-----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, WLEGkKJ93mMeFdXIOPmFEn85fgV51/YI3gIkcW+o6iANxp6F1H1XwzuXP+YFiP4C mgxCY0+9AfjwbbQeH4LnYQ== 0000914760-00-000063.txt : 20000321 0000914760-00-000063.hdr.sgml : 20000321 ACCESSION NUMBER: 0000914760-00-000063 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN SKY SYSTEMS INC CENTRAL INDEX KEY: 0001070669 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 431749060 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-64367 FILM NUMBER: 573751 BUSINESS ADDRESS: STREET 1: 605 W 47TH ST STREET 2: STE 300 CITY: KANSAS CITY STATE: MO ZIP: 64112 BUSINESS PHONE: 8167535544 MAIL ADDRESS: STREET 1: 605 W 47TH ST STREET 2: STE 300 CITY: KANSAS CITY STATE: MO ZIP: 64112 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______to ______. Commission file number 333-64367 --------- GOLDEN SKY SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 43-1749060 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 4700 BELLEVIEW, SUITE 300 KANSAS CITY, MO 64112 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code, (816) 753-5544 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of the chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ X ]. As of December 31, 1999, the Registrant's outstanding common stock consisted of 1,000 shares of Common Stock. The Registrant is a wholly-owned subsidiary of Golden Sky DBS, Inc., which is a wholly-owned subsidiary of Golden Sky Holdings, Inc. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 31, 1999 was $0. TABLE OF CONTENTS PART I Item 1. Business............................................................. 1 Item 2. Properties...........................................................13 Item 3. Legal Proceedings....................................................13 Item 4. Submission of Matters to a Vote of Security Holders..................14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............................................................15 Item 6. Selected Financial Data..............................................15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........27 Item 8. Financial Statements and Supplementary Data..........................27 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.................................................27 PART III Item 10. Directors and Executive Officers of the Registrant...................28 Item 11. Executive Compensation...............................................30 Item 12. Security Ownership of Certain Beneficial Owners and Management.......33 Item 13. Certain Relationships and Related Transactions.......................37 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....38 SOURCES OF MATERIAL INFORMATION Information in this report concerning the National Rural Telecommunications Cooperative, or the NRTC, and its arrangements with DIRECTV is based upon information that has been made available to us by the NRTC or is otherwise publicly available. Unless otherwise indicated, information in this report regarding numbers of households in rural DIRECTV markets is based upon information compiled by Claritas, Inc. Other industry-related information is derived from SkyREPORT. We have not independently verified this data. The following trademarks owned by third parties are used in this Report: DIRECTV(R), USSB(R), Total Choice(R), NFL SUNDAY TICKET(TM), NHL(R) CENTER ICE(R), MLB EXTRA INNINGS SM , ESPN FULL COURT TM, ESPN GamePlan TM and DirecPC(R). PART I ITEM 1. BUSINESS This report contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. The words "may," "expect," "believe," "could," "anticipate," "project," "estimate," their opposites and similar expressions are intended to identify forward-looking statements. We caution readers that these statements are not guarantees of future performance or events and are subject to a number of risks, uncertainties and assumptions that may influence the accuracy of the statements and the projections on which they are based. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise. These risks, uncertainties and other factors include, among other things: a decrease in subscriber growth; an increase in subscriber acquisition costs; an equipment shortage; impediments to the retransmission of distant broadcast network signals; an increase in competition from cable television system operators, other direct broadcast satellite system operators, and other providers of subscription television services; the introduction of new technologies and competitors into the subscription television business; general business and economic conditions; and other risk factors described from time to time in our reports filed with the Securities and Exchange Commission. All statements herein other than statements of historical fact, including, without limitation, the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding our profitability, financial position, liquidity and capital requirements, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurances that those expectations will prove to be correct. Certain other important factors, or cautionary statements, that could cause our actual results to differ materially from our expectations are disclosed in this report. All written forward-looking statements by or attributable to us or persons acting on our behalf contained in this report are expressly qualified in their entirety by the risk factors and the cautionary statements referred to above. GENERAL We are the second largest independent provider of DIRECTV programming in rural markets in the United States. As of December 31, 1999, approximately 345,200 subscribers in 57 rural markets located in 24 states received DIRECTV service through us. DIRECTV, a division of Hughes Electronics Corporation, is one of two high-power direct broadcast satellite companies in the United States. Hughes Electronics Corporation is a subsidiary of General Motors Corporation. Direct broadcast satellite providers deliver digital television programming and related services to subscribers via satellite. In order to receive this programming, subscribers must install a satellite antenna, or dish, activate a digital set-top receiver and pay a monthly fee. We provide DIRECTV programming services in rural markets in the United States as a non-voting affiliate of the National Rural Telecommunications Cooperative, commonly known as the NRTC. Under a 1992 agreement with DIRECTV, as amended in 1994, the NRTC acquired exclusive rights for participating members and affiliates to distribute DIRECTV programming services in approximately 250 rural markets in the United States, representing approximately 9.0 million households, or about 9% of total U.S. television households. According to the NRTC, these markets accounted for approximately 1.4 million, or approximately 21%, of DIRECTV's direct broadcast satellite subscribers as of December 31, 1999. Under our agreements with the NRTC, we generally have the exclusive right to provide DIRECTV programming to subscribers in our rural markets and to receive related monthly service revenues from those subscribers, regardless of the subscribers' original point of purchase. Our exclusive rural DIRECTV markets are located in the following areas of the United States:
NUMBER OF RURAL GEOGRAPHICAL AREA DIRECTV MARKETS TOTAL HOUSEHOLDS STATES REPRESENTED Southeast................. 6 210,000 AL, FL, GA, NC, TN Southwest................. 13 520,000 AR, OK, TX Midwest................... 21 547,000 IA, KS, MI, MN, MO, ND, NE, WI Rocky Mountain............ 10 227,000 CO, ID, MT, UT, WY Pacific................... 7 357,000 CA, NV, OR --------------------- ------------------- Total.................. 57 1,861,000 ===================== =================== ------------------- Total households are based on estimates of primary residences by Claritas, Inc.
Our subscriber base has increased rapidly due to acquisitions, internal growth and a low rate of subscriber disconnects, or churn. During 1999, we added 104,900 new subscribers, net of disconnects, in our rural markets through internal growth. Our churn rate for the twelve-month period ended December 31, 1999 approximated 15.9%. Merger with Pegasus Communications Corporation On January 10, 2000, we entered into a definitive merger agreement with Pegasus Communications Corporation. Pegasus is the largest independent provider of DIRECTV subscription television services in the United States. The combined operations of Pegasus and Golden Sky Holdings, Inc. ("Golden Sky Holdings") will serve in excess of 1.1 million subscribers in 41 states and have exclusive rights to serve approximately 7.2 million rural households. Under the terms of the agreement, Pegasus will issue up to 6.5 million shares of its Class A common stock to shareholders of Golden Sky Holdings. Golden Sky Holdings is the parent company of Golden Sky DBS, Inc. ("Golden Sky DBS"), which is the parent company of Golden Sky Systems, Inc. ("Golden Sky Systems" and, together with Golden Sky Holdings and Golden Sky DBS, "Golden Sky"). Golden Sky Systems is the primary operating subsidiary of Golden Sky. Upon completion of the merger, Golden Sky Holdings will become a wholly-owned subsidiary of Pegasus. The transaction is expected to close during the first or second quarter of 2000. Except as otherwise provided, all information in this report does not give effect to the merger. 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 AND DEALER NETWORK. We have established direct sales forces in our rural DIRECTV markets to market our DIRECTV programming services. Since inception we have opened approximately 70 full service retail stores in our rural DIRECTV markets and operated 68 of these stores as of December 31, 1999. During 2000, we plan to close approximately 30 of these stores. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Our direct sales force currently consists of approximately 225 direct salespeople who are compensated on a commission basis. We also have close relationships with approximately 450 independent dealers of direct broadcast satellite, commonly known as DBS, equipment to whom we provide marketing, subscriber authorization, and installation and customer service support. Wherever possible, our arrangements with dealers are exclusive. In connection with the sale of a DBS unit and a subscription to DIRECTV programming offered by us, a dealer retains the proceeds from the sale of the equipment and earns a one-time commission paid by us. We retain the ongoing monthly subscription revenue from the subscriber. For equipment sold through the indirect dealer network, we generally provide a subsidy, thus lowering the price of the equipment for the consumer. OTHER DISTRIBUTION CHANNELS. In addition to our direct sales force, we utilize other distribution channels to offer DIRECTV programming to potential subscribers in our rural DIRECTV markets, including: o national retailers selected by DIRECTV; o consumer electronics dealers authorized by DIRECTV to sell DIRECTV programming; and o satellite dealers and consumer electronics dealers authorized by five regional sales management agents selected by DIRECTV. In a similar fashion to our indirect dealer network, we pay a one-time commission to these distribution channels for the sale of DIRECTV programming to a subscriber located in our rural DIRECTV markets and we receive all associated monthly programming revenue associated therewith, regardless of what outlet originally sold DIRECTV programming to the subscriber. MARKETING We believe that DBS services compete favorably with medium and low-power direct-to-home, cable and other subscription television services on the basis of superior signal quality, channel capacity, programming choice and price. We complement the existing marketing effort of DIRECTV and its other national distribution partners through focused local marketing and sales, including local print and radio advertising. We also implement support-advertising programs for our indirect distribution channels. We have implemented specific promotions, like offering new subscribers an initial month's service at no charge, to motivate customers to purchase these plans. We also have incentive-based sales compensation for both our direct and dealer sales forces to promote and sell premium subscription plans. A key element of our marketing strategy is to lower the up-front costs to consumers of becoming Golden Sky subscribers by subsidizing the costs of DBS equipment and installation. 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. 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 and, beginning in February 2000, by a third-party provider of call center services. We also provide professional installation services and technical assistance in each of our offices. OVERVIEW OF THE DIRECT-TO-HOME TELEVISION INDUSTRY Direct-to-home television services encompass all types of television transmission from satellites directly to the home. The FCC has authorized two types of satellite services for transmission of television programming: direct broadcast satellite services, commonly referred to as "DBS", and fixed satellite service, commonly referred to as low-power and medium-power satellite services. DBS services operate at high power or 120 to 240 watts per frequency channel, in the Ku-band. Fixed satellite services include low-power services transmitting in the C-band, as well as medium-power services transmitting in the Ku-band at 20 to 100 watts per frequency channel. Both DBS and medium-power direct-to-home 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 direct-to-home signals require satellite dishes of 27 inches to six feet in diameter, depending on the geographical location of the dish and wattage per frequency channel. See "-- DIRECTV." DIRECTV and EchoStar Communications Corporation are currently the only domestic providers of DBS services. All other direct-to-home domestic satellite television providers currently provide medium or low-power direct-to-home services. See "-- Competition." A DBS system consists of an uplink center, one or more orbiting satellites and the subscriber's reception equipment. The uplink center collects programming from on-site video equipment and from the direct feeds of programmers. Through antennae located at the uplink center, the operator transmits, or uplinks, the programming to transponders located on its geostationary satellite. The transponders receive and amplify the digital signal and transmit it to receiving dishes within the service area covered by the satellite. The digital signal is then transmitted via coaxial cable to the subscriber's receiver, where it is converted into an analog signal, which allows it to be received by the subscriber's televisions. System security is maintained through the use of reprogrammable access cards that must be inserted into each subscriber's integrated receiver decoder, sometimes referred to as a digital set-top box, to unscramble programming signals. DIRECTV DIRECTV is a multichannel DBS programming service initially introduced to U.S. television households in 1994. DIRECTV currently offers in excess of 200 channels of digital quality video and audio programming, and transmits via high-power Ku-band satellites. As of December 31, 1999, DIRECTV had over 8.0 million subscribers (including those acquired as a result of Hughes' acquisition of Primestar), which represented approximately 70.3% of the DBS and medium-power direct-to-home market. Major manufacturers under brand names including RCA, Sony, Hughes, and others produce DBS equipment. DBS equipment is currently sold at retail outlets throughout the U.S. for prices typically ranging from $79 to $199, depending upon the generation of the equipment, the features offered and the retail outlet. Programming DIRECTV programming includes: o cable networks, broadcast networks and audio services available for purchase in tiers for a monthly subscription fee; o premium services available a-la-carte or in tiers for a monthly subscription fee; o sports programming, including major professional league sports packages like the exclusive NFL SUNDAY TICKET, regional sports networks and seasonal college sports packages, which is available for a yearly, seasonal or monthly subscription fee; and o 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 in an attempt 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: o 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; o Select Choice: Package of 40 video channels, 31 CD audio channels and access to up to 55 channels of pay-per-view movies and events; and o NFL SUNDAY TICKET: All out-of-market NFL Sunday games. Other sports programming packages include: o NHL CENTER ICE: Approximately 500 out-of-market NHL games; o MLB EXTRA INNINGS: Approximately 800 out-of-market major league baseball games; o ESPN FULL COURT: Hundreds of college basketball games; and o ESPN GamePlan: Up to ten college football games every Saturday. DIRECTV recently began offering subscribers in selected markets programming packages containing local broadcast stations affiliated with the NBC, CBS, ABC and FOX national broadcast television networks. Subscribers in markets where these local network packages are not offered may be able to receive their local network affiliates by means of over-the-air reception using equipment that allows for seamless switching between satellite-delivered programming and broadcast television programming. Seamless switching between over-the-air programming and satellite programming is possible with all DBS units. In addition, DIRECTV offers distant NBC, CBS, ABC and FOX affiliates to subscribers who are unable to receive the signal of a local affiliate using a conventional roof-top antenna or who otherwise meet other specific eligibility requirements. See "___ Regulation." RELATIONSHIP WITH THE NRTC AND DIRECTV The NRTC is a cooperative whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. The NRTC acquired the right to provide DIRECTV programming to residential households and commercial establishments located in rural DIRECTV markets under a 1992 agreement, as amended in 1994, with Hughes and DIRECTV as successor to Hughes ("the Hughes Agreement"). The NRTC subdivided its rights to provide these services into approximately 250 geographically-based rural DIRECTV markets and then sold its rights to the individual rural DIRECTV markets to NRTC members and affiliates under agreements between the NRTC and its individual members and affiliates (the "NRTC Agreements"). We have acquired the exclusive rights generally to provide DIRECTV programming in each of our rural DIRECTV markets from various NRTC members through assignment of their NRTC Agreements. Each NRTC Agreement was assigned to us with the consent of the NRTC and DIRECTV. Because we do not qualify as a member of the NRTC, we act as a non-voting affiliate. Under the NRTC Agreements, we are obligated to promote, market and sell DIRECTV programming and to take all reasonable steps to ensure that DIRECTV programming is not received at any unauthorized locations or in any unauthorized manner. We also purchase customer authorization, billing services and centralized remittance-processing services from the NRTC under the NRTC Agreements. The NRTC Agreements also contain customary provisions regarding payment terms, compliance with laws and indemnification and provide that both the NRTC and DIRECTV must consent prior to any assignment or transfer of our rights or obligations under the NRTC Agreements, which consent shall not be unreasonably withheld. The NRTC Agreements also contain termination provisions that allow the NRTC to terminate the agreements: o as a result of a termination of the Hughes Agreement, with the NRTC remaining responsible for paying to us its pro rata portion of any refunds that the NRTC receives from DIRECTV under the Hughes Agreement; o if we fail to make any payment due to the NRTC or otherwise breach a material obligation in the NRTC Agreements and this failure or breach continues for more than 30 days after written notice from the NRTC; or o if we fail to keep and maintain any letter of credit required to be provided to the NRTC in full force and effect or to adjust the amount of the letter of credit as required by the NRTC Agreements. The NRTC Agreements also require us to comply with policies of the NRTC promulgated from time to time. We, along with other NRTC-affiliated DIRECTV providers, have disputed some of the policies proposed by the NRTC in the past that we believed did not comply with the NRTC Agreements and applicable law. For example, the NRTC has adopted a policy regarding its own interests in the subscriber information of NRTC members and affiliates. The NRTC Agreements provide that NRTC members and affiliates, including us, have "substantial proprietary interests" in and rights to the information and data with respect to their subscribers. The NRTC and its affiliates, including us, have differed over the import of these rights and interests, which may have consequences in the event that our rights to offer DIRECTV programming through the NRTC are terminated or expire. Under the NRTC Agreements, we have, among other things, the exclusive right in our rural DIRECTV markets to market and sell all programming transmitted by the DIRECTV satellites over 27 frequencies licensed to DIRECTV and the right to retain all of the revenue from subscribers derived from these sales and marketing activities. We pay the NRTC for the wholesale cost of this programming. We also pay a fee to DIRECTV based upon 5% of the programming revenue and certain shared satellite costs. The NRTC has the right to choose to provide some non-select services, like NFL SUNDAY TICKET, as DIRECTV and the content providers enter into new agreements. "Non-select services" are services not generally included in the DIRECTV programming we provide because providers of the programming require minimum subscriber guarantees, advance payments or other similar commitments that the NRTC declines to give. We retain 5% of the revenue from non-select services purchased by our subscribers and remit the balance to DIRECTV. The NRTC Agreements and the Hughes Agreement expire when the satellites that broadcast the specified programming covered by the agreements reach the end of their useful lives and are removed from their assigned orbital locations. According to Hughes, the DIRECTV satellites have estimated orbital lives of at least 12 to 15 years from their respective launches in December 1993, August 1994 and June 1995. The NRTC is currently in litigation with Hughes and DIRECTV over some aspects of the NRTC's rights to distribute direct broadcast satellite services under the Hughes Agreement. We and Pegasus also filed a lawsuit in federal court in Los Angeles against DIRECTV, seeking various monetary and declaratory relief based upon DIRECTV's failure to provide the NRTC with premium programming and DIRECTV's position with respect to the NRTC's rights under the Hughes Agreement, among other things. For more information about these lawsuits, see "Legal Proceedings." As part of their counterclaim in their lawsuit with the NRTC, DIRECTV and Hughes are seeking a declaratory judgment that the term of the NRTC's agreement with Hughes, and therefore the term of our rights under the NRTC Agreements, is measured only by the orbital life of DBS-1 and not the orbital lives of any other satellites subsequently launched by Hughes. According to Hughes, DBS-1 suffered a failure of its primary spacecraft control processor in July 1998 and, since that time, has been operating normally using the spare control processor. If DIRECTV and Hughes were to prevail on their counterclaim, the end of DBS-1's life could have a material adverse effect on our DIRECTV programming rights. There are numerous risks associated with satellite transmission technology in general and DIRECTV's delivery of direct broadcast services in particular. Satellite transmission of video, audio and other data is highly complex and requires the manufacture and integration of diverse and advanced components that may not function as expected. The useful life of a direct broadcast satellite also may be adversely affected by acts of war, electrostatic storms or collisions with space debris. We cannot assure you as to the longevity of the satellites that are required to broadcast our DIRECTV programming or that we will continue to have access to any or all of our DIRECTV programming upon the expiration of the useful life of DBS-1 or any other DIRECTV satellite. The Hughes Agreement provides the NRTC with a right of first refusal to obtain specified DBS distribution services from any successor satellite launched by Hughes. Hughes launched a new satellite in October 1999, which it claims was necessary in order to prevent a disruption of service in the event of any failure of DBS-1. As part of its counterclaim in the pending lawsuit with the NRTC, DIRECTV is asking the court to declare this satellite as the successor satellite to which the right of first refusal relates under the Hughes Agreement. DIRECTV is also seeking to limit the programming services and transponder capacity that it is obligated to provide under the right of first refusal as described more fully below. If DIRECTV and Hughes prevail on their counterclaim, our cost of securing programming and other DBS services could increase substantially. The NRTC Agreements do not expressly provide an equivalent right of first refusal for NRTC members or affiliates to acquire DBS services through the NRTC should the NRTC exercise its right of first refusal under the Hughes Agreement. If we are unable for any reason to acquire DBS distribution services on satisfactory terms upon the expiration of the Hughes Agreement or the NRTC Agreements, we would be required to acquire these services from others, or to attempt to sell our subscriber base to one or more other DBS providers. If we are unable to do this for contractual or other reasons, we may be forced to cease or fundamentally change our business operations. Any material adverse change in our relationship with the NRTC or the NRTC's relationship with DIRECTV could have a material adverse effect on our business, financial condition and results of operations. Prior to April 1999, DIRECTV, United States Satellite Broadcasting Company, Primestar and EchoStar were the principal domestic satellite television operators, serving over 80% of satellite television subscribers in the United States. In April 1999, Hughes acquired Primestar's medium-power direct-to-home business for approximately $1.8 billion. In May 1999, Hughes acquired USSB for approximately $1.6 billion. Prior to its acquisition by Hughes, Primestar offered a full range of satellite television programming to approximately 2.3 million subscribers nationwide, approximately 100,000 of which we believe were located within our rural DIRECTV markets. As a result of our exclusive distribution rights, former Primestar subscribers who are located in our rural markets and choose to receive DIRECTV programming will become our subscribers. COMPETITION We face competition for acquisitions of rural DIRECTV markets from one other company. We also face competition for subscribers within our exclusive rural DIRECTV