the laws of the State of Delaware (the "Company"), as issuer, and United States Trust Company of New York, a New York banking corporation, as trustee (the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of 13 1/2% Senior Discount Notes due 2007, Series A, and 13 1/2% Senior Discount Notes due 2007, Series B, to be issued in exchange for the 13 1/2% Senior Discount Notes due 2007, Series A, pursuant to a Registration Rights Agreement (as defined herein), and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Securities (as defined herein), when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of each of the Company and the Trustee in accordance with the terms hereof. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders (as hereinafter defined) of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions. "Accreted Value" as of any date (the "Specified Date") means, with respect to each $1,000 principal amount at maturity of Securities: (i) if the Specified Date is one of the following dates (each a "Semi-Annual Accreted Date"), the amount set forth opposite such date below: 10
-2- ACCRETED SEMI-ANNUAL ACCRETED DATE VALUE -------------------------- ------------- February 19, 1999 518.12 September 1, 1999 555.51 March 1, 2000 593.00 September 1, 2000 633.03 March 1, 2001 675.76 September 1, 2001 721.37 March 1, 2002 770.07 September 1, 2002 822.05 March 1, 2003 877.53 September 1, 2003 936.77 March 1, 2004 1000.00
(ii) if the Specified Date occurs between two Semi-Annual Accreted Dates, the sum of (A) the Accreted Value for the Semi-Annual Accreted Date immediately preceding the Specified Date and (B) an amount equal to the product of (i) the Accreted Value for the immediately following Semi- Annual Accreted Date less the Accreted Value for the immediately preceding Semi-Annual Accreted Date and (ii) a fraction, the numerator of which is the number of days from the immediately preceding Semi-Annual Accreted Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180. "Acquired Indebtedness" means Indebtedness of a Person (a) assumed in connection with an Acquisition from such Person or (b) existing at the time such Person becomes a Restricted Subsidiary or is merged or consolidated with or into the Company or any Restricted Subsidiary. "Acquired Person" means, with respect to any specified Person, any other Person that merges with or into or becomes a Subsidiary of such specified Person. "Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) by the Company or any Restricted Subsidiary to any other Person, or any acquisition or purchase of Equity Interests of any other Person by the Company or any Restricted Subsidiary, in either case pursuant to which such Person shall become a Restricted Subsidiary or shall be consolidated or merged with or into the Company or any Restricted Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary of the assets of any Person which constitute substantially 11 -3- all of an operating unit or line of business of such Person or which is otherwise outside of the ordinary course of business. "Additional Interest" has the meaning provided in the Registration Rights Agreement. "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided, however, that (i) beneficial ownership of 10.0% or more of the voting power of the then outstanding voting securities of a Person shall be deemed to be control and (ii) no individual, other than a director of the Company or an officer of the Company with a policy making function, shall be deemed an Affiliate of the Company or any of the Company's Subsidiaries solely by reason of such individual's employment, position or responsibilities by or with respect to the Company or any of the Company's Subsidiaries. "Asset Sale" means any direct or indirect sale, conveyance, transfer, lease (that has the effect of a disposition) or other disposition (including, without limitation, any merger, consolidation or sale-leaseback transaction) to any Person other than the Company or a Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Equity Interest of any Restricted Subsidiary; (ii) any material license, franchise or other authorization of the Company or any Restricted Subsidiary; (iii) any assets of the Company or any Restricted Subsidiary that constitute substantially all of an operating unit or line of business of the Company or any Restricted Subsidiary; or (iv) any other property or asset of the Company or any Restricted Subsidiary outside of the ordinary course of business (including the receipt of proceeds paid on account of the loss of or damage to any property or asset, except to the extent used to repurchase or repair such property or asset, and awards of compensation for any asset taken by condemnation, eminent domain or similar proceedings). The term "Asset Sale" shall not include (a) any transaction consummated in compliance with Article Eight and the creation of any Lien not prohibited by Section 10.14; provided, however, that any transaction consummated in compliance with Article Eight involving 12 -4- a sale, conveyance, assignment, transfer, lease or other disposal of less than all of the properties or assets of the Company and the Restricted Subsidiaries shall be deemed to be an Asset Sale with respect to the properties or assets of the Company and Restricted Subsidiaries that are not so sold, conveyed, assigned, transferred, leased or otherwise disposed of in such transaction; (b) sales of property or equipment that has become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, as the case may be; and (c) any transaction consummated in compliance with Section 10.15. "Bankruptcy Law" means Title 11, United States Code or any similar federal or state law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or the law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Bankruptcy Order" means any court order made in a proceeding pursuant to or within the meaning of any Bankruptcy Law, containing an adjudication of bankruptcy or insolvency, or providing for liquidation, receivership, winding-up, dissolution, "concordate" or reorganization, or appointing a Custodian of a debtor or of all or any substantial part of a debtor's property, or providing for the staying, arrangement, adjustment or composition of indebtedness or other relief of a debtor. "Board" means the Board of Directors of the Company. "Board of Directors" means (i) in the case of a Person that is a corporation, the board of directors of such Person and (ii) in the case of any other Person, the board of directors, board of managers, management committee or similar governing body of such Person (or in the case of a limited partnership, of such Person's general partner, or in the case of a limited liability company, of such Person's manager), or any authorized committee thereof responsible for the management of the business and affairs of such Person. "Board Resolution" means a copy of a resolution delivered to the Trustee and certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board and to be in full force and effect on the date of such certification. 13 -5- "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York, State of New York are authorized or obligated by law, regulation or executive order to close. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be so required to be capitalized on the balance sheet in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness (with, for purposes of Section 10.19 only, a maturity of 365 days or less) issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof that (provided that the full faith and credit of the United States is pledged in support thereof or such Indebtedness constitutes a general obligation of such country) have maturities of not more than six months from the date of acquisition; (ii) time deposits, certificates of deposit or acceptances (with, for purposes of Section 10.19 only, a maturity of 365 days or less) of any financial institution that is a member of the Federal Reserve System, in each case having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $200.0 million and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Company) organized under the laws of the United States or any State thereof and rated at least "A-1" by S&P or "P-1" by Moody's and in each case maturing not more than six months after the date of acquisition; (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above and entered into with any bank meeting the qualifications specified in clause (ii) above; and (v) money market funds that invest substantially all of their assets in securities described in the preceding clauses (i) through (iv). "Change of Control" is defined to mean the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately 14 -6- or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Equity Interests of the Company; or (b) the Company consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Equity Interests of the Company are converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Equity Interests of the Company are converted into or exchanged for (1) Voting Equity Interests (other than Disqualified Equity Interests) of the surviving or transferee corporation or its parent corporation and/or (2) cash, securities and other property in an amount that could be paid by the Company as a Restricted Payment under this Indenture and (ii) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Equity Interests of the surviving or transferee corporation or its parent corporation, as applicable; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board of Directors then in office; or (d) the approval by stockholders of the Company of any liquidation or dissolution of the Company. "Common Stock" means, with respect to any Person, any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or nonvoting) of, such Person's common stock whether outstanding at the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor person 15 -7- shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its Vice-Chairman, its Chief Executive Officer, its President, its Chief Financial Officer or a Vice President, and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Income Tax Expense" means, with respect to the Company for any period, the provision for federal, state, local and foreign income taxes payable by the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, with respect to the Company for any period, without duplication, the sum of (i) the interest expense of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount; (b) the net cost under Interest Rate Protection Obligations (including any amortization of discounts); (c) the interest portion of any deferred payment obligation; (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; and (e) all capitalized interest and all accrued interest; (ii) the interest component of Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP; and (iii) dividends and distributions in respect of Disqualified Equity Interests actually paid in cash by the Company during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to any period, the net income of the Company and the Restricted Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, adjusted, to the extent included in calculating such net income, by excluding, without duplication, (a) all extraordinary gains or losses and all gains and losses from the sales or other dispositions of assets out of the ordinary course of business (net of taxes, fees and expenses relating to the transaction giving rise thereto) for such period; (b) that portion of such net income derived from or in respect 16 -8- of investments in Persons other than Restricted Subsidiaries, except to the extent actually received in cash by the Company or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (e) of this definition); (c) the portion of such net income (or loss) allocable to minority interests in any Person (other than a Restricted Subsidiary) for such period, except to the extent actually received in cash by the Company or any Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the provisions of clause (e) of this definition); (d) net income (or loss) of any other Person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination; and (e) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time (regardless of any waiver) permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its Equity Interest holders, except, solely for the purposes of Section 10.12 and for determining the amount available under clause (iii) of Section 10.16 for a proposed Restricted Payment constituting an Investment, for any restriction in any agreement or instrument governing Indebtedness outstanding on the Issue Date or Incurred in compliance with this Indenture. "Consolidated Operating Cash Flow" means, with respect to any period, Consolidated Net Income for such period increased (without duplication) by the sum of (a) Consolidated Income Tax Expense for such period to the extent deducted in determining Consolidated Net Income for such period; (b) Consolidated Interest Expense for such period to the extent deducted in determining Consolidated Net Income for such period; (c) all dividends on Preferred Equity Interests to the extent taken into account for computing Consolidated Net Income for that period; and (d) depreciation, amortization and any other non-cash items for such period to the extent deducted in determining Consolidated Net Income for such period (other than any non-cash item that requires the accrual of, or a reserve for, cash charges for any future period) of the Company and the Restricted Subsidiaries, including, without limitation, amortization of capitalized debt issuance costs for such period, all of the foregoing determined on a consolidated basis in accordance with GAAP minus non-cash items to the extent they increase Consolidated Net Income (including the partial or entire reversal of reserves taken in prior periods, except to the extent any such reserves were not permitted to be added back in the calculation of Consolidated Operating Cash Flow for a prior period pursuant to clause (d) above) for such period. 17 -9- "control" means, with respect to any specified Person, the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of Voting Stock, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 114 West 47th Street, Attn: Corporate Business Unit, New York, New York 10036. "Credit Facility" means the Amended and Restated Credit Agreement dated as of July 7, 1997, amended and restated as of May 8, 1998, amended as of February 10, 1999, among Holdings, Systems, the banks party thereto from time to time, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent, and General Electric Capital Corporation, as Documentation Agent, including any deferrals, renewals, extensions, replacements, refinancings or refundings thereof, or amendments, modifications or supplements thereto (including, without limitation, any such deferrals, renewals, extensions, replacements, refinancings, refundings, amendments, modifications or supplements that increase the aggregate amount of commitments or borrowings thereunder or add Subsidiaries of the Company as additional borrower or guarantor thereunder), and any agreements providing therefor, whether by or with the same or any other lender, creditor or group of lenders or creditors, and including related notes, guarantees, security agreements, pledge agreements, mortgages, note agreements, other collateral documents and note agreements and other instruments and agreements executed in connection therewith. "Cumulative Operating Cash Flow" means, as at any date of determination, the positive cumulative Consolidated Operating Cash Flow realized during the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of determination for which consolidated financial information of the Company is available or, if such cumulative Consolidated Operating Cash Flow for such period is negative, the negative amount by which cumulative Consolidated Operating Cash Flow is less than zero. 18 -10- "Custodian" means any receiver, interim receiver, receiver and manager, receiver-manager, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law or any other law respecting secured creditors and the enforcement of their security or any other person with like powers whether appointed judicially or out of court and whether pursuant to an interim or final appointment. "DBS" means direct broadcast satellite. "Debt to Operating Cash Flow Ratio" means the ratio of (a) an amount equal to the Total Consolidated Indebtedness as of the date of calculation (the "Determination Date") to (b) four times the Consolidated Operating Cash Flow for the latest fiscal quarter for which financial information is available immediately preceding such Determination Date (the "Measurement Period"). For purposes of calculating Consolidated Operating Cash Flow for the Measurement Period immediately prior to the relevant Determination Date, (I) any Person that is a Restricted Subsidiary on the Determination Date (or would become a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Consolidated Operating Cash Flow) will be deemed to have been a Restricted Subsidiary at all times during such Measurement Period, (II) any Person that is not a Restricted Subsidiary on such Determination Date (or would cease to be a Restricted Subsidiary on such Determination Date in connection with the transaction that requires the determination of such Consolidated Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at any time during such Measurement Period, and (III) if the Company or any Restricted Subsidiary shall have in any manner (x) acquired (including through an Acquisition or the commencement of activities constituting such operating business) or (y) disposed of (including by way of an Asset Sale or the termination or discontinuance of activities constituting such operating business) any operating business during such Measurement Period or after the end of such period and on or prior to such Determination Date, such calculation will be made on a pro forma basis in accordance with GAAP as if, in the case of an Acquisition or the commencement of activities constituting such operating business, all such transactions had been consummated on the first day of such Measurement Period and, in the case of an Asset Sale or termination or discontinuance of activities constituting such operating business, all such transactions had been consummated prior to the first day of such Measurement Period; provided, however, that such pro forma adjustment shall not give effect to the Operating Cash Flow of any Acquired Person 19 -11- to the extent that such Person's net income would be excluded pursuant to clause (e) of the definition of Consolidated Net Income. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Default Amount" means, (i) prior to March 1, 2004, the Accreted Value of the Securities as of the payment date, and (ii) after March 1, 2004, the principal amount at maturity thereof, plus, in the case of clause (ii), accrued and unpaid interest thereon, if any, to the payment date. "Depository" means The Depository Trust Company, its nominees and successors. "DIRECTV Services" means DBS television services and all other video, audio, data packages, "a la carte" programming services and other services offered by DIRECTV, Inc., the predecessor-in-interest of Hughes Communications Galaxy, Inc., or its successors or assigns. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Company or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party to such transactions or series of related transactions. "Disposition" means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets. "Disqualified Equity Interest" means any Equity Interest which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event (other than a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable, at the option of the holder thereof, in whole or in part, or exchangeable into Indebtedness on or prior 20 -12- to the earlier of the maturity date of the Securities or the date on which no Securities remain outstanding. "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500.0 million or its equivalent in foreign currency, whose debt is rated Investment Grade at the time as of which any investment or rollover therein is made. "Equity Interest" in any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock or other equity participations, including partnership interests, whether general or limited, or member interests in such Person, including any Preferred Equity Interests. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated by the SEC thereunder. "Exchange Securities" means 13 1/2% Senior Discount Notes due 2007, Series B (the terms of which are identical to the Initial Securities except that the Exchange Securities shall be registered under the Securities Act and shall not contain the restrictive legend on the face of the form of Initial Securities), issued pursuant to this Indenture. "Existing Indebtedness" means any Indebtedness of the Company and the Restricted Subsidiaries in existence on the Issue Date until such amounts are repaid. "Fair Market Value" means, with respect to any asset, the price (after taking into account any liabilities relating to such assets) that could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of which is under any compulsion to complete the transaction; provided, however, that the Fair Market Value of any such asset or assets shall be determined conclusively by the Board acting in good faith, and shall be evidenced by resolutions of the Board delivered to the Trustee. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States that are applicable at the date of determination and that are consistently applied for all applicable periods. 21 -13- "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States of America are pledged. "guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. A guarantee shall include, without limitation, any agreement to maintain or preserve any other Person's financial condition or to cause any other Person to achieve certain levels of operating results. "High Power Satellite Transmission Business" means the business of the acquisition, transmission or sale of programming in the high power DBS business utilizing broadcast satellite service (including any provision of such services to cable operators or other media providers), which may utilize all or part of satellites owned by DIRECTV, Inc. or Hughes Communications Galaxy, Inc., and all other activities relating thereto or arising therefrom. "Holder" means the Person in whose name a Security is registered on the Registrar's books, as the context requires. "Holdings" means Golden Sky Holdings, Inc. or any successor or assign thereof that owns 100% of the Equity Interests of the Company. "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (including by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings correlative to the foregoing). "Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (a) 22 -14- every obligation of such Person for money borrowed; (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (d) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable incurred in the ordinary course of business and payable in accordance with industry practices, or other accrued liabilities arising in the ordinary course of business that are not overdue or that are being contested in good faith); (e) every Capital Lease Obligation of such Person; (f) every net obligation under Interest Rate Protection Obligations; (g) every obligation of the type referred to in clauses (a) through (f) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor, guarantor or otherwise; and (h) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a) through (g) above. Indebtedness (a) shall never be calculated taking into account any cash and Cash Equivalents held by such Person; (b) shall not include obligations of any Person (x) arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business, provided that such obligations are extinguished within two Business Days of their incurrence unless covered by an overdraft line, (y) resulting from the endorsement of negotiable instruments for collection in the ordinary course of business and consistent with past business practices and (z) under standby letters of credit to the extent collateralized by cash or Cash Equivalents; (c) that provides that an amount less than the principal amount thereof shall be due upon any declaration of acceleration thereof shall be deemed to be incurred or outstanding in an amount equal to the accreted value thereof at the date of determination; (d) shall include the liquidation preference and any mandatory redemption payment obligations in respect of any Disqualified Equity Interests of the Company or any Restricted Subsidiary; and (e) shall not include obligations under performance bonds, performance guarantees, surety bonds and appeal bonds, letters of credit or similar obligations Incurred in the ordinary course of business (including standby letters of credit securing obligations to the NRTC Incurred in the ordinary course of business that are not overdue or that are being contested in good faith 23 -15- by appropriate proceedings) (other than obligations under or in respect of any direct or indirect credit support for obligations of any Unrestricted Subsidiary). "Indenture" means this instrument as originally executed (including all exhibits and schedules hereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture, the Securities or the Registration Rights Agreement to pay principal of, premium, if any, and interest on the Securities when due and payable (including, without limitation, Additional Interest), whether at maturity, by acceleration, call for redemption or repurchase or otherwise, and all other amounts due or to become due under or in connection with this Indenture or the Securities and the performance of all other obligations to the Trustee (including, but not limited to, payment of all amounts due the Trustee under Section 6.07 hereof), and the Holders of the Securities under this Indenture and the Securities, according to the terms thereof. "Independent Financial Advisor" means a nationally recognized accounting, appraisal or investment banking firm or consultant with experience advising DBS businesses that is, in the judgment of the Board, qualified to perform the task for which it has been engaged (i) that does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect financial interest in the Company and (ii) that, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities LLC, Donaldson, Lufkin & Jenrette Securities Corporation and Fleet Securities, Inc. "Initial Securities" means the 13 1/2% Senior Discount Notes due 2007, Series A, for so long as such securities constitute Restricted Securities. "Insolvency or Liquidation Proceeding" means, with respect to any Person, any liquidation, dissolution or winding up of such Person, or any bankruptcy, reorganization, insolvency, 24 -16- receivership or similar proceeding with respect to such Person, whether voluntary or involuntary. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "interest" means, with respect to the Securities, the sum of any cash interest and any Additional Interest on the Securities. "Interest Payment Date" means, when used with respect to any Security, the Stated Maturity of an installment of interest on such Security, as set forth in such Security. "Interest Rate Protection Obligations" means, with respect to any Person, the Obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect loan, advance, guarantee or other extension of credit or capital contribution to (by means of transfers of cash or other property or assets to others or payments for property or services for the account or use of others, or otherwise), or purchase or acquisition of capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. In no event will the issuance by the Company of Qualified Equity Interests of the Company in exchange for any such capital stock, bonds, notes, debentures or other securities or evidences of Indebtedness constitute an Investment. The amount of any Investment shall be the original cost of such Investment, plus the cost of all additions thereto, and minus the amount of any portion of such Investment repaid to such Person in cash or other property or assets that would not otherwise constitute an Investment as a repayment of principal or a return of capital, as the case may be, but without any other adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. In determining the amount of any Investment or any repayment in respect of an Investment involving a transfer of any property or asset other than cash, such property shall be valued at its Fair Market Value at the time of such transfer, as determined in good faith by the Board of Directors (or comparable body) of the Person making such transfer or receiving such repayment. 25 -17- "Investment Grade" means, with respect to a security, that such security is rated by at least two nationally recognized statistical rating organizations in one of each such organization's four highest generic rating categories. "Issue Date" means the original issue date of the Securities. "Lien" means any lien, mortgage, charge, security interest, hypothecation, assignment for security or encumbrance of any kind (including any conditional sale or capital lease or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Marketable Securities" means: (a) Government Securities; (b) any certificate of deposit maturing not more than 365 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (c) commercial paper maturing not more than 365 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with an Investment Grade rating, at the time as of which any investment therein is made, issued or offered by an Eligible Institution; (d) any bankers' acceptances or money market deposit accounts issued or offered by an Eligible Institution; and (e) any fund investing substantially in investments of the types described in clauses (a) through (d) above. "Maturity Date" means the date, which is set forth on the face of the Securities, on which the Securities will mature. "Net Cash Proceeds" means the aggregate proceeds in the form of cash or Cash Equivalents received by the Company or any Restricted Subsidiary in respect of any Asset Sale, including all cash or Cash Equivalents received upon any sale, liquidation or other exchange of proceeds of Asset Sales received in a form other than cash or Cash Equivalents, net of (a) the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions) and any relocation expenses incurred as a result thereof; (b) taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements); (c) amounts required to be applied to the repayment of Indebtedness secured by a Lien on the asset or assets that were the subject of such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of Directors of the Company to be provided as a reserve, in accordance with GAAP, against any liabilities associated with such assets that are the subject of such Asset Sale (provided 26 -18- that the amount of any such reserves shall be deemed to constitute Net Cash Proceeds at the time such reserves shall have been released or are not otherwise required to be retained as a reserve); and (e) with respect to Asset Sales by Restricted Subsidiaries, the portion of such cash payments attributable to Persons holding a minority interest in such Restricted Subsidiary. "NRTC" means the National Rural Telecommunications Cooperative and any successor entity to it. "Obligations" means any principal, interest, premium, penalties, fees, indemnifications, reimbursement obligations, damages and other liabilities payable under the documentation governing any Indebtedness. "Offer" has the meaning set forth under Section 10.19. "Offering Memorandum" means the Offering Memorandum dated February 11, 1999 pursuant to which the Initial Securities were offered, and any supplement thereto. "Officer" means, with respect to the Company, the Chairman of the Board, a Vice Chairman, the Chief Executive Officer, the President, the Chief Financial Officer, a Vice President, the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Chief Executive Officer, a Vice Chairman, the Chief Financial Officer, the President or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, of the Company and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel who may be counsel for the Company or the Trustee, and who shall be reasonably acceptable to the Trustee. "Outstanding" means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; 27 -19- (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in trust or set aside and segregated in trust by the Company or any Affiliate thereof (if the Company or Affiliate shall act as Paying Agent) for the Holders of such Securities; provided, however, that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four, to the extent provided in Sections 4.02 and 4.03; and (iv) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. The Company shall notify the Trustee, in writing, when it repurchases or otherwise acquires Securities, of the aggregate principal amount of such Securities so repurchased or otherwise acquired. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. If the Paying Agent holds, in its capacity as such, on any Maturity Date or on any optional redemption date money sufficient to pay all accrued interest and principal with respect to such Securities payable 28 -20- on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Securities cease to be Outstanding and interest on them ceases to accrue. Securities may also cease to be outstanding to the extent expressly provided in Article Four. "Permitted Acquisition Deposits" means any advance or payment of funds, whether as consideration for an option to purchase or as a deposit, binder or earnest money, whether or not refundable, and whether or not made into escrow, made pursuant to any written agreement, term sheet, letter of intent or other instrument providing for the Acquisition of any High Power Satellite Transmission Business. "Permitted Business" means those businesses in which the Company and the Restricted Subsidiaries are engaged on the Issue Date or business reasonably related thereto (including, without limitation, the High Power Satellite Transmission Business and the business of satellite data transmission). "Permitted Holders" any of (i) means Burr, Egan, Deleage & Co., Spectrum Equity Investors, L.P., BancBoston Ventures Inc., Norwest Equity Partners and HarbourVest Partners, LLC and (ii) their respective Affiliates. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (a) Indebtedness of any Restricted Subsidiary outstanding on the Issue Date; (b) (1) Indebtedness under the Credit Facility of any Restricted Subsidiary, and, without duplication, any guarantee thereof by any other Restricted Subsidiary, Incurred in an aggregate principal amount at any one time outstanding not to exceed $150.0 million, which amount shall be reduced by (x) any permanent reduction of commitments thereunder and (y) any other repayment accompanied by a permanent reduction of commitments thereunder (other than in connection with any refinancing thereof where the aggregate principal amount outstanding and commitments thereunder immediately prior thereto are not greater than such amounts immediately thereafter); and (2) Indebtedness of any Restricted Subsidiary, and, without duplication, any guarantee thereof by any other Restricted Subsidiary, Incurred to fund Acquisitions of Permitted Businesses, Capital Lease Obligations, Investments permitted under 29 -21- this Indenture and working capital to support a Permitted Business in an aggregate principal amount at any one time outstanding not to exceed $65.0 million, which amount shall be reduced by any permanent reduction of commitments thereunder; (c) Indebtedness of Systems such that, at the time of and after giving effect to the Incurrence thereof, the total aggregate principal amount of Indebtedness Incurred under this clause (c) and any refinancing thereof (whether initial or successive) Incurred pursuant to and otherwise Incurred in compliance with this Indenture would not exceed 200% of Total Incremental Invested Equity (which includes the contributed proceeds from the issuance of the Notes); (d) Indebtedness of any Restricted Subsidiary owed to and held by the Company or any Restricted Subsidiary; provided, however, that an Incurrence of Indebtedness that is not permitted by this clause (d) shall be deemed to have occurred upon (i) any sale or other disposition of any Indebtedness of any Restricted Subsidiary referred to in this clause (d) to a Person (other than the Company or any other Restricted Subsidiary) or (ii) the Designation of a Restricted Subsidiary that holds Indebtedness of any other Restricted Subsidiary as an Unrestricted Subsidiary; (e) Interest Rate Protection Obligations of any Restricted Subsidiary relating to Indebtedness of a Restricted Subsidiary (which Indebtedness (i) bears interest at fluctuating interest rates and (ii) is otherwise permitted to be Incurred under this covenant) and guarantees by any Restricted Subsidiary thereof; provided, however, that the notional principal amount of such Interest Rate Protection Obligations does not exceed the principal amount of the Indebtedness to which such Interest Rate Protection Obligations relate; (f) indemnification obligations of any Restricted Subsidiary and guarantees thereof under agreements providing for the disposition of assets or one or more businesses or Restricted Subsidiaries; provided, however, that such obligations do not exceed at any time the Fair Market Value of the gross proceeds received by the Restricted Subsidiaries for such disposition; (g) Indebtedness to the extent representing a replacement, renewal, refinancing or extension (collectively, 30 -22- a "refinancing") of outstanding Indebtedness Incurred in compliance with the Debt to Operating Cash Flow Ratio of Section 10.12 or clause (a), (b)(2), (h) or (j) of this definition; provided, however, that (i) any such refinancing shall not exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof at the time of such refinancing, an amount no greater than such lesser amount) of the Indebtedness being refinanced, plus the amount of accrued interest or dividends thereon, plus the amount of an reasonably determined prepayment premium necessary to accomplish such refinancing and such reasonable fees and expenses incurred in connection therewith, (ii) Indebtedness representing a refinancing of Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced, and (iii) with respect to any refinancing of Indebtedness Incurred pursuant to subparagraph (h) or (i) of this definition, such refinancing pursuant to this clause (g) shall also be deemed to be Incurred pursuant to clause (h) or (i), as the case may be, of this paragraph (for the avoidance of doubt, the result of which is that a refinancing does not create new debt incurrence capacity under such clauses); (h) Indebtedness of any Restricted Subsidiary Incurred to finance the acquisition of the exclusive right to distribute DIRECTV Services within designated Rural DIRECTV Markets; provided, however, that such Indebtedness shall be Permitted Indebtedness under this subparagraph (h) in an amount not greater than the face amount of any letter of credit issued under the Credit Facility to support such Indebtedness, it being understood that the issuance of such letter of credit (but only for so long as such letter of credit remains outstanding) constitutes a reduction in the amount of Permitted Indebtedness available to be Incurred under clause (b) of this definition; and; (i) in addition to the items referred to in subparagraphs (a) through (h) above, Indebtedness of any of the Restricted Subsidiaries (including any Indebtedness under the Credit Facility that utilizes this clause (i)) having an aggregate principal amount for the Restricted Subsidiaries not to exceed $25.0 million at any time outstanding. 31 -23- Indebtedness of any Person or any of its Subsidiaries existing at the time such Person becomes a Restricted Subsidiary (or is merged into or consolidated with the Company or any Restricted Subsidiary), whether or not such Indebtedness was Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary (or being merged into or consolidated with the Company or any Restricted Subsidiary), shall be deemed Incurred at the time any such Person becomes a Restricted Subsidiary or merges into or consolidates with the Company or any Restricted Subsidiary. "Permitted Investments" means (a) Cash Equivalents; (b) Investments by the Company or any Restricted Subsidiary in any Person that is or will become immediately after such Investment a Restricted Subsidiary or that will merge or consolidate into the Company or a Restricted Subsidiary; (c) Investments in the Company by any Restricted Subsidiary; (d) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (e) loans and advances to employees made in the ordinary course of business not to exceed $1.0 million in the aggregate at any one time outstanding; (f) Interest Rate Protection Obligations; (g) bonds, notes, debentures or other securities received as a result of Asset Sales permitted under Section 10.19 not to exceed 25% of the total consideration for such Asset Sales (determined and computed as set forth under Section 10.19); (h) transactions with officers, directors and employees of the Company or any Restricted Subsidiary entered into in the ordinary course of business (including compensation or employee benefit arrangements with any such director or employee) and consistent with past business practices; (i) Investments existing as of the Issue Date and any amendment, extension, renewal or modification thereof to the extent that any such amendment, extension, renewal or modification does not require the Company or any Restricted Subsidiary to make any additional cash or non-cash payments or provide additional services in connection therewith; and (j) Permitted Acquisition Deposits. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, limited liability limited partnership, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" means, with respect to any particular Security, every previous Security evidencing all or a portion of the same debt as that evidenced by such particular 32 -24- Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 hereof in exchange for a mutilated Security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Equity Interest," in any Person, means an Equity Interest of any class or classes (however designated) that is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over Equity Interests of any other class in such Person. "principal amount at maturity" means $1,000 per $1,000 face amount of the Securities. "Private Exchange Securities" shall have the meaning set forth in the Registration Rights Agreement. "Private Placement Legend" shall mean the first paragraph of the legend initially set forth in the Securities in the form set forth on Exhibit A-1. "Public Equity Offering" means an underwritten public offering of Equity Interests (other than Disqualified Equity Interests) of the Company made on a primary basis by the Company pursuant to a registration statement filed with and declared effective by the SEC in accordance with the Securities Act. "Purchase Money Indebtedness" means Indebtedness of any Restricted Subsidiary Incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of any property; provided, however, that the aggregate principal amount of such Indebtedness does not exceed the lesser of the Fair Market Value of such property or such purchase price or cost, including any refinancing of such Indebtedness that does not increase the aggregate principal amount (or accreted amount, if less) thereof as of the date of refinancing. "Qualified Equity Interest" in any Person means any Equity Interest in such Person other than any Disqualified Equity Interest. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. 33 -25- "Redemption Date" means, with respect to any Security to be redeemed, the date fixed by the Company for such redemption pursuant to this Indenture and Securities. "Redemption Price" means, with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to this Indenture and the terms of the Securities. "Registered Exchange Offer" means the registration by the Company under the Securities Act of all Exchange Securities pursuant to a registration statement under which the Company offers each Holder of Initial Securities the opportunity to exchange all Initial Securities held by such Holder for Exchange Securities in an aggregate principal amount equal to the aggregate principal amount of Initial Securities held by such Holder, all in accordance with the terms and conditions of the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement dated as of February 19, 1999 by and among the Company and the Initial Purchasers, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof. "Regular Record Date" means the Regular Record Date specified in the Securities. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer" means, with respect to the Trustee, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or assistant trust officer, or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on Equity Interests of the Company or any payment made to the direct or indirect holders (in their capacities as such) of Equity Interests of the Company (other than dividends or distributions payable solely in Equity Interests (other than Disqualified Equity Interests) of the Company) or in options, 34 -26- warrants or other rights to purchase Equity Interests (other than Disqualified Equity Interests) of the Company; (ii) the purchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company (other than any such Equity Interests owned by the Company or a Wholly Owned Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value prior to any scheduled repayment, sinking fund or maturity of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv) the making by the Company or any Restricted Subsidiary of any Investment (other than a Permitted Investment) in any Person. "Restricted Security" shall have the meaning specified in Rule 144(a)(3) under the Securities Act; provided that the Trustee shall be entitled to request and conclusively rely upon an Opinion of Counsel with respect to whether a Security is a Restricted Security. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board, by a resolution of the Board delivered to the Trustee, as an Unrestricted Subsidiary pursuant to Section 10.15. Any such designation may be revoked by a resolution of the Board delivered to the Trustee, subject to the provisions of such covenant. "Rule 144A" means Rule 144A under the Securities Act. "SEC" means the Securities and Exchange Commission. "Securities" means, collectively the Initial Securities, the Exchange Securities and the Private Exchange Securities, if any, treated a single class of securities, as amended or supplemented from time to time in accordance with the terms of this Indenture, that are issued pursuant to this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Securityholder" means the Person in whose name a Security is registered on the Registrar's books, as the context requires. "Seller Notes" means any promissory notes issued by a Restricted Subsidiary to any Person selling any assets or properties to the Company or any Restricted Subsidiary in an Acquisition, including those outstanding on the Issue Date. 35 -27- "Significant Restricted Subsidiary" means, at any date of determination, (a) any Restricted Subsidiary that, together with its Subsidiaries that constitute Restricted Subsidiaries, (i) for the most recent fiscal year of the Company accounted for more than 5.0% of the consolidated revenues of the Company and the Restricted Subsidiaries or (ii) as of the end of such fiscal year owned more than 5.0% of the consolidated assets of the Company and the Restricted Subsidiaries, all as set forth on the consolidated financial statements of the Company and the Restricted Subsidiaries for such year prepared in conformity with GAAP, and (b) any Restricted Subsidiary that, when aggregated with all other Restricted Subsidiaries that are not otherwise Significant Restricted Subsidiaries and as to which any event described in Section 5.01 (v), (vii) or (viii) has occurred, would constitute a Significant Restricted Subsidiary under clause (a) of this definition. "Special Record Date" means, with respect to the payment of any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof. "Stated Maturity," when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subordinated Indebtedness" means with respect to the Company, Indebtedness of the Company that is expressly subordinated in right of payment to the Securities. "Subsidiary" means, with respect to any Person, (a) any corporation of which the outstanding Voting Equity Interests having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such Person, or (b) any other Person of which at least a majority of Voting Equity Interests are at the time, directly or indirectly, owned by such first named Person. "Systems" means Golden Sky Systems, Inc., a Wholly Owned Restricted Subsidiary. "Total Consolidated Indebtedness" means, as at any date of determination, an amount equal to the aggregate amount of all Indebtedness and Disqualified Equity Interests of the Company and the Restricted Subsidiaries outstanding as of such date of determination. 36 -28- "Total Incremental Invested Equity" means, at any date of determination, the sum of, without duplication, (a) the aggregate net cash proceeds received by Systems either (x) as capital contributions to Systems on or after the Issue Date, including any capital contributions made out of the proceeds from the issuance of the Securities or (y) from the issue and sale (other than to a Subsidiary of Systems by Systems) of its Qualified Equity interests after the Issue Date, plus (b) the aggregate net proceeds received by Systems or any Restricted Subsidiary after the Issue Date from the issuance (other than to a Subsidiary of Systems) of Qualified Equity Interests upon the conversion of, or in exchange for, Indebtedness of the Company or a Restricted Subsidiary that has been converted into or exchanged for Qualified Equity Interests of Systems, minus (c) the aggregate amount of all Restricted Payments made on or after the Issue Date and all Designation Amounts arising after the Issue Date, but only to the extent the amount set forth in this clause (c) would exceed the amount determined under subclause (a) of clause (iii) of the first paragraph under Section 10.16, plus (d) in the case of the disposition or repayment of any Investment which has been deducted pursuant to clause (c) of this definition, an amount equal to the lesser of the return of capital with respect to such Investment and the amount of such Investment which has been deducted pursuant to such clause (c), plus (e) in the case of any Revocation with respect to any Subsidiary that was made the subject of Designation after the Issue Date and as to which a Designation Amount has been deducted pursuant to clause (c) of this definition, an amount equal to the lesser of such Designation Amount or the Fair Market Value of the Investment of Systems and the other Restricted Subsidiaries in such Subsidiary at the time of Revocation. "12 3/8% Notes" means the $195,000,000 aggregate principal amount of 12 3/8% Senior Subordinated Notes due 2006 of Systems. "12 3/8% Notes Indenture" means the indenture dated July 31, 1998 governing the 12 3/8% Notes. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. 37 -29- "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to Section 10.15. Any such designation may be revoked by a resolution of the Board of Directors of the Company delivered to the Trustee, subject to the provisions of Section 10.15. "Voting Equity Interests" means Equity Interests in a corporation or other Person with voting power under ordinary circumstances entitling the holders thereof to elect the Board of Directors or other governing body of such corporation or such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal, including payment of final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (b) the then outstanding aggregate principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of the outstanding Voting Equity Interests (other than directors' qualifying shares) of which are owned, directly or indirectly, by the Company. Section 1.02. Other Definitions.