markets from a broad range of companies offering communications and entertainment services, including cable operators, other satellite service providers, wireless cable operators, telephone companies, television networks and home video product companies. Many of our competitors have greater financial and marketing resources than we do and the business of providing subscription and pay television programming is highly competitive. We believe that quality and variety of programming, signal quality, service and cost will be the key bases of competition. Competition for Acquisition of Rural DIRECTV Markets Historically, both we and Pegasus have been pursuing the same goal of consolidating rural DIRECTV markets. Pegasus is currently the largest independent provider of DIRECTV services and has substantially greater financial resources than we do. Pegasus had approximately 702,100 subscribers and 4.9 million households in 36 states as of December 31, 1999. As a result of our announced merger with Pegasus, we have suspended evaluation of future acquisition opportunities. To the extent we resume our acquisition activities, our pace of any future acquisitions may be slower than our historical experience due to, among other factors, a reduction in the number of attractive acquisition opportunities and capital constraints. In addition, Pegasus' competing acquisition strategy could have a material adverse effect on our ability to execute our acquisition strategy. Competing Subscription Television Providers Cable Television Providers Cable operators in the United States serve approximately 65 million subscribers, representing over 65% penetration of television households passed by cable systems. Cable operators typically offer 30 to 80 channels of programming at an average monthly subscription price of approximately $36. While cable companies currently serve a majority of the U.S. television market, we believe many may not be able to provide the quality and variety of programming offered by DIRECTV until they significantly upgrade their coaxial systems. Many cable television providers are in the process of upgrading their systems and other cable operators have announced their intentions to make significant upgrades. Many proposed upgrades, like conversion to digital format, fiber optic cabling, advanced compression technology and other technological improvements, when fully completed, will permit cable companies to increase channel capacity, thereby increasing programming alternatives, and to deliver a better quality signal. Although cable systems with adequate channel capacity may offer digital service without major rebuilds, we believe that other cable systems that have limited channel capacity, like those in most of our rural DIRECTV markets, will have to be upgraded to add bandwidth in order to provide digital service. We believe that these upgrades will require substantial investments of capital and time to complete industry-wide. As a result, we believe that there will be a substantial delay before cable systems in the rural DIRECTV markets can offer programming services equivalent to DBS satellite providers and that some cable systems in those markets may never be upgraded, subject to advances in digital compression technology currently under development. Other Direct-To-Home Television Providers EchoStar, the only other remaining DBS provider in the United States, began national broadcasting of programming in March 1996 and currently broadcasts approximately 500 channels of digital television programming and CD quality audio programming services to the entire continental United States. EchoStar has 21 licensed channel frequencies at the 119 degrees W.L. orbital position and 29 licensed channel frequencies at the 110 degrees W. L. orbital position. The 110 degrees and 119 degrees W.L. orbital positions are two of the three DBS orbital locations that can serve the entire continental United States. These three orbital locations are sometimes referred to as full "CONUS." EchoStar also has 69 frequencies in other partial CONUS orbital locations. EchoStar reported approximately 3.4 million subscribers as of December 31, 1999. In June 1999, EchoStar acquired its license for 29 DBS frequencies at 110 degrees W.L., two satellites to be delivered in orbit and a direct broadcast operations facility from The News Corporation Limited and MCI WorldCom Inc. EchoStar expects to significantly expand its DBS and other programming offerings as a result of this acquisition, which will potentially strengthen its competitive strength relative to DIRECTV and us. Low-power C-band direct-to-home operators reported approximately 1.6 million subscribers as of December 31, 1999. C-band direct-to-home operators provide subscription television services primarily to subscribers who live in markets not served by cable television. C-band equipment, including the six-to-eight-foot dish necessary to receive the low-power signal, currently costs approximately $2,000 and is distributed by local TVRO satellite dealers. During 1998 and 1999, the number of C-band customers decreased by approximately 465,000 subscribers. Other Competitors Regional telephone companies and other long distance companies could become significant competitors in the future, as they have expressed an interest in becoming subscription multichannel video programming distributors. Furthermore, the Telecommunications Act of 1996 (the "1996 Act") removes barriers to entry that previously inhibited local telephone companies from competing, or made it more difficult for telephone companies to compete, in the provision of video programming and information services. Several telephone companies have received authorization to test market video and other services in specified geographic areas using fiber optic cable and digital compression over existing telephone lines. Estimates for the timing of wide-scale deployment of these multi-channel video services vary, as several telephone companies have pushed back or cancelled originally announced deployment schedules. In addition, mergers, joint ventures and alliances among franchise, wireless or private cable television operators and regional telephone companies may result in competitors capable of offering bundled cable television and telecommunications services. For example, the merger of AT&T and Tele-Communications, Inc. resulted in a large, integrated communications provider with significantly greater technical, financial and marketing resources than we have. As more telephone companies begin to provide multichannel video programming and other information and communications services to their customers, additional significant competition for subscribers will develop. Among other things, telephone companies have an existing relationship with substantially every household in their service area, substantial financial resources and an existing infrastructure. Further, telephone companies may be able to subsidize the delivery of programming through their position as the sole source of local wireline telephone service to the home. Most areas of the United States are covered by traditional terrestrial over-the-air VHF/UHF television broadcasters. Consumers can receive from three to ten channels of over-the-air programming in most markets. These stations provide local, network and syndicated programming free of charge, but each major market is generally limited in the number of programming channels. On August 5, 1997, Congress approved the release of additional digital spectrum for use by VHF/UHF broadcasters. REGULATION Unlike a cable operator, DBS operators like DIRECTV are free to set prices and serve customers according to their business judgment, without rate of return or other regulation or the obligation not to discriminate among customers. However, there are laws and regulations that affect DIRECTV and, therefore, us. As an operator of a privately owned United States satellite system, DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with respect to: o the licensing of individual satellites, including a requirement that DIRECTV meet minimum financial, legal and technical standards; o avoidance of interference with radio stations; and o compliance with rules that the FCC has established specifically for DBS licenses, including rules that the FCC is in the process of adopting to govern the retransmission of broadcast television stations by DBS operators. As a distributor of television programming, DIRECTV also is affected by numerous other laws and regulations. The 1996 Act clarifies that the FCC has exclusive jurisdiction over direct-to-home satellite services and that criminal penalties may be imposed for piracy of direct-to-home satellite services. The 1996 Act also offers direct-to-home operators relief from private and local government-imposed restrictions on the placement of receiving antennae. In some instances, direct-to-home operators have been unable to serve areas due to laws, zoning ordinances, homeowner association rules, or restrictive property covenants banning the installation of antennae on or near homes. In August 1996, the FCC promulgated rules designed to implement Congress' intent by prohibiting any restriction, including zoning, land use or building regulation, or any private covenant, homeowners' association rule or similar restriction on property within the exclusive use or control of the antenna user where the user has a direct or indirect ownership interest in the property, to the extent that the restriction impairs the installation, maintenance or use of a DBS receiving antenna that is one meter or less in diameter or diagonal measurement, except where the restriction is necessary to accomplish a clearly defined safety objective or to preserve a recognized historic district. Local governments and associations may apply to the FCC for a waiver of this rule based on local concerns of a highly specialized or unusual nature. In November 1998, the FCC amended its rules to extend these protections to rental property in those areas under the exclusive use or control of the renter. The 1996 Act also preempted local, but not state, governments from imposing taxes or fees on direct-to-home services, including DBS. Finally, the 1996 Act required that multi-channel video programming distributors, including direct-to-home operators, fully scramble or block channels providing indecent or sexually explicit adult programming. If a multi-channel video programming distributor cannot fully scramble or block this programming, it must restrict transmission to those hours of the day when children are unlikely to view the programming, as determined by the FCC. On December 30, 1998, a three-judge federal court in Delaware held that this provision was unconstitutional. The United States Supreme Court is currently reviewing the judgment of the Delaware Court and a decision is expected this year. In addition to regulating pricing practices and competition within the cable television industry, the Cable Television Consumer Protection and Competition Act of 1992 (the "Cable Act") was intended to establish and support existing and new multi-channel video services, including wireless cable and direct-to-home, to provide subscription television services. We and DIRECTV have benefited from the programming access provisions of the Cable Act and implementing rules in that DIRECTV has been able to gain access to previously unavailable programming services and, in some circumstances, has obtained programming services at reduced cost. Any amendment to, or interpretation of, the Cable Act or the FCC's rules that would permit cable companies or entities affiliated with cable companies to discriminate against competitors like DIRECTV in making programming available or to discriminate in the terms and conditions of its programming could adversely affect DIRECTV's ability to acquire programming on a cost-effective basis, which would have an adverse impact on us. Some of the restrictions on cable-affiliated programmers will expire in 2002 unless the FCC or Congress extends these restrictions. The Cable Act also required the FCC to conduct a rule-making proceeding to impose public interest requirements for providing video programming on direct-to-home licensees. In November 1998, the FCC adopted rules requiring direct-to-home licensees to provide reasonable and non-discriminatory access by qualified candidates for elective office. These rules also require direct-to-home licensees to set aside four percent of the licensee's channel capacity for non-commercial programming of an educational or informational nature. Petitions for reconsideration seeking the imposition of additional regulatory obligations on direct-to-home licensees are pending at the FCC. The Satellite Home Viewer Improvement Act of 1999, or SHVIA, enacted by Congress late last year, amends the Copyright Act and the Communications Act in order to clarify the terms and conditions under which a direct-to-home operator may retransmit local and distant broadcast television stations to subscribers. The new law was intended to promote the ability of satellite services to compete with cable television systems and to resolve disputes that had arisen between broadcasters and satellite carriers regarding the delivery of broadcast television station programming to satellite service subscribers. The SHVIA permits direct-to-home operators like DIRECTV to retransmit the signal of a broadcast television station to subscribers who reside in the station's local market. Until May 29, 2000, a direct-to-home operator can retransmit a local broadcast television station without the station's consent. However, in order to retransmit a local broadcast television station to a satellite service subscriber after May 29, 2000, the satellite provider must have obtained the station's express consent; failure to comply with this requirement could subject a satellite provider to substantial liability. The FCC is currently considering the adoption of rules governing the retransmission consent process, including rules prohibiting a broadcast television station from entering into exclusive retransmission consent agreements or from failing to engage in good faith negotiations for retransmission consent. Beginning January 1, 2002, a satellite provider that retransmits a broadcast television station to subscribers residing in the station's local television market will be subject to a "must carry" obligation under which the carrier will be required to retransmit any other broadcast television station that is located in that market and that has elected to demand mandatory carriage rather than negotiate a retransmission consent agreement with the satellite carrier. The FCC is required to adopt rules implementing the provisions of the SHVIA regarding a local broadcast television stations must carry rights and the station's election between must carry and retransmission consent. The increased use of channel capacity to fulfill this "must carry" obligation may have a limiting effect on the number of markets in which DBS providers offer packages of local broadcast television stations. Congress has indicated that it intends to consider legislation that would promote the retransmission of local broadcast stations to satellite service subscribers in all markets. It is not possible to predict how such legislation, if enacted, will impact Golden Sky's ability to offer local broadcast television signals to customers in the territories that it serves. SHVIA also creates a new compulsory copyright license applicable to the retransmission of local broadcast television stations to satellite service subscribers. Although there is no royalty payment obligation associated with this new compulsory copyright license, eligibility for the compulsory copyright license is conditioned on the satellite carrier's compliance with the applicable Communications Act provisions and FCC rules governing the delivery of local broadcast television stations by a satellite carrier. Noncompliance with the Communications Act and/or FCC requirements could subject a satellite carrier to liability for copyright infringement. A number of provisions contained in the SHVIA address the retransmission by a satellite service provider of a broadcast television station to subscribers who reside outside the local market of the station being retransmitted. A DBS provider may retransmit such "distant" broadcast stations affiliated with the four major national broadcast television networks (ABC, CBS, NBC and FOX) to those subscribers that meet certain specified eligibility criteria, which the FCC is directed to implement. The primary determinant of a subscriber's eligibility to receive a distant affiliate of a particular network is whether the subscriber is able to receive a "Grade B" strength signal from an affiliate of that network using a conventional rooftop broadcast television antenna. The SHVIA also contains a waiver provision and a "grandfathering" provision, each of which allows DBS providers to offer distant network stations to certain subscribers that would otherwise be ineligible to receive such programming. The number of distant affiliates of a particular network that a satellite carrier can provide to eligible subscribers is capped at two per network. The SHVIA contains additional provisions describing the terms and conditions under which a DBS provider can retransmit distant broadcast television stations that are affiliated with emerging national broadcast television networks (such as WB, UPN and PAX) or that are unaffiliated with any network. In particular, the SHVIA directs the FCC to adopt rules that would subject the retransmission of such stations to certain "blackout" rules similar to rules currently applicable to the retransmission of distant broadcast television stations by cable systems. The SHVIA also makes a number of revisions to the compulsory copyright license provisions that apply to the retransmission of distant broadcast television stations to satellite service subscribers. These changes include reducing the monthly per subscriber royalty rate payable under the distant signal compulsory copyright license from 27 cents per distant signal for all types of stations to 14.85 cents per signal for those stations that are affiliated with a national broadcast network and 18.9 cents per signal for "superstations" (stations that are not affiliated with a national broadcast television network). The SHVIA also creates a new compulsory copyright license applicable to the retransmission of a national PBS programming feed (with a monthly per subscriber royalty rate of 14.85 cents). The compulsory copyright license applicable to the retransmission of distant broadcast signals to satellite service subscribers will expire on January 1, 2005 unless it is extended by Congress. If the license expires, direct-to-home operators will be required to negotiate in the marketplace to obtain the copyright clearances necessary for the retransmission of distant broadcast signals to satellite service subscribers. MANAGEMENT AND EMPLOYEES As of January 31, 2000, we had approximately 580 full-time and 191 part-time employees. We are not a party to any collective bargaining agreement and consider our relations with our employees to be good. ITEM 2. PROPERTIES We are currently headquartered in approximately 35,000 square feet of leased office space in Kansas City, Missouri. Annual rent under this lease approximates $570,000 and the lease will terminate in August 2002. We also lease approximately 70 local sales and customer service offices in our rural DIRECTV markets. We expect these facilities to be adequate for our needs in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV seeking a court order to enforce the NRTC's contractual rights to obtain from DIRECTV certain premium programming formerly distributed by United States Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's members and affiliates in their rural markets. The NRTC also sought a temporary restraining order preventing DIRECTV from marketing the premium programming in such markets and requiring DIRECTV to provide the NRTC with the premium programming for exclusive distribution in those areas. The court, in an order dated June 17, 1999, denied the NRTC a preliminary injunction on such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV responded to the NRTC's continuing lawsuit by denying the NRTC's claims to exclusive rights and by filing a counterclaim seeking judicial clarification of certain provisions of DIRECTV's contract with the NRTC. In particular, DIRECTV contends in its counterclaim that the term of DIRECTV's contract with the NRTC is measured solely by the orbital life of DBS-1, the first DIRECTV satellite launched into orbit at the 101(0) WL orbital location, without regard to the orbital lives of the other DIRECTV satellites at the 101(0) WL orbital location. DIRECTV also alleges in its counterclaim that the NRTC's right of first refusal, which is effective at the end of the term of DIRECTV's contract with the NRTC, does not provide for certain programming and other rights comparable to those provided under the contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss certain of the NRTC's claims, leaving all of the causes of action asserted by the NRTC at issue. On September 9, 1999, the NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations of the end of term and right of first refusal provisions. On August 26, 1999, the NRTC filed a separate lawsuit in federal court against DIRECTV claiming that DIRECTV had failed to provide to the NRTC its share of launch fees and other benefits that DIRECTV and its affiliates have received relating to programming and other services. On November 15, 1999, the court granted a motion by DIRECTV and dismissed the tort claim asserted by the NRTC, but left in place the remaining claims asserted by the NRTC. The court also consolidated that lawsuit with the other pending NRTC/DIRECTV lawsuit. The court set various discovery and motion deadlines for the spring and summer of 2000 but did not set a trial date. On December 29, 1999, DIRECTV filed a motion for partial summary judgment. The motion seeks a court order that the NRTC's right of first refusal, effective at the termination of DIRECTV's contract with the NRTC, does not include programming services and is limited to 20 program channels of transponder capacity. The hearing date on DIRECTV's motion was vacated by the court pending resolution of certain procedural issues raised by a new lawsuit we and Pegasus filed against DIRECTV (discussed below). The court has not yet set a trial date on the merits of the claims. On January 10, 2000, we and Pegasus filed a class action lawsuit in federal court in Los Angeles against DIRECTV as representatives of a proposed class that would include all members and affiliates of the NRTC that are distributors of DIRECTV. The complaint contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the NRTC with premium programming, thereby preventing the NRTC from providing this programming to the class members. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of refusal. The complaint seeks monetary damages and a court order regarding the rights of the NRTC and its members and affiliates. On February 10, 2000, we and Pegasus filed an amended complaint which added new tort claims against DIRECTV for interference with plaintiff's relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. We and Pegasus also withdrew the class action allegations to allow a new class action to be filed on behalf of the members and affiliates of the NRTC. On February 22, 2000, DIRECTV refiled its motion for summary judgment first filed on December 29, 1999. Again, the hearing date on DIRECTV's motion was vacated by the court pending resolution of certain procedural issues raised by the new class action complaint recently filed (discussed below). The court has not yet set a trial date on the merits of the claims. On February 29, 2000, certain NRTC Members filed a class action lawsuit in federal court in Los Angeles against DIRECTV as representatives of a proposed class that would include all members and affiliates of the NRTC that are distributors of DIRECTV. The complaint contains causes of action for various torts, common counts and declaratory relief based on DIRECTV's failure to provide the NRTC with premium programming, thereby preventing the NRTC from providing this programming to the class members. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of refusal. The complaint seeks monetary damages and a court order regarding the rights of the NRTC and its members and affiliates. The outcome of the litigation described above could have a material adverse effect on the scope and duration of our right to provide DIRECTV programming in our rural markets, our capital requirements and our costs of operations. Thus, if determined adversely, this matter could have a material adverse effect upon our business, financial condition and results of operations. In addition to the matters discussed above, from time to time we are involved with claims that arise in the normal course of our business. In our opinion, the ultimate liability with respect to these claims will not have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No items were submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of December 31, 1999, all 1,000 authorized, issued and outstanding shares of our Common Stock ($.01 par value) were held by Golden Sky DBS. There is currently no established public trading market for our Common Stock. All of the outstanding capital stock of Golden Sky DBS is owned by Golden Sky Holdings. There is no established public trading market for the common stock ($.01 par value) of Golden Sky Holdings. We have never declared or paid any cash dividends on our common stock and do not expect to do so in the foreseeable future. Payment of any future dividends will depend upon our earnings and capital requirements, our debt facilities, and other factors the Board of Directors considers appropriate. We currently intend to retain our earnings, if any, to support future growth and expansion. Our ability to declare dividends is affected by covenants in our debt facilities that prohibit us from declaring dividends and our subsidiaries from transferring funds in the form of cash dividends, loans or advances to Golden Sky DBS or Golden Sky Holdings. ITEM 6. SELECTED FINANCIAL DATA The following table presents our financial and operating information for the periods indicated. The historical financial information presented below was taken from our audited consolidated financial statements. Household and subscriber data presented below reflect 100% of the households and subscribers comprising our rural DIRECTV markets, including one rural DIRECTV market in which we acquired less than 100% ownership. In that market, we acquired approximately 76% ownership. We receive 100% of the revenue generated by all subscribers in our rural DIRECTV markets. The following should be read in conjunction with our consolidated financial statements and the notes to those financial statements and other financial information, and Management's Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere herein.
INCEPTION THROUGH YEARS ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------------- 1996 1997 1998 1999 --------------- --------------- --------------- --------------- (in thousands) STATEMENT OF OPERATIONS DATA Revenue: DBS services.......................... $ 219 $ 16,452 $ 74,910 $ 139,933 Lease and other....................... 36 944 1,014 640 --------------- --------------- --------------- --------------- Total revenue............................ 255 17,396 75,924 140,573 Costs and Expenses: Costs of DBS services................. 130 9,304 45,291 88,690 System operations..................... 26 3,796 11,021 19,733 Sales and marketing................... 73 7,316 32,201 64,933 General and administrative............ 1,035 2,331 7,431 15,703 Depreciation and amortization......... 97 7,300 23,166 35,963 --------------- --------------- --------------- --------------- Total costs and expenses................. 1,361 30,047 119,110 225,022 --------------- --------------- --------------- --------------- Operating loss........................... (1,106) (12,651) (43,186) (84,449) Net interest expense..................... (61) (3,133) (18,964) (30,048) Other non-operating expenses............. -- -- -- (402) --------------- --------------- ------------------------------- Loss before extraordinary charge......... (1,167) (15,784) (62,150) (114,899) Extraordinary charge on early retirement of debt.................... -- -- (2,577) (2,935) --------------- --------------- --------------- --------------- Net loss................................. $ (1,167) $ (15,784) $ (64,727) $ (117,834) =============== =============== =============== =============== INCEPTION THROUGH DECEMBER 31, YEARS ENDED DECEMBER 31, ----------------------------------------------- 1996 1997 1998 1999 --------------- --------------- --------------- --------------- (in thousands) OTHER FINANCIAL DATA EBITDA................................... $(1,009) $ (5,351) $(20,020) $ (48,332) Net cash used in operating activities.... (790) (3,099) (36,588) (61,096) Net cash used in investing activities.... (3,231) (120,729) (159,921) (12,232) Net cash provided by financing activities............................ 4,500 136,981 187,337 72,104 Capital expenditures..................... 105 998 3,317 3,452 Aggregate purchase price of acquisitions.......................... 5,256 129,725 124,844 35,339 OPERATING DATA Households at end of period.............. 22,000 1,135,000 1,727,000 1,861,000 Subscribers acquired in acquisitions..... 3,000 65,300 54,900 18,300 Subscribers added in existing rural DIRECTV markets....................... 100 21,500 77,200 104,900 Subscribers at end of period............. 3,100 89,900 222,000 345,200 SAC per gross subscriber added........... $290 $280 $320 $380 Penetration at end of period............. 14.1% 7.9% 12.9% 18.5% DECEMBER 31, --------------------------------------------------------------- 1996 1997 1998 1999 --------------- --------------- --------------- --------------- (in thousands) BALANCE SHEET DATA Cash and cash equivalents................ $ 479 $ 13,632 $ 4,460 $ 3,236 Restricted cash: Current............................... -- -- 28,083 23,731 Long-term............................. -- -- 23,534 -- Working capital.......................... (1,948) 3,827 15,204 (1,753) Total assets............................. 6,383 156,236 328,071 296,016 Total debt............................... 4,450 69,113 278,204 257,283 Stockholder's equity (deficit)........... (1,166) 70,449 15,922 (6,367) - -------------------- Restricted cash represents the amount placed in escrow to fund the first four scheduled interest payments on our 12 3/8% senior subordinated notes due 2006. It also includes $5.3 million as of December 31, 1998 that was deposited with the administrative agent under our credit facility to fund a contingent reduction of availability under the term loan facility. This contingent reduction did not occur as a result of an amendment to our credit facility. EBITDA represents earnings before interest, taxes, depreciation and amortization, non-cash charges, extraordinary items and non-recurring charges. EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income or loss as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized measure of performance in the communications industry and is the basis for many of our financial covenants. As a result, investors may use this data to analyze and compare other communications companies with us in terms of operating performance, leverage and liquidity. Further, we believe that EBITDA provides useful information regarding an entity's ability to incur and/or service debt. Changes in our EBITDA may indicate changes in our free cash flows available to incur and service debt and cover fixed charges. However, EBITDA is not intended to represent cash flows for the period and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as we calculate it, is not necessarily comparable to similarly captioned amounts of other companies. SAC per gross subscriber added represents subscriber acquisition costs on a per gross new subscriber activation basis. This excludes acquired subscribers and does not net out disconnected subscribers.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of our historical consolidated results of operations, liquidity and capital resources without giving effect to the pending merger with Pegasus. See "Business - General - Merger with Pegasus Communications Corporation." This discussion should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this report. OVERVIEW Company History We are the second largest independent provider of DIRECTV programming in rural markets in the United States. As of December 31, 1999, we were the exclusive provider of DIRECTV programming services to approximately 345,200 subscribers in our rural markets. DIRECTV, a division of Hughes Electronics Corporation, is one of two direct broadcast satellite companies in the United States. Direct broadcast satellite providers deliver digital television programming and related services to subscribers via satellite. We provide DIRECTV programming services in rural markets in the United States as a non-voting affiliate of the National Rural Telecommunications Cooperative, commonly known as the NRTC. The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in rural America. Under a 1992 agreement with DIRECTV, as amended in 1994, the NRTC acquired exclusive rights for its members and affiliates to distribute DIRECTV programming services in approximately 250 rural markets in the United States, representing approximately 9.0 million households, or about 9% of total U.S. television households. Since our formation in June 1996, we have acquired the exclusive right to provide DIRECTV programming in 57 rural markets in 24 states serving approximately 1.9 million households and 141,500 subscribers. The aggregate purchase price for these acquisitions totaled approximately $298.5 million, or about $160 per household. We have sought to create a strong local presence in each of our markets and attempt to increase our subscriber base through increased penetration of our rural DIRECTV markets. Since inception, we have opened approximately 70 full service retail stores in our rural DIRECTV markets and operated 68 of these stores as of December 31, 1999. In addition, we have established dealer relationships with approximately 450 local retailers of direct broadcast satellite equipment. During 1999, we acquired ten rural DIRECTV markets. These markets included approximately 134,000 households and served approximately 18,300 subscribers as of the dates of acquisition. The aggregate purchase price for these acquisitions, including direct acquisition costs, approximated $35.3 million. Also during 1999, we acquired certain minority ownership interests in our rural DIRECTV markets for aggregate consideration of $3.4 million. As a result of our announced merger with Pegasus, we have suspended evaluation of future acquisition opportunities. To the extent we resume our acquisition activities, our pace of any future acquisitions may be slower than our historical experience due to, among other factors, a reduction in the number of attractive acquisition opportunities and capital constraints. EBITDA EBITDA represents earnings before interest, taxes, depreciation and amortization, non-cash charges, extraordinary items and non-recurring charges. EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net income or loss as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly recognized measure of performance in the communications industry. Many of our financial covenants are also based upon EBITDA. As a result, investors may use this data to analyze and compare other communications companies with us in terms of operating performance, leverage and liquidity. Further, we believe that EBITDA provides useful information regarding an entity's ability to incur and service debt. Changes in our EBITDA may indicate changes in our free cash flows available to incur and service debt and cover fixed charges. However, EBITDA is not intended to represent cash flows for the period and should not be considered in isolation or as a substitute for measures of performance determined in accordance with generally accepted accounting principles. EBITDA, as we calculate it, is not necessarily comparable to similarly captioned amounts of other companies. During the year ended December 31, 1999, we: o used net cash of $61.1 million in operating activities; o used net cash of $12.2 million in investing activities; and o provided net cash of $72.1 million from financing activities. During the year ended December 31, 1998 we: o used net cash of $36.6 million in operating activities; o used net cash of $159.9 million in investing activities; and o provided net cash of $187.4 million from financing activities. During the year ended December 31, 1997 we: o used net cash of $3.1 million in operating activities; o used net cash of $120.7 million in investing activities; and o provided net cash of $137.0 million from financing activities. Churn Our rate of subscriber disconnect, or churn, has increased in recent periods on both an average monthly and last twelve months basis. During 1999, our average monthly churn approximated 1.8%, compared to 0.8% during 1998. For the twelve-month periods ended December 31, 1999 and 1998, our churn rate approximated 15.9% and 7.5%, respectively. Our increased churn rate has resulted from several factors, many of which are non-recurring and external in nature. Those factors have included, but are not limited to, the following: o involuntary disconnects for non-payment of subscribers attracted to our service during the first half of 1999 by DIRECTV's free-programming promotions; o voluntary disconnects by disenchanted subscribers who were adversely affected by the termination of delivery of certain distant broadcast network services in January and July 1999 as a result of an agreement between DIRECTV and the National Association of Broadcasters; o higher subscriber turnover among former Primestar subscribers; and o decreases in up-front equipment and installation costs to new subscribers, which has had the effect of making our service more affordable for potentially less credit-worthy customers. As a result of the factors described above, we anticipate that we may experience higher churn rates for at least the next six months. However, as previously described, many of the factors that have contributed to our recent higher churn are not expected to recur. Consequently, while there can be no assurance, we expect that our rate of subscriber churn will approach historical levels during the latter half of 2000. 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.
INCEPTION TO YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------- 1996 1997 1998 1999 ---------------- --------------- ---------------- ---------------- Revenue: DBS services........................ 85.9 % 94.6 % 98.7 % 99.5% Lease and other..................... 14.1 5.4 1.3 0.5 ---------------- --------------- ---------------- ---------------- Total revenue.......................... 100.0 100.0 100.0 100.0 Costs and Expenses: Costs of DBS services............... 51.0 53.5 59.7 63.1 System operations................... 10.2 21.8 14.5 14.0 Sales and marketing................. 28.6 42.0 42.4 46.2 General and administrative.......... 405.9 13.4 9.8 11.2 Depreciation and amortization....... 38.0 42.0 30.5 25.6 ---------------- --------------- ---------------- ---------------- Total costs and expenses............... 533.7 172.7 156.9 160.1 ---------------- --------------- ---------------- ---------------- Operating loss......................... (433.7) (72.7) (56.9) (60.1) Net interest expense and other......... (23.9) (18.0) (25.0) (21.6) ---------------- --------------- ---------------- ---------------- Loss before extraordinary charge....... (457.6)% (90.7)% (81.9)% (81.7)% ================ =============== ================ ================
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 to the extent we continue to make acquisitions and open additional, or expand existing, field offices. However, many of these costs are fixed in nature and we do not expect that these expenses will increase in direct proportion to revenue. Sales and Marketing. Sales and marketing expenses include advertising, promotional expenses, marketing personnel expenses, commissions paid to our employees and outside sales agents, net equipment and installation costs and other marketing overhead costs. We subsidize the cost to the consumer of DBS equipment and the cost of installation of DBS equipment. Equipment and installation revenues and related expenses are recognized upon the delivery and installation of DBS equipment. Net transaction costs associated with the sale and installation of DBS equipment are reported as a component of sales and marketing expenses in our statement of operations. We invest significantly to develop our sales and distribution systems and to acquire new subscribers. A large part of our sales and marketing expense is comprised of costs related to the addition of new subscribers. Although we anticipate continuing to incur these costs as we build our subscriber base, these costs are not expected to increase in direct proportion to revenue. General and Administrative. General and administrative expenses include corporate general office and administration expenses incurred primarily at our Kansas City corporate office. We expect that these expenses will increase as we grow and continue to expand our infrastructure. However, since many of these 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. We are subject to income taxation under Subchapter C of the Internal Revenue Code. To date, we have not recognized any income tax benefit for financial reporting purposes because we have incurred operating losses in all periods, and realization of future tax benefits is uncertain. As of December 31, 1999, we had net operating loss carryforwards for federal income tax purposes of approximately $166.5 million. These net operating loss carryforwards expire beginning in 2011. Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 Revenue. DBS services revenue for the year ended December 31, 1999 totaled $139.9 million, which represented an 87% increase as compared to the prior year. These higher revenues resulted from the increase in the number of subscribers to our DIRECTV service, offset somewhat by lower revenues per subscriber. The average number of subscribers in our rural DIRECTV markets during 1999 increased to approximately 285,400, compared to approximately 151,100 during 1998. Average monthly revenue per subscriber approximated $41.00 and $41.75 during those same periods. The decrease in revenue per subscriber resulted primarily from lower revenues from distant broadcast network services and lower sports programming revenues. Distant broadcast network services revenue decreased as a result of an agreement between DIRECTV and the National Association of Broadcasters. Pursuant to that agreement, provision of certain distant broadcast network services to a number of our subscribers was terminated during January and July 1999. The termination of these distant broadcast network services adversely impacted our revenues and contributed to our increased churn. We do not anticipate any further termination of these services to our existing subscribers as a result of federal legislation that was enacted in November 1999. Costs of DBS Services. Costs of DBS services increased $43.4 million, or 96%, during 1999 to $88.7 million. This increase resulted from the 89% increase in the average number of subscribers previously described, and from higher fees charged by DIRECTV for satellite and ground service operations. As a percentage of total revenue, the costs of DBS services increased to 63.1% during 1999, compared to 59.7% during 1998. This increase resulted from the higher fees charged by DIRECTV previously described. System Operations. System operations expenses totaled $19.7 million during the year ended December 31, 1999, an $8.7 million increase, or 79%, over 1998. These costs rose as a result of the increased number of field offices and related activity resulting from our acquisitions of rural DIRECTV markets, as well as from subscriber growth. As a percentage of total revenue, system operations expenses decreased to 14.0% during 1999, from 14.5% during 1998. This decrease in system operations expenses as a percentage of total revenues resulted primarily from scale economies realized from our larger subscriber base. Sales and Marketing. Sales and marketing expenses totaled $64.9 million during the year ended December 31, 1999, an increase of $32.7 million, or 102%, compared to the year ended December 31, 1998. Sales and marketing costs per new subscriber activation approximated $380 and $320 during the years ended December 31, 1999 and 1998, respectively. The increase in sales and marketing expenses resulted from: o an 82% increase in the number of new subscriber activations during 1999; o higher subscriber acquisition costs associated with our conversions of Primestar subscribers to our DIRECTV service; o increased equipment and installation subsidies provided to our subscribers; and o increased costs associated with free programming provided to new subscribers under certain DIRECTV national sales promotions. In April 1999, Hughes acquired Primestar's medium-power broadcast satellite business and high-powered DBS assets. Subsequent to Hughes' announcement of its proposed acquisition of Primestar, EchoStar Communications Corporation began to offer increased promotional and other incentives to Primestar customers, as well as to EchoStar retailers, to entice the conversion of Primestar subscribers to EchoStar's competing DBS service, the DISH Network. EchoStar is the second largest provider of DBS service in the United States. Consequently, beginning in February 1999 we increased our marketing efforts with respect to Primestar subscribers. Our increased Primestar conversion efforts include, among other things, an offer of free equipment and installation to current Primestar subscribers, as well as higher sales commission incentives to both our internal and external sales forces. Approximately 30% of our gross subscriber additions during 1999 were conversions of former Primestar subscribers. While we believe that opportunities continue to exist to convert additional Primestar subscribers to our DIRECTV programming service, we expect to accomplish such conversions at a slower rate in future periods. Consequently, while there can be no assurance, we anticipate that our subscriber acquisition costs per new subscriber activation will decrease in future periods. General and Administrative. During the year ended December 31, 1999, general and administrative expenses totaled $15.7 million, compared to $7.4 million during 1998. As a percentage of total revenue, general and administrative expenses increased to 11.2% during 1999, from 9.8% during 1998. These increases in general and administrative expenses resulted from the addition of administrative resources necessary to support our growth and increased bad debts expenses. Our bad debts expenses increased from $1.5 million, or 2.0% of total revenue, during 1998, to $4.1 million, or 2.9% of total revenue, during 1999. This increase in bad debts expense resulted from the increases in subscribers and revenues previously described, as well as from higher bad debts associated with former Primestar subscribers and subscribers attracted to our service during the first half of 1999 by DIRECTV's free programming promotions. EBITDA. EBITDA for the year ended December 31, 1999 totaled negative $48.3 million, compared to EBITDA of negative $20.0 million during the year ended December 31, 1998. This increase in negative EBITDA primarily resulted from the higher sales and marketing expenses and related new subscriber activations previously described. Depreciation and Amortization. Depreciation and amortization expenses increased $12.8 million to $36.0 million during the year ended December 31, 1999, compared to $23.2 million during the year ended December 31, 1998. This increase reflects the amortization of higher intangible asset balances resulting from our acquisitions of rural DIRECTV markets. Interest Expense. Interest expense totaled $32.4 million during the year ended December 31, 1999 and $20.5 million during 1998. This increase of $11.9 million resulted from higher outstanding debt balances and an increase in our weighted-average interest rate. Our weighted-average interest rate increased due to the issuance of our 12 3/8% senior subordinated notes due 2006 in July 1998. 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 151,100, compared to approximately 33,200 during 1997. Average monthly revenue per subscriber approximated $41.75 and $43.75 during these same periods. The decrease in average monthly revenue per subscriber principally resulted from lower lease and other revenues during 1998. 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 total revenue, the costs of DBS services increased to 59.7% during 1998, compared to 53.5% 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 previously described. Sales and Marketing. Sales and marketing expenses totaled $32.2 million during the year ended December 31, 1998, an increase of $24.9 million compared to the previous year. This increase principally resulted from the 265% increase in new subscriber activations during 1998, as compared to 1997. Sales and marketing costs per new subscriber activation approximated $320 during the year ended December 31, 1998 and $280 during the year ended December 31, 1997. General and Administrative. During the year ended December 31, 1998, general and administrative expenses totaled $7.4 million, compared to $2.3 million during 1997. The increase in general and administrative expenses resulted from the addition of administrative resources necessary to support our growth. As a percentage of total revenue, general and administrative expenses decreased to 9.8% during the year ended December 31, 1998, from 13.4% during 1997. This decrease reflects the continued leveraging of these costs, which are partially fixed in nature, over increased subscribers and revenues. EBITDA. 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. Depreciation and Amortization. Depreciation and amortization expenses increased $15.9 million to $23.2 million during the year ended December 31, 1998, compared to $7.3 million during the year ended December 31, 1997. This increase resulted from higher intangible assets balances, which resulted from our acquisition of additional rural DIRECTV markets. Interest Expense. Interest expense totaled $20.5 million during the year ended December 31, 1998, as compared to $3.2 million during 1997. This increase of $17.3 million primarily resulted from higher outstanding debt balances and, to a lesser degree, from an increase in weighted-average interest costs. LIQUIDITY AND CAPITAL RESOURCES We have experienced net losses as well as negative EBITDA and cash flows from operations since our inception. These shortfalls are primarily the result of our rapid subscriber growth and acquisitions of rural DIRECTV markets. In particular, we have incurred significant sales and marketing expenses in our effort to rapidly build our subscriber base. Many of these expenses, which are expensed as incurred and include advertising and promotional expenses, sales commissions and DBS equipment and installation subsidies, are incurred at or before the time a new subscriber is activated. As a result, revenue attributable to new subscribers lags behind the expense incurred in acquiring them. The impact of this lag generally increases with the rate at which we add subscribers. 