Defined in Term Section ---- ---------- "Act" 1.05 "Affiliate Transaction" 10.22 "Agent Member" 3.16 "Change of Control Date" 10.10 "Change of Control Offer" 10.10 "Change of Control Payment Date" 10.10 "Change of Control Purchase Price" 10.10 "covenant defeasance" 4.03 "Defaulted Interest" 3.07 "defeasance" 4.02 "Defeased Securities" 4.01 "Designation" 10.15 "Designation Amount" 10.15 "Global Security" 3.03 "insolvent person" 4.04
38 -30-
Defined in Term Section ---- ---------- "Non-Global Purchasers" 3.03 "Offer to Purchase" 10.19 "Offshore Physical Securities" 3.03 "Paying Agent" 3.02 "Physical Security" 3.03 "Securities Register" 3.05 "Securities Registrar" 3.02 "Surviving Entity" 8.01 "Unutilized Net Cash Proceeds" 10.19
Section 1.03. Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to "$" or "dollars" shall refer to the lawful currency of the United States of America; and (f) the words "include," "included" and "including" as used herein shall be deemed in each case to be followed by the phrase "without limitation." 39 -31- Section 1.04. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated, with proper identification of each matter covered therein, and form one instrument. Section 1.05. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution 40 -32- (as provided below in subsection (b) of this Section 1.05) of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01 hereof) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any reasonable manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security or the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof to the same extent as the original Holder, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Section 1.06. Notices, etc., to the Trustee and the Company Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed, in writing, to or with the Trustee at 114 West 47th Street, New York, New York 10036, Attention: Corporate Business Unit, or at any other address previously furnished in writing to the Holders the Company by the Trustee; or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose (except as otherwise expressly provided herein) hereunder if in writing and mailed, first-class postage prepaid, to the Company addressed to it at Golden Sky DBS, Inc., 605 West 47th Street, Suite 300, Kansas City, Missouri 64112, Attention: Chief Executive Officer, or at any other address previously furnished in writing to the Trustee by the Company. 41 -33- Section 1.07. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise expressly provided herein) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 1.08. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, such provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. 42 -34- Section 1.09. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.10. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. Section 1.11. Separability Clause. In case any provision in this Indenture or in the Securities issued pursuant hereto shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.12. Benefits of Indenture. Nothing in this Indenture or in the Securities or issued pursuant hereto, express or implied, shall give to any person (other than the parties hereto and their successors hereunder, any Paying Agent and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.13. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 1.14. No Recourse Against Others. A director, officer, employee, Subsidiary or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. The Trustee and the Holders agree that they will not seek in any proceeding to cause the assets of any Subsidiary of the Company to be made available to satisfy any claims based on, in respect of, or by reason of obligations of the Company under the Securities or 43 -35- this Indenture, including without limitation, by asserting claims of substantive consolidation. Section 1.15. Independence of Covenants. All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists. Section 1.16. Exhibits. All exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 1.17. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. Section 1.18. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. ARTICLE TWO SECURITY FORMS Section 2.01. Form and Dating. The Initial Securities and the Exchange Securities and the Trustee's certificate of authentication with respect thereto shall be in substantially the forms set forth, or referenced, in Exhibit A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon 44 -36- as may be required to comply with any applicable law or with the rules of the Depository, any clearing agency or any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. The definitive Securities shall be printed, typewritten, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Each Security shall be dated the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are expressly made, a part of this Indenture. ARTICLE THREE THE SECURITIES Section 3.01. Title and Terms. The aggregate principal amount at maturity of Securities which may be authenticated and delivered under this Indenture is limited to $193,100,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10, 10.19 or 11.08. The Securities will mature on March 1, 2007. The Securities shall be issued at a discount to yield gross proceeds of $100,048,972. The Securities shall not accrue cash interest prior to March 1, 2004. Commencing on March 1, 2004, interest on the Securities will accrue at a rate of 13 1/2% per annum and will be payable semi-annually in arrears from the most recent Interest Payment Date to which interest has been paid or, if no interest has been paid, from September 1, 2004. The Securities shall be redeemable as provided in Article Eleven and as provided in the Securities. At the election of the Company, the entire Indebtedness on the Securities or certain of the Company's obligations 45 -37- and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. Section 3.02. Registrar and Paying Agent. The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for registration of transfer or for exchange (the "Security Registrar"), an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for payment (the "Paying Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may act as its own Paying Agent, except for the purposes of payments on account of principal on the Securities pursuant to Sections 10.10 and 10.19. The Company shall enter into an appropriate agency agreement with any Paying Agent not a party to this Indenture, which shall incorporate the provisions of the Trust Indenture Act. The agreement shall implement the provisions of this Indenture that relate to such Paying Agent. The Company shall notify the Trustee of the name and address of any such Paying Agent. If the Company fails to maintain a Security Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 6.07 hereof. The Company initially appoints the Trustee as the Security Registrar and Paying Agent and agent for service of notices and demands in connection with the Securities. Section 3.03. Execution and Authentication. Two Officers shall execute the Securities on behalf of the Company by either manual or facsimile signature. Securities bearing the manual or facsimile signature of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices on the date of such Securities. 46 -38- At any time and from time to time after the execution and delivery of this Indenture, the Company many deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as provided in this Indenture and not otherwise. A Security shall not be entitled to any benefit under this Indenture or be valid or obligatory for any purpose until the Trustee manually signs the certificate of authentication on the Security. The Trustee's signature on such certificate shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Initial Securities for original issue in an aggregate principal amount at maturity not to exceed $193,100,000, upon receipt of a Company Order. In addition, on or prior to the date of the Registered Exchange Offer, the Trustee or an authenticating agent shall authenticate Exchange Securities (including any Private Exchange Securities which will be in the form of Exhibit A-2 but which shall have the restrictive legend contained in Exhibit A-1) to be issued at the time of the Registered Exchange Offer in the aggregate principal amount at maturity of up to $193,100,000 upon receipt of a Company Order of the Company. In each case, the Company Order shall specify the amount of Securities to be authenticated, the names of the persons in which such Securities shall be registered and the date on which such Securities are to be authenticated and direct the Trustee to authenticate such Securities together with an Officer's Certificate certifying that all conditions precedent to the issuance of such Securities contained herein have been complied with. The aggregate principal amount at maturity of Securities outstanding at any time may not exceed $193,100,000, except as provided in Section 3.04 hereof. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. Such authenticating agent shall have the same authenticating rights and duties as the Trustee in any dealings hereunder with the Company or with any Affiliate of the Company. 47 -39- The certificates representing the Securities will be issued in fully registered form, without coupons and only in denominations of $1,000 principal amount at maturity and any integral multiple thereof. Except as described below, the Securities will be deposited with, or on behalf of, the Depository, and registered in the name of Cede & Co. as the Depository's nominee in the form of a global note certificate substantially in the form of Exhibit A-1 (the "Global Security"). Securities purchased by or transferred to (i) Institutional Accredited Investors who are not Qualified Institutional Buyers, (ii) except as described below, persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act or (iii) any other persons who are not Qualified Institutional Buyers (collectively, "Non-Global Purchasers") will be issued in registered form without coupons substantially in the form of Exhibit A-1 (the "U.S. Physical Securities"). Upon the transfer to a Qualified Institutional Buyer of U.S. Physical Securities initially issued to a Non-Global Purchaser, such U.S. Physical Security will be exchanged for an interest in the Global Security or in the Securities in the custody of the Trustee representing the principal amount at maturity of Securities being transferred. Securities purchased by persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act will be represented upon issuance by a temporary global note certificate substantially in the form of Exhibit A-1 (the "Offshore Physical Securities" and, together with the U.S. Physical Securities, the "Physical Securities") which will not be exchangeable for U.S. Physical Securities until the expiration of the "40-day restricted period" within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act. The Offshore Physical Securities will be registered in the name of, and be held by, an offshore physical security holder (the "Offshore Physical Security Holder") until the expiration of such 40-day period, at which time the Offshore Physical Securities will be delivered to the Trustee in exchange for Securities registered in the names requested by the Offshore Physical Security Holder. In addition, until the expiration of such 40-day period, transfers of interests in the Offshore Physical Securities can only be effected through the Offshore Physical Security Holder in accordance with the requirements of Section 3.17 hereof. 48 -40- Section 3.04. Temporary Securities. Until definitive Securities are prepared and ready for delivery, the Company may execute and upon a Company Order the Trustee shall authenticate and deliver temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities, in any authorized denominations, but may have variations that the Company reasonably considers appropriate for temporary Securities as conclusively evidenced by the Company's execution of such temporary Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay but in no event later than the date that the Registered Exchange Offer is consummated. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of like tenor and of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 3.05. Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being sometimes referred to herein as the "Securities Register") in which, subject to such reasonable regulations as the Securities Registrar may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby initially appointed Security Registrar for the purpose of registering Securities and transfers of Securities as herein provided. When Securities are presented to the Registrar or a co-Registrar with a request from the Holder of such Securities to register the transfer or exchange for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided that every Security presented or surrendered for registration of transfer or exchange shall be duly 49 -41- endorsed or be accompanied by a written instrument of transfer or exchange in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. Whenever any Securities are so presented for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. No service charge shall be made to the Securityholder for any registration of transfer or exchange. The Company may require from the Securityholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 9.06 or 10.10, hereof (in which events the Company will be responsible for the payment of all such taxes which arise solely as a result of the transfer or exchange and do not depend on the tax status of the Holder). The Trustee shall not be required to exchange or register the transfer of any Security for a period of 15 days immediately preceding the first mailing of notice of redemption of Securities to be redeemed or of any Security selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not to be redeemed. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security of any series claims that the Security has been lost, destroyed or wrongfully taken, the Company shall execute and upon a Company Order, the Trustee shall authenticate and deliver a replacement Security of like tenor and principal amount at maturity bearing a number not contemporaneously outstanding, if the Holder of such Security furnishes to the Company and to the Trustee evidence reasonably acceptable to them of the ownership and the destruction, loss or theft of such Security and an indemnity bond shall be posted, sufficient in the judgment of the Company or the Trustee, as the case may be, to protect the Company, the Trustee or the Paying Agent from any loss that any of them may suffer if such Security is replaced. The Company may charge such Holder for 50 -42- the Company's expenses in replacing such Security (including expenses of the Trustee charged to the Company) and the Trustee may charge the Company for the Trustee's expenses (including the reasonable fees and expenses of its agents and counsel) in replacing such Security. Every replacement Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 3.07. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall 51 -43- deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this subsection (a) provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the actual receipt by a Responsible Officer of the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this subsection (b), such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 3.08. Persons Deemed Owners. Prior to and at the time of due presentment for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose 52 -44- name any Security is registered in the Security Register as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security shall be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 3.09. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer or exchange, redemption or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section 3.09, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be returned to the Company. Section 3.10. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. Section 3.11. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal, premium, if any, or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, date established 53 -45- for the payment of Defaulted Interest or at the Stated Maturity, as the case may be, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity, as the case may be, to the next succeeding Business Day. Section 3.12. CUSIP Number. The Company in issuing the Securities may use a "CUSIP" number (if then generally in use), and if so, the Trustee may use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee in writing of any change in the CUSIP number of either series of Securities. Section 3.13. Paying Agent To Hold Money in Trust. Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Company at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default, upon a Company Order to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee. Section 3.14. Treasury Securities. In determining whether the Holders of the required aggregate principal amount at maturity of Securities have concurred in any direction, waiver, consent or notice, Securities owned by the Company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so considered. The Company shall notify the Trustee, in writing, when it or any of its Affiliates repurchases or otherwise acquires Securities, of the 54 -46- aggregate principal amount at maturity of such Securities so repurchased or otherwise acquired. Section 3.15. Deposits of Monies. Prior to 10:30 a.m. New York City time on each Interest Payment Date, maturity date and Change of Control Payment Date, the Company shall have deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date, maturity date and Change of Control Payment Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Holders on such Interest Payment Date, maturity date and Change of Control Payment Date, as the case may be. Section 3.16. Book-Entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Exhibit B. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Securities may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 3.17. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Securities if (i) the Depository notifies the 55 -47- Company that it is unwilling or unable to continue as Depository for any Global Security and a successor Depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository to issue Physical Securities. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Security to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount at maturity of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and principal amount of authorized denominations. (d) In connection with the transfer of Global Securities as an entirety to beneficial owners pursuant to paragraph (b), the Global Securities shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Securities, an equal aggregate principal amount at maturity of Physical Securities of like tenor of authorized denominations. (e) Any Physical Security constituting a Restricted Security delivered in exchange for an interest in a Global Security pursuant to subparagraphs (b) or (c) of this Section 3.16 shall, except as otherwise provided by paragraphs (a)(l)(x) and (c) of Section 3.17, bear the legend regarding transfer restrictions applicable to the Physical Securities set forth in Exhibit A-1. (f) The Holder of any Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. Section 3.17. Special Transfer Provisions. (a) Transfers to Non-QIB Institutional Accredited Investors and Non-U.S. persons. The following provisions shall apply with respect to the registration of any proposed transfer 56 -48- of a Security constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB or to any non-U.S. person: (1) the Registrar shall register the transfer of any Security constituting a Restricted Security, whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is not prior to the date which is two years (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original Issue Date of such Security (or of any Predecessor Security) or the last day on which the Company or any Affiliate of the Company was the owner of such Security or any Predecessor Security or (y) (1) in the case of a transfer to a person purporting to be an Institutional Accredited Investor which is not a QIB (excluding non-U.S. persons), the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto or (2) in the case of a transfer to a person purporting to be a non-U.S. person, the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto; and (2) if the proposed transferor is an Agent Member holding a beneficial interest in a Global Security, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (1) above and (y) instructions given in accordance with the Depository's and the Registrar's procedures; whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of Outstanding Physical Securities) a decrease in the principal amount at maturity of a Global Security in an amount equal to the principal amount at maturity of the beneficial interest in a Global Security to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and principal amount at maturity of authorized denominations. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a person purporting to be a QIB (excluding transfers to non-U.S. persons): 57 -49- (1) the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that the transfer has been made in compliance with the exemption from registration under the Securities Act provided under Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that such transferee represents and warrants that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (2) if the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in the Global Security, upon receipt by the Registrar of instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on the Security Register the date and an increase in the principal amount at maturity of the Global Security in an amount equal to the principal amount at maturity of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. (c) Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless (i) the circumstances contemplated by paragraph (a)(l)(x) of this Section 3.17 exist, (ii) there is delivered to the Registrar an Opinion of Counsel satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act 58 -50- or (iii) such Security has been sold pursuant to an effective registration statement under the Securities Act. (d) Other Transfers. If a Holder proposes to transfer a Security constituting a Restricted Security pursuant to any exemption from the registration requirements of the Securities Act other than as provided for by Section 3.17(a) and (b), the Registrar shall only register such transfer or exchange if such transferor delivers an Opinion of Counsel satisfactory to the Company and the Registrar that such transfer is in compliance with the Securities Act and the terms of this Indenture; provided that the Company may, based upon the opinion of its counsel, instruct the Registrar by a Company Order not to register such transfer in any case where the proposed transferee is not a QIB, non-U.S. person or Institutional Accredited Investor. (e) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 3.16 or this Section 3.17 for a period of two years at which time such letters, notices and other written communications shall be delivered to the Company. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any time during normal business hours upon the giving of reasonable prior written notice to the Registrar. ARTICLE FOUR DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 4.02 or Section 4.03 be applied to all of the Outstanding Securities (the "Defeased Securities"), upon compliance with the conditions set forth below in this Article Four. 59 -51- Section 4.02. Defeasance and Discharge. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.02, the Company shall be deemed to have been discharged from its obligations with respect to the Defeased Securities on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Defeased Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 4.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other Obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company and upon Company Request, shall execute proper instruments acknowledging the same), except for the following, which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Securities to receive, solely from the trust fund described in Section 4.04 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (b) the Company's Obligations with respect to such Defeased Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder, including, without limitation, the Trustee's rights under Section 6.07, and (d) this Article Four. Subject to compliance with this Article Four, the Company may exercise its option under this Section 4.02 notwithstanding the prior exercise of its option under Section 4.03 with respect to the Securities. Section 4.03. Covenant Defeasance. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.03, the Company shall be released from its obligations under any covenant or provision contained in Sections 10.06 through 10.23 and the provisions of Articles Eight and Eleven shall not apply, with respect to the Defeased Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Securities, the Company may 60 -52- omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(iii)-(vi), but, except as specified above, the remainder of this Indenture and such Defeased Securities shall be unaffected thereby. Section 4.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 4.02 or Section 4.03 to the Defeased Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article Four applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (a) U.S. dollars in an amount, or (b) Government Securities which through the scheduled payment of principal, premium, if any, and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (c) a combination thereof, in any such case, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest on the Defeased Securities upon redemption or at the Stated Maturity of such principal or installment of principal, premium, if any, or interest; provided, however, that the Trustee shall have been irrevocably instructed in writing to apply such money or the proceeds of such Government Securities to said payments with respect to the Securities; (2) No Default shall have occurred and be continuing on the date of such deposit; 61 -53- (3) Neither the Company nor any Subsidiary of the Company is an "insolvent person" within the meaning of any applicable Bankruptcy Law on the date of such deposit or at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (4) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest in violation of Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company; (5) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (6) In the case of an election under Section 4.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) In the case of an election under Section 4.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (8) The Company shall have delivered to the Trustee, an Opinion of Counsel to the effect that immediately following the ninety-first day after the deposit, the trust funds established pursuant to this Article will not be subject to the effect of any applicable bankruptcy, insolvency, 62 -54- reorganization or similar laws affecting creditors' rights generally under any applicable U.S. Federal or state law; (9) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under Section 4.02 or 4.03 was not made by the Company with the intent of preferring the Holders over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that (i) all conditions precedent (other than conditions requiring the passage of time) provided for relating to either the defeasance under Section 4.02 or the covenant defeasance under Section 4.03 (as the case may be) have been complied with as contemplated by this Section 4.04 and (ii) if any other Indebtedness of the Company shall then be outstanding or committed, such defeasance or covenant defeasance will not violate the provisions of the agreements or instruments evidencing such Indebtedness. Opinions required to be delivered under this Section may have such qualifications as are customary for opinions of the type required and acceptable to the Trustee. Section 4.05. Deposited Money and Government Securities To Be Held in Trust; Other Miscellaneous Provisions. Subject to the proviso of the last paragraph of Section 10.03, all money and Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. 63 -55- The Company shall pay and indemnify the Trustee and hold it harmless against any tax, fee or other charge imposed on or assessed against the Government Securities deposited pursuant to Section 4.04 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Defeased Securities. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Securities held by it as provided in Section 4.04 which, in the opinion of an internationally recognized firm of independent public accountants expressed in a written certification thereof delivered to a Responsible Officer of the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. Section 4.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or Government Securities in accordance with Section 4.02 or 4.03, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture, the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 4.02 or 4.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money and Government Securities in accordance with Section 4.02 or 4.03, as the case may be; provided, however, that if the Company makes any payment of principal, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money and Government Securities held by the Trustee or Paying Agent. 64 -56- ARTICLE FIVE REMEDIES Section 5.01. Events of Default. "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in the payment of interest on the Securities issued thereunder when it becomes due and payable and continuance of such default for a period of 30 days or more; or (ii) default in the payment of (a) if prior to March 1, 2004, the Accreted Value of, and (b) if on or after March 1, 2004, the principal amount at maturity of and premium, if any, on the Securities when due (including the failure to make a payment to purchase Securities pursuant to a Change of Control Offer); or (iii) default in the performance, or breach, of any covenant described under Section 10.19 or Article Eight; or (iv) default in the performance, or breach, of any covenant in this Indenture (other than defaults specified in clause (i), (ii) or (iii) above) and continuance of such default or breach for a period of 30 days or more after written notice to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount at maturity of the outstanding Securities (in each case, when such notice is deemed received in accordance with this Indenture); or (v) failure to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $15.0 million or more under which the Company or a Restricted Subsidiary is obligated, and either (a) such Indebtedness is already due and payable in full and has not been paid in full (and such failure continues for a period of 30 days or more) or (b) such failure results in the acceleration of the final 65 -57- maturity of such Indebtedness (which acceleration has not been rescinded prior to any declaration of acceleration of the Securities); or (vi) one or more judgments, orders or decrees, not subject to appeal, for the payment of money of $15.0 million or more, either individually or in the aggregate (in all cases net of amounts covered by insurance for which coverage is not being challenged or denied), shall be entered against the Company or any of the Company's Significant Restricted Subsidiaries or any of their respective properties and shall not be discharged, paid or stayed within 60 days after the right of appeal has expired; or (vii) the Company or any Significant Restricted Subsidiary of the Company pursuant to or under or within the meaning of any Bankruptcy Law: (a) commences a voluntary case or proceeding; (b) consents to the making of a Bankruptcy Order in an involuntary case or proceeding or the commencement of any case against it; (c) consents to the appointment of a Custodian of it or for any substantial part of its property; (d) makes a general assignment for the benefit of its creditors; (e) files an answer or consent seeking reorganization or relief; (f) shall admit in writing its inability to pay its debts generally; or (g) consents to the filing of a petition in bankruptcy; or (viii) a court of competent jurisdiction in any involuntary case or proceeding enters a Bankruptcy Order against the Company or any Significant Restricted Subsidiary, and such Bankruptcy Order remains unstayed and in effect for 60 consecutive days; or (ix) a Custodian shall be appointed out of court with respect to the Company or any Significant Restricted Subsidiary or with respect to all or any substantial part 66 -58- of the assets or properties of the Company or any Significant Restricted Subsidiary. Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to the Securities (other than an Event of Default with respect to the Company described in clause (vii) of the preceding paragraph) occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount at maturity of the outstanding Securities by notice in writing to the Company may declare the Default Amount of all the outstanding Securities to be due and payable immediately and, upon any such declaration, such Default Amount will become immediately due and payable. If an Event of Default specified in clause (vi) of the preceding paragraph with respect to the Company occurs under the Indenture, the outstanding Securities will ipso facto become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of the Securities. Notwithstanding the foregoing, in the event of a declaration of acceleration in respect of the Securities because an Event of Default specified in clause (v) above shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or paid or such Event of Default shall have been cured or waived by the holders of such Indebtedness and written notice of such discharge, cure or waiver, as the case may be, shall have been given to the Trustee by the Company or by the requisite holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the Securities, and no other Event of Default shall have occurred which has not been cured or waived during such 30-day period. After a declaration of acceleration, the Holders of a majority in aggregate principal amount at maturity of the outstanding Securities may, by notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default have been cured or waived, other than nonpayment of principal of, premium, if any, and accrued interest on the Securities that has become due solely as a result of the acceleration thereof, and if the rescission of acceleration would not conflict with any judgment or decree. Past defaults under this Indenture (except a default in the payment of the principal of, premium, if any, or interest on any Security issued thereunder or in respect 67 -59- of a covenant or a provision which cannot be modified or amended without the consent of all Holders of such Securities) may be waived by the Holders of a majority in aggregate principal amount of the outstanding Securities. Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if an Event of Default specified in Section 5.01(i), 5.01(ii) or 5.01(iii) (to the extent relating to the payment required by Section 10.19) shall have occurred and be continuing, the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders, the whole amount then due and payable on such Securities for principal, premium, if any, and interest, with interest upon the overdue principal, premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate then borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may, but is not obligated under this paragraph to, at the expense of the Company, institute a judicial proceeding for the collection of the sums so due and unpaid and may, but is not obligated under this paragraph to, prosecute such proceeding to judgment or final decree, and may, but is not obligated under this paragraph to, enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion, but is not obligated under this paragraph to, (i) proceed to protect and enforce its rights and the rights of the Holders under this Indenture by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted herein, or (ii) proceed to protect and enforce any other proper remedy. No recovery of any such judgment upon any 68 -60- property of the Company shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 5.04. Trustee May File Proofs of Claims. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities, including the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. 69 -61- Section 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders in respect of which such judgment has been recovered. Section 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article, shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: to the Trustee for amounts due under Section 6.07; Second: to Holders for interest accrued on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest; Third: to Holders for principal and premium, if any, amounts owing under the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and premium, if any; and Fourth: the balance, if any, to the Company. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 5.06. 70 -62- Section 5.07. Limitation on Suits. No Holder of any Security will have any right to institute any proceeding with respect to this Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default thereunder and unless the Holders of at least 25% of the aggregate principal amount of the outstanding Securities under this Indenture shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as Trustee, and the Trustee shall have not received from the Holders of a majority in aggregate principal amount at maturity of outstanding Securities a direction inconsistent with such request and shall have failed to institute such proceeding within 45 days. However, such limitations do not apply to a suit instituted by a holder of a Security for enforcement of payment of the principal of and premium, if any, or interest on such Security on or after the respective due dates expressed in such Security. During the existence of an Event of Default under this Indenture, the Trustee is required to exercise such rights and powers vested in it under this Indenture and use the same degree of care and skill in its exercise thereof as a prudent Person would exercise under the circumstances in the conduct of such Person's own affairs. Subject to the provisions of this Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee is not under any obligation to exercise any of its rights or powers under this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to such Trustee security or indemnity satisfactory to it. Subject to certain provisions of this Indenture concerning the rights of the Trustee, the Holders of a majority in aggregate principal amount of the applicable issue of outstanding Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee under this Indenture, or exercising any trust, or power conferred on the Trustee. It is understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Security to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture or any Security, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. 71 -63- Section 5.08. Unconditional Right of Holders To Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive cash payment of the principal of, premium, if any, and (subject to Section 3.07 hereof) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the respective Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Security and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. Rights and Remedies Cumulative. Except as provided in Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be 72 -64- exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.12. Control by Majority. The Holders of a majority in aggregate principal amount at maturity of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture or any Security or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 5.13. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount at maturity of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Security or (b) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Section 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action 73 -65- taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount at maturity of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the respective Redemption Dates). Section 5.15. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Securities contemplated herein or in the Securities or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 5.16. Unconditional Right of Holders To Institute Certain Suits. Notwithstanding any other provision in this Indenture and any other provision of any Security, the right of any Holder of any Security to receive payment of the principal of, premium, if any, and interest on such Security on or after the respective Stated Maturities (or the respective Redemption Dates, in the case of redemption) expressed in such Security, or after such respective dates, shall not be impaired or affected without the consent of such Holder. 74 -66- ARTICLE SIX THE TRUSTEE Section 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein). (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own gross negligent action, its own gross negligent failure to act, or its own willful misconduct, except that no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 75 -67- (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01. Section 6.02. Notice of Defaults. Within 90 days after the occurrence of any Default or Event of Default with respect to the outstanding Securities, the Trustee shall give the Holders notice of all uncured Defaults or Events of Default known to it; provided, however, that, except in the case of an Event of Default in payment with respect to such Securities or a Default or Event of Default in complying with Article Eight, the Trustee shall be protected in withholding such notice if and so long as a committee of its trust officers in good faith determines that the withholding of such notice is in the interest of the Holders. Section 6.03. Certain Rights of Trustee. Subject to Section 6.01 hereof and the provisions of Section 315 of the Trust Indenture Act: (a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document (whether in its original or facsimile form) believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company may be sufficiently evidenced by a Board Resolution thereof; (c) the Trustee may consult with counsel of its selection and any advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the 76 -68- Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by the Trustee in compliance with such request or direction; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture other than any liabilities arising out of its own gross negligence; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security, other evidence of indebtedness or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Securities then Outstanding; provided, however, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require indemnity satisfactory to it against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the sole cost of the Company and shall incur no liability or additional liability of any kind by reason of such inquiry or investigation; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. 77 -69- Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility and Qualification on Form T-1, if any, to be supplied to the Company are true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc. The Trustee, any Paying Agent, Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent and, subject to Sections 6.08 and 6.13 hereof and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. Section 6.06. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required herein or by law. The Trustee shall not be under any liability for interest on any moneys received by it hereunder. Section 6.07. Compensation and Indemnification of Trustee and Its Prior Claim. The Company covenants and agrees: (a) to pay to the Trustee from time to time, and the Trustee shall be entitled to, compensation for all services rendered by it hereunder 78 -70- (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as the Company and the Trustee shall, from time to time, agree in writing; (b) to reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, fees, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation, fees, and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its gross negligence, bad faith or willful misconduct; and (c) to indemnify the Trustee (which for purposes of this Section 6.07 shall include its officers, directors, employees and agents) and each predecessor Trustee for, and to hold it harmless against, any and all loss, liability, claim, damage, or expense (including taxes other than taxes based upon the income of the Trustee) incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including enforcement of this Section 6.07. The obligations of the Company under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for such expenses, fees, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. To secure the obligations of the Company to the Trustee under this Section 6.07, the Trustee shall have a prior Lien upon all property and funds held or collected by the Trustee as such, except funds and property paid by the Company held in trust for the benefit of the Holders of Securities. Section 6.08. Conflicting Interests. The Trustee shall be subject to and comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2) and which shall have or be wholly owned by an entity having a combined capital and surplus of at least $50,000,000, and have a Corporate Trust Office in the Borough of Manhattan in The City of New York, State of New 79 -71- York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of any Federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.10. Resignation and Removal; Appointment of Successor Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee, or any trustee or trustees hereinafter appointed, may at any time resign by giving written notice thereof to the Company at least 20 Business Days prior to the date of such proposed resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors of the Company, a copy of which shall be delivered to the resigning Trustee and a copy to the successor Trustee. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 20 Business Days after the giving of such notice of resignation, the resigning Trustee may, or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount at maturity of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act in 80 -72- accordance with Section 6.08 hereof after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 hereof and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose or rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, the Holder of any Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution of its Board of Directors, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of the Securities and accepted appointment in the manner hereinafter provided, the Holder of any Security who has been a bona fide Holder for at least six months may, subject to Section 5.14, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by 81 -73- first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor Trustee, upon payment of any and all amounts due it pursuant to Section 6.07, such retiring Trustee shall duly assign, transfer and deliver to the successor Trustee all moneys and property at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers, duties and obligations of the retiring Trustee. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.07. No successor Trustee with respect to the Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor Trustee shall be eligible to act as Trustee under this Article. Upon acceptance of appointment by any successor Trustee as provided in this Section 6.11, the successor shall give notice thereof to the Holders of the Securities, by mailing such notice to such Holders at their addresses as they shall appear on the Security Register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 6.10. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Company. 82 -74- Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated or amalgamated, or any corporation resulting from any merger, conversion, amalgamation or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such corporation shall be eligible under this Article to serve as Trustee hereunder. In case at the time such successor to the Trustee under this Section 6.12 shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee under this Section 6.12 may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have been authenticated. Section 6.13. Trustee's Application for Instructions from the Company. Any application by the Trustee for written instructions from the Company may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application concerning the action to be taken or omitted. 83 -75- ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation of Information; Company To Furnish Trustee Names and Addresses of Holders. (a) The Trustee shall preserve the names and addresses of the Securityholders and otherwise comply with Section 312(a) of the Trust Indenture Act. If the Trustee is not the Registrar, the Company shall furnish or cause the Registrar to furnish to the Trustee before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Securityholders. Neither the Company nor the Trustee shall be under any responsibility with regard to the accuracy of such list. (b) The Company will furnish or cause to be furnished to the Trustee: (i) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (ii) at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Security Registrar, no such list need be furnished pursuant to this Subsection 7.01(b). Section 7.02. Communications of Holders. Holders may communicate with other Holders with respect to their rights under this Indenture or under the Securities pursuant to Section 312(b) of the Trust Indenture Act. The Company and the Trustee and any and all other persons 84 -76- benefited by this Indenture shall have the protection afforded by Section 312(c) of the Trust Indenture Act. Section 7.03. Reports by Trustee. Within 60 days after June 1 of each year commencing with the first June 1 following the date of this Indenture, the Trustee shall mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such June 1, in accordance with, and to the extent required under Section 313 of the Trust Indenture Act. At the time of its mailing to Holders, a copy of each such report shall be filed by the Trustee with the Company, the SEC and with each stock exchange on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange or delisted therefrom. ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Section 8.01. Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge with or into (whether or not the Company is the Surviving Person) any other entity and the Company shall not, and shall not cause or permit any Restricted Subsidiary to, sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of the Company's properties and assets (determined on a consolidated basis for the Company and the Restricted Subsidiaries) to any entity in a single transaction or series of related transactions, unless: (i) either (x) the Company shall be the Surviving Person or (y) the Surviving Person (if other than the Company) shall be a corporation, partnership or limited liability company organized and validly existing under the laws of the United States of America or any State thereof or the District of Columbia, and shall expressly assume by a supplemental indenture the due and punctual payment of the principal of, premium, if any, and interest on all the Securities and the performance and observance of every covenant of this Indenture and the Registration Rights Agreement to be performed or observed on the part of the Company; (ii) immediately thereafter, no Default shall have occurred and be continuing; (iii) immediately after giving effect to any such transaction 85 -77- involving the Incurrence by the Company or any Restricted Subsidiary, directly or indirectly, of additional Indebtedness (and treating any Indebtedness not previously an obligation of the Company or any Restricted Subsidiary in connection with or as a result of such transaction as having been Incurred at the time of such transaction), the Company or the Surviving Person, as applicable, could Incur, on a pro forma basis after giving effect to such transaction as if it had occurred at the beginning of the latest fiscal quarter for which consolidated financial statements of the Company are available, at least $1.00 of additional Indebtedness under the proviso in Section 10.12; and (iv) the Company has delivered to the Trustee an opinion of counsel to the effect that the Holders will not recognize gain or loss for federal income tax purposes as a result of such transaction; provided, however, that the Company may consolidate with or merge with or into Holdings without complying with clause (iii) of this Section 8.01. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all the properties and assets of one or more Restricted Subsidiaries the Equity Interests of which constitute all or substantially all the properties and assets of the Company shall be deemed to be the transfer of all or substantially all the properties and assets of the Company. The meaning of the phrase "all or substantially all" as used above varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under relevant law and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Company, and therefore it may be unclear whether the foregoing provisions are applicable. Section 8.02. Successor Substituted. In the event of any transaction (other than a lease) described in and complying with the conditions listed above in which the Company is not the Surviving Person and the Surviving Person is to assume all of the Obligations of the Company under the Securities, this Indenture and the Registration Rights Agreement pursuant to a supplemental indenture, such Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company and the Company 86 -78- shall be discharged from its Obligations under this Indenture and the Securities. For all purposes of this Indenture and the Securities (including the provision of this Section 8.02 and the covenants described in Sections 10.11, 10.14 and 10.16), Subsidiaries of any Surviving Entity shall, upon such transaction or series of related transactions, become Restricted Subsidiaries unless and until designated as Unrestricted Subsidiaries pursuant to and in accordance with Section 10.15. ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form and substance satisfactory to the Trustee, or waiver for any of the following purposes: (a) to evidence the succession of another person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities; (b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company, as applicable, herein, in the Securities, as the case may be; (c) to cure any ambiguity, to correct or supplement any provision herein, in the Securities which may be defective or inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture and the Securities; provided, however, that, in each case, such provisions shall not materially adversely affect the interests of the Holders; (d) to comply with the requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 9.05 hereof or otherwise; 87 -79- (e) to evidence and provide the acceptance of the appointment of a successor Trustee hereunder; (f) to mortgage, pledge, hypothecate or grant a security interest in any property or assets in favor of the Trustee for the benefit of the Holders as security for the payment and performance of this Indenture Obligations; or (g) to increase the rate of interest on the Securities or otherwise amend its indenture in a manner benefiting the Holders; provided, however, that the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not materially adversely affect the interests or legal rights of any Holders. Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders. With the written consent of the Holders of not less than a majority in aggregate principal amount at maturity of the Outstanding Securities delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto satisfactory to the Trustee for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or the Securities, or of modifying in any manner the rights of the Holders under this Indenture or the Securities. The Holders of not less than a majority in aggregate principal amount at maturity of the Outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities. However, no such supplemental indenture, agreement or instrument, including any waiver pursuant to Section 5.13, shall, without the written consent or waiver of the Holder of each Outstanding Security affected thereby: (a) reduce the principal amount at maturity of, change the fixed maturity of, or alter the redemption provisions of, the Securities; (b) change the currency in which any Securities or amounts owing thereon are payable; (c) reduce the percentage of the aggregate principal amount at maturity outstanding of Securities which must 88 -80- consent to an amendment, supplement or waiver or consent to take any action under this Indenture or the Securities; (d) impair the right to institute suit for the enforcement of any payment on or with respect to the Securities; (e) waive a default in payment with respect to the Securities; (f) reduce the rate or extend the time for payment of interest on the Securities; (g) following the occurrence of a Change of Control or an Asset Sale, alter the Company's obligation to purchase the Securities in accordance with this Indenture or waive any default in the performance thereof; or (h) affect the ranking of the Securities in a manner adverse to the Holder. Upon the written request of the Company accompanied by a copy of a Board Resolution authorizing the execution of any such supplemental indenture or other agreement, instrument or waiver, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture or other agreement, instrument or waiver. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture or other agreement, instrument or waiver, but it shall be sufficient if such Act shall approve the substance thereof. Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate from each obligor under the Securities entering into such supplemental indenture, agreement, instrument or waiver, each stating that the execution of such supplemental indenture, agreement, instrument or 89 -81- waiver (a) is authorized or permitted by this Indenture and (b) does not violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company or any Subsidiary of the Company. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement, instrument or waiver which affects the Trustee's own rights, duties or immunities under this Indenture, the Securities or otherwise. Section 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article Nine, this Indenture and/or the Securities shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture and/or the Securities, as the case may be, for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. Section 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee upon a Company Order in exchange for Outstanding Securities. Section 9.07. Record Date. The Company may, but shall not be obligated to, fix, a record date for the purpose of determining the Holders entitled to consent to any supplemental indenture, agreement or instrument or any waiver, and shall promptly notify the Trustee of any such record date. If a record date is fixed those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to 90 -82- consent to such supplemental indenture, agreement or instrument or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. Section 9.08. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if a notation of the consent is not made on any Security. However, any such Holder, or subsequent Holder, may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver shall become effective in accordance with its terms and thereafter bind every Holder. ARTICLE TEN COVENANTS Section 10.01. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of, premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 10.02. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan in The City of New York, State of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee at its Corporate Trust Office will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or 91 -83- shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York, State of New York) where the Securities may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York, State of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 10.03. Money for Security Payments To Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. If the Company is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on, any Securities, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Holders entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent will agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: 92 -84- (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company (or any other obligor upon the Securities) in the making of any payment of principal of, premium, if any, or interest on the Securities; (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent will be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company upon receipt of a Company Request therefor, or (if then held by the Company) will be discharged from such trust; and the Holder of such Security will thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and the Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the 93 -85- date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. Section 10.04. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of the Restricted Subsidiaries; provided, however, that the Company will not be required to preserve any such right, license or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Restricted Subsidiaries as a whole and that the loss thereof is not adverse in any material respect to the Holders; provided, further, that the foregoing will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company or any of its assets in compliance with the terms of this Indenture. Section 10.05. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed (i) upon the Company or any of its Subsidiaries or (ii) upon the income, profits or property of the Company or any of the Restricted Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, could reasonably be expected to become a Lien upon the property of the Company or any of the Restricted Subsidiaries; provided, however, that the Company will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted. Section 10.06. Maintenance of Properties. The Company will cause all material properties owned by the Company or any of the Restricted Subsidiaries or used or held for use in the conduct of their respective businesses to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in 94 -86- connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.06 will prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any of the Restricted Subsidiaries and is not disadvantageous in any material respect to the Holders. Section 10.07. Insurance. The Company will at all times keep all of its and the Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually and customarily so insured by corporations similarly situated and owning like properties. Section 10.08. Books and Records. The Company will, and will cause each of the Restricted Subsidiaries to, keep proper books of record and account, in which full and correct entries will be made of all financial transactions and the assets and business of the Company and each Restricted Subsidiary of the Company in accordance with GAAP. Section 10.09. Reports. Whether or not the Company has a class of securities registered under the Exchange Act, the Company will furnish without cost to each holder of Securities and file with the Trustee and, following the effectiveness of any Exchange Offer Registration Statement or a Shelf Registration Statement, file with the SEC (i) within the applicable time period required under the Exchange Act, after the end of each fiscal year of the Company, the information required by Form 10-K (or any successor form thereto) under the Exchange Act with respect to such period, (ii) within the applicable time period required under the Exchange Act after the end of each of the first three fiscal quarters of each fiscal year of the Company, the information required by Form 10-Q (or any successor form thereto) under the Exchange Act with respect to such period and (iii) any current reports on Form 8-K (or any successor forms) required to be filed under the Exchange Act. 95 -87- Section 10.10. Change of Control. In the event of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Company will be obligated, within 30 days after the Change of Control Date, to make an offer to purchase (a "Change of Control Offer") on a business day not later than the 60th day following the Change of Control Date (the "Change of Control Payment Date") all of the then outstanding Securities at a purchase price (the "Change of Control Purchase Price") in cash equal to 101% of the Accreted Value of the Securities on the Change of Control Payment Date, unless the Change of Control Payment Date is on or after March 1, 2004, in which case such Change of Control Purchase Price shall be equal to 101% of the principal amount at maturity thereof, plus accrued and unpaid interest thereon, if any, to the Change of Control Payment Date. The Company will be required to purchase all Securities properly tendered and not withdrawn pursuant to the Change of Control Offer. Prior to the mailing of the notice, referred to below, but in any event within 30 days following any Change of Control, the Company covenants to either (i) repay in full and terminate all commitments under all Indebtedness under the Credit Facility or offer to repay in full and terminate all commitments under all Indebtedness under the Credit Facility and to repay the Indebtedness owed to each lender which has accepted such offer or (ii) obtain the requisite consents under the Credit Facility to permit the repurchase of the Securities as provided below. The Company shall first comply with the covenant in the immediately preceding sentence before it shall be required to repurchase Securities pursuant to the provisions described herein. The Company's failure to comply with the two immediately preceding sentences shall constitute an Event of Default described in clause (iv) and not in clause (ii) under Section 5.01. In order to effect such Change of Control Offer, the Company will, not later than the 30th day after the Change of Control Date, be obligated to mail to each Holder of Securities notice of the Change of Control Offer, which notice will govern the terms of the Change of Control Offer and will state, among other things, the procedures that Holders must follow to accept the Change of Control Offer. The Change of Control Offer will be required to be kept open for a period of at least 20 business days. 96 -88- The notice, which shall govern the terms of the Change of Control Offer, shall include such disclosures as are required by law and shall state: (a) that the Change of Control Offer is being made pursuant to this Section 10.10 and that all Securities tendered into the Change of Control Offer will be accepted for payment; (b) the purchase price (including the amount of accrued interest, if any) for each Security, the Change of Control Purchase Date and the date on which the Change of Control Offer expires; (c) that any Security not tendered for payment will continue to accrue interest in accordance with the terms thereof; (d) that, unless the Company shall default in the payment of the purchase price, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; (e) that Holders electing to have Securities purchased pursuant to a Change of Control Offer will be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Purchase Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; (f) that Holders of Securities will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Change of Control Purchase Date, a facsimile transmission or letter setting forth the name of the Holders, the principal amount of Securities the Holders delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (g) that Holders whose Securities are purchased only in part will be issued Securities of like tenor equal in principal amount to the unpurchased portion of the Securities surrendered; 97 -89- (h) the instructions that Holders must follow in order to tender their Securities; and (i) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the SEC pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the SEC, the comparable reports prepared pursuant to Section 10.09), a description of material developments in the Company's business, information with respect to pro forma historical financial information after giving effect to such Change of Control and such other information concerning the circumstances and relevant facts regarding such Change of Control and Change of Control Offer as would, in the good faith judgment of the Company, be material to a Holder of Securities in connection with the decision of such Holder as to whether or not it should tender Securities pursuant to the Change of Control Offer. On the Change of Control Payment Date, the Company will (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent will promptly mail or deliver to the Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security of like tenor equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer not later than the first Business Day following the Change of Control Purchase Date. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act, and any other applicable securities laws or regulations in connection with the repurchase of Securities pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations and any applicable requirements of any securities exchange on which the Securities are listed conflict with the provisions of this Section 10.10, the Company will comply with the applicable securities laws and regulations 98 -90- and requirements and shall not be deemed to have breached its obligations under this Section 10.10 by virtue thereof. Section 10.11. Limitation on Indebtedness of the Company. The Company will not, directly or indirectly, Incur, contingently or otherwise, any Indebtedness (including any Acquired Indebtedness), except that the Company may Incur each and all of the following: (a) Indebtedness of the Company evidenced by the Securities and this Indenture; (b) Indebtedness represented by a guarantee of (1) the Company's obligations of amounts outstanding under the Credit Facility and (2) Indebtedness of a Restricted Subsidiary Incurred under clauses (b)(2), (e), (h) and (i) of the definition of "Permitted Indebtedness," and any refinancing thereof under clause (g) of such definition, pursuant to Section 10.12; and (c) Indebtedness of the Company the proceeds of which are used solely to refinance Indebtedness Incurred under clause (a) above; provided that (i) the principal amount of Indebtedness incurred pursuant to this clause (c) (or, if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness) shall not exceed the sum of (x) if prior to March 1, 2004, the total Accreted Value or, if on or after March 1, 2004, the aggregate principal amount at maturity of the Securities refinanced, plus (y) the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated purchase, plus (z) the amount of expenses in connection therewith, (ii) the new Indebtedness refinancing such Indebtedness shall have an Weighted Average Life to Stated Maturity that is equal to or greater than the remaining Weighted Average Life Stated Maturity of such Indebtedness and shall have no scheduled principal payment prior to the 91st day after the Stated Maturity for the final scheduled principal payment of such Indebtedness, and (iii) in the case of any partial refinancing of the Securities, such new Indebtedness shall be unsecured. 99 -91- Section 10.12. Limitation on Additional Indebtedness of Subsidiaries of the Company. The Company will not permit any Restricted Subsidiary to, directly or indirectly, Incur, contingently or otherwise, any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness; provided that the Restricted Subsidiaries will be permitted to Incur Indebtedness (including Acquired Indebtedness), if, at the time of and immediately after giving pro forma effect to such Incurrence (including the application of the net proceeds therefrom), the Debt to Operating Cash Flow Ratio of the Company would be less than or equal to 6.5 to 1.0. Section 10.13. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 95 days after the end of each fiscal year of the Company ending after the date hereof, a written statement signed by the chairman or a chief executive officer, the principal financial officer or principal accounting officer of the Company, stating (i) that a review of the activities of the Company during the preceding fiscal year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and (ii) that, to the knowledge of each officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant and condition contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions, conditions and covenants hereof (or, if a Default shall have occurred, describing all such Defaults of which such officers may have knowledge, their status and what action the Company is taking or proposes to take with respect thereto). (b) When any Default under this Indenture has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder of any other evidence of Indebtedness of the Company or any Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness (other than Indebtedness evidenced by the Securities) in the principal amount of less than $5,000,000), the Company will promptly notify a Responsible Officer of the Trustee of such Default, notice or action and will deliver to the Trustee by registered or certified mail or by telegram, or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such event, notice or other action within five 100 -92- Business Days after the Company becomes aware of such occurrence and what action the Company is taking or proposes to take with respect thereto. Section 10.14. Limitation on Liens. The Company will not, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind upon any of its property or assets, whether now owned or acquired after the Issue Date, or any proceeds therefrom, or assign or convey any right to receive income therefrom to secure either (i) Subordinated Indebtedness, unless the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness, or (ii) any Indebtedness of the Company that is not Subordinated Indebtedness, unless the Securities are equally and ratably secured with the Liens securing such other Indebtedness, except, in either case for Liens to secure Indebtedness on cash representing the proceeds of such Indebtedness or Government Securities acquired with such cash and pledged for the purpose of providing for the payment of interest on such Indebtedness and except for Liens to secure the Company's guarantee of the Credit Facility and Interest Rate Protection Obligations of a Restricted Subsidiary. Section 10.15. Designation of Unrestricted Subsidiaries. (a) The Company may designate after the Issue Date any Subsidiary of the Company (other than Systems) as an "Unrestricted Subsidiary" under this Section 10.15 (a "Designation") only if: (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (ii) at the time of and after giving effect to such Designation, Systems could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the proviso in Section 10.12; and (iii) the Company would be permitted to make an Investment (other than a Permitted Investment) at the time of Designation (assuming the effectiveness of such Designation) pursuant to the first paragraph or subclause (iv) of the second paragraph of Section 10.16 in an amount (the "Designation Amount") equal 101 -93- to the Fair Market Value of the Company's proportionate interest of the Company and the Restricted Subsidiaries in such Subsidiary on such date. Notwithstanding the above, no Subsidiary of the Company shall be designated an Unrestricted Subsidiary if such Subsidiary distributes, directly or indirectly, DIRECTV Services pursuant to an agreement with the NRTC or has any right, title or interest in the revenue or profits in, or holds any Lien in respect of, any such agreement. Neither the Company nor any Restricted Subsidiary shall at any time (x) provide credit support for, subject any of its property or assets (other than the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of, or guarantee, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary, or (z) be directly or indirectly liable for any Indebtedness that provides that the Holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary, except, in the case of clause (x) or (y), to the extent otherwise permitted under the terms of this Indenture, including, without limitation, pursuant to Sections 10.16 and 10.19. (b) The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (i) no Default or Event of Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by a Board Resolution, delivered to the Trustee certifying compliance with the foregoing provisions. 102 -94- Section 10.16. Limitation on Restricted Payments. The Company will not, and will not permit any of the Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or after giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, a Restricted Subsidiary would be able to Incur $1.00 of Indebtedness under the Debt to Operating Cash Flow Ratio set forth in Section 10.12; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments and Designation Amounts declared or made on or after the Issue Date does not exceed an amount equal to the sum of, without duplication, (a) the difference between (x) the Cumulative Operating Cash Flow determined for the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of such Restricted Payment and (y) 150% of Cumulative Consolidated Interest Expense determined for the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of such Restricted Payment, plus (b) the aggregate net cash proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issue and sale (other than to a Subsidiary of the Company) of its Qualified Equity Interests after the Issue Date, plus (c) the aggregate net cash proceeds received by the Company or any Restricted Subsidiary after the Issue Date upon the conversion of, or exchange for, Indebtedness of the Company or a Restricted Subsidiary that has been converted into or exchanged for Qualified Equity Interests of the Company, plus (d) in the case of the disposition or repayment of any Investment constituting a Restricted Payment (other than an Investment made pursuant to clause (iv) of the following paragraph) made after the Issue Date, an amount (to the extent not included in the computation of Cumulative Operating Cash Flow) equal to the lesser of: (i) the return of capital with respect to such Investment and (ii) the amount of such Investment that was treated as a Restricted Payment, plus (e) so long as the Designation thereof was treated as a Restricted Payment made after the Issue Date, 103 -95- with respect to any Unrestricted Subsidiary that has been redesignated as a Restricted Subsidiary after the Issue Date in accordance with Section 10.15, the Company's proportionate interest equal to the Fair Market Value of any Unrestricted Subsidiary that has been redesignated as a Restricted Subsidiary after the Issue Date in accordance with Section 10.15 not to exceed in any case the Designation Amount with respect to such Restricted Subsidiary upon its Designation, minus (f) the greater of (i) $0 and (ii) the Designation Amount (measured as of the date of Designation) with respect to any Subsidiary of the Company that has been Designated as an Unrestricted Subsidiary after the Issue Date in accordance with Section 10.15 and minus (g) 50% of the aggregate principal amount of outstanding Indebtedness included in the calculation of clause (c) of the definition of Permitted Indebtedness at the time of such Restricted Payment to the extent funded with the net cash proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issue and sale (other than to a Subsidiary of the Company) of its Qualified Equity Interests after the Issue Date. For purposes of the preceding clauses (b) and (c) and without duplication and for purposes of the definition of Total Incremental Invested Equity, the value of the aggregate net cash proceeds received by the Company upon the issuance of Qualified Equity Interests either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental cash received by the Company upon the conversion, exchange or exercise thereof. The provisions of this Section 10.16 shall not prohibit: (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof, if at such date of declaration such payment would comply with the provisions of this Indenture; (ii) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement or other acquisition of any Equity Interests of the Company (A) in exchange for or conversion into or (B) out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Subsidiary of the Company) of Equity Interests of the Company (other than Disqualified Equity Interests); provided that any such net cash proceeds pursuant to the immediately preceding subclause (B) are excluded from clause (iii)(b) of the preceding paragraph; (iii) so long as no 104 -96- Default shall have occurred and be continuing, the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Indebtedness made by exchange for (including any such exchange pursuant to the exercise of a conversion right or privilege in which cash is paid in lieu of fractional shares or scrip), or out of the net cash proceeds of a substantially concurrent issue or sale (other than to a Subsidiary of the Company) of, (A) Equity Interests (other than Disqualified Equity Interests) of the Company; provided that any such net cash proceeds, to the extent so used, are excluded from clause (iii) of the preceding paragraph, and/or (B) other Subordinated Indebtedness, having a Weighted Average Life to Maturity that is equal to or greater than the Weighted Average Life to Maturity of the Subordinated Indebtedness being purchased, redeemed, defeased or otherwise acquired or retired; (iv) Investments constituting Restricted Payments in Persons engaged primarily in a Permitted Business in an amount not to exceed $10.0 million outstanding at any time; (v) the making of any Investment in or payment of any dividend or distribution by the Company to Holdings for bona fide costs and operating expenses of Holdings directly related to the operations of Holdings and its Subsidiaries; and (vi) the payment of any dividend or distribution by the Company to Holdings to enable it to purchase, redeem, or otherwise acquire or retire for value Equity Interests of Holdings held by employees or former employees of the Company, or any Subsidiary of the Company (or their estates or beneficiaries under their estates) upon death, disability, retirement or termination of employment, not to exceed $1.0 million in any year or $3.0 million in the aggregate since the Issue Date plus, in each case, the amount of the net proceeds received by the Company or any such Subsidiary from life insurance policies on the life of the employee whose Equity Interests are being purchased, redeemed or otherwise acquired or retired for value. In no event shall a Restricted Payment made on the basis of consolidated financial statements prepared in good faith in accordance with GAAP be subject to rescission or constitute a Default by reason of any requisite subsequent restatement of such financial statements which would have made such Restricted Payment prohibited at the time that it was made. In determining the amount of Restricted Payments permissible under this covenant, amounts expended pursuant to clauses (i), (iv) and (vi) of the second preceding paragraph shall be included as Restricted Payments and amounts expended pursuant to clauses (ii), (iii) and (v) shall be excluded. The 105 -97- amount of any non-cash Restricted Payment shall be deemed to be equal to the Fair Market Value thereof at the date of the making of such Restricted Payment. Section 10.17. Ownership of Systems. The Company will at all times be the legal and beneficial owner (as defined in this Indenture) of 100% of the Capital Stock of Systems. Section 10.18. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company will not, and will not cause or permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions to the Company or any other Restricted Subsidiary on its Equity Interests or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (b) make loans or advances to, or guarantee any Indebtedness or other obligations of, the Company or any other Restricted Subsidiary, or (c) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of (i) restrictions under the 12 3/8% Notes Indenture, as the same may from time to time be modified or amended and restrictions under agreements governing Indebtedness Incurred to refinance the 12 3/8% Notes (or refinancings thereof), in each case, so long as the restrictions as modified or amended or contained in such agreements governing such refinancing Indebtedness, as the case may be, are no less favorable to the holders of the Securities in any material respect than the restrictions under the 12 3/8% Notes Indenture on the Issue Date; (ii) restrictions under the Credit Facility so long as such restrictions are no less favorable to the holders of the Securities in any material respect than the restrictions under the Credit Facility in effect on the Issue Date; (iii) restrictions under other agreements governing Indebtedness Incurred in compliance with this Indenture, provided that any such restrictions permit the payment of dividends to the Company in amounts and at the times necessary to permit the payment of cash interest due on the Securities on and after September 1, 2004, but no such permission need apply when a default or event of default in respect of such Indebtedness has occurred and is 106 -98- continuing; (iv) applicable law; (v) any instrument governing Indebtedness or Equity Interests of an Acquired Person acquired by the Company or any Restricted Subsidiary as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred by such Acquired Person in connection with, as a result of or in contemplation of such acquisition); provided, however, that such encumbrances and restrictions are not applicable to the Company or any Restricted Subsidiary, or the properties or assets of the Company or any Restricted Subsidiary, other than the Acquired Person; (vi) customary non-assignment provisions in leases and other contracts entered into in the ordinary course of business and consistent with past practices (including, without limitation, non-assignment provisions in agreements between the Company, Systems or any Restricted Subsidiary and the NRTC with respect to DBS services); (vii) Purchase Money Indebtedness for property acquired in the ordinary course of business that only imposes encumbrances and restrictions on the property so acquired; and (viii) any agreement for the sale or disposition of the Equity Interests or assets of any Restricted Subsidiary; provided, however, that such encumbrances and restrictions described in this clause (viii) are only applicable to such Restricted Subsidiary or assets, as applicable, and any such sale or disposition is made in compliance with Section 10.19 to the extent applicable thereto. Section 10.19. Disposition of Proceeds of Asset Sales. The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold or otherwise disposed of and (b) at least 85% of such consideration consists of (A) cash or Cash Equivalents, (B) properties and capital assets to be used in a Permitted Business and/or (C) Equity Interests in one or more Persons that are primarily engaged in a Permitted Business so long as upon the consummation of any sale in accordance with this clause (C), such Person becomes a Wholly Owned Restricted Subsidiary; provided, however, that, in the case of sales pursuant to clauses (B) and (C) not involving solely an exchange of a Permitted Business and cash (if any), if the Fair Market Value of the assets sold or otherwise disposed of in a single transaction or series of transactions exceeds $5.0 million, the Company shall be required to obtain the written opinion from an Independent Financial Advisor (and file 107 -99- such opinion with the Trustee) stating that the terms of such Asset Sale are fair, from a financial point of view, to the Company or the Restricted Subsidiary involved in such Asset Sale. The amount of any (i) Indebtedness (other than any Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is actually assumed by the transferee in such Asset Sale and from which the Company and the Restricted Subsidiaries are fully released shall be deemed to be cash for purposes of determining the percentage of cash consideration received by the Company or the Restricted Subsidiaries and (ii) notes or other similar obligations received by the Company or the Restricted Subsidiaries from such transferee that are immediately converted, sold or exchanged (or are converted, sold or exchanged within thirty days of the related Asset Sale) by the Company or the Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal to the net cash proceeds realized upon such conversion, sale or exchange for purposes of determining the percentage of cash consideration received by the Company or the Restricted Subsidiaries. Notwithstanding the foregoing, during the term of the Securities, the Company and the Restricted Subsidiaries may engage in Asset Sales involving up to $10.0 million without complying with clause (b) of the first sentence of this paragraph. Notwithstanding the foregoing, the Company or such Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to repay or purchase or retire Indebtedness of Systems and permanently reduce any related commitment, (ii) apply such Net Cash Proceeds to acquire, construct or improve properties and capital assets to be used on a Permitted Business within 365 days after the receipt thereof, or (iii) any combination of the foregoing. To the extent that all or part of the Net Cash Proceeds of any Asset Sale are not applied (or, in the case of clause (i) above, an offer to purchase or retire such Indebtedness of Systems has not been made) within 365 days of such Asset Sale as described in clause (i) or (ii) of the immediately preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall, within 20 days after such 365th day, make an offer to purchase ("Offer to Purchase") all outstanding Securities, at a purchase price in cash equal to 100% of the Accreted Value of the Securities on the Purchase Date, unless the Purchase Date is on or after March 1, 2004, in which case such purchase price shall be an amount in cash equal to 100% of the principal amount at maturity thereof, plus accrued and unpaid interest (including Additional Interest, if 108 -100- any) thereon, if any, to the Purchase Date; provided, however, that the Offer to Purchase may be deferred until there are aggregate Unutilized Net Cash Proceeds equal to or in excess of $10.0 million, at which time the entire amount of such Unutilized Net Cash Proceeds, and not just the amount in excess of $10.0 million, shall be applied as required pursuant to this paragraph. With respect to any Offer to Purchase effected pursuant to this covenant, to the extent that the principal amount at maturity of the Securities tendered pursuant to such Offer to Purchase exceeds the Net Cash Proceeds to be applied to the purchase thereof, such Securities shall be purchased pro rata based on the principal amount at maturity of such Securities tendered by each holder. In the event that the Company makes an Offer to Purchase the Securities, the Company shall comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act, and any violation of the provisions of the Indenture relating to such Offer to Purchase occurring as a result of such compliance shall not be deemed an Event of Default or an event that with the passing of time or giving of notice, or both, would constitute an Event of Default. Each holder of Securities shall be entitled to tender all or any portion of the Securities owned by such holder pursuant to the Offer to Purchase, subject to the requirement that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount at maturity and subject to any proration among tendering holders as described above. Section 10.20. Limitation on Issuances and Sales of Preferred Equity Interests by Restricted Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue any Preferred Equity Interests (other than to the Company or a Restricted Subsidiary) and (ii) will not permit any Person (other than the Company or a Restricted Subsidiary) to own any Preferred Equity Interests of any Restricted Subsidiary. 109 -101- Section 10.21. Limitations on Conduct of Business of the Company and the Restricted Subsidiaries. The Company will not, conduct any trade or business, other than through a Subsidiary and the ownership of Common Stock of Systems, and the Company will not permit any of the Restricted Subsidiaries to be primarily engaged in any business, except for a Permitted Business. Section 10.22. Limitation on Transactions with Affiliates. The Company will not, and will not permit, cause or suffer any Restricted Subsidiary to, conduct any business or enter into any transaction (or series of related transactions that are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial holder of 10% or more of the Common Stock of the Company or any officer or director of the Company (each, an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing, and are fair and reasonable to the Company or such Restricted Subsidiary, as the case may be. Each Affiliate Transaction involving aggregate payments or other Fair Market Value in excess of $5.0 million shall be approved by a majority of the Board of Directors, such approval to be evidenced by a board resolution stating that the Board of Directors has determined that such transaction or transactions comply with the foregoing provisions. In addition to the foregoing, each Affiliate Transaction involving aggregate consideration of $10.0 million or more shall be approved by a majority of the Disinterested Directors; provided that, in lieu of such approval by the Disinterested Directors, the Company may obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction to the Company or the Restricted Subsidiary, as the case may be, are fair from a financial point of view. Notwithstanding the foregoing, the restrictions set forth in this Section 10.22 shall not apply to (i) transactions with or among the Company and any Restricted Subsidiary or between or among Restricted Subsidiaries; (ii) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, bonuses or employment agreements, compensation or employee benefit arrangements and incentive arrangements with any officer, director or employee of the Company entered into in the ordinary course of business (including customary benefits thereunder) and payments under any indemnification 110 -102- arrangements permitted by applicable law; (iii) any transactions undertaken pursuant to any other contractual obligations in existence on the Issue Date (as in effect on the Issue Date); (iv) any Restricted Payments made in compliance with Section 10.16; (v) loans, advances and reimbursements to officers, directors and employees of the Company and the Restricted Subsidiaries for travel, entertainment, moving and other relocation expenses, in each case made in the ordinary course of business and consistent with past business practices; (vi) the pledge of Equity Interests of Unrestricted Subsidiaries to support the Indebtedness thereof; (vii) the sale of products or property by any Person to the Company or a Restricted Subsidiary, or by the Company or any Restricted Subsidiary to any Person, in the ordinary course of business and consistent with past practice and (viii) the issuance and sale by Systems of Qualified Equity Interests. Section 10.23. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company and any other obligor on the Securities will furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenants compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents, certificates and/or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture will include: (i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 111 -103- (iii) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 11.01. Right of Redemption. If the Company elects to redeem Securities pursuant to Paragraph 3 of the Initial Notes or Paragraph 2 of the Exchange Notes, it shall notify the Trustee of the Redemption Date and principal amount at maturity of Securities to be redeemed. Section 11.02. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. Section 11.03. Election To Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution and an Officers' Certificate. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount at maturity of Securities to be redeemed. Section 11.04. Selection by Trustee of Securities To Be Redeemed. In the case of a partial redemption, selection of the Securities for redemption will be made pro rata, by lot or such 112 -104- other method as the Trustee in its sole discretion deems appropriate and just; provided that any redemption pursuant to the provisions relating to a Public Equity Offering shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to procedures of the Depository). No Securities of a principal amount at maturity of $1,000 or less shall be redeemed in part. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at its registered address. If any Security is to be redeemed in part only, the notice of redemption that relates to such Security shall state the portion of the principal amount at maturity thereof to be redeemed. A new Security in a principal amount at maturity equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender for cancellation of the original Security. Upon giving of a redemption notice, interest on Securities called for redemption will cease to accrue from and after the date fixed for redemption (unless the Company defaults in providing the funds for such redemption) and such Securities will cease to be outstanding. The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for partial redemption and the principal amount at maturity thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount at maturity of such Security which has been or is to be redeemed. Section 11.05. Notice of Redemption. Notice of redemption will be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at the address of such Holder appearing in the Security Register. All notices of redemption will fully identify the Securities and will state: (i) the Redemption Date; (ii) the Redemption Price; 113 -105- (iii) if less than all Outstanding Securities are to be redeemed, the identification of the particular Securities to be redeemed; (iv) in the case of a Security to be redeemed in part, the principal amount at maturity of such Security to be redeemed and that after the Redemption Date upon surrender of such Security, a new Security or Securities in the aggregate principal amount at maturity equal to the unredeemed portion thereof shall be issued; (v) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (vi) that on the Redemption Date the Redemption Price shall become due and payable upon each such Security or portion thereof, and that (unless the Company shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; (vii) the place or places where such Securities are to be surrendered for payment of the Redemption Price; (viii) the CUSIP number relating to such Securities; and (ix) the paragraph of the Securities pursuant to which the Securities are being redeemed. Notice of redemption of Securities to be redeemed at the election of the Company will be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. The notice if mailed in the manner herein provided will be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part will not affect the validity of the proceedings for the redemption of any other Security. Section 11.06. Deposit of Redemption Price. On or prior to any Redemption Date, the Company will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold 114 -106- in trust as provided in Section 10.03) an amount of money in same day funds sufficient to pay the Redemption Price of, and accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. Section 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed will, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Securities will cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security will be paid by the Company at the Redemption Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate then borne by such Security. Section 11.08. Securities Redeemed or Purchased in Part. Any Security which is to be redeemed or purchased only in part shall be surrendered to the Paying Agent at the office or agency maintained for such purpose pursuant to Section 10.02 (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to, the Company, the Security Registrar or the Trustee duly executed by the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount at maturity equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed or purchased. 115 -107- ARTICLE TWELVE SATISFACTION AND DISCHARGE Section 12.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Securities herein expressly provided for) and the Trustee, on written demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when either (a) all Securities theretofore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 hereof and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (b) (i) all such Securities not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee in trust an amount of money in dollars sufficient to pay and discharge the entire Indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for the principal amount at maturity of, premium, if any, and accrued interest to the date of such deposit; (ii) the Company has paid all other sums payable hereunder by the Company; and (iii) the Company has delivered to the Trustee (i) irrevocable instructions to apply the deposited money toward payment of the Securities at maturity or on the Redemption Dates thereof, as the case may be, and (ii) an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. 116 -108- Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 12.01, the obligations of the Trustee under Section 12.02 and the last paragraph of Section 10.03 shall survive such satisfaction and discharge. Section 12.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the persons entitled thereto, of the principal of, premium, if any, and interest on the Securities for whose payment such money has been deposited with the Trustee. [signatures on following pages] 117 -109- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. GOLDEN SKY DBS, INC. By: /s/ RODNEY A. WEARY ------------------------------------------- Name: Rodney A. Weary Title: Chief Executive Officer By: /s/ JOHN R. HAGER ------------------------------------------- Name: John R. Hager Title: Chief Financial Officer UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: /s/ GERARD F. GANEY ------------------------------------------- Name: Gerard F. Ganey Title: Senior Vice President 118 EXHIBIT A-1 [Form of Security] THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER PERIOD AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY OR (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON A-1-1 119 TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-1-2 120 GOLDEN SKY DBS, INC. ----------------- 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A CUSIP No. __________ No. ___________ $ This Security is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code. For each $1,000 of principal amount of this Security, the issue price is $518.12 and the amount of original issue discount is $886.88. The issue date of this Security is February 19, 1999 and the yield to maturity is 13 1/2%. GOLDEN SKY DBS, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________ or registered assigns, the principal sum of _______________ Dollars on March 1, 2007, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2004, accruing from March 1, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/2% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the A-1-3 121 person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. A-1-4 122 Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: February 19, 1999 GOLDEN SKY DBS, INC. By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: A-1-5 123 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/2% Senior Discount Notes due 2007, Series A, referred to in the within-mentioned Indenture. Dated: February 19, 1999 UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ----------------------------- Authorized Signatory A-1-6 124 [REVERSE OF SECURITY] 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 13 1/2% Senior Discount Notes due 2007, Series A (herein called the "Initial Securities"). The Securities are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount at maturity to $193,100,000, which may be issued under an indenture (herein called the "Indenture") dated as of February 19, 1999, by and among the Company and United States Trust Company of New York, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities include the Initial Securities, the Private Exchange Securities and the Exchange Securities, issued in exchange for the Initial Securities pursuant to the Registration Rights Agreement. The Initial Securities and the Exchange Securities are treated as a single class of securities under the Indenture. All capitalized terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. A-1-7 125 2. Registration Rights. Pursuant to the Registration Rights Agreement by and among the Company and the Initial Purchasers, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Security shall have the right to exchange this Security for 13 1/2% Senior Discount Notes due 2007, Series B, of the Company (herein called the "Exchange Securities"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Securities (other than as set forth in this paragraph). The Holders of Securities shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Rights Agreement. 3. Redemption. (a) Optional Redemption. The Securities will be redeemable, at the option of the Company, in whole or in part, at any time on or after March 1, 2004 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount at maturity) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2004....................................................... 106.750% 2005....................................................... 103.375% 2006 and thereafter........................................ 100.000%
(b) Optional Redemption upon Public Equity Offerings. On or prior to March 1, 2002, the Company may, at its option, redeem up to 35% of the originally issued aggregate principal amount at maturity of the Securities, at a redemption price in cash equal to 113.5% of the Accreted Value of the Securities at the date of redemption solely with the net proceeds of a Public Equity Offering of the Company or Holdings yielding gross proceeds of at least $40 million and any subsequent Public Equity Offerings; provided, however, that not less than 65% of the originally issued aggregate principal amount of the Securities is outstanding following such redemption. Notice of any such redemption must be given not later than 60 days after the consummation of any sale resulting in the requisite gross proceeds. A-1-8 126 (c) Mandatory Redemption. The Company will not be required to make any mandatory sinking fund payments in respect of the Securities. However, (i) following the occurrence of a Change of Control, the Company will be required to make an offer to purchase all outstanding Securities at a price equal to 101% of the Accreted Value thereof, or if the Change of Control occurs on or after March 1, 2004, the principal amount at maturity thereof (in each case determined at the date of purchase), plus accrued interest thereon, if any, to the date of purchase and (ii) upon the occurrence of an Asset Sale, the Company may be obligated to make an offer to purchase all or a portion of the outstanding Securities at a price equal to 100% of the Accreted Value thereof, or if the Asset Sale occurs on or after March 1, 2004, the principal amount at maturity thereof (determined at the date of purchase), plus accrued and unpaid interest, if any, to the date of purchase. (d) Interest Payments. In the case of any redemption of Series A Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (e) Partial Redemption. In the event of redemption of this Series A Security in part only, a new Series A Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 4. Offers to Purchase. Section 10.10 and 10.19 of the Indenture provide that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Securities in accordance with the procedures set forth in the Indenture. 5. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to and including the date the Securities are paid, may be declared due and payable in the manner and with the effect provided in the Indenture. A-1-9 127 6. Defeasance. The Indenture contains provisions (which provisions apply to this Security) for defeasance at any time of (a) the entire indebtedness of the Company and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 7. Amendments and Waivers. The Indenture permits, with certain exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount at maturity of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount at maturity of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. 8. Denominations, Transfer and Exchange. The Securities are issuable only in registered form without coupons in denominations of $1,000 principal amount at maturity and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like aggregate principal amount at maturity of Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon A-1-10 128 one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 9. Persons Deemed Owners. Prior to and at the time of due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 10. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: Golden Sky DBS, Inc., 605 West 47th Street, Suite 300, Kansas City, Missouri 64112. A-1-11 129 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to ___________________________________ ________________________________________________________________________________ (Insert assignee's social security or tax ID number)____________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________________________________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the SEC of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Security (or any Predecessor Security) or the last date on which the Company or any Affiliate of the Company was the owner of this Security (or any Predecessor Security), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: A-1-12 130 [Check One] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or [ ] (b) this Security is being transferred other than in accordance with (a) above and documents, including (i) a transferee certificate substantially in the form of Exhibit C to the Indenture in the case of a transfer to non-QIB Accredited Investors or (ii) a transferor certificate substantially in the form of Exhibit D to the Indenture in the case of a transfer pursuant to Regulation S, are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.17 of the Indenture shall have been satisfied. Date: _______________________ Your signature: _________________________________ (Sign exactly as your name appears on the other side of this Security) By:______________________________ NOTICE: To be executed by an executive officer Signature Guarantee:____________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional A-1-13 131 buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:_________________________________ ________________________________ NOTICE: To be executed by an executive officer A-1-14 132 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.10 or 10.19 of the Indenture, check the appropriate box: Section 10.10 [ ] Section 10.19 [ ] If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.10 or 10.19 of the Indenture, state the principal amount at maturity of such portion: $__________________ Date:__________________________ Your signature:________________________________ (Sign exactly as your name appears on the other side of this Security) By:_____________________________ NOTICE: To be executed by an executive officer Signature Guarantee:____________________ A-1-15 133 Exhibit A-2 GOLDEN SKY DBS, INC. ----------------- 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES B CUSIP No. __________ No. ___________ $ This Security is issued with original issue discount for purposes of Section 1271 et seq. of the Internal Revenue Code. For each $1,000 of principal amount of this Security, the issue price is $518.12 and the amount of original issue discount is $886.88. The issue date of this Security is February 19, 1999 and the yield to maturity is 13 1/2%. GOLDEN SKY DBS, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________ or registered assigns, the principal sum of _______________ Dollars on March 1, 2007, at the office or agency of the Company referred to below, and to pay interest thereon on March 1 and September 1 (each an "Interest Payment Date"), of each year, commencing on September 1, 2004, accruing from March 1, 2004 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13 1/2% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on February 15 or August 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, A-2-1 134 to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. A-2-2 135 Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: February 19, 1999 GOLDEN SKY DBS, INC. By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: A-2-3 136 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 13 1/2% Senior Discount Notes due 2007, Series B, referred to in the within-mentioned Indenture. Dated: February 19, 1999 UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ------------------------------------- Authorized Signatory A-2-4 137 REVERSE OF SECURITY 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 13 1/2% Senior Discount Notes due 2007, Series B (herein called the "Exchange Securities"). The Securities are limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount at maturity to $193,100,000, which may be issued under an indenture (herein called the "Indenture") dated as of February 19, 1999, by and among the Company and United States Trust Company of New York, as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities include the Initial Securities, the Private Exchange Securities and the Exchange Securities, issued in exchange for the Initial Securities pursuant to the Registration Rights Agreement. The Initial Securities and the Exchange Securities are treated as a single class of securities under the Indenture. All capitalized terms used in this Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) (the "TIA"), as in effect on the date of the Indenture. Notwithstanding anything to the contrary herein, the Securities are subject to all such terms, and Holders of Securities are referred to the Indenture and the TIA for a statement of such terms. No reference herein to the Indenture and no provisions of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. A-2-5 138 2. Redemption. (a) Optional Redemption. The Securities will be redeemable, at the option of the Company, in whole or in part, at any time on or after March 1, 2004 upon not less than 30 nor more than 60 days' written notice at the redemption prices (expressed as percentages of principal amount at maturity) set forth below, plus accrued and unpaid interest thereon, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on March 1 of each of the years indicated below:
YEAR PERCENTAGE ---- ---------- 2004....................................................... 106.750% 2005....................................................... 103.375% 2006 and thereafter........................................ 100.000%