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. Provided churn remains relatively low, we believe that our investment in building our subscriber base rapidly will enhance our cash flow and operating results in the longer term. Improvement in our results of operations is principally dependent upon our ability to cost effectively expand our subscriber base, control subscriber churn and effectively manage our operating and overhead costs. We plan to reduce our future operating and overhead costs by transitioning from a principally direct sales distribution model to a largely indirect, retail sales distribution model. Accordingly, during the year ending December 31, 2000 we plan, among other things, to: o close approximately 30 of our local sales offices; o reduce our corporate overhead expenses through headcount and other expense reductions; and o increase the number of third-party retailers of our direct broadcast satellite television service in our rural DIRECTV markets. We estimate that we will incur aggregate, non-recurring costs of approximately $1.5 million in connection with these actions. These costs are expected to primarily consist of employee severance and lease termination costs. Our operations require substantial capital for: o financing subscriber growth (including DBS equipment and installation subsidies and marketing and selling expenses); o investments in, and maintenance of, field offices in our rural DIRECTV markets; o financing infrastructure development costs necessary to support the growth of our business; and o funding of start-up losses and other working capital requirements. Historically, we also have utilized substantial capital to acquire rural DIRECTV markets. Our capital expenditures, inclusive of acquisitions of rural DIRECTV markets and related minority interests, totaled $40.2 million during 1999, $107.8 million during 1998 and $121.0 million during 1997. Net cash used in operations totaled $61.1 million in 1999, $36.6 million in 1998 and $3.1 million in 1997. To date, our acquisitions, subscriber growth and operations have been financed from borrowings under our bank credit facility, proceeds from the offering of our 12 3/8% Notes, proceeds from the offering of Golden Sky DBS's 13 1/2% Notes, proceeds from the issuance of Golden Sky Holding's capital stock, and to a lesser extent, the issuance of promissory notes to sellers of rural DIRECTV markets. During the year ended December 31, 1999, our net cash flows from financing activities totaled $72.1 million. This was comprised of: o a capital contribution by Golden Sky DBS of approximately $95.4 million; o net repayments of $15.0 million under our bank credit facility; o repayments of other debt totaling $8.8 million; o increased deferred financing costs of $869,000 resulting from the amendment of our bank credit facility; and o capital contributions of $1.4 million received from certain minority interest holders. In 1998, our net cash flows from financing activities of $187.3 million were comprised of: o net proceeds of $189.2 million from the offering of our 12 3/8% Notes; o net borrowings of $7.0 million under our bank credit facility; o deferred financing costs of $5.2 million resulting from the amendment of our bank credit facility and the offering of our 12 3/8% Notes; and o $3.7 million of repayments on other debt. In 1997, our net cash flows from financing activities of $137.0 million were comprised of: o $81.1 million from the issuance of preferred stock; o deferred financing costs of $3.3 million resulting from the execution of our bank credit facility; and o $59.2 million of net borrowings under our bank credit facility and other indebtedness. Credit Facility We have a credit facility with a group of banks that provides for a $150.0 million line of credit to fund acquisitions and working capital requirements. Of this amount, $35.0 million is in the form of a term loan facility and $115.0 million is in the form of a revolving credit facility, including a letter of credit sub-limit of $40.0 million. As of December 31, 1999, we (1) had fully utilized the entire $35.0 million of term loan availability, (2) had borrowed $17.0 million under the revolving credit line, and (3) had utilized approximately $19.6 million of the letter of credit sub-facility. Availability under the revolving credit line depends upon satisfaction of various financial and operating covenants as well as minimum subscriber base requirements. The term loan amortizes in specified quarterly installments from March 31, 2002 through maturity on December 31, 2005. Availability of revolving loan borrowings decreases by specified amounts over the period from March 31, 2001 through maturity on September 30, 2005. Borrowings under the credit facility bear interest at variable rates (approximately 10.0% as of December 31, 1999) calculated on a base rate, which is either the prime rate or LIBOR, plus an applicable margin, with reductions under some circumstances, based on leverage. As of September 30, 1999, we were not in compliance with certain of the restrictive covenants prescribed by our credit facility. During January 2000, we completed an amendment to the credit facility. The amendment, which was effective as of December 31, 1999, waived our third quarter 1999 covenant violations and amended certain fourth quarter 1999 and year 2000 covenant requirements. Pursuant to the amendment, we may borrow up to an additional $20.0 million under the credit facility prior to March 31, 2000. Any such incremental borrowings, which are secured by letters of credit provided by certain of Golden Sky Holdings' shareholders, must be repaid by March 31, 2000 from the proceeds of either a private or public equity offering. The required repayment date relative to these year 2000 incremental borrowings may be deferred until May 31, 2000 under certain conditions. Upon repayment of the incremental borrowings in March (or prior to May 31 if the repayment date is extended), we will have potential incremental borrowing capacity during the year ending December 31, 2000 equal to the lesser of the proceeds received from either a public or private equity offering or $20.0 million. Coincident with the amendment of the credit facility, Golden Sky Holdings entered into stock subscription agreements with certain of its shareholders for an aggregate of $20.0 million of its preferred stock. Also in January 2000, our credit facility was further amended to approve the change in ownership of Golden Sky that would result from the merger with Pegasus. As of December 31, 1999, we were in compliance with the credit facility's amended covenants. 12 3/8% Notes On July 31, 1998, we completed the sale of $195.0 million aggregate principal amount at maturity of our 12 3/8% Notes. Interest on the 12 3/8% Notes is payable in cash semi-annually on February 1 and August 1 of each year. The 12 3/8% Notes mature on August 1, 2006. The offering of these notes resulted in net proceeds of approximately $189.2 million after payment of underwriting discounts and other issuance costs. In the event the merger with Pegasus is consummated, we will be required to make an offer to the holders of the 12 3/8% Notes to purchase those notes for 101% of their principal amount plus accrued interest. If our offer for the 12 3/8% Notes is accepted by any of our note holders, and we are unable to purchase those notes, we may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 12 3/8% Notes tendered in response to our offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. 13 1/2% Notes On February 19, 1999, Golden Sky DBS completed the sale of $193.1 million aggregate principal amount at maturity of its 13 1/2% Notes. Interest on these notes is payable in cash semi-annually on March 1 and September 1 of each year, with the first cash interest payment due on September 1, 2004. The 13 1/2% Notes mature on March 1, 2007. These notes were offered at a substantial discount and resulted in net proceeds of approximately $95.4 million, after the payment of underwriting discounts and other issuance costs aggregating approximately $4.7 million. In the event the merger with Pegasus is consummated, Golden Sky DBS will be required to make an offer to the holders of its 13 1/2% Notes to purchase those notes for 101% of their accreted value plus accrued interest. If Golden Sky DBS's offer for the 13 1/2% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky DBS may be in default of the terms of the 13 1/2% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 13 1/2% Notes tendered in response to Golden Sky DBS's offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. Future Capital Requirements Our future capital requirements will depend upon a number of factors, including the rate of our internal subscriber growth, the extent to which we complete additional acquisitions, if any, and our working capital needs necessary to accommodate such growth. We expect to continue to expand our marketing efforts in order to increase our subscriber penetration. As previously described, we subsidize a portion of the cost of DBS equipment and subscriber installations. The extent of our future subsidies of DBS equipment and installations may materially affect our liquidity and capital requirements. We also expect that continued investment in our administrative and computer systems will be necessary to support our increased size and continued internal growth. Excluding any 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 not exceed $5.0 million during the year ending December 31, 2000. Our operating costs and working capital requirements are partly a function of our rights and obligations under our agreements with the NRTC and the NRTC's agreement with Hughes. The NRTC is currently in litigation with Hughes and its subsidiary DIRECTV over the scope and extent of certain of these rights. On January 10, 2000, we and Pegasus filed a lawsuit against DIRECTV and Hughes in the United States District Court, Central District of California. The action asserts various claims, including intentional interference with contractual relations and interference with prospective economic advantage, and seeks declaratory relief. The claims are based on DIRECTV's failure to provide the NRTC with certain premium programming, thereby preventing the NRTC from providing this premium programming to the class action members. The claims are also based on DIRECTV's position with respect to launch fees and other benefits it has received, contract term and rights of refusal. See "Business - Legal Proceedings." The outcome of this matter could have a material adverse effect on the scope and duration of our right to provide DIRECTV programming in our rural markets, our capital requirements and our costs of operations. Thus, if determined adversely, this matter could have a material adverse effect upon our business, financial condition and results of operations. During 1999, we acquired ten rural DIRECTV markets. These markets included approximately 134,000 households and served approximately 18,300 subscribers as of the dates of acquisition. The aggregate purchase price for these acquisitions, including direct acquisition costs, approximated $35.3 million. As noted above under "- Overview - Company History," we have suspended evaluation of future acquisition opportunities as a result of the pending merger with Pegasus. To the extent we resume our acquisition activities and identify attractive acquisition candidates in the future, we may require additional capital to complete such acquisitions. We are highly leveraged and, to the extent we are able to borrow additional funds under our credit facility or otherwise, our leverage will continue to increase. The approximately $9.8 million of seller notes payable outstanding at December 31, 1999 mature as follows: $2.9 million in 2000, $3.0 million in 2001, $2.9 million in 2002, and $1.0 million in 2003. Our ability to pay dividends and make other distributions and advances is subject to, among other things, the terms of our debt instruments and applicable law. Our credit facility and the indenture governing our 12 3/8% Notes contain restrictive covenants that limit our ability to pay dividends or make distributions to Golden Sky DBS, our direct parent company. We cannot assure you that we will be in compliance with these covenants at the time of a required interest payment on Golden Sky DBS's 13 1/2% Notes. We currently expect that it may be difficult for us to generate the requisite dividend capacity to enable Golden Sky DBS to make the initial cash interest payments on its 13 1/2% Notes. Our ability to generate sufficient dividend capacity under the indenture governing our 12 3/8% Notes to service Golden Sky DBS's 13 1/2% 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, 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 Golden Sky DBS's initial interest payments absent consents from our lenders and existing bondholders. Moreover, any significant adverse developments would likely preclude Golden Sky DBS from being able to access our cash flow for these initial interest payments. As of December 31, 1999, we had unrestricted cash on hand of approximately $3.2 million. While there can be no assurance, we believe we have sufficient cash and availability under our amended bank credit facility to finance our expected internal growth through at least December 31, 2000. There are a number of factors, some of which may be beyond our control or ability to predict, that could require us to raise additional capital. These factors include unexpected increases in operating costs and expenses, subscriber growth in excess of that currently expected, an increase in the cost of acquiring subscribers or possible acquisitions of additional rural DIRECTV markets. Additional financing also may be required to meet our debt service requirements. There can be no assurance that additional financing will be available on terms acceptable to us, or at all, and if available, that the proceeds of this financing would be sufficient to enable us to meet our debt service requirements or completely execute our business plan. Year 2000 Readiness Many existing computer systems and applications currently use two-digit date fields to designate a particular 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 may cause computer systems and applications to incorrectly process critical financial and operational information. During 1999, we undertook an effort to identify and correct any potential year 2000 issues that may have existed with our information systems, suppliers and facilities. As of the date of this report, our business has not been affected by the year 2000 issue. We will continue to monitor the impact of the year 2000 issue on our business throughout the year ending December 31, 2000. There can be no assurance that the year 2000 issue will not adversely affect our business, financial condition or results of operations in future periods. The foregoing constitutes a year 2000 statement and readiness disclosure subject to the protections afforded it by the Year 2000 Information and Readiness Disclosure Act of 1998. RECENT ACCOUNTING DEVELOPMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, we have no derivative instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on our business, financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about our market sensitive financial instruments is provided below and constitutes a "forward-looking statement." Our major market risk exposure is changing interest rates under our credit facility. Our policy is to manage interest rates through the use of floating rate debt. Our objective in managing our exposure to interest rate changes is to limit the impact of interest rate changes on earnings and cash flow and to lower our overall borrowing costs. We currently have $35.0 million of outstanding borrowings under the variable rate term loan portion of our credit facility. This loan is to be repaid in 15 consecutive quarterly installments of approximately $88,000, beginning on March 31, 2002, with approximately $33.7 million due as a final payment at maturity on December 31, 2005. Interest on the loan is calculated on a base rate, which is either the lender's prime rate or LIBOR, plus an applicable margin. As of December 31, 1999, we had $17.0 million of borrowings outstanding under the $115.0 million revolving loan commitment of our credit facility. Availability of revolving loan borrowings under the credit facility reduces by specified amounts quarterly from March 31, 2001 through maturity on September 30, 2005. Interest on revolving loan borrowings is calculated on a base rate, which is either the lenders' prime rate or LIBOR, plus an applicable margin. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of Golden Sky Systems, Inc. required by this item are included in this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding our executive officers and directors as of December 31, 1999.
NAME AGE POSITION ------------------------------ --- ----------------------------------------- Rodney A. Weary........................................ 49 Chairman of the Board, Chief Executive Officer and Director John R. Hager.......................................... 38 Chief Financial Officer William J. Gerski...................................... 47 Senior Vice President, Sales and Marketing Scott R. Brown......................................... 34 Vice President, Operations Gordon Smith........................................... 57 Vice President, Human Resources Jo Ellen Linn.......................................... 38 Secretary and General Counsel Robert F. Benbow(1).................................... 63 Director William O. Charman..................................... 36 Director William P. Collatos(1)................................. 45 Director William A. Johnston(1)(2).............................. 47 Director Robert B. Liepold(2)................................... 73 Director Erik M. Torgerson(2)................................... 34 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 Golden Sky Systems in June 1996 and has been its Chief Executive Officer since inception. Until 1995, he was President of Cable Video Enterprises Inc., which he formed in 1986 by acquiring traditional cable systems located in three states. From 1988 to December 1994, Mr. Weary was a co-founder, officer and director of Premiere Page, a paging company. John R. Hager. Mr. Hager has been our Chief Financial Officer since October 1998. Mr. Hager joined us in August 1998 as Vice President, Finance and Controller. From February 1997 until August 1998, Mr. Hager was Vice President-- Controller of EchoStar. 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 Senior Vice President, Sales and Marketing since July1999. Mr. Gerski joined us in May 1997 as our Vice President, Sales and Marketing. From May 1996 to April 1997, Mr. Gerski was Regional Director of Marketing and Sales at American Telecasting, Inc. From December 1995 to May 1996, Mr. Gerski was Vice President of Marketing and Sales of Bell Atlantic Video Services. From April 1990 through November 1995, Mr. Gerski was Corporate Director of Sales at Adelphia Cable Communications. 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 positions with Tele-Communications, Inc, including General Manager of TCI Cable of Westchester, General Manager of TCI Cablevision of Pinellas County, Business Manager of TCI Cablevision of Dade/Broward County, and Internal Auditor of TCI North Central Division. Gordon G. Smith. Mr. Smith has been our Vice President of Human Resources since May 1999. From 1998 to 1999, Mr. Smith was a Principal of Somerset Partners, a human resources consulting firm. From 1990 to 1998 Mr. Smith was Vice President of Human Resources, Health Care Services at Olsten Corporation. Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since inception. From 1993 to 1996, Ms. Linn was General Counsel to Cable Video Management, Inc., a communications management company and the former Cable Video Enterprises, Inc., which owned and operated domestic cable television systems. Ms. Linn is licensed to practice law in Kansas and Texas. BACKGROUND OF DIRECTORS Robert F. Benbow. Mr. Benbow has been a director since February 1997. He is a Vice President of Burr, Egan, Deleage & Co., a private venture capital firm, and a managing general partner of Alta Communications Inc. 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. Additionally, he serves as a director of Diginet Americas, Inc., a fixed wireless local loop service provider throughout South America; Advanced Telcom Group, Inc., a competitive local exchange carrier; and Preferred Networks, Inc., a public paging company. William O. Charman. Mr. Charman has been a director since March 1997. He has served as a Vice President of BancBoston Capital since 1995. From 1993 to 1995, Mr. Charman was a Director and team leader for Bank of Boston's Media & Communications Group in London. William P. Collatos. Mr. Collatos has been a director since March 1997. He is a managing general partner of Spectrum Equity Investors, a private equity investment firm focused on the communication services, networking infrastructure, electronic commerce and media industries, which he founded in 1993. He serves as a director of Galaxy Telecom, L.P., which owns, operates and develops cable television systems; ITXC Corp., a global provider of Internet-based voice, fax and voice-enabled services; and JazzTel, a competitive local exchange provider based in Madrid, Spain. William A. Johnston. Mr. Johnston has been a director since November 1997. He is a Managing Director of HarbourVest Partners, LLC and has served in a variety of capacities for HarbourVest Partners, LLC and its predecessor, Hancock Venture Partners, Inc., since 1983. Robert B. Liepold. Mr. Liepold has been a director since inception. Mr. Liepold has been President and Chief Executive Officer of KCWE-TV, an independent commercial television station operating in Kansas City, Missouri, since 1994. Since 1983, Mr. Liepold also has been a consultant to the telecommunications industry. Erik M. Torgerson. Mr. Torgerson has been a director since November 1997. He is a partner at Norwest Equity Partners. Prior to joining Norwest Equity Partners in 1993, Mr. Torgerson was with Arthur Anderson & Co.'s financial consulting and audit practice. Each of our Directors has been elected pursuant to the terms of the Stockholders' Agreement. See "Certain Relationships and Related Transactions -- Stockholders' Agreement." All directors are elected annually and hold office until the next annual meeting of stockholders and until their successors are duly elected and qualified. Directors do not receive an annual retainer or meeting attendance fees. However, we reimburse non-management directors for expenses incurred in attending meetings of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain compensation information for the fiscal years ended December 31, 1997, 1998 and 1999 as to the Chief Executive Officer and our four other highest paid executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS -------------------- ANNUAL COMPENSATION SECURITIES ---------------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION ($) - ---------------------------------------- ------------------------------------------------------- -------------------- Rodney A. Weary 1999 $249,996 $ 87,500 21,884 $5,600 (1) Chief Executive Officer, Chairman 1998 227,462 90,000 21,884 7,945 (1) of the Board of Directors 1997 198,818 50,000 21,884 -- John R. Hager 1999 166,851 65,800 10,000 -- Chief Financial Officer 1998 43,892 50,000 10,000 47,675 (2) William J. Gerski 1999 188,463 70,000 15,000 14,697 (3) Senior Vice President, Sales 1998 153,270 80,000 15,000 -- and Marketing 1997 60,259 50,000 12,182 -- Jo Ellen Linn 1999 109,993 26,950 3,226 -- Secretary and General Counsel 1998 93,061 32,500 2,501 -- 1997 80,926 25,000 2,501 -- Scott R. Brown (4) 1999 116,597 55,020 4,000 65,429 (2) Vice President, Operations (1) Represents compensation attributable to Mr. Weary's use of a company-owned vehicle. (2) Represents compensation related to a relocation allowance provided to the named executive officer. (3) Represents compensation attributable to a vehicle allowance provided to Mr. Gerski. (4) Mr. Brown's employment with us began as of February 1, 1999.
OPTION GRANTS The following table sets forth certain information concerning grants of stock options to the Named Executive Officers during the fiscal year ended December 31, 1999: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED ANNUAL NUMBER OF TOTAL RATES OF STOCK PRICE SECURITIES OPTIONS/ APPRECIATION FOR OPTION UNDERLYING SARS GRANTED EXERCISE OF TERM OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION --------------------------- NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) - --------------------------------- -------------- ------------- ----------- -------------- ------------- ------------- Rodney A. Weary........................ -- -- -- -- -- -- John R. Hager.......................... -- -- -- -- -- -- William J. Gerski...................... -- -- -- -- -- -- Jo Ellen Linn.......................... 725 6.25% $ 1.00 8/16/2009 $ 1,181 $ 1,881 Scott R. Brown.........................4,000 34.48% 1.00 2/1/2009 6,516 10,376
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1) EXERCISE REALIZED ------------------------------ ------------------------- NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------- ------------ ----------- ----------- ------------- ----------- ------------- Rodney A. Weary........................ -- -- 7,294 4,864 $4,077,346 $2,718,976 John R. Hager.......................... -- -- 4,444 5,556 2,484,196 3,105,804 William J. Gerski...................... -- -- 6,252 3,334 3,494,868 1,863,706 Jo Ellen Linn.......................... -- -- 894 1,221 499,746 682,539 Scott R. Brown......................... -- -- 1,222 2,778 683,098 1,552,902 (1) Based on a value of $559.00 per share, which was the approximate fair value of the Golden Sky Holdings common stock on January 10, 2000, the date the merger agreement with Pegasus was executed, based upon the value on that date of the merger consideration to be received.
EMPLOYMENT AGREEMENTS In January 1997, we entered into non-competition agreements with Mr. Weary and Ms. 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, we entered into an employment agreement with Mr. Weary pursuant to which he agreed to serve as our President and Chief Executive Officer through February 2000. Such agreement may be extended according to its terms. Under the agreement, Mr. Weary is paid compensation in the amount of $200,000 per year, subject to adjustments, and is eligible to participate in our stock option plan. In the event that Mr. Weary's employment is terminated by the Company for any reason other than for "Cause" or by Mr. Weary for "Good Reason" following a "Change of Control," Mr. Weary shall be entitled to receive (i) continued payment of his annual salary as in effect as of the date of his termination, said payments to be made for the remainder of his Employment Period (as defined in the agreement) on the same periodic dates as would have been required had Mr. Weary not been terminated, (ii) continuation of Mr. Weary's group health plan benefits, and (iii) a lump sum payment equal to such portion of Mr. Weary's cash "Incentive Compensation" for the then-current fiscal year as shall be prorated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable objectives prior to the date of his termination. 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 us in their present capacity through February 2000 for Ms. Linn and November 2000 for Mr. Gerski. These agreements may be extended according to their terms. Under the agreements, Ms. Linn is paid compensation in an amount not less than $82,500 per year, and Mr. Gerski is paid compensation in an amount not less than $100,000 per year. Each is also eligible to participate in our stock option plan. In the event that either agreement is terminated by the Company for any reason other than for "Cause" or by the employee for "Good Reason" following a "Change of Control," the employee shall be entitled to receive (i) continued payment of the employee's annual salary as in effect as of the date of termination, said payments to be made for a period of six months following the date of termination (or, in the event of a termination by the employee for "Good Reason," for a period of 12 months following the date of termination) on the same periodic dates as would have been required had the employee not been terminated, (ii) continuation of the employee's group health plan benefits, and (iii) a lump sum payment equal to such portion of the employee's cash "Incentive Compensation" for the then-current fiscal year as shall be prorated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable objectives prior to the date of termination. We also entered into a non-competition agreement with Mr. Gerski in November 1997. The terms of the non-competition agreement preclude Mr. Gerski from competing with us during the term of his employment and for a period of two years thereafter in any market in the United States in which we operate and require Mr. Gerski to maintain the confidentiality of our proprietary information during the period of his employment and thereafter. In August 1998, we entered into an employment agreement with Mr. Hager pursuant to which Mr. Hager agreed to serve us in his current capacity through August 2001. The employment agreement may be extended in accordance with its terms. Mr. Hager is paid compensation under the employment agreement in an amount not less than $120,000 per year and is eligible to participate in our stock option plan. In the event that the agreement is terminated by the Company for any reason other than for "Cause" or by Mr. Hager for "Good Reason" following a "Change of Control," Mr. Hager shall be entitled to receive (i) continued payment of his annual salary as in effect as of the date of termination, said payments to be made for a period of six months following the date of termination (or, in the event of a termination by Mr. Hager for "Good Reason," for a period of 12 months following the date of termination) on the same periodic dates as would have been required had he not been terminated, (ii) continuation of his group health plan benefits, and (iii) a lump sum payment equal to such portion of his cash "Incentive Compensation" for the then-current fiscal year as shall be prorated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable objectives prior to the date of his termination. We also entered into a non-competition agreement and a confidentiality and proprietary rights agreement with Mr. Hager 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 two years thereafter in any market in the United States in which we operate or intend to operate. The confidentiality and proprietary rights agreement requires Mr. Hager to maintain the confidentiality of our proprietary information during the period of his employment and thereafter. In February 1999, we entered into an employment agreement with Mr. Brown pursuant to which Mr. Brown agreed to serve us in his current capacity through February 2002. The employment agreement may be extended in accordance with its terms. Mr. Brown is paid compensation under the employment agreement in an amount not less than $129,000 per year and is eligible to participate in our stock option plan. In the event that the agreement is terminated by the Company for any reason other than for "Cause" or by Mr. Brown for "Good Reason" following a "Change of Control," Mr. Brown shall be entitled to receive (i) continued payment of his annual salary as in effect as of the date of termination, said payments to be made for a period of six months following the date of termination on the same periodic dates as would have been required had he not been terminated, (ii) continuation of his group health plan benefits, (iii) a lump sum payment equal to such portion of his cash "Incentive Compensation" for the then-current fiscal year as shall be prorated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable objectives prior to the date of his termination, and (iv) a release from certain obligations contained in Mr. Brown's non-competition agreement with the Company. We also entered into a non-competition agreement with Mr. Brown in February 1999. The terms of the non-competition agreement preclude Mr. Brown from competing with us during the term of his employment and for six months thereafter in any market in the United States in which we operate and require Mr. Brown 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 and Restricted Stock Purchase Plan to provide our employees, officers and directors with an opportunity to invest in our common stock and to advance the interests of Golden Sky Systems and its stockholders. Effective September 9, 1997, the plan was assumed by Golden Sky Holdings. The plan permits our board of directors to grant incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options within the meaning of Treasury Regulations Section 1.83-7 and restricted stock awards to our officers, directors and employees. The maximum number of shares of our common stock that may be subject to options or awards granted under the plan may not exceed, in the aggregate, 85,218 shares. Shares of our common stock that are attributable to grants or awards that have expired or been terminated, cancelled or forfeited are available for issuance in connection with future grants or awards. The Compensation Committee of our Board of Directors administers the plan, makes grants and awards under the plan and establishes the terms and conditions of the grants and awards. 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Benbow, Mr. Collatos and Mr. Johnston were the members of the Compensation Committee of the Board of Directors as of December 31, 1999. No member of the Compensation Committee was an officer or employee of Golden Sky or its subsidiaries during 1999, or an officer of Golden Sky or its subsidiaries at any time prior to 1999. During 1999, none of the Named Executive Officers served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of our Compensation Committee. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of our issued and outstanding capital stock is owned by Golden Sky DBS, and all of the issued and outstanding capital stock of Golden Sky DBS is owned by Golden Sky Holdings. The following table sets forth certain information as of December 31, 1999, regarding the ownership of Golden Sky Holdings' common stock; Series A Convertible Participating Preferred Stock, $.01 par value; Series B Convertible Participating Preferred Stock, $.01 par value; and Series C Senior Convertible Preferred Stock, $.01 par value, 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 Golden Sky Holdings' capital stock and (ii) our executive officers and directors. Beneficial ownership percentages of Golden Sky Holdings' common stock presented below are significantly affected by the securities convertible into or exercisable for Golden Sky Holdings common stock held by each stockholder. Except as required by law or Golden Sky Holdings' Certificates of Designation, holders of Golden Sky Holdings' common stock are not entitled to 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 7.7% 8.9% Alta Communications VI, L.P. (4).................. 92,365.00 22.1 18,504.38 8.1 -- -- 3,522.00 12.2 14.8 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 * 6.5 Spectrum Equity Investors II L.P. (5).................. 100,000.00 23.9 -- -- -- -- 25.00 * 13.0 BancBoston Ventures Inc. (6) 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4 Norwest Equity Partners VI, L.P. (7).................. -- -- 50,083.75 21.9 -- -- -- -- 6.5 Norwest Venture Partners VI, L.P. (7)............. -- -- 25,041.87 11.0 -- -- -- -- 3.3 HarbourVest Partners V-Direct Fund L.P. (8)... -- -- 75,125.62 32.9 -- -- -- -- 9.8 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 Poulson (11)....... 100.00 - -- -- 21,350.76 37.0 21,450.76 45.7 2.8 Jack S. Ramirez and Carol H. Ramirez (12).......... -- -- -- -- 7,873.10 13.6 7,873.10 26.2 1.0 Joyce Travis, Trustee of the Travis Living Trust Dated the 5th day of March, 1998 (13)......... -- -- -- -- 5,337.68 9.3 5,337.68 17.4 * James and Constance R. Hertz (14)............... -- -- -- -- 3,754.93 6.5 3,754.93 14.0 * Maxon R. and Kristina Davis (15)..................... -- -- -- -- 3,385.89 5.9 3,385.89 11.8 * Louise A. Davis (16)...... -- -- -- -- 3,308.68 5.7 3,308.68 11.5 * Jay and Marla Downen (17). -- -- -- -- 3,088.10 5.4 3,088.10 10.8 * Chris J. Downen (19)...... -- -- -- -- 4,628.01 8.0 4,628.01 15.4 * 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 -- -- -- -- 18,240.00 53.8 4.5 John R. Hager (21) (22)... -- -- -- -- -- -- 5,000.00 16.4 * William J. Gerski (21) (23) -- -- -- -- -- -- 12,500.00 38.5 1.6 Scott R. Brown (21) (31).. -- -- -- -- -- -- 1,444.00 5.4 * Gordon G. Smith (21) (32). -- -- -- -- -- -- 666.00 2.6 * Jo Ellen Linn (21) (24)... 430.00 * -- -- -- -- 2,184.00 8.3 * Robert F. Benbow (25)..... 150,000.00 35.9 30,051.45 13.2 -- -- 5,719.00 20.2 24.2 William O. Charman (26)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4 William P. Collatos (27).. 150,000.00 35.9 -- -- -- -- 37.00 * 19.5 William A. Johnston (28).. -- -- 75,125.62 32.9 -- -- -- -- 9.8 Robert B. Liepold (21) (29) 1,000.00 * -- -- -- -- 3,009.00 11.2 * Erik M. Torgerson (30).... -- -- 75,125.62 32.9 -- -- -- -- 9.8 All executive officers and directors as a group (twelve persons)......... 392,460.00 93.9 192,824.13 84.4 -- -- 48,818.00 100.00 82.5 * 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 Golden Sky Holdings 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 Golden Sky Holdings common stock appears unusually large, because there is a small number of shares of Golden Sky Holdings common stock outstanding relative to the number of shares of Golden Sky Holdings 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 funds. The general partners of Alta Subordinated Debt Management III, L.P., which is the general partner of Alta Sub Debt III, include Messrs. Craig Burr, William P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble, Jean Deleage and Jonathan Flint and Ms. Eileen McCarthy. These general partners may be deemed to share voting and investment 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. These general partners may be deemed to share voting and investment powers for the shares held by Alta VI. These general partners disclaim beneficial ownership of all such securities held by the funds except to the extent of their proportionate pecuniary interests in the shares. Some of the principals of Burr, Egan, Deleage & Co. and Alta Communications, Inc. (including some of the individuals identified above) are members of S by S, which invests alongside Alta VI. As members of S by S, they may be deemed to share voting and investment power for the shares held by S by S. These principals disclaim beneficial ownership of all such shares except to the extent of their proportionate pecuniary interest in the shares. 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 One International Place, 29th Floor, Boston, Massachusetts 02110, Attn: William P. Collatos. The sole general partner of Spectrum Equity Investors, L.P. is Spectrum Equity Associates, L.P., a limited partnership whose general partners are Messrs. Brion B. Applegate and William P. Collatos. The sole general partner of Spectrum Equity Investors II, L.P. is Spectrum Equity Associates II, L.P., a limited partnership whose general partners are Messrs. Brion B. Applegate, William P. Collatos and Kevin J. Maroni. 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 Maroni may be deemed to share beneficial ownership of the shares owned by Spectrum Equity Investors II, L.P. These individuals disclaim beneficial ownership of all of these shares except to the extent of their respective pecuniary interests in the shares. (6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110, Attn: William O. Charman. The shares of Series A Preferred Stock and Series B Preferred Stock beneficially owned by BancBoston Ventures Inc. are controlled by its President, Frederick M. Fritz, and by its Managing Director, Sanford Anstey, and by William O. Charman, who is a director of our company. (7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, Attn: Erik M. Torgerson. The shares of Series B Preferred Stock beneficially owned by Norwest Equity Partners VI, LP are controlled by its general partner, Itasca LBO Partners VI, LLP, which is controlled by John E. Lindahl, Managing Partner, and by John P. Whaley, Managing Administrative Partner. The shares of Series B Preferred Stock beneficially owned by Norwest Venture Partners VI, LP are controlled by its general partner, Itasca VC Partners, LLP, which is controlled by its Managing Partner, George J. Still, Jr., and by John P. Whaley, Managing Administrative Partner. (8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole general partner of HarbourVest Partners V-- Direct Fund L.P. ("HarbourVest V") is a limited liability company whose managing member is HarbourVest Partners, LLC. The managing directors of HarbourVest Partners, LLC are Messrs. George Anson, John M. Begg, Philip M. Bilden, Theodore A. Clark, Kevin S. Delbridge, William A. Johnston, Edward W. Kane, Frederick C. Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D. Brooks Zug, and Ms. Martha D. Vorlicek. These individuals may be deemed to share beneficial ownership of the shares held by HarbourVest V, and disclaim beneficial ownership of all of these shares except to the extent of their respective pecuniary interest in the shares. (9) The address is c/o London Merchant Securities, Carlton House, 33 Robert Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion Investments Limited and Westpool Investment Trust plc is a wholly-owned subsidiary of London Merchant Supplies plc, a publicly traded company in the U.K. (10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut 06927, Attn: Peter Foley. General Electric Capital Corporation is a wholly-owned subsidiary of General Electric Corporation. (11) The address is P.O. Box 1376, Great Falls, Montana 59403. (12) The address is 2061 Norwich Ct., Glenview, Illinois 60025. (13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086. (14) The address is 7444 Molt Road, Billings, Montana 59106. (15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404. (16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128. (17) The address is 511 Fortress Circle, Leesburg, Virginia 21075. (18) The address is 2105 Noble Avenue, Springfield, Illinois 62704. (19) The address is 1617 Outer Park, Springfield, Illinois 62704. (20) 16,030 shares of Series A Preferred Stock and 4 shares of Golden Sky Holdings 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, Mr. Weary owns 9,726 shares of Golden Sky Holdings common stock, and through our stock option plan, Mr. Weary has the right to acquire 8,510 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue, Suite 300, Kansas City, Missouri 64112. (22) Through our stock option plan, Mr. Hager has the right to acquire 5,000 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (23) Mr. Gerski beneficially owns 5,414 shares of common stock. In addition, through our stock option plan, Mr. Gerski has the right to acquire 7,086 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (24) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and 1,111 shares of Golden Sky Holdings common stock. In addition, through our stock option plan, Ms. Linn has the right to acquire 973 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (25) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite 4050, San Francisco, California 94111. The shares are held of record by Alta Subordinated Debt Partners III, L.P., Alta Communications VI, L.P. and Alta-Comm S By S, LLC. Mr. Benbow is a general partner of the respective general partners of Alta Subordinated Debt Partners III, L.P. and Alta Communications VI, L.P. As a general partner, he may be deemed to share voting and investment power with respect to the shares held by the funds. Mr. Benbow disclaims beneficial ownership of the shares held by these funds except to the extent of his proportionate pecuniary interest therein. Mr. Benbow also disclaims beneficial ownership of all shares held by Alta Comm S by S, LLC, of which he is not a member. (26) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th Floor, Boston, Massachusetts 02110. The shares are held of record by BancBoston Ventures Inc., which may be deemed to be beneficially owned by Mr. Charman. (27) The address is c/o Spectrum Equity Investors, One International Place, 29th Floor, Boston, Massachusetts 02110. The shares are held of record by Spectrum Equity Investors L.P. and Spectrum Equity Investors II L.P., which may be deemed to be beneficially owned by Mr. Collatos. (28) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th Floor, Boston, Massachusetts 02111. The shares are held of record by HarbourVest Partners V-Direct Fund L.P., which may be deemed to be beneficially owned by Mr. Johnston. (29) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock and 1,425 shares of Golden Sky Holdings common stock. In addition, through our stock option plan, Mr. Liepold has the right to acquire 609 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (30) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402-3388. The shares are held of record by Norwest Equity Partners VI, LP, which may be deemed to be beneficially owned by Mr. Torgerson. (31) Through our stock option plan, Mr. Brown has the right to acquire 1,222 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days. (32) Through the stock option plan, Mr. Smith has the right to acquire 666 shares of Golden Sky Holdings common stock pursuant to options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSFER OF GOLDEN SKY SYSTEMS' CAPITAL STOCK On February 19, 1999, Golden Sky Holdings transferred all of Golden Sky Systems' outstanding capital stock (together with $100 in cash) to Golden Sky DBS in exchange for 100 shares of common stock, $.01 par value, of Golden Sky DBS. CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD Golden Sky Systems has an oral consulting agreement with Robert B. Liepold, a director of Golden Sky Systems, to provide expertise on an "as needed" basis. Golden Sky Systems paid to Mr. Liepold an aggregate of $84,000 in 1999 in connection with these services. PAYMENTS TO AFFILIATES OF RODNEY A. WEARY Golden Sky Systems utilizes the air transportation services of a company owned by Rodney A. Weary, Golden Sky Systems' Chief Executive Officer. Golden Sky Systems paid approximately $300,000 to this entity in 1999 in connection with these services. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) Financial Statements PAGE ---- Independent Auditors' Report .................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999..F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999............................F-4 Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..........F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................F-6 Notes to Consolidated Financial Statements....................F-7 (2) Financial Statement Schedules None. All schedules have been included in the Consolidated Financial Statements or Notes thereto. (3) Exhibits The following documents are filed as Exhibits to this report on Form 10-K or incorporated by reference herein. Each document incorporated by reference is identified by a parenthetical referencing the prior filing in which it was included. 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. (Exhibit 2.1 to Registration Statement on Form S-4 No. 333-64367) 2.2 Asset Purchase Agreement, dated as of July 19, 1998, by and between Golden Sky Systems, Inc. and Volcano Vision, Inc. (Exhibit 2.2 to Registration Statement on Form S-4 No. 333-64367) 2.3 Agreement and Plan of Merger, dated as of September 1, 1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Western Montana DBS, Inc. d/b/a Rocky Mountain DBS and the stockholders of Western Montana DBS, Inc. named therein. (Exhibit 2.3 to Registration Statement on Form S-4 No. 333-64367) 3.1 Second Amended and Restated Certificate of Incorporation of Golden Sky Systems, Inc. (Exhibit 3.1 to Registration Statement on Form S-4 No. 333-64367) 3.2 By-Laws of Golden Sky Systems, Inc., adopted as of October 1, 1997. (Exhibit 3.2 to Registration Statement on Form S-4 No. 333-64367) 4.1 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 12 3/8% Senior Subordinated Notes due 2006, Series A and 12 3/8% Senior Subordinated Notes due 2006, Series B of Golden Sky Systems, Inc. (Exhibit 4.1 to Registration Statement on Form S-4 No. 333-64367) 4.2 Form of 12 3/8% Senior Subordinated Note due 2006, Series B of Golden Sky Systems, Inc. (Included in Exhibit 4.1 to Registration Statement on Form S-4 No. 333-64367) 4.3 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. (Exhibit 4.3 to Registration Statement on Form S-4 No. 333-64367) 4.4 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 as trustee under the Indenture, and Golden Sky Systems, Inc. (Exhibit 4.4 to Registration Statement on Form S-4 No. 333-64367) 4.5 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 as custodian and securities intermediary. (Exhibit 4.5 to Registration Statement on Form S-4 No. 333-64367) 10.1 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 12 3/8% Senior Subordinated Notes due 2006, Series A of Golden Sky Systems, Inc. (Exhibit 10.1 to Registration Statement on Form S-4 No. 333-64367) 10.2 Amended and Restated Credit Agreement, dated as of May 8, 1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National Bank, as administrative agent, and General Electric Capital Corporation, as documentation agent. (Exhibit 10.2 to Registration Statement on Form S-4 No. 333-64367) 10.3 First Amendment to Amended and Restated Credit Agreement, dated as of February 10, 1999, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National Bank, as administrative agent, and General Electric Capital Corporation, as documentation agent. (Exhibit 10.17 to Registration Statement on Form S-4 No. 333-64367) 10.4 Form of NRTC/Member Agreement for Marketing and Distribution of DBS Services, as amended. (Exhibit 10.3 to Registration Statement on Form S-4 No. 333-64367) 10.6 Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Rodney A. Weary. (Exhibit 10.6 to Registration Statement on Form S-4 No. 333-64367)* 10.7 Non-Competition Agreement between Golden Sky Systems, Inc., and Rodney A. Weary. (Exhibit 10.11 to Registration Statement on Form S-4 No. 333-64367)* 10.8 Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.7 to Registration Statement on Form S-4 No. 333-64367)* 10.9 Non-Competition Agreement between Golden Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.12 to Registration Statement on Form S-4 No. 333-64367)* 10.10 Employment Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski. (Exhibit 10.8 to Registration Statement on Form S-4 No. 333-64367)* 10.11 Employment Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.10 to Registration Statement on Form S-4 No. 333-64367)* 10.12 Non-Competition Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.13 to Registration Statement on Form S-4 No. 333-64367)* 10.13 Confidentiality and Proprietary Rights Agreements, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.15 to Registration Statement on Form S-4 No. 333-64367)* 10.14 Form of Director Indemnification Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and each of the members of its Board of Directors. (Exhibit 10.14 to Registration Statement on Form S-4 No. 333-64367) 10.15 Exchange Agency Agreement, dated as of November 24, 1998, between Golden Sky Systems, Inc. and State Street Bank and Trust Company of Missouri, N.A., as exchange agent. (Exhibit 10.16 to Registration Statement on Form S-4 No. 333-64367) 10.16 Office Building Lease, dated January 27, 1999, between Belletower Partners, L.L.C. and Golden Sky Systems, Inc. (Exhibit 10.18 to Registration Statement on Form S-4 No. 333-64367) 10.17 Amendment and Waiver, dated as of June 14, 1999, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent and General Electric Capital Corporation, as Documentation Agent. (Exhibit 10.24 to Registration Statement on Form S-4 No. 333-76413) 10.18 Employment Agreement, dated as of February 1, 1999, between Golden Sky Systems, Inc. and Scott R. Brown.* ** 10.19 Noncompetition Agreement, dated as of February 1, 1999, between Golden Sky Systems, Inc. and Scott R. Brown.* ** 10.20 Noncompetition Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski.* ** 10.21 Stock and Warrant Purchase Agreement, dated as of January 4, 2000, by and among Golden Sky Holdings, Inc. and the investors identified therein.** 10.22 Agreement and Plan of Merger, dated as of January 10, 2000, among Pegasus Communications Corporation and certain of its shareholders, Pegasus GSS Merger Sub, Inc., Golden Sky Holdings, Inc. and certain of its shareholders. (Exhibit 2.1 to Registration Statement on Form S-4 No. 333-31080) 10.23 Second Amendment, Consent and Waiver, dated as of January 4, 2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., 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.** 10.24 Third Amendment, Consent and Waiver, dated as of January 20, 2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., 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.** 21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit 21.1 to Registration Statement on Form S-4 No. 333-64367) 24.1 Powers of Attorney of the members of the Board of Directors of Golden Sky Systems, Inc. (Included in the signature pages of this report)** 27.1 Financial Data Schedule. ** 99.1 Stock Purchase Agreement, dated as of February 12, 1997, among Golden Sky Systems, Inc., Rodney A. Weary and the investors named therein. (Exhibit 99.3 to Registration Statement on Form S-4 No. 333-64367) 99.2 Stock Purchase Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Rodney A. Weary, and the investors named therein. (Exhibit 99.4 to Registration Statement on Form S-4 No. 333-64367) 99.3 Stockholders Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc. and the investors and other stockholders named therein. (Exhibit 99.5 to Registration Statement on Form S-4 No. 333-64367) ------------- * Management contract or compensatory plan or arrangement. ** Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1999. On January 18, 2000, we filed a Form 8-K reporting, under Item 5, that Golden Sky Holdings, Inc. had entered into a definitive merger agreement with Pegasus Communications Corporation. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN SKY SYSTEMS, INC. By: /s/ John R. Hager John R. Hager Chief Financial Officer Date: March 20, 2000 The undersigned directors and officers of Golden Sky Systems, 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 Exchange Act of 1934, as amended, any and all amendments to this Report on Form 10-K, and Exhibits to this Report on Form 10-K, 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 Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated
Signature Title Date - --------- ----- ---- /s/ RODNEY A. WEARY Chairman of the Board, March 20, 2000 - ------------------------------------- Chief Executive Officer Rodney A. Weary and Director (Principal Executive Officer) /s/ JOHN R. HAGER Chief Financial Officer March 20, 2000 - ------------------------------------------ (Principal Financial and John R. Hager Accounting Officer) /s/ ROBERT F. BENBOW Director March 20, 2000 - ------------------------------------ Robert F. Benbow /s/ WILLIAM O. CHARMAN Director March 20, 2000 - ---------------------------------- William O. Charman /s/ WILLIAM P. COLLATOS Director March 20, 2000 - ----------------------------------- William P. Collatos /s/ WILLIAM A. JOHNSTON Director March 20, 2000 - ---------------------------------- William A. Johnston /s/ ROBERT B. LIEPOLD Director March 20, 2000 - -------------------------------------- Robert B. Liepold /s/ ERIK M. TORGERSON Director March 20, 2000 - ------------------------------------ Erik M. Torgerson
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report to security holders covering the registrant's last fiscal year or proxy statement, form of proxy or other proxy soliciting material has been sent to any security holders. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report..............................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999..............F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999.......................................F-4 Consolidated Statements of Stockholder's Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999 ..........................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.......................................F-6 Notes to Consolidated Financial Statements................................F-7 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, 1998 and 1999 and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1998 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP February 14, 2000 Kansas City, Missouri GOLDEN SKY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, ----------------------------------------------- 1998 1999 --------------------- --------------------- ASSETS Current assets: Cash and cash equivalents...................................... $ 4,460 $ 3,236 Restricted cash, current portion............................... 28,083 23,731 Subscriber receivables (net of allowance for uncollectible accounts of $293 and $973, respectively)..................... 8,632 12,333 Other receivables.............................................. 2,465 1,599 Inventory...................................................... 10,146 3,108 Prepaid expenses and other..................................... 1,859 1,652 --------------------- --------------------- Total current assets.............................................. 55,645 45,659 Restricted cash, net of current portion........................... 23,534 -- Property and equipment (net of accumulated depreciation of $3,214 and $5,918, respectively)............................... 4,994 5,853 Intangible assets, net............................................ 233,139 236,926 Deferred financing costs ......................................... 10,541 7,318 Other assets...................................................... 218 260 --------------------- --------------------- Total assets................................................. $ 328,071 $ 296,016 ===================== ===================== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Trade accounts payable......................................... $ 13,539 $ 22,893 Interest payable............................................... 11,009 11,659 Current maturities of long-term obligations.................... 8,916 3,248 Unearned revenue............................................... 5,574 8,669 Accrued payroll and other...................................... 1,403 943 --------------------- --------------------- Total current liabilities......................................... 40,441 47,412 Long-term obligations, net of current maturities: 12 3/8% Notes................................................. 195,000 195,000 Bank debt...................................................... 67,000 52,000 Seller notes payable........................................... 6,912 6,932 Other notes payable and obligations under capital leases....... 376 103 Minority interest.............................................. 2,420 936 --------------------- --------------------- Total long-term obligations, net of current maturities............ 271,708 254,971 --------------------- --------------------- Total liabilities................................................. 312,149 302,383 Commitments and contingencies Stockholder's Equity (Deficit): Common Stock, par value $.01; 1,000 shares authorized, issued and outstanding....................................... -- -- Additional paid-in capital..................................... 97,600 193,145 Accumulated deficit............................................ (81,678) (199,512) --------------------- --------------------- Total stockholder's equity (deficit).............................. 15,922 (6,367) --------------------- --------------------- Total liabilities and stockholder's equity (deficit)......... $ 328,071 $ 296,016 ===================== ===================== See accompanying Notes to Consolidated Financial Statements.
GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1997 1998 1999 ---------------------------------------------------- Revenue: DBS services........................................ $ 16,452 $ 74,910 $ 139,933 Lease and other..................................... 944 1,014 640 ---------------------------------------------------- Total revenue.......................................... 17,396 75,924 140,573 Costs and expenses: Costs of DBS services............................... 9,304 45,291 88,690 System operations................................... 3,796 11,021 19,733 Sales and marketing................................. 7,316 32,201 64,933 General and administrative.......................... 2,331 7,431 15,703 Depreciation and amortization....................... 7,300 23,166 35,963 ---------------------------------------------------- Total costs and expenses............................... 30,047 119,110 225,022 ---------------------------------------------------- Operating loss......................................... (12,651) (43,186) (84,449) Non-operating items: Interest and investment income...................... 40 1,573 2,393 Interest expense.................................... (3,173) (20,537) (32,441) Other non-operating expenses ....................... -- -- (402) ---------------------------------------------------- Total non-operating items.............................. (3,133) (18,964) (30,450) ---------------------------------------------------- Loss before income taxes............................... (15,784) (62,150) (114,899) Income taxes........................................... -- -- -- ---------------------------------------------------- Loss before extraordinary charge....................... (15,784) (62,150) (114,899) Extraordinary charge on early retirement of debt....... -- (2,577) (2,935) ---------------------------------------------------- Net loss............................................... $ (15,784) $ (64,727) $ (117,834) ==================================================== See accompanying Notes to Consolidated Financial Statements.
GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------------- ------------- ------------- ----------- Balance at December 31, 1996................................. $ -- $ 1 $ (1,167) $ (1,166) Cancellation of originally issued Golden Sky Systems, Inc. Common Stock.......................................... -- (1) -- (1) 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 Deferred compensation pursuant to issuance of Golden Sky Holdings, Inc. common stock options ....................... -- 154 -- 154 Contribution from Golden Sky DBS, Inc........................ -- 95,391 -- 95,391 Net loss..................................................... -- -- (117,834) (117,834) ------------- ------------- ------------- ----------- Balance at December 31, 1999................................. $ -- $ 193,145 $(199,512) $(6,367) ============= ============= ============= =========== See accompanying Notes to Consolidated Financial Statements.
GOLDEN SKY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1997 1998 1999 --------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $ (15,784) $ (64,727) $ (117,834) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................ 7,300 23,166 35,963 Amortization of debt discount, deferred financing costs and other........................................ 215 977 1,126 Deferred compensation pursuant to issuance of Common Stock options.......................................... -- -- 154 Extraordinary charge on early retirement of debt......... -- 2,577 2,935 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue........ (2,501) (1,757) (541) Other receivables...................................... (161) (2,130) 1,188 Inventory.............................................. (1,604) (8,049) 7,038 Prepaid expenses and other............................. (203) (1,228) 207 Trade accounts payable................................. 7,515 5,068 9,354 Interest payable....................................... 733 10,223 650 Accrued payroll and other.............................. 1,391 (708) (1,336) --------------- ---------------- ----------------- Net cash used in operating activities....................... (3,099) (36,588) (61,096) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets....................... (120,051) (104,487) (35,339) Purchases of minority interests............................. -- -- (1,439) Proceeds from interest escrow account ...................... -- (51,617) 24,224 Release of amounts reserved for contingent reduction of bank debt................................................ -- -- 5,449 Investment earnings placed in escrow ....................... -- -- (1,787) Purchases of property and equipment......................... (998) (3,317) (3,452) Other....................................................... 320 (500) 112 --------------- ---------------- ----------------- Net cash used in investing activities....................... (120,729) (159,921) (12,232) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of Series A preferred stock ......... 34,289 -- -- Contribution from Golden Sky Holdings, Inc ................. 46,800 -- -- Net proceeds from issuance of 12 3/8% Notes................. -- 189,150 -- Contribution from Golden Sky DBS, Inc. ..................... -- -- 95,391 Borrowings on bank debt..................................... 75,000 90,000 38,000 Principal payments on bank debt............................. (15,000) (83,000) (53,000) Proceeds from issuance of notes payable..................... 2,115 -- -- Principal payments on notes payable and obligations under capital leases........................................... (2,902) (3,675) (8,846) Increase in deferred financing costs........................ (3,321) (5,138) (869) Capital contribution from minority partner ................. -- -- 1,428 --------------- ---------------- ----------------- Net cash provided by financing activities................... 136,981 187,337 72,104 --------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents..... 13,153 (9,172) (1,224) Cash and cash equivalents, beginning of period........... 479 13,632 4,460 --------------- ---------------- ----------------- Cash and cash equivalents, end of period................. $ 13,632 $ 4,460 $ 3,236 =============== ================ ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest ..................................... $ 2,225 $ 9,337 $ 30,014 Property and equipment acquired under capitalized lease 554 609 78 obligations.............................................. Retirement of Credit Agreement from borrowings under the Credit Facility.......................................... -- 88,000 -- Issuance of seller notes payable in acquisitions............ 8,600 10,157 -- Conversion of notes payable and subscriptions to Series A preferred stock ......................................... 6,311 -- -- Issuance of note payable in purchase of minority interest... -- -- 2,925 Series C preferred stock issued in acquisition.............. -- 10,200 -- See accompanying Notes to Consolidated Financial Statements.