(b) Optional Redemption upon Public Equity Offerings. On or prior to March 1, 2002, the Company may, at its option, redeem up to 35% of the originally issued aggregate principal amount at maturity of the Securities, at a redemption price in cash equal to 113.5% of the Accreted Value of the Securities at the date of redemption solely with the net proceeds of a Public Equity Offering of the Company or Holdings yielding gross proceeds of at least $40 million and any subsequent Public Equity Offerings; provided, however, that not less than 65% of the originally issued aggregate principal amount of the Securities is outstanding following such redemption. Notice of any such redemption must be given not later than 60 days after the consummation of any sale resulting in the requisite gross proceeds. (c) Mandatory Redemption. The Company will not be required to make any mandatory sinking fund payments in respect of the Securities. However, (i) following the occurrence of a Change of Control, the Company will be required to make an offer to purchase all outstanding Securities at a price equal to 101% of the Accreted Value thereof, or if the Change of Control occurs on or after March 1, 2004, the principal amount at maturity thereof (in each case determined at the date of purchase), plus accrued interest thereon, if any, to the date of purchase and (ii) upon the occurrence of an Asset Sale, the Company may be obligated to make an offer to purchase all or a portion of the outstanding Securities at a price equal to 100% of the Accreted Value thereof, or if the Asset Sale occurs on or after March 1, 2004, the principal amount at maturity thereof (determined at the date of purchase), plus accrued and unpaid interest, if any, to the date of purchase. A-2-6 139 (d) Interest Payments. In the case of any redemption of Series B Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (e) Partial Redemption. In the event of redemption of this Series B Security in part only, a new Series B Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 3. Offers to Purchase. Section 10.10 and 10.19 of the Indenture provide that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase all or a portion of the Securities in accordance with the procedures set forth in the Indenture. 4. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to and including the date the Securities are paid, may be declared due and payable in the manner and with the effect provided in the Indenture. 5. Defeasance. The Indenture contains provisions (which provisions apply to this Security) for defeasance at any time of (a) the entire indebtedness of the Company and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 6. Amendments and Waivers. The Indenture permits, with certain exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount at maturity of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount at maturity of the Securities at the time Outstanding, on behalf of A-2-7 140 the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. 7. Denominations, Transfer and Exchange. The Securities are issuable only in registered form without coupons in denominations of $1,000 principal amount at maturity and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like aggregate principal amount at maturity of Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 8. Persons Deemed Owners. Prior to and at the time of due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. A-2-8 141 9. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. The Company will furnish to any Holder of a Security upon written request and without charge a copy of the Indenture. Requests may be made to: Golden Sky DBS, Inc., 605 West 47th Street, Suite 300, Kansas City, Missouri 64112. A-2-9 142 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to ___________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Insert assignee's social security or tax ID number)____________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint ________________________________________________________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. Date:_______________________ Your signature:___________________________________ (Sign exactly as your name appears on the other side of this Security) By:________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:___________________________ A-2-10 143 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.10 of the Indenture, check the box: [ ] If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.10 of the Indenture, state the principal amount at maturity of such portion: $______________ Date:_______________________ Your signature:___________________________________ (Sign exactly as your name appears on the other side of this Security) By:________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:___________________________ A-2-11 144 EXHIBIT B FORM OF LEGEND FOR BOOK-ENTRY SECURITIES Any Global Security authenticated and delivered hereunder shall bear a legend (which would be in addition to any other legends required in the case of a Restricted Security) in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 145 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors Golden Sky DBS, Inc. 605 West 47th Street, Suite 300 Kansas City, Missouri 64112 Ladies and Gentlemen: In connection with our proposed purchase of $193,100,000 aggregate principal amount at maturity of the 13 1/2% Senior Discount Notes due 2007 (the "Securities") of Golden Sky DBS, Inc. (the "Company"), we confirm that: 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Securities to offer, sell or otherwise transfer such Securities prior to (x) the date which is two years (or such shorter period of time as permitted by Rule 144 under the Securities Act) after the later of the date of original issue of the Securities and (y) such later date, if any, as may be required by any subsequent change in applicable law (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a "qualified institutional buyer" under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States to "foreign purchasers" (as defined below) in offshore transactions meeting the requirements of Rule 904 of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the C-1 146 Securities Act (an "Accredited Investor") that is purchasing for its own account or for the account of such an institutional "accredited investor," or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject, in each of the foregoing cases, to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (c) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Trustee, which shall provide, among other things, that the transferee is an Accredited Investor within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company, the Trustee and the Transfer Agent and Registrar reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clause (d), (e) or (f) above to require the delivery of an opinion of counsel, certification and/or other information satisfactory to the Company and the Trustee. 2. We are an Accredited Investor or a QIB purchasing Notes for our own account or for the account of one or more Accredited Investors, and we are acquiring the Securities for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or the securities laws of any state of the United States and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment in the Securities for an indefinite period. 3. We are acquiring the Securities purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion and we and C-2 147 any such account are (a) a QIB, aware that the sale is being made in reliance on Rule 144A under the Securities Act, (b) an Accredited Investor, or (c) a person other than a U.S. person ("foreign purchasers"), which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust) in offshore transactions meeting the requirements of Rules 903 and 904 of Regulation S under the Securities Act. 4. We have received a copy of the Offering Memorandum and acknowledge that we have had access to such financial and other information, and have been afforded the opportunity to ask such questions of representatives of the Company and receive answers thereto, as we deem necessary in order to verify the information contained in the Offering Memorandum. 5. We are not purchasing the Securities for or on behalf of, and will not transfer the Securities to, any pension or welfare plan (as defined in Section 3 of ERISA), except as may be permitted under ERISA and as described under "Notice to Investors" in the Offering Memorandum. 6. In the event that we purchase any Securities, we will acquire Securities having an outstanding principal amount of at least $250,000 for our own account and $250,000 for each account for which we are acting. We understand that the Trustee and the Transfer Agent will not be required to accept for registration of transfer any Securities acquired by us, except upon presentation of evidence satisfactory to the Company and the Trustee that the foregoing restrictions on transfer have been complied with. We further understand that the Securities purchased by us will be in the form of definitive physical certificates and that such certificates will bear a legend reflecting the substance of this paragraph. We further agree to provide to any person acquiring any of the Securities from us a notice advising such person that transfers of such Securities are restricted as stated herein and that certificates representing such Securities will bear a legend to that effect. We represent that you, the Company, the Trustee and others are entitled to rely upon the truth and accuracy of our acknowledgements, representations and agreements set forth C-3 148 herein, and we agree to notify you promptly in writing if any of our acknowledgements, representations or agreements herein cease to be accurate and complete. You are also irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. We represent to you that we have full power to make the foregoing acknowledgements, representations and agreements on our own behalf and on behalf of any investor account for which we are acting as fiduciary agent. As used herein, the terms "offshore transaction," "United States" and "U.S. person" have the respective meanings given to them in Regulation S under the Securities Act. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, (Name of Purchaser) By: -------------------------------------- Date: ------------------------------------ Upon transfer, the Securities would be registered in the name of the new beneficial owner as follows: Name: ------------------------------------ Address: --------------------------------- C-4 149 EXHIBIT D Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S --------------, ---- United States Trust Company of New York 114 West 47th Street New York, NY 10036 Attention: Corporate Trust Trustee Administration Re: Golden Sky DBS, Inc. (the "Company") 13 1/2% Senior Discount Notes due 2007 (the "Securities") Ladies and Gentlemen: In connection with our proposed sale of $193,100,000 aggregate principal amount at maturity of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; (5) we have advised the transferee of the transfer restrictions applicable to the Securities; and D-1 150 (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Securities may be offered and sold during the restricted period specified in Rule 903(c)(2) or (3), as applicable; in accordance with the provisions of Regulation S; pursuant to registration of the Securities under the Securities Act; or pursuant to an available exemption from the registration requirements under the Securities Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ----------------------------------- Authorized Signature D-2 EX-4.3 5 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.3 REGISTRATION RIGHTS AGREEMENT Dated as of February 19, 1999 by and among GOLDEN SKY DBS, INC. and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, NATIONSBANC MONTGOMERY SECURITIES LLC, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, and FLEET SECURITIES, INC. as Initial Purchasers 2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of February 19, 1999 by and among GOLDEN SKY DBS, INC., a Delaware corporation (the "Company"), and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, NATIONSBANC MONTGOMERY SECURITIES LLC, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION and FLEET SECURITIES, INC. (the "Initial Purchasers"). This Agreement is made pursuant to the Purchase Agreement dated as of February 11, 1999 by and among the Company and the Initial Purchasers (the "Purchase Agreement"), that provides for, among other things, the sale by the Company to the Initial Purchasers of $193,100,000 aggregate principal amount at maturity of the Company's 13 1/2% Senior Discount Notes due 2007 (the "Notes"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Accreted Value" as of any date (the "Specified Date") means, with respect to each $1,000 principal amount at maturity of Notes: (i) if the Specified Date is one of the following dates (each a "Semi-Annual Accreted Date"), the amount set forth opposite such date below:
ACCRETED SEMI-ANNUAL ACCRETED DATE VALUE ------------------------- ---------- February 19, 1999 518.12 September 1, 1999 555.51 March 1, 2000 593.00 September 1, 2000 633.03 March 1, 2001 675.76 September 1, 2001 721.37 March 1, 2002 770.07 September 1, 2002 822.05 March 1, 2003 877.53 September 1, 2003 936.77 March 1, 2004 1000.00
3 -2- (ii) if the Specified Date occurs between two Semi-Annual Accreted Dates, the sum of (A) the Accreted Value for the Semi-Annual Accreted Date immediately preceding the Specified Date and (B) an amount equal to the product of (i) the Accreted Value for the immediately following Semi- Annual Accreted Date less the Accreted Value for the immediately preceding Semi-Annual Accreted Date and (ii) a fraction, the numerator of which is the number of days from the immediately preceding Semi-Annual Accreted Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180. "Additional Interest" see Section 2(e) hereof. "Advice" see the last paragraph Section 3 hereof. "Applicable Period" see Section 3(s) hereof. "Business Day" shall mean a day that is not a Saturday, a Sunday, or a day on which banking institutions in New York, New York are required to be closed. "Closing Time" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble to this Agreement and also includes the Company's successors and permitted assigns. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, in The City of New York. "Effectiveness Period" see Section 2(b) hereof. "Effectiveness Target Date" see Section 2(e) hereof. "Event Date" see Section 2(e) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 4 -3- "Exchange Offer" shall mean the exchange offer by the Company of Exchange Notes for Notes pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-1, S-3 or S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Period" see Section 2(a) hereof. "Exchange Notes" shall mean the 13 1/2% Senior Discount Notes due 2007, issued by the Company under the Indenture containing terms identical to the Notes (except that (i) the transfer restrictions with respect to the Notes and all registration rights in respect thereof shall be eliminated and (ii) the provisions relating to Additional Interest shall be eliminated) to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Holders" shall mean the Initial Purchasers, for so long as they own any Transfer Restricted Notes, each of their direct and indirect successors, assigns and transferees who become registered owners of Transfer Restricted Notes under the Indenture and each Participating Broker-Dealer that holds Exchange Notes for so long as such Participating Broker-Dealer is required to deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes. "Indenture" shall mean the Indenture relating to the Notes dated as of February 19, 1999 between the Company and United States Trust Company of New York, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Purchasers" shall have the meaning set forth in the preamble to this Agreement. "Inspectors" see Section 3(m) hereof. 5 -4- "Issue Date" shall mean the date on which the Notes are originally issued. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount at maturity of outstanding Transfer Restricted Notes. "Notes" shall have the meaning set forth in the preamble of this Agreement. "Participating Broker-Dealer" shall have the meaning set forth in Section 3(s) hereof. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Private Exchange" see Section 2(a) hereof. "Private Exchange Notes" see Section 2(a) hereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Transfer Restricted Notes covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. "Records" see Section 3(m) hereof. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company with this Agreement, including without limitation: (i) all applicable SEC, stock exchange or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of one counsel for Holders that are Initial Purchasers in connection with blue sky qualification of any of the Exchange Notes or Transfer Restricted Notes) and compliance 6 -5- with the rules of the NASD, (iii) all applicable expenses incurred by the Company in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing any other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, if any, (v) the fees and disbursements of counsel for the Company, (vii) all fees and expenses incurred in connection with the listing, if any, of any of the Transfer Restricted Notes on any securities exchange or exchanges, if the Company, in its discretion, elects to make any such listing; but excluding fees of counsel to the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Transfer Restricted Notes by a Holder. "Registration Statement" shall mean any registration statement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement) of the Company which covers any of the Exchange Notes or Transfer Restricted Notes pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Representative" shall mean Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) hereof which covers all of the Transfer Restricted Notes or all of the Private Exchange Notes, as the case may be, on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including 7 -6- post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Target Effectiveness Date" see Section 2(a). "TIA" shall have the meaning set forth in Section 3(k) hereof. "Transfer Restricted Notes" means each Note until (i) the date on which such has been exchanged by a person other than a broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date on which such Exchange Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement, (iv) the date on which such Note is distributed to the public pursuant to Rule 144(k) under the Securities Act (or any similar provision then in force, but not Rule 144A under the Securities Act), (v) such Note shall have been otherwise transferred by the holder thereof and a new Note not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of such Note shall not require registration or qualification under the Securities Act or any similar state law then in force or (vi) such Note ceases to be outstanding. "Trustee" shall mean the trustee with respect to the Notes under the Indenture. 2. Registration Under the Securities Act. (a) Exchange Offer. The Company shall, for the benefit of the Holders, at the Company's cost, (i) unless the Exchange Offer would not be permitted by applicable law or SEC policy, file with the SEC within 60 days after the Closing Time an Exchange Offer Registration Statement on an appropriate form under the Securities Act covering the offer by the Company to the Holders to exchange all of the Transfer Restricted Notes (other than Private Exchange Notes (as defined below)) for a like principal amount at maturity of Exchange Notes, (ii) unless the Exchange Offer would not be permitted by applicable law or SEC policy, use its best efforts to have such Exchange 8 -7- Offer Registration Statement declared effective under the Securities Act by the SEC not later than 150 days after the Closing Time (the "Target Effectiveness Date"), (iii) have such Registration Statement remain effective until the closing of the Exchange Offer and (iv) unless the Exchange Offer would not be permitted by applicable law or SEC policy, commence the Exchange Offer and use its best efforts to issue, on or prior to the 30th Business Day after the date on which the Exchange Offer Registration Statement was declared effective by the SEC, Exchange Notes in exchange for all Notes tendered prior thereto in the Exchange Offer. Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Transfer Restricted Notes for Exchange Notes (assuming that such Holder is not an affiliate of the Company within the meaning of Rule 405 under the Securities Act and is not a broker-dealer tendering Transfer Restricted Notes acquired directly from the Company for its own account, acquires the Exchange Notes in the ordinary course of such Holder's business and has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing (within the meaning of the Securities Act) the Exchange Notes) and to transfer such Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Exchange Offer open for acceptance for a period of not less than 20 Business Days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (iii) utilize the services of the Depositary for the Exchange Offer; (iv) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice, a telegram, 9 -8- telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Notes delivered for exchange, and a statement that such Holder is withdrawing his election to have such Notes exchanged; and (v) otherwise comply in all material respects with all applicable laws relating to the Exchange Offer. If, prior to consummation of the Exchange Offer the Initial Purchasers hold any Notes acquired by them and having the status of an unsold allotment in the initial distribution, the Company upon the request of any Initial Purchaser shall, simultaneously with the delivery of the Exchange Notes in the Exchange Offer, issue and deliver to such Initial Purchaser in exchange (the "Private Exchange") for the Notes held by such Initial Purchaser, a like principal amount at maturity of debt securities of the Company that are identical (except that such securities shall bear appropriate transfer restrictions) to the Exchange Notes (the "Private Exchange Notes"). The Exchange Notes and the Private Exchange Notes shall be issued under (i) the Indenture or (ii) an indenture identical to all material respects to the Indenture and that, in either case, has been qualified under the TIA or is exempt from such qualification and shall provide that the Exchange Notes shall not be subject to the transfer restrictions set forth in the Indenture. The Indenture or such indenture shall provide that the Exchange Notes, the Private Exchange Notes and the Notes shall vote and consent together on all matters as one class and that none of the Exchange Notes, the Private Exchange Notes or the Notes will have the right to vote or consent as a separate class on any matter. The Private Exchange Notes shall be of the same series as and the Company shall use all commercially reasonable efforts to have the Private Exchange Notes bear the same CUSIP number as the Exchange Notes. The Company shall not have any liability under this Agreement solely as a result of such Private Exchange Notes not bearing the same CUSIP number as the Exchange Notes. The Exchange Offer and the Private Exchange shall not be subject to any conditions, other than that (i) the Exchange Offer or Private Exchange, as the case may be, does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) no action or proceeding shall have been instituted or threatened in any court or by any governmental agency that might materially impair the ability of the Company to proceed with the Exchange Offer or the Private Exchange, and no material adverse development shall have occurred in any existing 10 -9- action or proceeding with respect to the Company and (iii) all governmental approvals shall have been obtained, which approvals the Company deems necessary for the consummation of the Exchange Offer or Private Exchange. As soon as practicable after the close of the Exchange Offer and/or the Private Exchange, as the case may be, the Company shall: (i) accept for exchange all Transfer Restricted Notes or portions thereof properly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and the letter of transmittal that is an exhibit thereto; (ii) accept for exchange all Notes properly tendered pursuant to the Private Exchange; and (iii) deliver, or cause to be delivered, to the Trustee for cancellation all Transfer Restricted Notes or portions thereof so accepted for exchange by the Company, and issue, and cause the Trustee under the Indenture to promptly authenticate and deliver to each Holder, a new Exchange Note or Private Exchange Note, as the case may be, equal in principal amount at maturity to the principal amount at maturity of the Transfer Restricted Notes surrendered by such Holder and accepted for exchange. To the extent not prohibited by any law or applicable interpretation of the staff of the SEC, the Company shall use its reasonable best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. Each Holder of Transfer Restricted Notes who wishes to exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer will be required to make certain customary representations in connection therewith, including representations that: (1) any Exchange Notes to be received by it will be acquired in the ordinary course of its business; (2) it has no arrangement with any person to participate in the distribution of the Exchange Notes; (3) it is not an "affiliate" of the Company, as defined in Rule 405 of the Securities Act, or if it is an affiliate of the Company, it will comply with the registration 11 -10- and prospectus delivery requirements of the Securities Act to the extent applicable; and (4) it is not a broker-dealer tendering notes which it acquired directly from the Company for its own account. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders and otherwise facilitate the tender of Transfer Restricted Notes in the Exchange Offer. Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Transfer Restricted Notes that are Private Exchange Notes and Exchange Notes held by Participating Broker-Dealers, and the Company shall have no further obligation to register Transfer Restricted Notes (other than Private Exchange Notes) pursuant to Section 2(b) hereof. (b) Shelf Registration. The Company will file with the SEC the Shelf Registration Statement if (i) the Company is not permitted to file the Exchange Offer Registration Statement or to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or SEC policy, (ii) the Exchange Offer is not for any other reason consummated within 180 days after the Issue Date, (iii) any holder of Notes notifies the Company within a specified time period that (a) due to a change in law or policy, in the opinion of counsel, it is not entitled to participate in the Exchange Offer, (b) due to a change in law or policy, in the opinion of counsel, it may not resell the Exchange Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and (x) the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder and (y) such prospectus is not promptly amended or modified in order to be suitable for use in connection with such resales for such holder and all similarly situated holders or (c) it is a broker-dealer and owns Notes acquired directly from the Company or an affiliate of the Company or (iv) the holders of a majority of the Notes may not resell the Exchange Notes acquired by them in the Exchange Offer to the public without restriction under the Securities Act and without restriction under applicable blue sky or state securities laws. If the Company is obligated to file the Shelf Registration Statement, the Company will use its best efforts to file such Shelf Registration Statement prior to the later of (a) 60 days after the Issue Date or (b) 30 days after such filing obligation arises and 12 -11- use its best efforts to cause the Shelf Registration Statement to be declared effective by the Commission on or prior to 60 days after such obligation arises; provided, however, that if the Company has not consummated the Exchange Offer within 180 days of the Issue Date, then it will file the Shelf Registration Statement with the Commission on or prior to the 181st day after the Issue Date. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company all information with respect to such Holder necessary to make any information previously furnished to the Company by such Holder not materially misleading. The Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended until the second anniversary of the effective date of the Shelf Registration Statement from the Issue Date (subject to extension pursuant to the last paragraph of Section 3 hereof) (or such shorter period that will terminate when all of the Transfer Restricted Notes covered by such Shelf Registration Statement have been sold pursuant thereto, cease to be outstanding or are eligible for resale pursuant to the provisions of Rule 144(k) under the Securities Act) (the "Effectiveness Period"); provided, however, that the Effectiveness Period in respect of the Shelf Registration Statement shall be extended to the extent required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein. The Company shall not permit any securities other than Transfer Restricted Notes to be included in the Shelf Registration. The Company further agrees, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company agrees to furnish to the Holders of Transfer Restricted Notes copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) Expenses. The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or 2(b) hereof and the reasonable fees and expenses of one counsel, if any, designated in writing by the Majority Holders to act as counsel for the Holders of the Transfer Restricted Notes in connection with a Shelf Registration Statement. Except as provided in the preceding sentence, each 13 -12- Holder shall pay all expenses of its own counsel, underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Transfer Restricted Notes pursuant to the Shelf Registration Statement. (d) Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the offering of Transfer Restricted Notes pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Transfer Restricted Notes may legally resume. The Company will be deemed not to have used its best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if it voluntarily takes any action that would result in any such Registration Statement not being declared effective or in the Holders of Transfer Restricted Notes covered thereby not being able to exchange or offer and sell such Transfer Restricted Notes during that period, unless such action is required by applicable law and except as otherwise provided in the second paragraph of Section 2(e) below. (e) Additional Interest. In the event that (i) the applicable Registration Statement is not filed with the SEC on or prior to the date specified herein for such filing, (ii) the applicable Registration Statement is not declared effective on or prior to the date specified herein for such effectiveness after such obligation arises (the "Effectiveness Target Date"), (iii) if the Exchange Offer is required to be consummated hereunder, the Company fails to consummate the Exchange Offer within 30 Business Days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) the applicable Registration Statement is filed and declared effective during the period effectiveness is required by Section 2(e) and 3(a) but shall thereafter cease to be effective or usable without being succeeded immediately by an additional Registration Statement covering the Transfer Restricted Notes that has been filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Company agrees to pay additional amounts on the Transfer Restricted Notes as to which such Registration Default 14 -13- relates ("Additional Interest"), with respect to the first 90-day period (or portion thereof) while a Registration Default is continuing immediately following the occurrence of such Registration Default in an amount equal to 0.75% per annum of the Accreted Value of the Notes on the date of such Registration Default. The rate of Additional Interest will increase by an additional 0.75% per annum of the Accreted Value of the Notes for each subsequent 90-day period (or portion thereof) while a Registration Default is continuing until all Registration Defaults have been cured, up to a maximum amount of 3.00% of the Accreted Value of the Notes on the date of such Registration Default. Additional Interest shall be computed based on the actual number of days elapsed during which any such Registration Defaults exists. Following the cure of a Registration Default, the accrual of Additional Interest with respect to such Registration Default will cease. If the Company issues a notice that the Shelf Registration Statement is unusable due to the pendency of an announcement of a material corporate transaction, or such notice is required under applicable securities laws to be issued by the Company, and the aggregate number of days in any consecutive twelve-month period for which the Shelf Registration Statement shall not be usable due to all such notices issued or required to be issued exceeds 60 days in the aggregate, then the interest rate borne by the Notes will be increased by 0.25% per annum of the principal amount at maturity of the Notes for the first 90-day period (or portion thereof) beginning on the 31st such date that such Shelf Registration Statement ceases to be usable, which rate shall be increased by an additional 0.25% per annum of the principal amount at maturity of the Notes at the beginning of each subsequent 90-day period, up to a maximum amount of 1.00% of the principal amount at maturity of the Notes. Upon the Shelf Registration Statement once again becoming usable, the interest rate borne by the Notes will be reduced to the original interest rate if the Company is otherwise in compliance with this Agreement at such time. Additional Interest shall be computed based on the actual number of days elapsed in each 90-day period in which the Shelf Registration Statement is unusable. The Company shall notify the Trustee within five Business Days after each and every date on which an event occurs in respect of which Additional Interest is required to be paid (an "Event Date"). Additional Interest shall be paid by depositing with the Trustee, in trust, for the benefit of the Holders of Transfer Restricted Notes, on or before the applicable semiannual interest payment date, immediately available 15 -14- funds in sums sufficient to pay the Additional Interest then due. The Additional Interest due shall be payable on each interest payment date to the record Holder of Notes entitled to receive the interest payment to be paid on such date as set forth in the Indenture. Each obligation to pay Additional Interest shall be deemed to accrue from and including the day following the applicable Event Date. 3. Registration Procedures. In connection with the obligations of the Company with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company shall: (a) prepare and file with the SEC a Registration Statement or Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form (i) shall be selected by the Company, (ii) shall, in the case of a Shelf Registration, be available for the sale of the Transfer Restricted Notes by the selling Holders thereof and (iii) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; and use their best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof. The Company shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must provide information for inclusion therein without the Holders being afforded an opportunity to review such documentation a reasonable time prior to the filing of such document if the Majority Holders or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be; and cause each Prospectus to be supplemented by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to 16 -15- the disposition of all securities covered by each Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Transfer Restricted Notes, at least three Business Days prior to filing, that a Shelf Registration Statement with respect to the Transfer Restricted Notes is being filed and advising such Holder that the distribution of Transfer Restricted Notes will be made in accordance with the method selected by the Majority Holders; and (ii) furnish to each Holder of Transfer Restricted Notes, without charge, as many copies of each Prospectus, and any amendment or supplement thereto and such other documents as such Holder may reasonably request, in order to facilitate the disposition of the Transfer Restricted Notes; and (iii) subject to the last paragraph of Section 3 hereof, hereby consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Transfer Restricted Notes in connection with the offering and sale of the Transfer Restricted Notes covered by such Prospectus or any amendment or supplement thereto subject to the limitations on the use thereof provided in Sections 2(b) and 2(c); (d) in the case of a Shelf Registration, use its best efforts to register or qualify, as may be required by applicable law, the Transfer Restricted Notes under all applicable state securities or "blue sky" laws of such jurisdictions by the time the applicable Registration Statement is declared effective by the SEC as any Holder of Transfer Restricted Notes covered by a Registration Statement shall reasonably request in advance of such date of effectiveness, and do any and all other acts and things that may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Transfer Restricted Notes owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a broker or dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; 17 -16- (e) in the case of (1) a Shelf Registration or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(t) hereof, notify each Holder of Transfer Restricted Notes, or such Participating Broker-Dealers, as the case may be, their counsel, if any, promptly and confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendments and supplements thereto become effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if the Company receives any notification with respect to the suspension of the qualification of the Transfer Restricted Notes or the Exchange Notes to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts or otherwise, during the period a Shelf Registration Statement is effective that makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or that causes such Registration Statement or Prospectus to omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (vi) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement as soon as practicable; (g) in the case of a Shelf Registration, furnish to each Holder of Transfer Restricted Notes, without charge, at least one conformed copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); 18 -17- (h) in the case of a Shelf Registration, cooperate with the selling Holders of Transfer Restricted Notes to facilitate the timely preparation and delivery of certificates not bearing any restrictive legends representing Notes covered by such Shelf Registration to be sold and relating to the subsequent transfer of such Notes; and cause such Transfer Restricted Notes to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least two Business Days prior to the closing of any sale of Transfer Restricted Notes; (i) in the case of a Shelf Registration or an Exchange Offer Registration, upon the occurrence of any circumstance contemplated by Section 3(e)(ii), 3(e)(iii), 3(e)(iv), 3(e)(v) or 3(e)(vi) hereof, use its best efforts to prepare a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Transfer Restricted Notes, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) obtain a CUSIP number for all Exchange Notes or Private Exchange Notes, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with certificates for the Exchange Notes or the Private Exchange Notes, as the case may be, in a form eligible for deposit with the Depositary; (k) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Notes or Transfer Restricted Notes, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be 19 -18- filed with the SEC to enable the Indenture to be so qualified in a timely manner; (l) in the case of a Shelf Registration, enter into such agreements (including underwriting agreements) and take all such other appropriate actions as are reasonably requested in order to expedite or facilitate the registration or the disposition of such Transfer Restricted Notes, and in such connection, (i) make such representations and warranties to Holders of such Transfer Restricted Notes with respect to the business of the Company and its subsidiaries as then conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and updates thereof in form and substance reasonably satisfactory to the Holders of a majority in principal amount of the Transfer Restricted Notes being sold, addressed to each selling Holder covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders; (iii) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the selling Holders of Transfer Restricted Notes that satisfy the applicable requirements of Statement of Accounting Standards No. 72, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by such selling Holders; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other provisions and procedures acceptable to the Company and the Holders of a majority in aggregate principal amount of Transfer Restricted Notes covered by such Registration with respect to all parties to be indemnified pursuant to said Section including, without limitation, such selling Holders). The above shall be done at each closing in respect of the sale of Transfer Restricted Notes, or as and to the extent required thereunder; 20 -19- (m) if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period, make available for inspection by each such person who would be an "underwriter" as a result of either (i) the sale by such person of Notes covered by such Shelf Registration Statement or (ii) the sale during the Applicable Period by a Participating Broker-Dealer of Exchange Notes (provided that a Participating Broker-Dealer shall not be deemed to be an underwriter solely as a result of it being required to deliver a prospectus in connection with any resale of Exchange Notes) and any attorney, accountant or other agent retained by any such person (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its subsidiaries to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement. Records that the Company determines, in good faith, to be confidential and any Records that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a material misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) the information in such Records has been made generally available to the public. Each selling Holder of such Transfer Restricted Notes and each such Participating Broker-Dealer will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such is made generally available to the public. Each selling Holder of such Transfer Restricted Notes and each such Participating Broker-Dealer will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company at its expense to undertake appropriate action to prevent disclosure of the Records deemed confidential; 21 -20- (n) comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 60 days after the end of any 12-month period (or 135 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Transfer Restricted Notes are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods; (o) upon consummation of an Exchange Offer or a Private Exchange, obtain an opinion of counsel to the Company addressed to the Trustee for the benefit of all Holders of Transfer Restricted Notes participating in the Exchange Offer or the Private Exchange, as the case may be, or the includes an opinion that (i) the Company has duly authorized, executed and delivered the Exchange Notes and Private Exchange Notes, as the case may be, and (ii) each of the Exchange Notes or the Private Exchange Notes, as the case may be, constitute a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms (in each case, with customary exceptions); (p) if an Exchange Offer or a Private Exchange is to be consummated, upon proper delivery of the Transfer Restricted Notes by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be, the Company shall mark, or cause to be marked, on such Transfer Restricted Notes and on the books of the Trustee, the Transfer Agent, the Registrar and the Depositary delivered by such Holders that such Transfer Restricted Notes are being canceled in exchange for the Exchange Notes or the Private Exchange Notes, as the case may be; but in no event shall such Transfer Restricted Notes be marked as paid or otherwise satisfied solely as a result of being exchanged for Exchange Notes or Private 22 -21- Exchange Notes in the Exchange Offer or the Private Exchange, as the case may be; (q) cooperate with each seller of Transfer Restricted Notes covered by any Registration Statement participating in the disposition of such Transfer Restricted Notes and one counsel acting on behalf of all such sellers in connection with the filings, if any, required to be made with the NASD; (r) use its best efforts to take all other steps necessary to effect the registration of the Transfer Restricted Notes covered by a Registration Statement contemplated hereby; and (s) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," which section shall be reasonably acceptable to the Representative and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer (a "Participating Broker-Dealer") that holds Transfer Restricted Notes acquired for its own account as a result of market-making activities or other trading activities and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of the Representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Notes for Transfer Restricted Notes pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Notes, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request; (iii) hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto, by any Person subject to the prospectus delivery requirements of the SEC, including all 23 -22- Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Notes covered by the Prospectus or any amendment or supplement thereto, (iv) use its best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements in order to resell the Exchange Notes; provided, however, that such period shall not be required to exceed 90 days (or such longer period if extended pursuant to the last sentence of Section 3 hereof) (the "Applicable Period"), and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Transfer Restricted Notes acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Notes received in respect of such Transfer Restricted Notes pursuant to the Exchange Offer;" and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Transfer Restricted Notes, such broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act; and (B) in the case of any Exchange Offer Registration Statement, the Company agrees to deliver, upon request, to the Trustee or to Participating Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of counsel substantially in the form attached hereto as Exhibit A, and (ii) an officers' certificate containing certifications substantially similar to those set forth in Section 7(c) of the Purchase Agreement. The Company may require each seller of Transfer Restricted Notes as to which any registration is being effected to furnish to the Company such information regarding such seller and the proposed distribution of such Transfer 24 -23- Restricted Notes, as the Company may from time to time reasonably request in writing. The Company may exclude from such registration the Transfer Restricted Notes of any seller who fails to furnish such information within a reasonable time (not to exceed 10 Business Days) after receiving such request and shall be under no obligation to compensate any such seller for any lost income, interest or other opportunity forgone, or any liability incurred, as a result of the Company's decision to exclude such seller. In the case of (1) a Shelf Registration Statement or (2) Participating Broker-Dealers who have notified the Company that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(t) hereof, that are seeking to sell Exchange Notes and are required to deliver Prospectuses, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(ii), 3(e)(iii), 3(e)(v), 3(e)(vi) or 3(e)(vii) hereof, such Holder will forthwith discontinue disposition of Transfer Restricted Notes pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Transfer Restricted Notes or Exchange Notes, as the case may be, current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Transfer Restricted Notes or Exchange Notes, as the case may be, pursuant to a Registration Statement, the Company shall use its best efforts to file and have declared effective (if an amendment) as soon as practicable an amendment or supplement to the Registration Statement and, in the case of an amendment, have such amendment declared effective as soon as practicable and shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Company shall have made available to the Holders (x) copies of the supplemented or amended Prospectus necessary to resume such dispositions or (y) the Advice. 4. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Initial Purchaser, 25 -24- each Holder, each Participating Broker-Dealer, each underwriter who participates in an offering of Transfer Restricted Notes, their respective affiliates, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto), covering Transfer Restricted Notes or Exchange Notes, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Sections 4(c) and 4(d) below) any such settlement is effected with the prior written consent of the Company; and (iii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of one counsel (in addition to any local counsel) chosen by the Representative, such Holder, such Participating Broker-Dealer or any underwriter (except to the extent otherwise expressly provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a); 26 -25- provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (i) made in reliance upon and in conformity with written information furnished in writing to the Company by or on behalf of such Initial Purchaser, such Holder, such Participating Broker-Dealer or any underwriter with respect to such Initial Purchaser, Holder, Participating Broker-Dealer or underwriter, as the case may be, expressly for use in the Registration Statement (or any amendment or supplement thereto) or any Prospectus (or any amendment or supplement thereto) or (ii) contained in any preliminary prospectus if such Initial Purchaser, such Holder, such Participating Broker-Dealer or such underwriter failed to send or deliver a copy of the Prospectus (in the form it was first provided to such parties for confirmation of sales) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where the Company shall have previously furnished copies thereof to such Initial Purchaser, such Holder, such Participating Broker-Dealer or such underwriter, as the case may be, in accordance with this Agreement, at or prior to the written confirmation of the sale of such Notes to such Person and the untrue statement contained in or the omission from the preliminary prospectus was corrected in the Final Prospectus (or any amendment or supplement thereto). Any amounts advanced by the Company to an indemnified party pursuant to this Section 4 as a result of such losses shall be returned to the Company if it shall be finally determined by a court of competent jurisdiction in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, each Initial Purchaser, each underwriter who participates in an offering of Transfer Restricted Notes and the other selling Holders and each of their respective directors and each Person, if any, who controls any of the Company, any Initial Purchaser, any underwriter or any other selling Holder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment or supplement thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information 27 -26- furnished to the Company by or on behalf of such selling Holder with respect to such Holder expressly for use in the Registration Statement (or any supplement thereto), or any such Prospectus (or any amendment thereto); provided, however, that, in the case of the Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Transfer Restricted Notes pursuant to the Shelf Registration Statement; provided, further, however, that for purposes of Section 4(a)(iii), such counsel shall (subject to Section 4(c) hereof) be chosen by the Company. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability that it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 4(a) above, one counsel to all the indemnified parties shall be selected by the Representative, and, in the case of parties indemnified pursuant to Section 4(b) above, counsel to all the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. Notwithstanding the foregoing, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving such notice, may assume the defense of such action with counsel chosen by it and approved by the indemnified parties defendant in such action (which approval shall not be unreasonably withheld), unless such indemnified parties reasonably object to such assumption on the ground that there may be legal defenses available to them which are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions arising out of the same general 28 -27- allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes a full and unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and the offer and sale of any Notes and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for reasonable fees and expenses of counsel pursuant to Section 4(a)(iii) above, then such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 4(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 4 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Company, the Initial Purchasers and the Holders, as applicable, shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Initial Purchasers and the Holders; provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company and the Initial Purchasers and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Company on the one hand 29 -28- and of the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or Initial Purchaser, as the case may be, on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial Purchasers, as the case may be, on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, or by the Holder of Transfer Restricted Notes, the Participating Broker-Dealer or the Initial Purchasers, as the case may be, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders of the Transfer Restricted Notes and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 4. For purposes of this Section 4, each affiliate of any Person, if any, who controls a Holder of Transfer Restricted Notes, an Initial Purchaser or a Participating Broker-Dealer within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such other Person, and each director of the Company, each affiliate of the Company, each executive officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. 5. Miscellaneous. (a) Rule 144 and Rule 144A. The Company shall provide to each Holder such reports as are required under Section 10.09 of the Indenture and, upon the request of any Holder of Transfer Restricted Notes (a) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Securities Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales pursuant 30 -29- to Rule 144A under the Securities Act and it will take such further action as any Holder of Transfer Restricted Notes may reasonably request, and (c) take such further action, if any, that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Transfer Restricted Notes without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the reasonable request of any Holder of Transfer Restricted Notes, the Company will deliver to such Holder a written statement as to whether they have complied with such requirements. (b) No Inconsistent Agreements. The rights granted to the Holders hereunder do not, and will not for the term of this Agreement in any way conflict with and are not, and will not during the term of this Agreement be inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any other agreements entered into by the Company. (c) Amendments and Waivers. The provisions of this Agreement, including provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Company and the Majority Holders; provided, however, that no amendment, modification, or supplement or waiver or consent to the departure with respect to the provisions of Section 4 hereof shall be effective as against any Holder of Transfer Restricted Notes or the Company unless consented to in writing by such Holder of Transfer Restricted Notes or the Company, as the case may be. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 5(d), which address initially is, with respect to the Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 5(d). 31 -30- All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Initial Purchasers, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Notes in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Notes, in any manner, whether by operation of law or otherwise, such Transfer Restricted Notes shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Notes, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiary. Each of the Initial Purchasers and each Holder shall be a third party beneficiary of the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 32 -31- (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. Specified times of day refer to New York City time. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Notes Held by the Company or Any of Its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held by the Company or any of their affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [Signature Page Follows] 33 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. GOLDEN SKY DBS, INC. By: /s/ JOHN R. HAGER ---------------------------------- Name: John R. Hager Title: Chief Financial Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FLEET SECURITIES, INC. By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By: /s/ JOSEPH B. SHEEHAN ------------------------------------------ Name: Joseph B. Sheehan Title: Director 34 Exhibit A Form of Opinion of Counsel 1. Each of the Exchange Offer Registration Statement and the Prospectus (other than the financial statements, notes or schedules thereto and other financial and statistical information and supplemental schedules included or referred to therein or omitted therefrom and the Form T-1, as to which such counsel need express no opinion), complies as to form in all material respects with the applicable requirements of the Securities Act and the applicable rules and regulations promulgated under the Securities Act. 2. In the course of such counsel's review and discussion of the contents of the Exchange Offer Registration Statement and the Prospectus with certain officers and other representatives of the Company and representatives of the independent certified public accountants of the Company, but without independent check or verification or responsibility for the accuracy, completeness or fairness of the statements contained therein, on the basis of the foregoing (relying as to materiality to a large extent upon representations and opinions of officers and other representatives of the Company), no facts have come to such counsel's attention which cause such counsel to believe that the Exchange Offer Registration Statement (other than the financial statements, notes and schedules thereto and other financial and statistical information contained or referred to therein and the Form T-1, as to which such counsel need express no belief), at the time the Exchange Offer Registration Statement became effective and at the time of the consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading, or that the Prospectus (other than the financial statements, notes and schedules thereto and other financial and statistical information contained or referred to therein, as to which such counsel need express no belief) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading. EX-5.1 6 OPINION - REBOUL MACMURRAY HEWITT MAYNARD KRISTOL 1 EXHIBIT 5.1 [Letterhead of Reboul, MacMurray, Hewitt, Maynard & Kristol] April 16, 1999 Golden Sky DBS, Inc. 4700 Belleview Avenue, Suite 300 Kansas City, Missouri 64112 Golden Sky DBS, Inc. Registration Statement on Form S-4 (Registration No. 333- ) ---------------------------------- Ladies and Gentlemen: We have acted as counsel to Golden Sky DBS, Inc., a Delaware corporation (the "Company"), in connection with the Company's Registration Statement on Form S-4 (the "Registration Statement"), filed under the Securities Act of 1933, as amended (the "Act"), relating to the proposed offer by the Company to exchange up to $193,100,000 aggregate principal amount at maturity of its 13 1/2% Senior Discount Notes due 2007, Series B (the "New Notes"), for a like principal amount at maturity of its outstanding 13 1/2% Senior Discount Notes due 2007, Series A (the "Old Notes"). In that connection, we have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents, corporate records and other instruments as we have deemed necessary or appropriate for the purposes of this opinion, including the Certificate of Incorporation and By-laws of the Company. 2 2 Based upon the foregoing, we are of opinion that: 1. The Company has been duly organized and is validly existing under the laws of the State of Delaware. 2. The New Notes have been duly and validly authorized by the Company and, when issued under the Indenture in substantially the form filed as Exhibit 4.1 to the Registration Statement in exchange for the Old Notes, upon the terms and subject to the conditions contained in the Prospectus comprising part of the Registration Statement and in the Letter of Transmittal substantially in the form filed as Exhibit 99.1 to the Registration Statement, will be valid and binding obligations of the Company. We are members of the bar of the State of New York and do not express any opinion as to the law of any jurisdiction other than the laws of the State of New York, the federal laws of the United States and the Delaware General Corporation Law. Our opinions are rendered only with respect to the laws, and the rules, regulations and orders thereunder, which are currently in effect. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Prospectus comprising a part of the Registration Statement. By giving the foregoing consent, we do not admit that we come within the category of persons whose consent is required under Section 7 of the Act. Very truly yours, /s/ Reboul, MacMurray, Hewitt, Maynard & Kristol EX-10.1 7 PURCHASE AGREEMENT 1 EXHIBIT 10.1 $193,100,000 GOLDEN SKY DBS, INC. PURCHASE AGREEMENT February 11, 1999 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FLEET SECURITIES, INC. c/o Merrill Lynch & Co. North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Golden Sky DBS, Inc., a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers named in Schedule A hereto (collectively, the "Initial Purchasers," which term shall also include any initial purchaser substituted as hereinafter provided in Section 11 hereof), for whom Merrill Lynch is acting as representative (in such capacity, the "Representative"), with respect to the issue and sale by the Company and the purchase by the Initial Purchasers, acting severally and not jointly, of the respective principal amounts set forth in said Schedule A of $193,100,000 aggregate principal amount at maturity of the Company's 13 1/2% Senior Discount Notes due 2007 (the "Securities"). The Securities are to be issued pursuant to an indenture dated as of February 19, 1999 (the "Indenture") between the Company and State Street Bank and Trust Company of Missouri, N.A., as trustee (the "Trustee"). Securities issued in book-entry form will be issued to Cede & Co. as nominee of The Depository Trust Company ("DTC") pursuant to a letter agreement, to be dated as of the Closing Time (as defined in Section 2 2(b)) (the "DTC Agreement"), among the Company, the Trustee and DTC. The Company understands that the Initial Purchasers propose to make an offering of the Securities on the terms and in the manner set forth herein and agrees that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Securities to purchasers ("Subsequent Purchasers") at any time after the date of this Agreement. The Securities are to be offered and sold through the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "1933 Act"), in reliance upon exemptions therefrom. Pursuant to the terms of the Securities and the Indenture, investors that acquire Securities may only resell or otherwise transfer such Securities if such Securities are hereafter registered under the 1933 Act or if an exemption from the registration requirements of the 1933 Act is available (including the exemption afforded by Rule 144A ("Rule 144A") or Regulation S ("Regulation S") of the rules and regulations promulgated under the 1933 Act by the Securities and Exchange Commission (the "Commission")). The holders of Securities (including the Initial Purchasers and subsequent transferees) will be entitled to the benefits of a registration rights agreement, to be dated as of February 19, 1999 (the "Registration Rights Agreement"), by and among the Company and the Initial Purchasers. Pursuant to the Registration Rights Agreement, the Company will agree to file with the Commission under the circumstances set forth therein either (i) a registration statement under the 1933 Act registering the Exchange Securities (as defined in the Registration Rights Agreement) to be offered in exchange for the Securities and to use its best efforts to cause such registration statement to be declared effective and (ii) under certain circumstances set forth therein, to file with the Commission a shelf registration statement pursuant to Rule 415 under the 1933 Act relating to the resale of the Securities by holders thereof or, if applicable, relating to the resale of Private Exchange Notes (as defined in the Registration Rights Agreement) by the Initial Purchasers pursuant to an exchange of the Securities for Private Exchange Notes, and to use its best efforts to cause such shelf registration statement to be declared effective. The Company has prepared and delivered to each Initial Purchaser copies of a preliminary offering memorandum dated February 4, 1999 (the "Preliminary Offering Memorandum") and has prepared and will deliver to each Initial Purchaser, on the date hereof or the next succeeding day, copies of a final -2- 3 offering memorandum dated February 11, 1999 (the "Final Offering Memorandum"), each for use by such Initial Purchaser in connection with its solicitation of purchases of, or offering of, the Securities. "Offering Memorandum" means, with respect to any date or time referred to in this Agreement, the most recent offering memorandum (whether the Preliminary Offering Memorandum, the Final Offering Memorandum, or any amendment or supplement to either such document), including exhibits thereto and any documents incorporated therein by reference, which has been prepared and delivered by the Company to the Initial Purchasers in connection with their solicitation of purchases of, or offering of, the Securities. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each Initial Purchaser as of the date hereof and as of the Closing Time referred to in Section 2(b) hereof, and agrees with each Initial Purchaser as follows: (i) Similar Offerings. The Company has not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Securities in a manner that would require the Securities to be registered under the 1933 Act. (ii) Offering Memorandum. The Offering Memorandum does not, and at the Closing Time will not, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that this representation, warranty and agreement shall not apply to statements in or omissions from the Offering Memorandum made in reliance upon and in conformity with information furnished to the Company in writing by any Initial Purchaser through the Representative expressly for use in the Offering Memorandum. (iii) Independent Accountants. The accountants who certified the financial statements and supporting schedules included in the Offering Memorandum are independent certified public accountants with respect to the Company -3- 4 and its subsidiaries within the meaning of Regulation S-X under the 1933 Act. (iv) Financial Statements. The financial statements (other than the pro forma financial statements) of the Company and its consolidated subsidiaries, together with the related schedules and notes, included in the Offering Memorandum present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Offering Memorandum present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Offering Memorandum present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Offering Memorandum. The pro forma financial statements of the Company and its subsidiaries and the related notes thereto included in the Offering Memorandum present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. Each of the Company and its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. -4- 5 (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise (a "Material Adverse Effect"), whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Designated Subsidiaries. Each "significant subsidiary" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Offering Memorandum, all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is -5- 6 fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of the Designated Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, or under the charter or by-laws of any Designated Subsidiary or under any agreement to which the Company or any Designated Subsidiary is a party. The subsidiaries of the Company other than Designated Subsidiaries, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (viii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the financial statements, including the schedules and notes, included in the Offering Memorandum in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to employee benefit plans referred to in the Offering Memorandum or pursuant to the exercise of convertible securities or options referred to in the Offering Memorandum). (ix) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company. (x) Authorization of the Indenture. The Indenture has been duly authorized by the Company and, at the Closing Time, will have been duly executed and delivered by the Company and will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xi) Authorization of the Registration Rights Agreement. The Registration Rights Agreement has been duly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and binding obligation of the Company, enforceable against the Company in -6- 7 accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). (xii) Authorization of the Securities. The Securities, Exchange Securities and Private Exchange Notes, if any, have been duly authorized and, at the Closing Time, will have been duly executed by the Company and, when authenticated in the manner provided for in the Indenture and delivered against payment of the purchase price therefor, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture, and the Exchange Securities and the Private Exchange Notes, if any, when executed, authenticated, issued and delivered by the Company, in exchange for the Securities in accordance with the terms of the Registration Rights Agreement, will constitute valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with the terms thereof, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). (xiii) Description of the Securities, the Registration Rights Agreement and the Indenture. The Securities, the Exchange Securities, the Private Exchange Notes, if any, -7- 8 the Registration Rights Agreement and the Indenture will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum and will be in substantially the respective forms previously delivered to the Initial Purchasers. (xiv) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (collectively, "Agreements and Instruments"), except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture and the Securities and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Offering Memorandum and the consummation of the transactions contemplated herein and in the Offering Memorandum (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use of Proceeds") and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or a Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, the Agreements and Instruments, except for such conflicts, breaches or defaults or liens, charges or encumbrances that, singly or in the aggregate, would not result in a Material Adverse Effect, nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their assets or properties. As used herein, a "Repayment Event" means any event or condi- -8- 9 tion which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries. (xv) Absence of Labor Dispute. No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any of its subsidiaries' principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xvi) Absence of Proceedings. Except as disclosed in the Offering Memorandum, there is no action, suit, proceeding, inquiry or investigation before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary thereof which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets of the Company or any of its subsidiaries or the consummation of this Agreement or the performance by the Company of its obligations hereunder. The aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary thereof is a party or of which any of their respective property or assets is the subject which are not described in the Offering Memorandum, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xvii) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or -9- 10 circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xviii) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement. (xix) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xx) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind, except such as (a) are described in the Offering Memorandum or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property -10- 11 by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Offering Memorandum, are in full force and effect, and neither the Company nor any of its subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of such the Company or any subsidiary thereof to the continued possession of the leased or subleased premises under any such lease or sublease. (xxi) Tax Returns. The Company and its subsidiaries have filed all material federal, state, local and foreign tax returns that are required to be filed or have duly requested extensions thereof, except as would not, singly or in the aggregate, have a Material Adverse Effect and have paid all taxes reflected as due on such returns and any related assessments, fines or penalties, except for any such tax, assessment, fine or penalty that is being contested in good faith and by appropriate proceedings and except as would not, singly or in the aggregate, have a Material Adverse Effect; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(v) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities. (xxii) Environmental Laws. Except as described in the Offering Memorandum and except such matters as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of -11- 12 chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or Environmental Laws. (xxiii) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Offering Memorandum will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxiv) Rule 144A Eligibility. The Securities are eligible for resale pursuant to Rule 144A and will not be, at the Closing Time, of the same class as securities listed on a national securities exchange registered under Section 6 of the 1934 Act, or quoted in a U.S. automated interdealer quotation system. (xxv) No General Solicitation. None of the Company, its affiliates, as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"), or any person acting on its or any of their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage, in connection with the offering of the Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. -12- 13 (xxvi) No Registration Required. Subject to compliance by the Initial Purchasers with the representations and warranties set forth in Section 2 and the procedures set forth in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by this Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "1939 Act"). (xxvii)No Directed Selling Efforts. With respect to those Securities sold in reliance on Regulation S, (A) none of the Company, its Affiliates or any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S and (B) each of the Company and its Affiliates and any person acting on its or their behalf (other than the Initial Purchasers, as to whom the Company makes no representation) has complied and will comply with the offering restrictions requirement of Regulation S. (xxviii) Solvency. Neither the Company nor any of its subsidiaries intend to, nor do any of them believe that they will, incur debts beyond their ability to pay such debts as they mature. As of the date hereof, the fair market value of the assets of the Company and its subsidiaries exceeds, and at the Closing Time the fair market value of the assets of the Company and its subsidiaries will exceed, the amounts that will be required to be paid on or in respect of their existing debts and other liabilities when and as they become absolute and mature. The assets of the Company and its subsidiaries do not constitute unreasonably small capital to carry on their respective businesses as conducted or proposed to be conducted. (xxix) Receipt of Consents. The Company has received all the consents, waivers and approvals from the lenders under the Credit Facility necessary to issue the Notes and consummate the transactions contemplated by this Agreement. (xxx) No Stabilization or Manipulation. Neither the Company nor any of its officers, directors or controlling persons has taken, directly or indirectly, any action de- -13- 14 signed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (b) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representative or to counsel for the Initial Purchasers shall be deemed a representation and warranty by the Company to each Initial Purchaser as to the matters covered thereby. SECTION 2. Sale and Delivery to Initial Purchasers; Closing. (a) Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Initial Purchaser, severally and not jointly, and each Initial Purchaser, severally and not jointly, agrees to purchase from the Company, at the price set forth in Schedule B, the aggregate principal amount at maturity of Securities set forth in Schedule A opposite the name of such Initial Purchaser, plus any additional principal amount of Securities that such Initial Purchaser may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) Payment. Payment of the purchase price for, and delivery of certificates for, the Securities shall be made at the office of Cahill Gordon & Reindel, 80 Pine Street, New York, New York 10005, or at such other place as shall be agreed upon by the Representative and the Company, at 9:00 A.M. on the fifth business day after the date hereof (unless postponed in accordance with the provisions of Section 11), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called the "Closing Time"). Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Representative for the respective accounts of the Initial Purchasers of certificates for the Securities to be purchased by them. It is understood that each Initial Purchaser has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Securities which it has -14- 15 agreed to purchase. Merrill Lynch, individually and not as representative of the Initial Purchasers, may (but shall not be obligated to) make payment of the purchase price for the Securities to be purchased by any Initial Purchaser whose funds have not been received by, the Closing Time, but such payment shall not relieve such Initial Purchaser from its obligations hereunder. The certificates representing the Securities shall be registered in the name of Cede & Co. pursuant to the DTC Agreement and shall be made available for examination and packaging by the Initial Purchasers in The City of New York not later than 10:00 A.M. on the last business day prior to the Closing Time. (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company that it is a "qualified institutional buyer" within the meaning of Rule 144A under the 1933 Act (a "Qualified Institutional Buyer"). (d) Denominations; Registration. Certificates for the Securities shall be in such denominations ($1,000 or integral multiples thereof) and registered in such names as the Representative may request in writing at least one full business day before the Closing Time. SECTION 3. Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (a) Offering Memorandum. The Company, as promptly as possible, will furnish to each Initial Purchaser, without charge, such number of copies of the Preliminary Offering Memorandum, the Final Offering Memorandum and any amendments and supplements thereto and documents incorporated by reference therein as such Initial Purchaser may reasonably request. (b) Notice and Effect of Material Events. The Company will immediately notify each Initial Purchaser, and confirm such notice in writing, of (x) any filing made by the Company of information relating to the offering of the Securities with any securities exchange or any other regulatory body in the United States or any other jurisdiction, and (y) prior to the completion of the placement of the Securities by the Initial Purchasers as evidenced by a notice in writing from the Initial Purchasers to the Company, any material changes in or affecting the earnings, business affairs or business prospects of the Company and its subsidiaries that (i) make any statement in the Offering Memorandum false or misleading or (ii) are not disclosed in the Offering Memorandum. In such event or if dur- -15- 16 ing such time any event shall occur as a result of which it is necessary, in the reasonable opinion of the Company, its counsel, the Initial Purchasers or counsel for the Initial Purchasers, to amend or supplement the Final Offering Memorandum in order that the Final Offering Memorandum not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances then existing, the Company will forthwith amend or supplement the Final Offering Memorandum by preparing and furnishing to each Initial Purchaser an amendment or amendments of, or a supplement or supplements to, the Final Offering Memorandum (in form and substance satisfactory in the reasonable opinion of counsel for the Initial Purchasers) so that, as so amended or supplemented, the Final Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a Subsequent Purchaser, not misleading. (c) Amendment to Offering Memorandum and Supplements. The Company will advise each Initial Purchaser promptly of any proposal to amend or supplement the Offering Memorandum and will not effect such amendment or supplement without the consent of the Initial Purchasers. Neither the consent of the Initial Purchasers, nor the Initial Purchasers' delivery of any such amendment or supplement, shall constitute a waiver of any of the conditions set forth in Section 5 hereof. (d) Qualification of Securities for Offer and Sale. The Company will use its best efforts, in cooperation with the Initial Purchasers, to qualify the Securities for offering and sale under the applicable securities laws of such jurisdictions as the Representative may designate and will maintain such qualifications in effect as long as required for the sale of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. (e) DTC. The Company will cooperate with the Representative and use its best efforts to permit the Securities to be eligible for clearance and settlement through the facilities of DTC. -16- 17 (f) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Offering Memorandum under "Use of Proceeds." (g) Restriction on Sale of Securities. During a period of 180 days from the date of the Offering Memorandum, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, any other debt securities of the Company or securities of the Company that are convertible into, or exchangeable for, the Securities or such other debt securities. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation and printing of the Offering Memorandum (including financial statements and any schedules or exhibits and any document incorporated therein by reference) and of each amendment or supplement thereto, (ii) the preparation, issuance and delivery of the certificates for the Securities to the Initial Purchasers, including any charges of DTC in connection therewith, (iii) the fees and disbursements of the Company's counsel, accountants and other advisors, (iv) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection therewith and in connection with the preparation of the Blue Sky Survey, any supplement thereto and any Legal Investment Survey, (v) the fees and expenses of the Trustee, including the fees and disbursements of counsel for the Trustee in connection with the Indenture and the Securities, (vi) any fees payable in connection with the rating of the Securities and (vii) any fees payable to the review by the National Association of Securities Dealers, Inc. (the "NASD") in connection with the initial and continued designation of the Securities as PORTAL securities under the PORTAL Market Rules pursuant to NASD Rule 5322 (it being understood that, except as provided in Sections 4(a)(v) and 4(b), the Initial Purchasers shall pay their own costs and expenses in connection with the transactions contemplated hereby). (b) Termination of Agreement. If this Agreement is terminated by the Representative in accordance with the provisions of Section 5 or Section 10(a)(i) hereof, the Company -17- 18 shall reimburse the Initial Purchasers for all of their documented out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Initial Purchasers. SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations of the several Initial Purchasers hereunder are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Opinion of Counsel for Company. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Reboul, MacMurray, Hewitt, Maynard & Kristol, counsel for the Company, in form and substance satisfactory to counsel for the Initial Purchasers, together with signed or reproduced copies of such letter for each of the other Initial Purchasers to the effect set forth in Exhibit A hereto and to such further effect as counsel to the Initial Purchasers may reasonably request. (b) Opinion of Regulatory Counsel for Company. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Fleischman and Walsh, L.L.P., regulatory counsel for the Company, in form and substance satisfactory to counsel for the Initial Purchasers, to the effect set forth in Exhibit B hereto and to such further effect as counsel to the Initial Purchasers may reasonably request. (c) Opinion of Counsel for Initial Purchasers. At the Closing Time, the Representative shall have received the favorable opinion, dated as of the Closing Time, of Cahill Gordon & Reindel, counsel for the Initial Purchasers, with respect to the matters set forth in (vii), (viii), (x) (solely as to the information in the Offering Memorandum under "Description of the Notes") and (xiv) of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, upon the opinions of counsel satisfactory to the Representative. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. -18- 19 (d) Officers' Certificate. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Representative shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1 hereof are true and correct, in all material respects, with the same force and effect as though expressly made at and as of the Closing Time (except the representations and warranties in Section 1 qualified as to materiality shall be true and correct with the same force and effect as though expressly made at and as of the Closing Time) and (iii) the Company has complied, in all material respects, with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time. (e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Representative shall have received from each of KPMG LLP, Eide Bailly LLP, Loucks & Glassley pllp, Bolinger, Segars, Gilbert, & Moss, L.L.P., Moss Adams LLP, Curtis Blakely & Co., P.C., CHMS, P.C., Anderson and Company, Olsen Thielen & Co., LTD. and Summers McNea & Company, P.C. a letter dated such date, in form and substance satisfactory to the Representative, containing statements and information of the type ordinarily included in accountants' "comfort letters" to Initial Purchasers with respect to the financial statements and certain financial information contained in the Offering Memorandum. (f) Bring-down Comfort Letter. At the Closing Time, the Representative shall have received from KPMG LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (g) Maintenance of Rating. At the Closing Time, and since the date of this Agreement, there shall not have occurred a downgrading in the rating assigned to any of the Company's or its subsidiaries' other debt securities by any nationally rec- -19- 20 ognized securities rating agency, and no such securities rating agency shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's or its subsidiaries' other debt securities. (h) PORTAL. At the Closing Time, the Securities shall have been designated for trading on PORTAL. (i) First Amendment to the Amended and Restated Credit Agreement. At the Closing Time, the Company shall have entered into the First Amendment to the Amended and Restated Credit Agreement, which shall be substantially in the form previously delivered to the Initial Purchasers and counsel for the Initial Purchasers. (j) Stockholder Approval. At the Closing Time, the Company shall have received all stockholder approvals necessary to issue the Notes and consummate the transactions contemplated by this Agreement. (k) Additional Documents. At the Closing Time, counsel for the Initial Purchasers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Representative and counsel for the Initial Purchasers. (l) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Representative by notice to the Company at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 7 and 8 shall survive any such termination and remain in full force and effect. -20- 21 SECTION 6. Subsequent Offers and Resales of the Securities. (a) Offer and Sale Procedures. Each of the Initial Purchasers and the Company hereby establish and agree to observe the following procedures in connection with the offer and sale of the Securities: (i) Offers and Sales Only to Institutional Accredited Investors or Non-U.S. Persons. Offers and sales of the Securities will be made only by the Initial Purchasers or Affiliates thereof qualified to do so in the jurisdictions in which such offers or sales are made. Each such offer or sale shall only be made (A) to persons whom the offeror or seller reasonably believes to be qualified institutional buyers (as defined in Rule 144A under the 1933 Act and (B) non-U.S. persons outside the United States to whom the offeror or seller reasonably believes offers and sales of the Securities may be made in reliance upon Regulation S under the 1933 Act. (ii) No General Solicitation. The Securities will be offered by approaching prospective Subsequent Purchasers on an individual basis. No general solicitation or general advertising (within the meaning of Rule 502(c) under the 1933 Act) will be used in the United States in connection with the offering of the Securities. (iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank Subsequent Purchaser of a Security acting as a fiduciary for one or more third parties, in connection with an offer and sale to such purchaser pursuant to clause (a) above, each third party shall, in the judgment of the applicable Initial Purchaser, be a Qualified Institutional Buyer or a non-U.S. person outside the United States. (iv) Subsequent Purchaser Notification. Each Initial Purchaser will take reasonable steps to inform, and cause each of its U.S. Affiliates to take reasonable steps to inform, persons acquiring Securities from such Initial Purchaser or affiliate, as the case may be, in the United States that the Securities (A) have not been and will not be registered under the 1933 Act, (B) are being sold to them without registration under the 1933 Act in reliance on Rule 144A or in accordance with another exemption from registration under the 1933 Act, as the case may be, and (C) may not be offered, sold or otherwise transferred ex- -21- 22 cept (1) to the Company, (2) outside the United States in accordance with Rule 904 of Regulation S, or (3) inside the United States in accordance with (x) Rule 144A to a person whom the seller reasonably believes is a Qualified Institutional Buyer that is purchasing such Securities for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the offer, sale or transfer is being made in reliance on Rule 144A or (y) the exemption from registration under the 1933 Act provided by Rule 144, if available. (v) Minimum Principal Amount. No sale of the Securities to any one Subsequent Purchaser will be for less than U.S. $100,000 principal amount at maturity and no Security will be issued in a smaller principal amount. If the Subsequent Purchaser is a non-bank fiduciary acting on behalf of others, each person for whom it is acting must purchase at least U.S. $100,000 principal amount at maturity of the Securities. (vi) Restrictions on Transfer. The transfer restrictions and the other provisions set forth in Section Two of the Indenture, including the legend required thereby, shall apply to the Securities except as otherwise agreed by the Company and the Initial Purchasers. Following the sale of the Securities by the Initial Purchasers to Subsequent Purchasers pursuant to the terms hereof, the Initial Purchasers shall not be liable or responsible to the Company for any losses, damages or liabilities suffered or incurred by the Company, including any losses, damages or liabilities under the 1933 Act, arising from or relating to any resale or transfer of any Security. (vii) Delivery of Offering Memorandum. Each Initial Purchaser will deliver to each purchaser of the Securities from such Initial Purchaser, in connection with its original distribution of the Securities, a copy of the Offering Memorandum, as amended and supplemented at the date of such delivery. (b) Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (i) Due Diligence. In connection with the original distribution of the Securities, the Company agrees that, prior to any offer or resale of the Securities by the Initial Purchasers, the Initial Purchasers and counsel for the Initial Purchasers shall have the right to make rea- -22- 23 sonable inquiries into the business of the Company and its subsidiaries. The Company also agrees to provide answers to each prospective Subsequent Purchaser of Securities who so requests concerning the Company and its subsidiaries (to the extent that such information is available or can be acquired and made available to prospective Subsequent Purchasers without unreasonable effort or expense and to the extent the provision thereof is not prohibited by applicable law) and the terms and conditions of the offering of the Securities, as provided in the Offering Memorandum. (ii) Integration. The Company agrees that it will not and will cause its Affiliates not to make any offer or sale of securities of the Company of any class if, as a result of the doctrine of "integration" referred to in Rule 502 under the 1933 Act, such offer or sale would render invalid (for the purpose of (i) the sale of the Securities by the Company to the Initial Purchasers, (ii) the resale of the Securities by the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the Securities by such Subsequent Purchasers to others) the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A OR BY REGULATION S thereunder or otherwise. (iii) Rule 144A Information. The Company agrees that, in order to render the Securities eligible for resale pursuant to Rule 144A under the 1933 Act, while any of the Securities remain outstanding, it will make available, upon request, to any holder of Securities or prospective purchasers of Securities the information specified in Rule 144A(d)(4), unless the Company furnishes information to the Commission pursuant to Section 13 or 15(d) of the 1934 Act (such information, whether made available to holders or prospective purchasers or furnished to the Commission, is herein referred to as "Additional Information"). (iv) Restriction on Repurchases. Until the expiration of two years after the original issuance of the Securities, the Company will not, and will cause its Affiliates not to, purchase or agree to purchase or otherwise acquire any Securities which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited broker's transactions) unless, immediately upon any such purchase, the Company or any Af- -23- 24 filiate shall submit such Securities to the Trustee for cancellation. SECTION 7. Indemnification. (a) Indemnification of Initial Purchasers. The Company agrees to indemnify and hold harmless each Initial Purchaser and each person, if any, who controls any Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Offering Memorandum or the Final Offering Memorandum (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 7(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum (or any -24- 25 amendment thereto); and provided, further, that the Company will not be liable to any Initial Purchaser hereunder with respect to any such loss, liability, claim, damage or expense that resulted from the fact that such Initial Purchaser sold Securities to a person to whom such Initial Purchaser failed to send or give, at or prior to the Closing Time, a copy of the Final Offering Memorandum, as then amended or supplemented, if the Company has previously furnished copies thereof (sufficiently in advance of the Closing Time to allow for distribution by the Closing Time) to the Initial Purchasers and the loss, liability, claim, damage or expense of such Initial Purchaser resulted from an untrue statement or omission or alleged untrue statement or omission of a material fact contained in or omitted from the Preliminary Offering that was corrected in the Final Offering Memorandum or, if applicable, amended or supplemented prior to the Closing Time. (b) Indemnification of Company, Directors and Officers. Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, its directors, its officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Offering Memorandum in reliance upon and in conformity with written information furnished to the Company by such Initial Purchaser through Merrill Lynch expressly for use in the Offering Memorandum. (c) Actions Against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 7(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnify- -25- 26 ing party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7 or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement Without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 8. Contribution. If the indemnification provided for in Section 7 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand from the -26- 27 offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the Initial Purchasers, bear to the aggregate initial offering price of the Securities. The relative fault of the Company on the one hand and the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Se- -27- 28 curities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Initial Purchaser, and each director of the Company, each officer of the Company, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Initial Purchasers' respective obligations to contribute pursuant to this Section 8 are several in proportion to the principal amount of Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 9. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the Initial Purchasers. SECTION 10. Termination of Agreement. (a) Termination; General. The Representative may terminate this Agreement, by notice to the Company, at any time at or prior to the Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the Offering Memorandum, any material adverse change in the condition, financial or otherwise or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States, any outbreak of hostilities or escalation thereof or other calamity or -28- 29 crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representative, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or limited by the Commission or, if trading generally on the American Stock Exchange or the New York Stock Exchange or in the National Market System has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 11. Default by One or More of the Initial Purchasers. If one or more of the Initial Purchasers shall fail at the Closing Time to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Representative shall have the right, but not the obligation, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Initial Purchasers, or any other Initial Purchasers, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 24-hour period, then this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser. No action pursuant to this Section shall relieve any defaulting Initial Purchaser from liability in respect of its default. -29- 30 In the event of any such default that does not result in a termination of this Agreement, either the Representative or the Company shall have the right to postpone the Closing Time for a period not exceeding seven days in order to effect any required changes in the Offering Memorandum or in any other documents or arrangement. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Initial Purchasers shall be directed to the Representative at North Tower, World Financial Center, New York, New York 10281-1201, attention of Evan Ladouceur; notices to the Company shall be directed to it at 605 West 47th Street, Suite 300, Kansas City, Missouri 64112, attention of John Hager. SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the Initial Purchasers and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Initial Purchasers and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 7 and 8 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Initial Purchasers and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Section headings herein and the Table of Contents are for convenience only, and shall not affect the construction hereof. -30- 31 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Initial Purchasers and the Company in accordance with its terms. Very truly yours, GOLDEN SKY DBS, INC. By: /s/ JOHN R. HAGER --------------------------------------- Name: John R. Hager Title: Chief Financial Officer CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED NATIONSBANC MONTGOMERY SECURITIES LLC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION FLEET SECURITIES, INC. By: Merrill Lynch, Pierce, Fenner & Smith Incorporated By: /s/ JOSEPH B. SHEEHAN ---------------------------------------- Name: Joseph B. Sheehan Title: Director 32 SCHEDULE A
Principal Amount at Maturity of Name of Initial Purchaser Securities - ------------------------- ----------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................... $106,205,000 NationsBanc Montgomery Securities LLC............... 48,275,000 Donaldson, Lufkin & Jenrette Securities Corporation.......................... 28,965,000 Fleet Securities, Inc............................... 9,655,000 ----------- Total............................................... $193,100,000 ===========
Sch A-1 33 SCHEDULE B GOLDEN SKY DBS, INC. $193,100,000 Senior Discount Notes due 2007 1. The initial public offering price of the Securities shall be 51.8% of the principal amount thereof at maturity, plus accretion, if any, from the date of issuance. 2. The purchase price to be paid by the Initial Purchasers for the Securities shall be 50.1% of the principal amount thereof at maturity. 3. Cash interest will not accrue on the Securities prior to March 1, 2004. Thereafter, cash interest on the securities will accrue at a rate of 13 1/2% per annum and will be payable March 1 and September 1 of each year commencing September 1, 2004. 4. The Securities will mature on March 1, 2007. Sch B-1 34 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(a) (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and to enter into and perform its obligations under the Purchase Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to reservations, agreements, employee benefit plans or the exercise of convertible securities or options referred to in the Offering Memorandum); the shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any security holder of the Company. (v) Each Designated Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct A-1 35 of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; all of the issued and outstanding capital stock of each Designated Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and, to the best of our knowledge and information, except as disclosed in the Offering Memorandum, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (vi) The Purchase Agreement has been duly authorized, executed and delivered by the Company. (vii) The Registration Rights Agreement has been duly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (viii) The Indenture has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery thereof by the Trustee) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or other similar laws relating to or affecting enforcement of creditors' rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (ix) The Securities are in the form contemplated by the Indenture, have been duly authorized by the Company and, when executed by the Company and authenticated by the Trustee in the manner provided in the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and delivered against payment of the purchase price therefor, and the Exchange Securities and the Private Exchange Notes (other than with respect to the delivery in book-entry form), if any, when executed, authenticated and delivered in exchange for the Securities in accordance with the terms of the A-2 36 Registration Rights Agreement, will be entitled to the benefits of the Indenture and will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium (including, without limitation, all laws relating to fraudulent transfers), or other similar laws relating to or affecting enforcement of creditor's rights generally, or by general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be entitled to the benefits of the Indenture. (x) The Securities, the Exchange Securities, the Private Exchange Notes, the Registration Rights Agreement and the Indenture conform in all material respects to the descriptions thereof contained in the Offering Memorandum. (xi) There is not pending or, to the best of their knowledge, threatened any action, suit, proceeding, inquiry or investigation, to which the Company or any subsidiary is a party, or to which the property of the Company or any subsidiary thereof is subject, before or brought by any court or governmental agency or body, which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in the Purchase Agreement or the performance by the Company of its obligations thereunder or the transactions contemplated by the Offering Memorandum. (xii) The information in the Offering Memorandum under "Offering Memorandum Summary -- The Offering," "Business--Litigation," "Description of the Notes," "Exchange Offer and Registration Rights" and "Certain Federal Income Tax Considerations," to the extent that it constitutes matters of law, summaries of legal matters, or legal proceedings, or legal conclusions, has been reviewed by them and is correct in all material respects. (xiii) All descriptions in the Offering Memorandum of contracts and other documents to which the Company or any of its subsidiaries are a party are accurate in all material respects; and to the best of our knowledge, there are no franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments that would be required to be described in the Offering Memorandum that are not described or referred to in the Offering Memorandum other than those described or referred to therein. A-3 37 (xiv) Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws and, to the best of our knowledge, no default by the Company or any of its subsidiaries (other than as described in the Offering Memorandum) exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Offering Memorandum. (xv) No authorization, approval, consent or order of any court or governmental authority or agency, other than such as may be required under the applicable securities laws of the various jurisdictions in which the Securities will be offered or sold, as to which no opinion is required in connection with the due authorization, execution and delivery of the Purchase Agreement or the due execution, delivery or performance of the Indenture by the Company, or for the offering, issuance, sale or delivery of the Securities to the Initial Purchasers or the resale by the Initial Purchasers in accordance with the Purchase Agreement. (xvi) It is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers and to each Subsequent Purchaser in the manner contemplated by the Purchase Agreement and the Offering Memorandum to register the Securities under the 1933 Act or to qualify the Indenture under the Trust Indenture Act. (xvii) The execution, delivery and performance of the Purchase Agreement, the DTC Agreement, the Indenture and the Securities and the consummation of the transactions contemplated in the Purchase Agreement and in the Offering Memorandum (including the use of the proceeds from the sale of the Securities as described in the Offering Memorandum under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the Purchase Agreement, the Indenture and the Securities will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section l(a)(iii) of the Purchase Agreement) under or result in the creation or imposition of any lien, charge or encumbrance (other than those created pursuant to the Company's Amended and Restated Credit Agreement) upon any property or assets of the Company or any subsidiary thereof pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument, including agreements governing the rights of stockholders of the Company, A-4 38 known to us, to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary thereof is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations. (xviii) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act. Nothing has come to our attention that would lead us to believe that the Offering Memorandum (except for financial statements and schedules and other financial data included or incorporated by reference therein as to which we make no statement), contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Offering Memorandum or any amendment or supplement thereto (except for financial statements and schedules and other financial data included therein, as to which such counsel need make no statement), at the time the Offering Memorandum was issued, at the time any such amended or supplemented Offering Memorandum was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). A-5 39 Exhibit B FORM OF OPINION OF COMPANY'S REGULATORY COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) (i) The statements in the Offering Memorandum under the captions "Risk Factors-Regulation; PrimeTime 24 Litigation" and "Business-Regulation," insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly summarize the matters referred to therein and, to our knowledge, such statements, as of the date of the Offering Memorandum and the date hereof, contain no untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. B-1 EX-12.1 8 STATEMENT RE: COMPUTATION OF RATIO TO EARNINGS 1 EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges
Six Months Ended June 30, Inception to Year Ended ------------------------- December 31, 1996 December 31, 1997 1997 1998 ------------------ ------------------ ------- -------- Net Loss $ (1,167) $(15,784) $(2,858) $(22,625) Net Internet Expense 61 2,918 126 4,942 Rent Expense (Interest Portion) 9 145 33 119 -------- -------- ------- -------- Earnings (as defined) (1,097) (12,721) (2,699) (17,564) -------- -------- ------- -------- Interest Expense 62 2,958 128 4,971 Rent Expense (Interest Portion) 9 145 33 119 -------- -------- ------- -------- Fixed Charges 71 3,103 161 5,090 -------- -------- ------- -------- Ratio of Earnings to Fixed Charges -- -- -- --
Pro Forma ------------------------------------- Year Ended Six Months Ended December 31, 1997 June 30, 1998 ------------------ ---------------- Net Loss $(60,311) $(34,434) Net Internet Expense 26,754 13,282 Rent Expense (Interest Portion) 145 119 -------- -------- Earnings (as defined) (33,412) (21,033) -------- -------- Interest Expense 26,794 13,311 Rent Expense (Interest Portion) 145 119 -------- -------- Fixed Charges 26,939 13,430 -------- -------- Ratio of Earnings to Fixed Charges -- --
The ratio of earnings to fixed charges is determined by dividing Earnings (defined as the sum of net loss before net interest expense and a portion of rent expense representative of interest) by Fixed Charges (defined as the sum of interest expense and such portion of rent expenses). For the periods ended December 31, 1996 and 1997 and the six month periods ending June 30, 1997 and 1998, the deficiency of earnings to fixed charges was $1,168, $15,824, $2,860 and $22,654, respectively. On a pro forma basis, for the year ended December 31, 1997 and the six month period ended June 30, 1998, the deficiency of earnings to fixed charges was $60,351 and $34,463, respectively. EX-21.1 9 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT State of Incorporation/ Name Organization - ---- -------------- DIRECT SUBSIDIARIES: Golden Sky Systems, Inc. ...........................Delaware GOLDEN SKY SYSTEMS' SUBSIDIARIES: Argos Support Services Company d/b/a Argos Direct Broadcast Satellite, Inc. ........Texas DCE Satellite Entertainment, LLC....................Wisconsin PrimeWatch, Inc. ...................................North Carolina South Plains DBS Limited Partnership................Texas EX-23.2 10 CONSENT OF KPMG PEAT MARWICK 1 Ex. 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the Registration Statement. /s/ KPMG PEAT MARWICK LLP March 3, 1999 Kansas City, Missouri EX-23.3 11 CONSENT OF EIDE BAILLY LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which this Exhibit forms a part. /s/ Eide Bailly LLP March 3, 1999 Sioux Falls, South Dakota EX-23.4 12 CONSENT OF LOUCKS & GLASSLEY 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which this Exhibit forms a part. /s/ LOUCKS & GLASSLEY, pllp Great Falls, Montana March 3, 1999 EX-23.5 13 CONSENT OF BOLINGER SEGARS GILBERT MOSS LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc. of which this Exhibit forms a part. /s/ BOLINGER, SEGARS, GILBERT & MOSS, L.L.P. Certified Public Accountants Lubbock, Texas March 3, 1999 EX-23.6 14 CONSENT OF MOSS ADAMS LLP 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc., of which this Exhibit forms a part. /s/ Moss Adams LLP Stockton, California March 3, 1999 EX-23.7 15 CONSENT OF CURTIS BLAKELY & CO. P.C. 1 EXHIBIT 23.7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on form S-4 of Golden Sky Systems, Inc. (File No. 333-64367) of which this Exhibit forms a part. CURTIS BLAKELY & CO., P.C. /s/ Curtis Blakely & Co., P.C. ---------------------------------------- Longview, Texas March 4, 1999 EX-23.8 16 CONSENT OF CHMS P.C. 1 EXHIBIT 23.8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc. of which this Exhibit forms a part. CHMS, P.C. By: /s/ Rocky L. Torgeson Sidney, Montana March 3, 1999 EX-23.9 17 CONSENT OF ANDERSON & CO. 1 EXHIBIT 23.9 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our reports included herein and to the references to our firm under the heading "Experts" in the Registration Statement. /s/ Anderson and Company January 25, 1999 Anderson and Company Emmetsburg, Iowa EX-23.10 18 CONSENT OF OLSEN THIELEN & CO. LTD 1 EXHIBIT 23.10 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Amendment No. 3 of the Registration Statement of Golden Sky Systems, Inc. on Form S-4 of our report dated February 10, 1998, on the financial statements of Gardonville Systems, Inc. as of December 31, 1997, and for the year then ended which report is included in or made part of the Registration Statement. /s/ Olsen Thielen & Co., Ltd. Olsen Thielen & Co., Ltd. St. Paul, Minnesota March 3, 1999 EX-23.11 19 CONSENT OF SUMMERS, MCNEA & CO. 1 EXHIBIT 23.11 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made part of the Registration Statement on Form S-4 of Golden Sky Systems, Inc. of which this Exhibit forms a part. /s/ Summers, McNea & Company, P.C. Billings, Montana March 3, 1999 EX-25.1 20 FORM T-1 STATEMENT OF ELIGIBILITY OF TRUSTEE 1 EXHIBIT 25.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ===================== CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) _______ ===================== UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) NEW YORK 13-3818954 (Jurisdiction of incorporation (I. R. S. Employer if not a U. S. national bank) Identification No.) 114 WEST 47TH STREET NEW YORK, NEW YORK 10036-1532 (Address of principal (Zip Code) executive offices) NONE (Name, address and telephone number of agent for service) ======================== GOLDEN SKY DBS, INC. (Exact name of obligor as specified in its charter) DELAWARE 43-1839531 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 605 WEST 47TH STREET, SUITE 300 KANSAS CITY, MISSOURI 64112 (Address of principal executive offices) (Zip Code) 13 1/2% Senior Discount Notes Due 2007, Series A (Title of the indenture securities) 2 -2- GENERAL 1. General Information FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. FEDERAL RESERVE BANK OF NEW YORK (2ND DISTRICT), NEW YORK, NEW YORK (BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM) FEDERAL DEPOSIT INSURANCE CORPORATION, WASHINGTON, D.C. NEW YORK STATE BANKING DEPARTMENT, ALBANY, NEW YORK (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. THE TRUSTEE IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. 2. Affiliations with the Obligor IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. NONE 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 AND 15: THE OBLIGOR IS CURRENTLY NOT IN DEFAULT UNDER ANY OF ITS OUTSTANDING SECURITIES FOR WHICH UNITED STATES TRUST COMPANY OF NEW YORK IS TRUSTEE. ACCORDINGLY, RESPONSES TO ITEMS 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 AND 15 OF FORM T-1 ARE NOT REQUIRED UNDER GENERAL INSTRUCTION B. 16. List of Exhibits T-1.1 -- ORGANIZATION CERTIFICATE, AS AMENDED, ISSUED BY THE STATE OF NEW YORK BANKING DEPARTMENT TO TRANSACT BUSINESS AS A TRUST COMPANY, IS INCORPORATED BY REFERENCE TO EXHIBIT T-1.1 TO FORM T-1 FILED ON SEPTEMBER 15, 1995 WITH THE COMMISSION PURSUANT TO THE TRUST INDENTURE ACT OF 1939, AS AMENDED BY THE TRUST INDENTURE REFORM ACT OF 1990 (REGISTRATION NO. 33-97056). T-1.2 -- INCLUDED IN EXHIBIT T-1.1. T-1.3 -- INCLUDED IN EXHIBIT T-1.1. 3 -3- 16. List of Exhibits (CONT'D) T-1.4 -- THE BY-LAWS OF UNITED STATES TRUST COMPANY OF NEW YORK, AS AMENDED, IS INCORPORATED BY REFERENCE TO EXHIBIT T-1.4 TO FORM T-1 FILED ON SEPTEMBER 15, 1995 WITH THE COMMISSION PURSUANT TO THE TRUST INDENTURE ACT OF 1939, AS AMENDED BY THE TRUST INDENTURE REFORM ACT OF 1990 (REGISTRATION NO. 33-97056). T-1.6 -- THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(B) OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED BY THE TRUST INDENTURE REFORM ACT OF 1990. T-1.7 -- A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. NOTE AS OF MARCH 24, 1999, THE TRUSTEE HAD 2,999,020 SHARES OF COMMON STOCK OUTSTANDING, ALL OF WHICH ARE OWNED BY ITS PARENT COMPANY, U.S. TRUST CORPORATION. THE TERM "TRUSTEE" IN ITEM 2, REFERS TO EACH OF UNITED STATES TRUST COMPANY OF NEW YORK AND ITS PARENT COMPANY, U. S. TRUST CORPORATION. ------------------ PURSUANT TO THE REQUIREMENTS OF THE TRUST INDENTURE ACT OF 1939, THE TRUSTEE, UNITED STATES TRUST COMPANY OF NEW YORK, A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF NEW YORK, HAS DULY CAUSED THIS STATEMENT OF ELIGIBILITY TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ALL IN THE CITY OF NEW YORK, AND STATE OF NEW YORK, ON THE 24TH OF MARCH 1999. UNITED STATES TRUST COMPANY OF NEW YORK, TRUSTEE BY: /s/ GERARD F. GANEY --------------------------- GERARD F. GANEY SENIOR VICE PRESIDENT 4 Exhibit T-1.6 THE CONSENT OF THE TRUSTEE REQUIRED BY SECTION 321(b) OF THE ACT. UNITED STATES TRUST COMPANY OF NEW YORK 114 WEST 47TH STREET NEW YORK, NY 10036 DECEMBER 19, 1997 SECURITIES AND EXCHANGE COMMISSION 450 5TH STREET, N.W. WASHINGTON, DC 20549 GENTLEMEN: PURSUANT TO THE PROVISIONS OF SECTION 321(B) OF THE TRUST INDENTURE ACT OF 1939, AS AMENDED BY THE TRUST INDENTURE REFORM ACT OF 1990, AND SUBJECT TO THE LIMITATIONS SET FORTH THEREIN, UNITED STATES TRUST COMPANY OF NEW YORK ("U.S. TRUST") HEREBY CONSENTS THAT REPORTS OF EXAMINATIONS OF U.S. TRUST BY FEDERAL, STATE, TERRITORIAL OR DISTRICT AUTHORITIES MAY BE FURNISHED BY SUCH AUTHORITIES TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST THEREFOR. VERY TRULY YOURS, UNITED STATES TRUST COMPANY OF NEW YORK BY: /S/ GERARD F. GANEY --------------------------- SENIOR VICE PRESIDENT 5 EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION DECEMBER 31, 1998 ($ IN THOUSANDS) ASSETS CASH AND DUE FROM BANKS $ 104,220 SHORT-TERM INVESTMENTS 207,292 SECURITIES, AVAILABLE FOR SALE 578,874 LOANS 2,061,582 LESS: ALLOWANCE FOR CREDIT LOSSES 17,199 ---------- NET LOANS 2,044,383 PREMISES AND EQUIPMENT 58,263 OTHER ASSETS 124,079 ---------- Total Assets $3,117,111 ========== LIABILITIES DEPOSITS: NON-INTEREST BEARING $ 709,221 INTEREST BEARING 1,908,861 ---------- TOTAL DEPOSITS 2,618,082 SHORT-TERM CREDIT FACILITIES 170,644 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 146,324 ---------- Total Liabilities $2,935,050 ========== STOCKHOLDER'S EQUITY COMMON STOCK 14,995 CAPITAL SURPLUS 53,041 RETAINED EARNINGS 111,402 UNREALIZED GAINS ON SECURITIES AVAILABLE FOR SALE (NET OF TAXES) 2,623 ---------- Total Stockholder's Equity 182,061 ---------- Total Liabilities and Stockholder's Equity $3,117,111 ==========
I, RICHARD E. BRINKMANN, MANAGING DIRECTOR & COMPTROLLER OF THE NAMED BANK DO HEREBY DECLARE THAT THIS STATEMENT OF CONDITION HAS BEEN PREPARED IN CONFORMANCE WITH THE INSTRUCTIONS ISSUED BY THE APPROPRIATE REGULATORY AUTHORITY AND IS TRUE TO THE BEST OF MY KNOWLEDGE AND BELIEF. RICHARD E. BRINKMANN, MANAGING DIRECTOR & CONTROLLER FEBRUARY 1, 1999 EX-27.1 21 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY SYSTEMS, INC. AT DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0001082925 GOLDEN SKY DBS INC. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,460 0 8,925 (293) 10,146 55,645 8,208 (3,214) 328,071 40,441 271,708 0 0 0 15,922 328,071 0 75,924 0 45,291 73,819 0 20,537 (62,150) 0 (62,150) 0 (2,577) 0 (64,727) 0 0
EX-99.1 22 LETTER OF TRANSMITTAL 1 EXHIBIT 99.1 LETTER OF TRANSMITTAL TO TENDER FOR EXCHANGE 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A OF GOLDEN SKY DBS, INC. PURSUANT TO THE PROSPECTUS DATED , 1999 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1999 (THE "EXPIRATION DATE"), UNLESS THE EXCHANGE OFFER IS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION, IN WHICH CASE THE TERM "EXPIRATION DATE" SHALL MEAN THE LATEST DATE AND TIME TO WHICH THE EXCHANGE OFFER IS EXTENDED. TENDERS MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE AGENT IS: UNITED STATES TRUST COMPANY OF NEW YORK By Overnight Courier and by Hand delivery after 4:30 PM on By Hand Delivery to 4:30 PM: By Registered or Certified Expiration Date: United States Trust Company Mail: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level of New York 770 Broadway, 13th Floor Attn: Corporate Trust Window P.O. Box 844, Cooper Station Attn: Corporate Trust Services New York, New York 10006 Attn: Corporate Trust Services New York, New York 10003 New York, New York 10276-0844
FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT 800-548-6565, OR BY FACSIMILE AT 212-780-0592 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. 1 2 The undersigned acknowledges receipt of the Prospectus dated , 1999 (the "Prospectus"), of Golden Sky DBS, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which together with the Prospectus constitutes the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount at maturity of its 13 1/2% Senior Discount Notes due 2007, Series B (the "New Notes"), for each $1,000 principal amount at maturity of its outstanding 13 1/2% Senior Discount Notes due 2007, Series A (the "Old Notes"). Recipients of the Prospectus should read the requirements described in such Prospectus with respect to eligibility to participate in the Exchange Offer. The undersigned hereby tenders the Old Notes described under "Description of Old Notes" below pursuant to the terms and conditions described in the Prospectus and this Letter of Transmittal. The undersigned is the registered owner of all the Old Notes, and the undersigned represents that it has received from each beneficial owner of Old Notes ("Beneficial Owners") a duly completed and executed form of "Instruction to Registered Holder from Beneficiary Owner" accompanying this Letter of Transmittal, instructing the undersigned to take the action described in this Letter of Transmittal. This Letter of Transmittal is to be used by a holder of Old Notes (i) if certificates representing Old Notes are to be forwarded herewith, (ii) if delivery of Old Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures set forth in the section of the Prospectus entitled "The Exchange Offer," or (iii) if a tender is made pursuant to the guaranteed delivery procedures in the section of the Prospectus entitled "The Exchange Offer." The undersigned hereby represents and warrants that the information received from the beneficial owners is accurately reflected in the boxes entitled "Beneficial Owner(s) -- Purchaser Status" and "Beneficial Owner(s) -- Residence." Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder of Old Notes promptly and instruct such registered holder of Old Notes to tender on behalf of the beneficial owner. If such beneficial owner wishes to tender on its own behalf, such beneficial owner must, prior to completing and executing this Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such beneficial owner's name or obtain a properly completed bond power from the registered holder of Old Notes. The transfer of record ownership may take considerable time. In order to properly complete this Letter of Transmittal, a holder of Old Notes must (i) complete the box entitled "Description of Old Notes," (ii) complete the boxes entitled "Beneficial Owner(s) -- Purchaser Status" and "Beneficial Owner(s) -- Residence," (iii) if appropriate, check and complete the boxes relating to book-entry transfer, guaranteed delivery, Special Issuance Instructions and Special Delivery Instructions, (iv) sign the Letter of Transmittal by completing the box entitled "Sign Here" and (v) complete the Substitute Form W-9. Each holder of Old Notes should carefully read the detailed instructions below prior to completing the Letter of Transmittal. Holders of Old Notes who desire to tender their Old Notes for exchange and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes, this Letter of Transmittal and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date, must tender the Old Notes pursuant to the guaranteed delivery procedures set forth in the section of the Prospectus entitled "The Exchange Offer." See Instruction 2. 2 3 - ------------------------------------------------------------------------------------------------------------ DESCRIPTION OF OLD NOTES - ------------------------------------------------------------------------------------------------------------ (4) PRINCIPAL (3) AMOUNT AT MATURITY AGGREGATE TENDERED (1) (2) PRINCIPAL FOR EXCHANGE NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) PRIVATE NOTE AMOUNT (MUST BE IN OF OLD NOTE(S), EXACTLY AS NAME(S) APPEAR(S) ON NUMBERS (ATTACH AT MATURITY INTEGRAL OLD NOTE(S) SIGNED LIST, IF REPRESENTED BY MULTIPLES OF CERTIFICATE(S) (PLEASE FILL IN, IF BLANK): NECESSARY) CERTIFICATE(S)(1) $1,000)(2) - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ TOTAL PRINCIPAL AMOUNT AT MATURITY OF NOTES TENDERED: - ------------------------------------------------------------------------------------------------------------ 1. Unless indicated in the column "Principal Amount at Maturity Tendered For Exchange," any tendering Holder of 13 1/2% Senior Discounted Notes due 2007, Series A, will be deemed to have tendered the entire aggregate principal amount at maturity represented by the column labeled "Aggregate Principal Amount at Maturity Represented by Certificate(s)." 2. The minimum permitted tender is $1,000 in principal amount at maturity of 13 1/2% Senior Discount Notes due 2007, Series A. All other tenders must be in integral multiples of $1,000. - ------------------------------------------------------------------------------------------------------------