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Principal Business Golden Sky Systems, Inc. ("Systems," and together with its subsidiaries "Golden Sky") 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, 1999, Systems had acquired 57 Rural DIRECTV Markets in 24 states with approximately 1.9 million households. As of that same date, Systems served approximately 345,200 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 common and preferred 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. Pegasus Merger Holdings entered into a definitive merger agreement with Pegasus Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the largest independent provider of DIRECTV subscription television services in the United States. The combined operations of Pegasus and Golden Sky will serve in excess of 1.1 million subscribers in 41 states and have the exclusive right to serve approximately 7.2 million rural households. Under the terms of the agreement, Pegasus will issue up to 6.5 million shares of its Class A common stock to Holdings shareholders. The value of the Pegasus shares to be issued to Holdings shareholders approximated $632 million as of the date of execution of the definitive merger agreement. Upon completion of the merger, Holdings will become a wholly owned subsidiary of Pegasus. Consummation of the merger, which is subject to certain conditions and approvals, is expected in the first or second quarter of 2000. Significant Risks and Uncertainties Substantial Leverage. Golden Sky is highly leveraged, making it vulnerable to changes in general economic conditions and interest rates. As of December 31, 1999, Golden Sky had outstanding long-term debt (including current portion) totaling approximately $257.3 million. Substantially all of Golden Sky's assets are pledged as collateral on its long-term debt. Further, the terms associated with Golden Sky's long-term debt obligations significantly restrict its ability to incur additional indebtedness. Thus, it may be difficult for Golden Sky and its subsidiaries to obtain additional debt financing if desired or required in order to further implement Golden Sky's business strategy. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Expected Operating Losses. Due to the substantial expenditures required to acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained significant losses since Inception. Golden Sky's operating losses were $12.7 million, $43.2 million, and $84.5 million for the years ended December 31, 1997, 1998 and 1999 respectively. Golden Sky's net losses during those same periods aggregated $15.8 million, $64.7 million, and $117.8 million respectively. Improvement in Golden Sky's results of operations is principally dependent upon its ability to cost effectively expand its subscriber base, control subscriber churn (i.e., the rate at which subscribers terminate service), and effectively manage its operating and overhead costs. Golden Sky plans to reduce its future operating and overhead costs by transitioning its direct sales distribution model to an indirect (i.e., retail) distribution model. Accordingly, during the year ending December 31, 2000 Golden Sky plans, among other things, to: (i) close approximately 30 of its 68 local sales offices; (ii) reduce its corporate overhead expenses through headcount and other expense reductions; and (iii) increase the number of third-party retailers in its Rural DIRECTV Markets. Golden Sky estimates that it will incur aggregate, non-recurring costs of approximately $1.5 million in connection with these actions. These costs are expected to primarily consist of employee severance and lease termination expenses. There can be no assurance that Golden Sky will be effective with regard to these plans. Golden Sky incurs significant costs to acquire DIRECTV subscribers. The high cost of obtaining new subscribers magnifies the negative effects of subscriber churn. Golden Sky anticipates that it will continue to experience operating losses through at least 2000. There can be no assurance that such operating losses will not continue beyond 2000 or that Golden Sky's operations will generate sufficient cash flows to pay its obligations, including its obligations on its long-term debt. Restrictions on Dividends and Other Distributions. The ability of Systems and its subsidiaries to pay dividends and make other distributions and advances is subject to, among other things, the terms of its long-term debt obligations and applicable law. As a result, Systems may be limited in its ability to make dividend payments and other distributions to Golden Sky DBS or Holdings at the time such distributions are needed by Golden Sky DBS or Holdings to meet their obligations. Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its revenue from the distribution of DIRECTV programming services. As a result, Golden Sky would be materially adversely affected by any material change in the assets, financial condition, programming, technological capabilities or services of DIRECTV or Hughes. Further, Golden Sky 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 Golden Sky from continuing to provide DBS services and could have a material adverse effect on Golden Sky's financial condition and results of operations. Additionally, Golden Sky's ability to offer DIRECTV programming services depends upon agreements between the NRTC and Hughes and between Golden Sky and the NRTC. The NRTC's interests may differ from Golden Sky's interests. Golden Sky would be materially and adversely affected by the termination of the NRTC's agreement with Hughes and/or the termination of Golden Sky's agreements with the NRTC. Golden Sky's 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 Golden Sky's business. On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal court in Los Angeles against DIRECTV (see Note 10). The outcome of this litigation and similar litigation filed by the NRTC against DIRECTV could have a material adverse effect on the scope and duration of Golden Sky's right to provide DIRECTV programming in its Rural DIRECTV Markets, its capital requirements and its costs of operations. Competition. The subscription television industry is highly competitive. Golden Sky faces competition from companies offering video, audio, data, programming and entertainment services. Many of these competitors have substantially greater financial and marketing resources than Golden Sky. Golden Sky's ability to effectively compete in the subscription television industry will depend on a number of factors, including competitive factors (such as the introduction of new technologies or the entry of additional strong competitors) and the level of consumer demand for such services. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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, direct 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 Golden Sky considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 1998 and 1999, cash and cash equivalents consisted of cash on hand, demand deposits and money market accounts. Restricted Cash Restricted cash, as reflected in the accompanying consolidated balance sheets, includes cash restricted by the indenture associated with Systems' 12 3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash, which is held in escrow, is invested in certain permitted debt and other marketable investment securities until disbursed for the express purposes identified in the indenture. As of December 31, 1998 and 1999, restricted cash was composed entirely of U.S. treasury notes. Inventory Inventory is stated at the lower of cost (first-in, first-out) or market and consists of receivers, satellite dishes and accessories ("DBS Equipment"). Golden Sky subsidizes the cost to the consumer of such equipment, which is required to receive DIRECTV programming services. Additionally, Golden Sky 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, 1997, 1998 and 1999, aggregate proceeds from the sale and installation of DBS Equipment totaled $3.8 million, $11.0 million, and $9.3 million respectively; related cost of sales totaled $4.6 million, $25.8 million, and $44.3 million during those same periods. Long-lived Assets Golden Sky 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 that 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 that are to be disposed of, the assets would be impaired to the extent the fair value does not exceed the book value. Golden Sky 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. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. 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. Deferred Financing Costs Deferred financing costs represent fees and other costs incurred in conjunction with the issuance of long-term debt. These costs are amortized over the term of the related debt using the effective interest method. Amortization of these costs totaled $215,000, $977,000, and $1,660,000 during 1997, 1998 and 1999, respectively. 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 Golden Sky's publicly-traded debt securities is based on quoted market prices. The carrying value of Golden Sky's bank debt and other notes payable approximates fair value, as interest rates are variable or approximate market rates. As of December 31, 1999, the carrying and fair values of Golden Sky's 12 3/8% Notes were $195.0 million and $211.6 million, respectively. Revenue Recognition DBS services revenue is recognized in the month service is provided. Unearned revenue represents subscriber advance billings for one or more months; related revenue recognition is deferred until service is provided. System Operations Expense System operations expense includes payroll and other administrative costs related to Golden Sky's local offices and national call center. Advertising Costs Advertising costs are expensed as incurred. Such costs aggregated $1.4 million, $5.1 million, and $5.9 million during the years ended December 31, 1997, 1998 and 1999, respectively. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Free Programming Promotions Certain DIRECTV national sales promotions offer free programming, generally for up to three months of service, to new subscribers. The cost of such free programming is expensed as sales and marketing expense in the period the services are provided. During 1999, sales and marketing expenses attributable to such promotions totaled $2.5 million. Income Taxes Golden Sky uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits, such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Effects of Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Currently, Golden Sky has no derivative instruments or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a material effect on Golden Sky's financial position or results of operations. Comprehensive Income Golden Sky has no components of comprehensive income other than net loss. 3. ACQUISITIONS Golden Sky accounts for its acquisitions using the purchase method. Golden Sky's consolidated statements of operations for the periods ended December 31, 1997, 1998 and 1999 include the results of operations of acquired Rural DIRECTV Markets from the respective acquisition dates. The aggregate purchase price (including direct acquisition costs) for the acquisitions completed during 1997, 1998 and 1999 were allocated as follows (dollars in thousands):
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1997 1998 1999 ----------------------------------------------- DIRECTV distribution rights................... $ 116,394 $114,747 $31,809 Customer lists................................ 9,450 7,114 -- Non-compete agreements........................ 4,879 2,587 4,869 Property and equipment........................ 1,953 204 -- Minority interest............................. (2,931) -- -- Working capital, net.......................... (20) 192 100 --------------- --------------- --------------- $ 129,725 $124,844 $36,778 =============== =============== ===============
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following summarizes Golden Sky's acquisitions of Rural DIRECTV Markets consummated during 1997, 1998 and 1999 (dollars in thousands):
AGGREGATE SELLER ACQUISITION DATE STATE CONSIDERATION - ------------------------------------------------------------------------------------------------------------------ Deep East Texas Telecommunications, Inc....... February 7, 1997 Texas $ 1,919 Images DBS Kansas, L.C., Images DBS Oklahoma, L.C. and Total Communications, Inc......... February 12, 1997 Kansas/Oklahoma 12,702 Direct Satellite TV, LTD...................... February 28, 1997 Texas 3,746 Thunderbolt Systems, Inc...................... March 11, 1997 Missouri 6,127 Western Montana DBS, Inc. dba Rocky Mountain DBS........................................ May 1, 1997 Colorado 4,774 TEG DBS Services, Inc......................... June 12, 1997 Nevada 5,237 GVEC Rural TV, Inc............................ July 8, 1997 Texas 5,176 Satellite Entertainment, Inc.................. July 14, 1997 Minnesota/Michigan 9,640 Direct Vision................................. July 15, 1997 Minnesota 7,452 Argos Support Services Company................ August 8, 1997 Florida/Texas/Utah 18,217 JECTV, a segment of Jackson Electric August 26, 1997 Texas 9,453 Cooperative................................ Lakes Area TV................................. September 2, 1997 Minnesota 1,355 DCE Satellite Entertainment, LLC.............. October 13, 1997 Wisconsin 313 Direct Broadcast Satellite, a segment of CTS Communication Corporation.................. November 7, 1997 Michigan 4,293 DBS, L.C...................................... November 17, 1997 Iowa 1,911 Panora Telecommunications, Inc................ November 20, 1997 Iowa 1,131 Souris River Television, Inc.................. November 21, 1997 North Dakota 7,276 Cal-Ore Digital TV, Inc....................... December 8, 1997 California/Oregon 5,095 NRTC System No. 0093, a segment of Cable and Communications Corporation................. December 17, 1997 Montana 3,876 Western Montana Entertainment Television, Inc. December 22, 1997 Montana 7,067 South Plains DBS.............................. December 23, 1997 Texas 9,143 Lakeland DBS.................................. December 24, 1997 Oklahoma 3,822 ----------------- TOTAL 1997 ACQUISITIONS.................... $129,725 ================= 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 June 29, 1998 Alabama 11,769 Corporation................................ Frontier Corporation.......................... July 8, 1998 Wisconsin 734 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED AGGREGATE SELLER ACQUISITION DATE STATE CONSIDERATION - ------------------------------------------------------------------------------------------------------------------ North Texas Communications.................... August 6, 1998 Texas $ 3,118 SEMO Communications Corporation............... August 26, 1998 Missouri 2,918 DBS Segment of Cumby Cellular, Inc............ August 31, 1998 Texas 7,553 Minburn Telephone............................. September 18, 1998 Iowa 447 Western Montana DBS, Inc. dba Rocky Mountain DBS........................................ October 2, 1998 Idaho/Montana 20,740 Direct Broadcast Satellite, a segment of Volcano Vision, Inc........................ October 9, 1998 California 31,425 North Central Missouri Electric Coop.......... November 2, 1998 Missouri 1,745 Star Search Rural Television, Inc............. November 5, 1998 Oklahoma 2,129 ----------------- TOTAL 1998 ACQUISITIONS.................... $124,844 ================= Breda Telephone Corporation................... January 11, 1999 Iowa/Nebraska $ 8,605 Thunderbolt Systems January 15, 1999 Missouri 2,731 Inc....................... Siskiyou Ruralvision, Inc..................... February 28, 1999 California 4,735 Baraga Telephone Co........................... March 31, 1999 Michigan 4,546 E. Ritter Communications...................... April 2, 1999 Arkansas 2,689 Yelcot Telephone Co........................... April 2, 1999 Arkansas 6,246 Van Buren DBS................................. April 14, 1999 Iowa 2,914 Kertel Communications, Inc.................... June 24, 1999 California 2,033 Mutual Telephone Company...................... August 5, 1999 Iowa 620 Dubois Telephone.............................. December 8, 1999 Montana 220 ----------------- TOTAL 1999 ACQUISITIONS.................... $ 35,339 =================
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not material and, accordingly, the pro forma impact of those acquisitions has not been presented. Unaudited pro forma total revenue and unaudited pro forma loss before extraordinary charge for the year ended December 31, 1998 approximated $87.9 million and $79.8 million, respectively. This unaudited pro forma information reflects Golden Sky's significant acquisitions of Rural DIRECTV Markets consummated during 1998 as if each such acquisition had occurred as of the beginning of 1998. These results are not necessarily indicative of future operating results or of what would have occurred had the acquisitions been consummated as of that date. During 1997, Golden Sky acquired a controlling interest in DCE Satellite Entertainment, LLC ("DCE"). In June 1999, Golden Sky acquired the remaining ownership interest in DCE that it did not hold in exchange for cash of $1.0 million and the issuance of seller notes payable totaling the $2.9 million. Also during 1999, Golden Sky acquired certain other minority interests for $496,000. 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 1998 1999 USEFUL LIFE --------------------------------------------------- DIRECTV distribution rights.............. $236,531 $266,874 9 -12 years Customer lists........................... 17,018 18,603 5 years Non-compete agreements................... 7,501 12,370 3 years ---------------------------------- 261,050 297,847 Less accumulated amortization............ (27,911) (60,921) ---------------------------------- Intangible assets, net............... $233,139 $236,926 ==================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (dollars in thousands):
DECEMBER 31, ---------------------------------- 1998 1999 ---------------------------------- 12 3/8% Notes................................................. $ 195,000 $ 195,000 Bank debt..................................................... 67,000 52,000 Seller notes payable.......................................... 15,407 9,823 Other notes payable and obligations under capital leases...... 797 460 Minority interest............................................. 2,420 936 ---------------------------------- Total long-term obligations................................... 280,624 258,219 Less current maturities....................................... (8,916) (3,248) ---------------------------------- Long-term obligations, net of current maturities......... $ 271,708 $ 254,971 ==================================
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, commencing February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net proceeds to Golden Sky 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 then contingent reduction of Golden Sky's availability under its Credit Facility. 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 Golden Sky. 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. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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. Golden Sky's merger with Pegasus will constitute a change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon closing of the merger with Pegasus, Golden Sky will be required to make an offer to the holders of the 12 3/8% Notes to purchase those notes consistent with the terms described above. If Golden Sky's offer for the 12 3/8% Notes is accepted by any of its note holders, and it is unable to purchase those notes, Golden Sky may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has entered into a commitment letter with an investment bank under which that investment bank has agreed to purchase any and all 12 3/8% Notes tendered in response to Golden Sky's offer to purchase. This commitment is subject to the execution of definitive documentation and customary closing conditions. There can be no assurance that Pegasus will be able to agree on definitive documentation with the investment bank or make alternative arrangements if necessary. The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). During 1998, Systems filed a registration statement with the Securities and Exchange Commission (the "SEC") relating to the exchange of the privately issued notes for publicly registered notes with substantially identical terms (including principal amount, interest rate, maturity, security and ranking). Because the registration statement was not declared effective within the time period required under the registration rights agreement associated with the 12 3/8% Notes Offering, from December 29, 1998 through March 22, 1999 (the date the registration statement was declared effective), Systems was required to pay liquidated damages of $18,750 per week to holders of the 12 3/8% Notes. 13 1/2% Notes On February 19, 1999, Golden Sky DBS consummated an offering of 13 1/2% senior discount notes (the "13 1/2% Notes"), which resulted in net proceeds to Golden Sky DBS of approximately $95.4 million (after initial purchasers' discount and other offering expenses). The 13 1/2% Notes have an aggregate balance due at stated maturity of $193.1 million. Cash interest on the 13 1/2% Notes will not accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1 of each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1, 2007. Golden Sky DBS contributed the net proceeds from the offering of the 13 1/2% Notes to Golden Sky Systems, of which $53.0 million was used to repay existing revolving credit indebtedness. Systems is not obligated for repayment of the 13 1/2% Notes and is restricted as to its ability to make payments to Golden Sky DBS. However, Golden Sky DBS is dependent on Systems for dividends or other cash distributions in amounts sufficient to enable Golden Sky DBS to meet its debt service requirements. 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). During May 1998, Systems entered into a seven-year, $150.0 million amended credit facility (the "Credit Facility") with a syndicate of lenders. Upon execution of the Credit Facility, Systems recognized an extraordinary charge of approximately $2.6 million to write-off unamortized deferred financing costs associated with the Credit Agreement. In February 1999, Systems' Credit Facility was amended to permit, among other things, the 13 1/2% Notes Offering. Upon execution of the February 1999 amendment to the Credit Facility, Systems recognized an extraordinary charge of approximately $2.9 million to write off unamortized deferred financing costs associated with the Credit Facility. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The Credit Facility provides for a term loan commitment of $35.0 million and a revolving loan commitment of $115.0 million. The Credit Facility's term loan commitment amortizes in specified quarterly installments from March 31, 2002 through maturity on December 31, 2005. The availability of revolving loan borrowings under the Credit Facility reduces by specified amounts over the period from March 31, 2001 through maturity on September 30, 2005. Borrowings under the Credit Facility bear interest at variable rates (approximately 10% as of December 31, 1999) calculated on a base rate, such as the prime rate or LIBOR, plus an applicable margin. 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. As of December 31, 1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0 million, including $35.0 million borrowed pursuant to the Credit Facility's term loan commitment. The Credit Facility contains a number of restrictive 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, 1998 and 1999, no amounts were available for distribution to Holdings. The Credit Facility also contains a number of financial covenants that 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 September 30, 1999, Systems was not in compliance with certain of the restrictive covenants prescribed by the Credit Facility. During January 2000, the Credit Facility was amended to modify certain fourth quarter 1999 and year 2000 covenant requirements. Further, in conjunction with the amendment, Golden Sky's third quarter 1999 covenant violations were waived. Pursuant to the amendment, which was effective as of December 31, 1999, Golden Sky may borrow up to an additional $20.0 million under the Credit Facility prior to March 31, 2000. Any such incremental borrowings, which are secured by letters of credit provided by certain of Golden Sky Holdings' shareholders, must be repaid by March 31, 2000 from the proceeds of either a private or public equity offering. The required repayment date relative to these year 2000 incremental borrowings may be deferred until May 31, 2000 under certain conditions. Upon repayment, systems will have potential incremental borrowing capacity during the year ending December 31, 2000 equal to the lesser of the proceeds received from either a public or private equity offering or $20.0 million. Coincident with the amendment of the Credit Facility, Holdings entered into stock subscription agreements with certain of its shareholders for an aggregate of $20.0 million of its preferred stock. Also in January 2000, the Credit Facility was further amended to approve the change in ownership of Holdings that would result from the merger with Pegasus. As of December 31, 1999, Systems was in compliance with the Credit Facility's amended covenants. Seller Notes Payable Seller notes payable bear interest at rates ranging from 7% to 10% and are collateralized by bank letters of credit. Other Notes Payable In November 1996, Golden Sky 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 GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 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 and remain outstanding as of December 31, 1999. Future maturities of amounts outstanding under Golden Sky's long-term obligations as of December 31, 1999 are summarized as follows (dollars in thousands):
SELLER 12 3/8% BANK NOTES NOTES DEBT PAYABLE OTHER TOTAL ------------------------------------------------------------ Year Ending December 31, 2000......................... $ -- $ -- $ 2,891 $357 $ 3,248 2001......................... -- -- 2,970 76 3,046 2002......................... -- 263 2,962 23 3,248 2003......................... -- 350 1,000 4 1,354 2004......................... -- 350 -- -- 350 Thereafter................... 195,000 51,037 -- -- 246,037 ----------------------------------------------------------- Total debt.................. $195,000 $52,000 $9,823 $460 $257,283 ===========================================================
6. STOCKHOLDER'S EQUITY (DEFICIT) 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. Options issued pursuant to the Stock Incentive Plan are exercisable during a period of up to ten years after grant and 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. GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED The following summarizes incentive stock option activity during the three-year period ended December 31, 1999:
1997 1998 1999 --------------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------------------------------------------------------------------------- Options outstanding, beginning of year... -- $-- 62,525 $ 1.00 48,745 $1.00 Granted.................................. 62,525 1.00 18,693 1.00 11,600 1.00 Exercised................................ -- -- (24,831) 1.00 (468) 1.00 Forfeited................................ -- -- (7,642) 1.00 (1,025) 1.00 --------------------------------------------------------------------------- Options outstanding, end of year......... 62,525 $1.00 48,745 $1.00 58,852 $1.00 =========================================================================== Options exercisable, end of year......... 8,684 $1.00 5,595 $1.00 30,165 $1.00 ===========================================================================