[ ]CHECK HERE IF TENDERED OLD NOTES ARE ENCLOSED HEREWITH. [ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS (AS HEREINAFTER DEFINED) ONLY): Name of Tendering Institution: ----------------------------------------------- Account Number: -------------------------------------------------------------- Transaction Code Number: ----------------------------------------------------- [ ]CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY): Name of Registered Holder of Private Note(s): -------------------------------- Date of Execution of Notice of Guaranteed Delivery: -------------------------- Window Ticket Number (if available): ----------------------------------------- Name of Institution that Guaranteed Delivery: -------------------------------- Account Number (if delivered by book-entry transfer): ------------------------ 3 4 [ ]CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: - -------------------------------------------------------------------------------- Address: ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 4 5 SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 1, 6, 7 AND 8) To be completed ONLY (i) if the New Notes issued in exchange for Old Notes, certificates for Old Notes in a principal amount at maturity not exchanged for New Notes, or Old Notes (if any) not tendered for exchange, are to be issued in the name of someone other than the undersigned or (ii) if Old Notes tendered by book-entry transfer which are not exchanged are to be returned by credit to an account maintained at DTC. Issue to: Name: - ---------------------------------------- (Please Type or Print) Address: - -------------------------------------- - ------------------------------------------------ - ------------------------------------------------ (Include Zip Code) - ------------------------------------------------ (Tax Identification or Social Security No.) Credit Old Notes not exchanged and delivered by book-entry transfer to DTC account set forth below: - ------------------------------------------------ (Account Number) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 6, 7 AND 8) To be completed ONLY if the New Notes issued in exchange for Old Notes, certificates for Old Notes in a principal amount at maturity not exchanged for New Notes, or Old Notes (if any) not tendered for exchange, are to be mailed or delivered (i) to someone other than the undersigned or (ii) to the undersigned at an address other than the address shown below the undersigned's signature. Name: - ---------------------------------------- (Please Type or Print) Address: - -------------------------------------- - ------------------------------------------------ - ------------------------------------------------ (Include Zip Code) - ------------------------------------------------ (Tax Identification or Social Security No.) 5 6 - --------------------------------------------------------------------------------------------- BENEFICIAL OWNER(S) -- RESIDENCE - --------------------------------------------------------------------------------------------- STATE OF DOMICILE/PRINCIPAL PLACE PRINCIPAL AMOUNT AT MATURITY OF PRIVATE OF BUSINESS OF EACH BENEFICIAL NOTES HELD FOR ACCOUNT OF OWNER OF OLD NOTES BENEFICIAL OWNER(S) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- BENEFICIAL OWNER(S) -- PURCHASER STATUS - --------------------------------------------------------------------------------------------- The beneficial owner of each of the Old Notes described herein is (check the box that applies): [ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the Securities Act) [ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) [ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that purchased the Old Notes outside the United States in accordance with Rule 904 of the Securities Act [ ] Other (describe): ------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 6 7 Ladies and Gentlemen: Pursuant to the offer by Golden Sky DBS, Inc., a Delaware corporation (the "Company"), upon the terms and subject to the conditions set forth in the Prospectus dated , 1999 (the "Prospectus") and this Letter of Transmittal (the "Letter of Transmittal"), which together with the Prospectus constitutes the Company's offer (the "Exchange Offer") to exchange $1,000 principal amount at maturity of its 13 1/2% Senior Discount Notes due 2007, Series B (the "New Notes"), for each $1,000 principal amount at maturity of its outstanding 13 1/2% Senior Discount Notes due 2007, Series A (the "Old Notes"), the undersigned hereby tenders to the Company for exchange the Old Notes indicated above. By executing this Letter of Transmittal and subject to and effective upon acceptance for exchange of the Old Notes tendered for exchange herewith, the undersigned will have irrevocably sold, assigned, transferred and exchanged, to the Company, all right, title and interest in, to and under all of the Old Notes tendered for exchange hereby, and hereby will have appointed the Exchange Agent as the true and lawful agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as agent of the Company) of such holder of Old Notes with respect to such Old Notes, with full power of substitution to (i) deliver certificates representing such Old Notes, or transfer ownership of such Old Notes on the account books maintained by DTC (together, in any such case, with all accompanying evidences of transfer and authenticity), to the Company, (ii) present and deliver such Old Notes for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights and incidents of beneficial ownership with respect to such Old Notes, in accordance with the terms of the Exchange offer. The power of attorney granted in this paragraph shall be deemed to be irrevocable and complete with an interest. The undersigned hereby represents and warrants that (i) the undersigned is the owner; (ii) the undersigned has full power and authority to tender, exchange, assign and transfer the Old Notes; and (iii) that when such Old Notes are accepted for exchange by the Company, the Company will acquire good and marketable title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims. The undersigned will, upon receipt, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of the Old Notes tendered for exchange hereby. By tendering, the undersigned hereby further represents to the Company that (i) the New Notes to be acquired by the undersigned in exchange for the Old Notes tendered hereby and any beneficial owner(s) of such Old Notes in connection with the Exchange Offer will be acquired by the undersigned and such beneficial owner(s) in the ordinary course of business of the undersigned, (ii) the undersigned have no arrangement or understanding with any person to participate in the distribution of the New Notes, (iii) the undersigned and each beneficial owner acknowledge and agree that any person who is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in certain no-action letters, (iv) the undersigned and each beneficial owner understand that a secondary resale transaction described in clause (iii) above and any resales of New Notes obtained by the undersigned in exchange for the Old Notes acquired by the undersigned directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the Commission, and (v) neither the undersigned nor any beneficial owner is an "affiliate," as defined under Rule 405 under the Securities Act, of the Company. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For purposes of the Exchange Offer, the Company will be deemed to have accepted for exchange, and to have exchanged, validly tendered Old Notes if, as and when the Company gives oral or written notice thereof 7 8 to the Exchange Agent. Tenders of Old Notes for exchange may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer -- Withdrawal of Tenders" in the Prospectus. Any Old Notes tendered by the undersigned and not accepted for exchange will be returned to the undersigned at the address set forth above unless otherwise indicated in the box above entitled "Special Delivery Instructions" as promptly as practicable after the Expiration Date. The undersigned acknowledges that the Company's acceptance of Old Notes validly tendered for exchange pursuant to any one of the procedures described in the section of the Prospectus entitled "The Exchange Offer" and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated in the box entitled "Special Issuance Instructions," please return any Old Notes not entered for exchange in the name(s) of the undersigned. Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail any certificates for Old Notes not tendered or exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s). In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange in the name(s) of, and return any Old Notes not tendered for exchange or not exchanged to, the person(s) so indicated. The undersigned recognizes that the Company has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Old Notes from the name of the holder thereof if the Company does not accept for exchange any of the Old Notes so tendered for exchange or if such transfer would not be in compliance with any transfer restrictions applicable to such Old Notes. IN ORDER TO VALIDLY TENDER OLD NOTES FOR EXCHANGE, HOLDERS OF OLD NOTES MUST COMPLETE, EXECUTE, AND DELIVER THIS LETTER OF TRANSMITTAL. Except as stated in the Prospectus, all authority herein conferred or agreed to be conferred shall survive the death, incapacity, or dissolution of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as otherwise stated in the Prospectus, this tender for exchange of Old Notes is irrevocable. 8 9 TENDERING HOLDERS SIGN HERE - -------------------------------------------------------------------------------- Signature(s) of Owner(s) Dated: - --------------------------------------- Must be signed by the registered holder(s) of Old Notes exactly as name(s) appear(s) on certificates) representing the Old Notes or on a security position listing or by person(s) authorized to become registered Old Note holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information. (See Instruction 6). Name(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please Print) Capacity (full title): - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- (Include Zip Code) Principal place of business (if different from address listed above): - ------------------------------------ - -------------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone No.: (---------) - ------------------------------ Tax Identification or Social Security Nos.: - -------------------------------------------------------------- PLEASE COMPLETE SUBSTITUTE FORM W-9 GUARANTEE OF SIGNATURE(S) (Signature(s) must be guaranteed if required by Instruction 1) Authorized Signature: - -------------------------------------------------------------------------------- Dated: - -------------------------------------------------------------------------------- Name and Title: - -------------------------------------------------------------------------------- (Please Print) Name and Title: - -------------------------------------------------------------------------------- 9 10 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. Guarantee of Signatures. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by an institution that is (1) a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., (2) a commercial bank or trust company having an office or correspondent in the United States, or (3) an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934 which is a member of one of the following recognized Signature Guarantee Programs (an "Eligible Institution"): a. The Securities Transfer Agents Medallion Program (STAMP) b. The New York Stock Exchange Medallion Signature Program (MSP) c. The Stock Exchange Medallion Program (SEMP) Signatures on this Letter of Transmittal need not be guaranteed (i) if this Letter of Transmittal is signed by the registered holder(s) of the Old Notes tendered herewith and such registered holder(s) have not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (ii) if such Old Notes are tendered for the account of an Eligible Institution. IN ALL OTHER CASES, ALL SIGNATURES MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION. 2. Delivery of This Letter of Transmittal and Old Notes; Guaranteed Delivery Procedures. This Letter of Transmittal is to be completed by holders of Old Notes (i) if certificates are to be forwarded herewith or (ii) if tenders are to be made pursuant to the procedures for tender by book-entry transfer or guaranteed delivery set forth in the section of the Prospectus entitled "The Exchange Offer." Certificates for all physically tendered Old Notes or any timely confirmation of a book-entry transfer (a "Book-Entry Confirmation"), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof, and any other documents required by this Letter of Transmittal, must be received by the Exchange Agent at its address set forth on the cover of this Letter of Transmittal prior to 5:00 p.m., New York City time, on the Expiration Date. Holders of Old Notes who elect to tender Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver the Old Notes, this Letter of Transmittal or other required documents to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date, must tender their Old Notes according to the guaranteed delivery procedures set forth in the Prospectus. Holders may have such tender elected if: (a) such tender is made through an Eligible Institution; (b) prior to 5:00 p.m., New York City time, on the Expiration Date, the Exchange Agent has received from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery, setting forth the name and address of the holder of such Old Notes, the certificate numbers(s) of such Old Notes and the principal amount at maturity of Old Notes tendered for exchange, stating that tender is being made thereby and guaranteeing that, within five New York Stock Exchange trading days after the Expiration Date, this Letter of Transmittal (or a facsimile thereof, together with the certificates) representing such Old Notes (or a Book-Entry Confirmation), in proper form for transfer, and any other documents required by this Letter of Transmittal, will be deposited by such Eligible Institution with the Exchange Agent; and (c) a properly executed Letter of Transmittal (or a facsimile hereof), as well as the certificates) for all tendered Old Notes in proper form for transfer or a Book-Entry Confirmation, together with any other documents required by this Letter of Transmittal, are received by the Exchange Agent within five New York Stock Exchange trading days after the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE 10 11 EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NEITHER THIS LETTER OF TRANSMITTAL NOR ANY OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. No alternative, conditional or contingent tenders will be accepted. All tendering holders of Old Notes, by execution of this Letter of Transmittal (or facsimile hereof, if applicable), waive any right to receive notice of the acceptance of their Old Notes for exchange. 3. Inadequate Space. If the space provided in the box entitled "Description of Old Notes" above is inadequate, the certificate numbers and principal amounts at maturity of the Old Notes being tendered should be listed on a separate signed schedule affixed hereto. 4. Withdrawals. A tender of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date by delivery of written or facsimile notice of withdrawal to the Exchange Agent at the address set forth on the cover of this Letter of Transmittal. To be effective, a notice of withdrawal of Old Notes must (i) specify the name of the person who tendered the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and aggregate principal amount at maturity of such Old Notes), and (iii) be signed by the holder of Old Notes in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature Guarantees). All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company in its sole discretion, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may be retendered by following one of the procedures described in the section of the Prospectus entitled "The Exchange Offer -- Procedures for Tendering" at any time prior to 5:00 p.m., New York City time, on the Expiration Date. 5. Partial Tenders. Tenders of Old Notes will be accepted only in integral multiples of $1,000 principal amount at maturity . If a tender for exchange is to be made with respect to less than the entire principal amount at maturity of any Old Note, fill in the principal amount at maturity of Old Notes which are tendered for exchange in column (4) of the box entitled "Description of Old Notes," as more fully described in the footnotes thereto. In case of a partial tender for exchange, a new certificate, in fully registered form, for the remainder of the principal amount at maturity of the Old Notes will be sent to the holders of Old Notes unless otherwise indicated in the appropriate box on this Letter of Transmittal as promptly as practicable after the expiration or termination of the Exchange Offer. 6. Signatures on This Letter of Transmittal, Assignment and Endorsements. (a) The signature(s) of the holder of Old Notes on this Letter of Transmittal must correspond with the name(s) as written on the face of the Old Notes without alteration, enlargement or any change whatsoever. (b) If tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. (c) If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal and any necessary or required documents as there are different registrations or certificates. (d) When this Letter of Transmittal is signed by the holder of Old Notes listed and transmitted hereby, no endorsements of Old Notes or bond powers are required. If, however, Old Notes not tendered or not accepted are to be issued or returned in the name of a person other than the holder of Old Notes, then the Old Notes transmitted hereby must be endorsed or accompanied by a properly completed bond power, in a form satisfactory to the Company, in either case signed exactly as the name(s) of the holder of Old Notes appear(s) on the Old Notes. Signatures on such Old Notes or bond powers must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). 11 12 (e) If this Letter of Transmittal or Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with this Letter of Transmittal. (f) If this Letter of Transmittal is signed by a person other than the registered holder of Old Notes listed, the Old Notes must be endorsed or accompanied by a properly completed bond power, in either case signed by such registered holder exactly as the name(s) of the registered holder of Old Notes appear(s) on the certificates. Signatures on such Old Notes or bond powers must be guaranteed by an Eligible Institution (unless signed by an Eligible Institution). 7. Transfer Taxes. Except as set forth in this Instruction 7, the Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange offer. If, however, a transfer tax is imposed for any reason other than the exchange of the Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemptions therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 8. Special Issuance and Delivery Instructions. If the New Notes are to be issued, or if any Old Notes not tendered for exchange are to be issued or sent to someone other than the holder of Old Notes or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Holders of Old Notes tendering Old Notes by book-entry transfer may request that Old Notes not accepted be credited to such account maintained at DTC as such holder of Old Notes may designate. 9. Irregularities. All questions as to the validity, form, eligibility (including time of receipt), compliance with conditions, acceptance and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Although the Company intends to notify holders of defects or irregularities with respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any other person shall incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 10. Waiver of Conditions. The Company reserves the absolute right to waive, amend or modify certain of the specified conditions as described under "The Exchange Offer -- Conditions" in the Prospectus in the case of any Old Notes tendered (except as otherwise provided in the Prospectus). 11. Requests for Information or Additional Copies. Requests for information or for additional copies of the Prospectus and this Letter of Transmittal may be directed to the Exchange Agent at the address or telephone number set forth on the cover of this Letter of Transmittal. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF, IF APPLICABLE) TOGETHER WITH CERTIFICATES, OR CONFIRMATION OF BOOK-ENTRY OR THE NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. 12 13 IMPORTANT TAX INFORMATION Under current federal income tax law, a holder of Old Notes whose tendered Old Notes are accepted for exchange may be subject to backup withholding unless the holder provides the Company (as payor), through the Exchange Agent, with either (i) such holder's correct taxpayer identification number ("TIN") on the Substitute Form W-9 attached hereto, certifying that the TIN provided on the Substitute Form W-9 is correct (or that such holder of Old Notes is awaiting a TIN) and that (A) the holder of Old Notes has not been notified by the Internal Revenue Service that he or she is subject to backup withholding as a result of a failure to report all interest or dividends or (B) the Internal Revenue Service has notified the holder of Old Notes that he or she is no longer subject to backup withholding; or (ii) an adequate basis for exemption from backup withholding. If such holder of Old Notes is an individual, the TIN is such holder's social security number. If the Exchange Agent is not provided with the correct taxpayer identification number, the holder of Old Notes may be subject to certain penalties imposed by the Internal Revenue Service. Certain holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. Exempt holders of Old Notes should indicate their exempt status on Substitute Form W-9. A foreign individual may qualify as an exempt recipient by submitting to the Exchange Agent a properly completed Internal Revenue Service Form W-8 (which the Exchange Agent will provide upon request) signed under penalty of perjury, attesting to the holder's exempt status. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "Guidelines") for additional instructions. If backup withholding applies, the Company is required to withhold 31% of any payment made to the holder of Old Notes or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The holder of Old Notes is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the record owner of the Old Notes. If the Old Notes are held in more than one name or are not held in the name of the actual owner, consult the enclosed Guidelines for additional guidance regarding which number to report. 13 14 INSTRUCTION TO REGISTERED HOLDER FROM BENEFICIAL OWNER OF 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A OF GOLDEN SKY DBS, INC. The undersigned hereby acknowledges receipt of the Prospectus dated , 1999 (the "Prospectus") of Golden Sky DBS, Inc., a Delaware corporation (the "Company"), and the accompanying Letter of Transmittal (the "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer"). Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus. This will instruct you, the registered holder, as to the action to be taken by you relating to the Exchange Offer with respect to the 13 1/2% Senior Discount Notes due 2007, Series A (the "Old Notes"), held by you for the account of the undersigned. The aggregate principal amount at maturity of the Old Notes held by you for the account of the undersigned is (fill in amount): $__________________ of the Old Notes. With respect to the Exchange offer, the undersigned hereby instructs you (check appropriate box): [ ] To TENDER the following Old Notes held by you for the account of the undersigned (insert principal amount of Old Notes to be tendered, if any): $_____________________ of the Old Notes. [ ] NOT to TENDER any Old Notes held by you for the account of the undersigned. If the undersigned instructs you to tender the Old Notes held by you for the account of the undersigned, it is understood that you are authorized (a) to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations and warranties contained in the Letter of Transmittal that are to be made with respect to the undersigned as a beneficial owner of the Old Notes, including but not limited to the representations that (i) the undersigned's principal residence is in the state of (fill in state) ________________________, (ii) the undersigned is acquiring the New Notes in the ordinary course of business of the undersigned, (iii) the undersigned has no arrangement or understanding with any person to participate in the distribution of New Notes, (iv) the undersigned acknowledges that any person who is a broker-dealer registered under the Exchange Act or is participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the Staff of the Securities and Exchange Commission set forth in certain no-action letters (See the section of the Prospectus entitled "The Exchange Offer"), (v) the undersigned understands that a secondary resale transaction described in clause (iv) above and any resales of New Notes obtained be the undersigned in exchange for the Old Notes acquired by the undersigned directly from the Company should be covered by an effective registration statement containing the selling securityholder information required by Item 507 or Item 508, if applicable, of Regulation S-K of the Commission, (vi) the undersigned is not an "affiliate," as defined in Rule 405 under the Securities Act, of the Company, and (vii) if the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act; (b) to agree, on behalf of the undersigned, as set forth in the Letter of Transmittal; and (c) to take such other action as necessary under the Prospectus or the Letter of Transmittal to effect the valid tender of Old Notes. 14 15 The purchaser status of the undersigned is (check the box that applies): [ ] A "Qualified Institutional Buyer" (as defined in Rule 144A under the Securities Act) [ ] An "Institutional Accredited Investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) [ ] A non "U.S. person" (as defined in Regulation S of the Securities Act) that purchased the Old Notes outside the United States in accordance with Rule 904 of the Securities Act [ ] Other (describe): - --------------------------------------------- SIGN HERE Name of Beneficial Owner(s): - -------------------------------------------------------------------------- Signature(s): - -------------------------------------------------------------------------------- Name(s) (please print): - -------------------------------------------------------------------------------- Address: - -------------------------------------------------------------------------------- Principal place of business (if different from address listed above): - ------------------------------------ - -------------------------------------------------------------------------------- Telephone Number(s): - -------------------------------------------------------------------------------- Taxpayer Identification or Social Security Number(s): - ------------------------------------------------- Date: - -------------------------------------------------------------------------------- 15 16 TO BE COMPLETED BY ALL TENDERING HOLDERS OF NOTES - -------------------------------------------------------------------------------------------------------------------------------- PAYER'S NAME: GOLDEN SKY DBS, INC. - -------------------------------------------------------------------------------------------------------------------------------- SUBSTITUTE PART I -- PLEASE PROVIDE YOUR TIN IN THE BOX AT ------------------------------------ RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Social Security Number FORM W-9 or Department of the Treasury ------------------------------------ Internal Revenue Service Employer Identification Number --------------------------------------------------------------------------------------------- PAYER'S REQUEST FOR PART II -- Certification -- Under penalties of perjury, I certify that: TAXPAYER IDENTIFICATION NUMBER ("TIN") (1) The number shown on this form is my current taxpayer identification number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. Certification Instructions -- You must cross out item (2) in Part II above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you are subject to backup withholding you receive another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2). --------------------------------------------------------------------------------------------- Name: ------------------------------------------- PART III -- (Please Print) Awaiting TIN [ ] Address: ----------------------------------------- (Including Zip Code) Signature ---------------------------------------- Date --------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECK THE BOX IN PART III OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a Taxpayer Identification Number has not been issued to me, and either (a) I have mailed or delivered an application to receive a Taxpayer Identification Number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver such an application in the near future. I understand that if I do not provide a Taxpayer Identification Number within sixty (60) days, 31% of all reportable payments made to me thereafter will be withheld until I provide such a number. Signature - ------------------------------------------------ Date - --------------------------------- 16 17 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER -- Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer. - --------------------------------------------------------- - ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF -- - --------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner of (joint account) the account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner of account) the account or, if joint funds, either person(1) 4. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if the account) minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor, or guardian or committee for a incompetent person(3) designated ward, minor, or incompetent person 7. a. The usual revocable The grantor- savings trust account trustee(1) (grantor is also trustee) b. So-called trust account The actual owner(1) that is not a legal or valid trust under State law 8. Sole proprietorship account The owner(4)
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF -- - --------------------------------------------------------- 9. A valid trust, estate, or Legal entity (Do not pension trust furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or The organization educational organization account 12. Partnership held in the name The partnership of the business 13. Association, club or other The organization tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the Department The public entity of Agriculture in the name of a public entity (such as a State or local governmental, school district or prison) that receives agricultural program payments
- --------------------------------------------------------- --------------------------------------------------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 18 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan. - The United States or any agency or instrumentality thereof. - A State, The District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization or any agency or instrumentality thereof. - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An exempt charitable remainder trust, or a nonexempt trust described in section 4947(a) (1). - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - Payments of patronage dividends where the amount renewed is not paid in money. - Payments made by certain foreign organizations. - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $6.00 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to non-resident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and F6050A. PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.2 23 NOTES OF GUARANTEED DELIVERY 1 EXHIBIT 99.2 NOTICE OF GUARANTEED DELIVERY WITH RESPECT TO 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A OF GOLDEN SKY DBS, INC. THIS FORM, OR ONE SUBSTANTIALLY EQUIVALENT HERETO, MUST BE USED BY ANY HOLDER OF 13 1/2% SENIOR DISCOUNT NOTES DUE 2007, SERIES A (THE "OLD NOTES"), OF GOLDEN SKY DBS, INC., A DELAWARE CORPORATION (THE "COMPANY"), WHO WISHES TO TENDER OLD NOTES PURSUANT TO THE COMPANY'S EXCHANGE OFFER, AS DEFINED IN THE PROSPECTUS DATED , 1999 (THE "PROSPECTUS") AND (I) WHOSE OLD NOTES ARE NOT IMMEDIATELY AVAILABLE OR (II) WHO CANNOT DELIVER SUCH OLD NOTES OR ANY OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL ON OR BEFORE THE EXPIRATION DATE (AS DEFINED IN THE PROSPECTUS) OR (III) WHO CANNOT COMPLY WITH THE BOOK ENTRY TRANSFER PROCEDURE ON A TIMELY BASIS. SUCH FORM MAY BE DELIVERED BY FACSIMILE TRANSMISSION, MAIL OR HAND DELIVERY TO THE EXCHANGE AGENT. SEE "THE EXCHANGE OFFER" IN THE PROSPECTUS. GOLDEN SKY DBS, INC. NOTICE OF GUARANTEED DELIVERY TO: UNITED STATES TRUST COMPANY OF NEW YORK By Overnight Courier and by Hand delivery after 4:30 PM on By Hand Delivery to 4:30 PM: By Registered or Certified Expiration Date: United States Trust Company Mail: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level of New York 770 Broadway, 13th Floor Attn: Corporate Trust Window P.O. Box 844, Cooper Station Attn: Corporate Trust Services New York, New York 10006 Attn: Corporate Trust Services New York, New York 10003 New York, New York 10276-0844
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 2 Ladies and Gentlemen: The undersigned hereby tenders to the Company upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount at maturity of Old Notes specified below pursuant to the guaranteed delivery procedures set forth under "The Exchange Offer" in the Prospectus. By so tendering, the undersigned does hereby make, at and as of the date hereof, the representations and warranties of a tendering Holder of Old Notes set forth in the Letter or Transmittal. The undersigned hereby tenders the Old Notes listed below: - --------------------------------------------------------------------------------------------- CERTIFICATE NUMBERS (IF AVAILABLE) PRINCIPAL AMOUNT AT MATURITY TENDERED - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
All authority herein conferred or agreed to be conferred shall survive the death, incapacity, or dissolution of the undersigned, and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. If Old Notes will be tendered by book-entry transfer: Name of Tendering Institution: - ------------------------------------------------------------------------------- The Depository Trust Company Account No.: - ---------------------------------------------------------------- Date: - -------------------------------------------------------------------------------- SIGN HERE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Signature(s) Name (Please Print) - -------------------------------------------------------------------------------- Address (Include Zip Code) - -------------------------------------------------------------------------------- Area Code and Telephone No. - -------------------------------------------------------------------------------- 2 3 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a participant in a Recognized Signature Guarantee Medallion Program, guarantees deposit with the Exchange Agent of the Letter of Transmittal (or facsimile thereof), together with the Old Notes tendered hereby in proper form for transfer, or confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at the Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in the Prospectus, and any other required documents, all by 5:00 p.m., New York City time, on the fifth New York Stock Exchange trading day following the Expiration Date (as defined in the Prospectus). Name of Firm: - -------------------------------------------------------------------------------- Date: - -------------------------------------------------------------------------------- SIGN HERE - -------------------------------------------------------------------------------- Authorized Signature Name (Please Print) - -------------------------------------------------------------------------------- Address (Include Zip Code) - -------------------------------------------------------------------------------- Area Code and Telephone No. - -------------------------------------------------------------------------------- 3 4 DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. ACTUAL SURRENDER OF CERTIFICATES FOR OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A COPY OF THE PREVIOUSLY EXECUTED LETTER OF TRANSMITTAL. INSTRUCTIONS 1. Delivery of This Notice of Guaranteed Delivery. A properly completed and duly executed copy of this Notice of Guaranteed Delivery and any other documents required by this Notice of Guaranteed Delivery must be received by the Exchange Agent at one of its addresses set forth on the cover hereof prior to the Expiration Date. The method of delivery of this Notice of Guaranteed Delivery and all other required documents to the Exchange Agent is at the election and risk of the holder, but, except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service, properly insured. If such delivery is by mail, it is recommended that the holder use properly insured, registered mail with return receipt requested. For a full description of the guaranteed delivery procedures, see the Prospectus under "The Exchange Offer." In all cases, sufficient time should be allowed to assure timely delivery. No Notice of Guaranteed Delivery should be sent to the Company. 2. Signature on This Notice of Guaranteed Delivery; Guarantee of Signatures. If this Notice of Guaranteed Delivery is signed by the registered holder(s) of the Old Notes referred to herein, then the signature must correspond with the name(s) as written on the face of the Old Notes without alteration, enlargement or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a person other than the registered holder(s) of any Old Notes listed, this Notice of Guaranteed Delivery must be accompanied by a properly completed bond power signed as the name of the registered holder(s) appear(s) on the face of the Old Notes without alteration, enlargement or any change whatsoever. If this Notice of Guaranteed Delivery is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, evidence satisfactory to the Company of their authority so to act must be submitted with this Notice of Guaranteed Delivery. 3. Requests for Assistance or Additional Copies. Questions relating to the Exchange Offer or the procedure for consenting and tendering as well as requests for assistance or for additional copies of the Prospectus, the Letter of Transmittal and this Notice of Guaranteed Delivery, may be directed to the Exchange Agent at the address set forth on the cover hereof or to your broker, dealer, commercial bank or trust company. Holders of Old Notes who wish to tender their Old Notes for exchange must complete columns (1) through (3) in the box below entitled "Description of Old Notes," complete the boxes entitled and sign the box below entitled "Sign Here." If only those columns are completed, such holder of Old Notes will have tendered for exchange all Old Notes listed in column (3) below. If the holder of Old Notes wishes to tender for exchange less than all of such Old Notes, column (4) must be completed in full. In such case, such holder of Old Notes should refer to Instruction 5. 4 -----END PRIVACY-ENHANCED MESSAGE-----