Accounting for Stock-Based Compensation Golden Sky 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, if 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. Golden Sky elected to not adopt FAS No. 123 for expense recognition purposes. For options granted during 1999, the estimated aggregate fair value of Holdings' common stock on the respective grant dates exceeded the related aggregate exercise price by approximately $462,000. This amount will be recognized as compensation expense over the vesting period of the related stock options. Accordingly, compensation cost of $154,000 was recorded during the year ended December 31, 1999. For options granted in 1998 and 1997, the exercise prices of the related stock options was not less than the fair value of Holdings' common stock as of the respective grant dates and, accordingly, no compensation expense was recognized relative to those options. The fair value of Holdings' common stock was estimated by management using trading prices for other similar publicly-traded companies, as adjusted for specific factors and differences deemed relevant to the valuation of Holdings' common stock. Pro forma information regarding net income is required by FAS No. 123 and has been determined as if Golden Sky 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 1999 ---------------------------------------------------- Risk-free interest rate........................................ 6.0% 6.0% 6.0% Dividend yield................................................. 0.0% 0.0% 0.0% Volatility factor.............................................. 0.0% 0.0% 0.0% Expected term of options....................................... 10 years 10 years 10 years
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Using the preceding assumptions, there was no pro forma effect on Golden Sky's net loss from applying the fair value method under FAS No. 123. 8. 401(K) RETIREMENT PLAN Golden Sky 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, 1998 and 1999, Golden Sky 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. 9. INCOME TAXES The components of Golden Sky's (provision for) benefit from income taxes are as follows (in thousands):
YEARS ENDED DECEMBER 31, 1997 1998 1999 ----------------------------------------------- Current (provision) benefit: Federal......................................... $ 3,777 $ 16,325 $ 32,420 State........................................... 717 3,097 6,152 Increase in valuation allowance................. (4,494) (19,422) (38,572) ----------------------------------------------- Total current (provision) benefit................. -- -- -- Deferred benefit: Federal......................................... 1,148 3,103 3,122 State........................................... 218 615 592 Increase in valuation allowance................. (1,366) (3,718) (3,714) ----------------------------------------------- Total deferred benefit............................ -- -- -- ----------------------------------------------- Total benefit (provision).................... $ -- $ -- $ -- ===============================================
As of December 31, 1999, Golden Sky had net operating loss carryforwards ("NOLs") for federal income tax purposes of approximately $166.5 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 1999, 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 changes in 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. 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, 1998 and 1999 are as follows (in thousands):
DECEMBER 31, ----------------------------------- 1998 1999 ----------------------------------- Current deferred tax assets: Allowance for doubtful accounts................................. $ 115 $ 383 Accrued expenses................................................ 104 337 ----------------------------------- Gross current deferred tax assets.................................. 219 720 Valuation allowance................................................ (219) (720) ----------------------------------- Net current deferred tax assets.................................... -- -- Non-current deferred tax assets: Depreciation.................................................... 92 139 Amortization of intangible assets............................... 5,931 8,255 Partnerships................................................... -- 841 Net operating loss carryforwards................................ 28,147 66,701 Other......................................................... -- 19 ----------------------------------- Total non-current deferred tax assets.............................. 34,170 75,955 Valuation allowance................................................ (34,170) (75,955) ----------------------------------- Net non-current deferred tax assets................................ -- -- ----------------------------------- Net deferred tax assets............................................ $ -- $ -- ===================================
The actual income tax benefit (provision) for 1997, 1998 and 1999 reconciles to the amounts computed by applying the statutory federal tax rate to income before income taxes as follows:
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1997 1998 1999 -------------------------------------------------------------- TAX Rate TAX RATE TAX RATE -------------------------------------------------------------- Statutory rate....................................... $ 5,367 34.0% $21,131 34.0 % $39,358 34.0 % State income taxes, net of federal benefit........... 617 3.9 2,450 3.9 4,450 3.8 Non-deductible amortization of intangible assets..... (291) (1.8) (0.7) (1,507) (1.3) (415) Other................................................ (12) (0.1) -- (15) -- (26) Increase in valuation allowance...................... (5,681) (36.0) (23,140) (37.2) (42,286) (36.5) -------------------------------------------------------------- Income taxes......................................... $ -- -- % $ -- -- % $ -- -- % ==============================================================
10. COMMITMENTS AND CONTINGENCIES DIRECTV Litigation In May 1999, Hughes acquired United States Satellite Broadcasting Company, Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel to subscribers throughout the United States, including those within the NRTC's rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined its DIRECTV business with USSB's assets to expand its programming lineup through the addition of HBO, Showtime, Cinemax and The Movie Channel. On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging breach of contract and seeking a court order requiring DIRECTV to provide NRTC members and affiliates with HBO, Showtime, Cinemax and The Movie Channel GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED programming for exclusive distribution in the NRTC's rural DIRECTV markets and a temporary restraining order and preliminary injunction preventing DIRECTV from providing, marketing, selling or billing for this programming in the NRTC's rural markets. On June 17, 1999, the court denied the NRTC's request for a temporary restraining order and preliminary injunction. On July 12, 1999, the NRTC amended its complaint to add a second claim for breach of contract and to seek a declaratory judgment that, if the court determines that the NRTC does not have the exclusive right to provide HBO, Showtime, Cinemax and The Movie Channel programming in its rural markets, then the NRTC has the non-exclusive right to distribute this programming in its rural markets. In July 1999, DIRECTV and Hughes filed a motion to dismiss this portion of the NRTC's complaint on the grounds that it fails to state a claim upon which relief may be granted because DIRECTV is in the process of negotiating USSB programming distribution rights with the NRTC and the DBS Distribution Agreement requires the parties to arbitrate any claims regarding the terms and conditions of these rights. The Court denied the motion to dismiss on September 8, 1999. In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In the counterclaim, DIRECTV seeks the following declaratory judgments: 1. That DBS-1, the first satellite launched by Hughes, is the only relevant satellite for determining the term of the DBS Distribution Agreement; and 2. That the DIRECTV-1R satellite, which was launched in October 1999, is a successor satellite to DBS-1 within the scope and meaning of the DBS Distribution Agreement; that DIRECTV appropriately and prudently exercised its discretion, including its sole discretion to determine when and under what conditions a successor satellite should be launched, in determining to launch DIRECTV-1R in order to prevent a disruption in service; that the NRTC's right of first refusal under the DBS Distribution Agreement will be based on the satellite expiration date of DBS-1; and that pursuant to its right of first refusal, the NRTC has no right to specified programming services currently required to be provided under the DBS Distribution Agreement or more than 20 program channels of transponder capacity. On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and Hughes in the United States District Court for the Central District of California. In this suit, the NRTC alleges that DIRECTV and Hughes have breached their fiduciary duty to the NRTC as well as the NRTC's agreement with Hughes and have engaged in unfair business practices in violation of California law by withholding from the NRTC various revenues, cost savings, discounts and other benefits belonging to the NRTC under its agreement with Hughes. On October 15, 1999 DIRECTV moved to have the NRTC's breach of fiduciary duty (and related breach of confidential relationship claims) dismissed. The court granted DIRECTV's motion on November 15, 1999. A trial date has not been set on the merits of any of the claims made by the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the outcome of these matters or how they will impact the business relationship between the NRTC and DIRECTV. On January 10, 2000, Golden Sky and Pegasus filed a lawsuit against DIRECTV and Hughes in the United States District Court, Central District of California. The action asserts various claims, including intentional interference with contractual relations and interference with prospective economic advantage, and seeks declaratory relief. The claims are based on DIRECTV's failure to provide NRTC with certain premium programming, thereby preventing NRTC from providing said premium programming to the class action members. The claims are also based on DIRECTV's position with respect to launch fees and other benefits it has received, contract term and rights of refusal. We are unable to predict the outcome of this matter or how it will impact our business, financial condition or results of operations. Other Litigation GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED Golden Sky is subject to various other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to those actions will not materially affect Golden Sky's financial position or results of operations. Operating Leases Golden Sky has non-cancelable operating leases for office, warehouse and storage space and equipment that expire at various dates. Future minimum lease payments as of December 31, 1999 are summarized as follows (dollars in thousands): 2000......................................................... $2,116 2001......................................................... 1,611 2002......................................................... 1,050 2003......................................................... 255 2004 and thereafter.......................................... 79 ----------------- Total.............................................. $5,111 ================= 11. RELATED PARTY TRANSACTIONS In 1997, Systems paid $66,000 to a company affiliated with Systems' president for consulting services received by Systems. Additionally, during 1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in connection with a 1998 acquisition) and $84,000, respectively, to one of its directors for consulting services. During 1996, Golden Sky's president provided Systems with a short-term loan in the amount of $381,000. In 1997, Golden Sky 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 was repaid during 1997. Through December 31, 1999, Golden Sky contracted with an entity owned by its president for air transportation services, including the lease of an aircraft. This lease, which was canceled effective December 31, 1999, required monthly payments equal to the greater of $20,000 or an aggregate fixed hourly operating charge. The fixed hourly operating charge was based on prevailing market prices. The total cost of such services approximated $109,000, $506,000 and $300,000 during 1997, 1998 and 1999, respectively. 12. VALUATION AND QUALIFYING ACCOUNTS Golden Sky's valuation and qualifying accounts as of December 31, 1997, 1998 and 1999 are as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1997 1998 1999 ---------------------------------------------- Allowance for doubtful accounts, beginning of period.... $ 4 $ 138 $ 293 Charged to costs and expenses........................... 417 1,537 3,909 Deductions.............................................. (283) (1,382) (3,229) ---------------------------------------------- Allowance for doubtful accounts, end of period.......... $ 138 $ 293 $ 973 ==============================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS Consolidating financial information for Golden Sky, Golden Sky's guarantor subsidiaries, and Golden Sky's non-guarantor subsidiaries is as follows (dollars in thousands): Consolidating Statement of Operations - Year Ended December 31, 1997
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- Revenue: DBS services...................... $ 13,356 $ 2,787 $ 309 $ -- $ 16,452 Lease and other................... 931 -- 13 -- 944 -------------------------------------------------------------------------- Total revenue...................... 14,287 2,787 322 -- 17,396 Costs and expenses: Costs of DBS services............. 7,514 1,601 189 -- 9,304 System operations................. 2,830 876 100 (10) 3,796 Sales and marketing............... 6,597 693 26 -- 7,316 General and administrative........ 2,260 59 12 -- 2,331 Depreciation and amortization..... 6,312 109 79 800 7,300 -------------------------------------------------------------------------- Total costs and expenses............ 25,513 3,338 406 790 30,047 -------------------------------------------------------------------------- Operating loss...................... (11,226) (551) (84) (790) (12,651) Non-operating items: Interest and investment income.... 30 10 -- -- 40 Interest expense.................. (3,170) (3) -- -- (3,173) -------------------------------------------------------------------------- Total non-operating items........... (3,140) 7 -- -- (3,133) -------------------------------------------------------------------------- Loss before income taxes............ (14,366) (544) (84) (790) (15,784) Income taxes........................ -- -- -- -- -- -------------------------------------------------------------------------- Net loss.......................... $(14,366) $ (544) $ (84) $(790) $(15,784) ==========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Statement of Cash Flows - Year Ended December 31, 1997
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss...................................$ (14,366) $ (544) $ (84) $ (790) $(15,784) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........... 6,312 109 79 800 7,300 Amortization of debt discount, deferred financing costs and other............. 215 -- -- -- 215 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue................... (1,827) (615) (59) -- (2,501) Other receivables..................... (185) 24 -- -- (161) Inventory............................. (1,499) (34) (71) -- (1,604) Prepaid expenses and other............ (201) 8 (10) -- (203) Trade accounts payable................ 7,683 (320) 152 -- 7,515 Interest payable...................... 733 -- -- -- 733 Accrued payroll and other............. (1,461) 2,460 402 (10) 1,391 -------------------------------------------------------------------------- Net cash provided by (used in) operating activities.............................. (4,596) 1,088 409 -- (3,099) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets...... (120,051) -- -- -- (120,051) Purchases of property and equipment........ (992) (6) -- -- (998) Other...................................... 320 -- -- -- 320 -------------------------------------------------------------------------- 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 ==========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Balance Sheet -- December 31, 1998
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents........... $ 827 $..1,189 $2,444 $ -- $4,460 Restricted cash, current portion.... 28,083 .-- -- -- 28,083 Subscriber receivables, net......... 6,815 1,043 774 -- 8,632 Other receivables................... 2,360 87 18 -- 2,465 Intercompany receivables............ 11,521 -- -- (11,521) -- Inventory........................... 9,255 583 308 -- 10,146 Prepaid expenses and other.......... 1,819 37 3 -- 1,859 -------------------------------------------------------------------------- Total current assets................... 60,680 2,939 3,547 (11,521) 55,645 Restricted cash, net of current portion 23,534 -- -- -- 23,534 Property and equipment, net............ 4,418 381 195 -- 4,994 Investment in subsidiaries............. 22,518 -- -- (22,518) -- 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...................... $ 321,691 $ 28,456 $7,267 $(29,343) $ 328,071 ========================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Trade accounts payable.............. $ 13,482 $ 49 $ 8 $ -- $13,539 Interest payable.................... 11,009 -- -- -- 11,009 Current maturities of long-term 8,916 -- -- -- 8,916 obligations....................... 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)............................. (83,954) 18,434 1,221 (17,379) (81,678) -------------------------------------------------------------------------- Total Stockholder's equity (deficit).... 13,646 21,297 1,221 (22,518) 15,922 --------------------------------------------------------------------------- Total liabilities and Stockholder's equity (deficit)........................ $ 321,691 $28,456 $7,267 $(29,343) $ 328,071 ===========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Statement of Operations - Year Ended December 31, 1998
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- Revenue: DBS services...................... $ 57,437 $ 11,172 $ 6,301 $ -- $ 74,910 Lease and other................... 982 22 10 -- 1,014 --------------------------------------------------------------------------- Total revenue....................... 58,419 11,194 6,311 -- 75,924 Costs and Expenses: Costs of DBS services............. 34,640 6,813 3,838 -- 45,291 System operations................. 7,683 2,533 1,318 (513) 11,021 Sales and marketing............... 23,753 5,045 3,403 -- 32,201 General and administrative........ 7,000 267 164 -- 7,431 Depreciation and amortization..... 19,336 996 340 2,494 23,166 --------------------------------------------------------------------------- Total costs and expenses............ 92,412 15,654 9,063 1,981 119,110 --------------------------------------------------------------------------- Operating loss...................... (33,993) (4,460) (2,752) (1,981) (43,186) Non-operating items: Interest and investment income.... 1,571 2 -- -- 1,573 Interest expense.................. (20,497) (28) (12) -- (20,537) --------------------------------------------------------------------------- Total non-operating items........... (18,926) (26) (12) -- (18,964) --------------------------------------------------------------------------- Loss before income taxes............ (52,919) (4,486) (2,764) (1,981) (62,150) Income taxes........................ -- -- -- -- -- --------------------------------------------------------------------------- Loss before extraordinary charge.... (52,919) (4,486) (2,764) (1,981) (62,150) Extraordinary charge on early (2,577) -- -- -- (2,577) retirement of debt................ --------------------------------------------------------------------------- Net loss.......................... $(55,496) $(4,486) $(2,764) $(1,981) $(64,727) ===========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Statement of Cash Flows - Year Ended December 31, 1998
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................. $(55,496) $(4,486) $(2,764) $(1,981) $(64,727) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.......... 19,336 996 340 2,494 23,166 Amortization of debt discount, deferred financing and other......... 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 bank debt................ 90,000 -- -- -- 90,000 Principal payments on bank debt........... (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 ==========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Balance Sheet -- December 31, 1999
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED -------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents.............. $ 2,850 $ 132 $ 254 $ -- $ 3,236 Restricted cash, current portion....... 23,731 -- -- -- 23,731 Subscriber receivables, net............ 10,118 1,445 770 -- 12,333 Other receivables...................... 1,599 -- -- -- 1,599 Intercompany receivables............... 5,555 -- -- (5,555) -- Inventory.............................. 2,525 331 252 -- 3,108 Prepaid expenses and other............. 1,642 8 2 -- 1,652 -------------------------------------------------------------------------- Total current assets...................... 48,020 1,916 1,278 (5,555) 44,659 Property and equipment, net............... 5,459 256 138 -- 5,853 Investment in subsidiaries................ 17,144 -- -- (17,144) -- Intangible assets, net.................... 213,229 22,930 767 -- 236,926 Deferred financing costs.................. 7,318 -- -- -- 7,318 Other assets.............................. 173 87 -- -- 260 -------------------------------------------------------------------------- Total assets......................... $ 291,343 $25,189 $2,183 $ (22,699) $ 296,016 ========================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Trade accounts payable................. $ 22,858 $ 18 $ 17 $ -- $ 22,893 Interest payable....................... 11,659 -- -- -- 11,659 Current maturities of long-term obligations 3,248 -- -- -- 3,248 Unearned revenue...................... 7,146 1,065 458 -- 8,669 Accrued payroll and other............. 734 7,032 1,638 (8,461) 943 -------------------------------------------------------------------------- Total current liabilities................ 45,645 8,115 2,113 (8,461) 47,412 Long-term obligations, net of current maturities: 12 3/8% Notes......................... 195,000 -- -- -- 195,000 Bank debt............................. 52,000 -- -- -- 52,000 Seller notes payable.................. 6,932 -- -- -- 6,932 Other notes payable and obligations under capital leases...................... 103 -- -- -- 103 Minority interest..................... -- -- -- 936 936 -------------------------------------------------------------------------- Total long-term obligations, net of current maturities..................... 254,035 -- -- 936 254,971 -------------------------------------------------------------------------- Total liabilities........................ 299,680 8,115 2,113 (7,525) 302,383 Stockholder's Equity (Deficit): Common Stock.......................... -- 896 -- (896) -- Additional paid-in capital............ 193,145 1,967 -- (1,967) 193,145 Retained earnings (accumulated deficit) (201,482) 14,211 70 (12,311) (199,512) -------------------------------------------------------------------------- Total Stockholder's equity (deficit).... (8,337) 17,074 70 (15,174) (6,367) -------------------------------------------------------------------------- Total liabilities and Stockholder's equity (deficit)........................ $ 291,343 $25,189 $2,183 $ (22,699) $ 296,016 ==========================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Statement of Operations - Year Ended December 31, 1999
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------------------------------------------ Revenue: DBS services...................... $112,714 $ 18,130 $ 9,089 $ -- $ 139,933 Lease and other................... 636 3 1 -- 640 ------------------------------------------------------------------ Total revenue....................... 113,350 18,133 9,090 -- 140,573 Costs and expenses: Costs of DBS services............. 71,510 11,516 5,664 -- 88,690 System operations................. 14,349 3,495 2,155 (266) 19,733 Sales and marketing............... 58,452 4,142 2,339 -- 64,933 General and administrative........ 15,703 -- -- -- 15,703 Depreciation and amortization..... 32,562 3,054 347 -- 35,963 ------------------------------------------------------------------ Total costs and expenses............ 192,576 22,207 10,505 (266) 225,022 ------------------------------------------------------------------ Operating income (loss)............. (79,226) (4,074) (1,415) 266 (84,449) Non-operating items: Interest and investment income.... 2,393 -- -- -- 2,393 Interest expense.................. (32,434) (5) (2) -- (32,441) Other non-operating expenses ..... (258) (144) -- -- (402) ------------------------------------------------------------------ Total non-operating items........... (30,299) (149) (2) -- (30,450) ------------------------------------------------------------------ Income (loss) before income taxes... (109,525) (4,223) (1,417) 266 (114,899) Income taxes........................ -- -- -- -- -- ------------------------------------------------------------------ Income (loss) before extraordinary (109,525) (4,223) (1,417) 266 (114,899) charge............................ Extraordinary charge on early (2,935) -- -- -- (2,935) retirement of debt................ ------------------------------------------------------------------ Net income (loss)................. $(112,460) $(4,223) $(1,417) $ 266 $(117,834) ==================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED Consolidating Statement of Cash Flows - Year Ended December 31, 1999
CONSOLIDATING AND GUARANTOR NON-GUARANTOR ELIMINATING SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED ------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................$(112,460) $(4,223) $(1,417) $266 $(117,834) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........ 32,562 3,054 347 -- 35,963 Amortization of debt discount, deferred financing costs and other. 1,126 -- 266 (266) 1,126 Earned stock compensation............ 154 -- -- -- 154 Extraordinary charge on early retirement of debt................. 2,935 -- -- -- 2,935 Change in operating assets and liabilities, net of acquisitions: Subscriber receivables, net of unearned revenue................. (472) (126) 57 -- (541) Other receivables.................. 236 87 18 847 1,188 Inventory.......................... 6,730 252 56 -- 7,038 Prepaid expenses and other......... 177 29 1 -- 207 Trade accounts payable............. 9,376 (31) 9 -- 9,354 Interest payable................... 650 -- -- -- 650 Accrued payroll and other.......... 1,106 (97) (1,498) (847) (1,336) ------------------------------------------------------------------ Net cash used in operating activities... (57,880) (1,055) (2,161) -- (61,096) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of Rural DIRECTV Markets... (35,339) -- -- -- (35,339) Purchases of minority interests......... (1,439) -- -- -- (1,439) Proceeds from interest escrow account... 24,224 -- -- -- 24,224 Release of amounts reserved for contingent reduction of bank debt.... 5,449 -- -- -- 5,449 Investment earnings placed in escrow ... (1,787) -- -- -- (1,787) Purchases of property and equipment..... (3,423) -- (29) -- (3,452) Other................................... 114 (2) -- -- 112 ------------------------------------------------------------------ Net cash used in investing activities... (12,201) (2) (29) -- (12,232) CASH FLOWS FROM FINANCING ACTIVITIES Bank borrowing.......................... 38,000 -- -- -- 38,000 Principal payments on bank debt......... (53,000) -- -- -- (53,000) Principal payments on notes payable and obligations under capital leases. (8,846) -- -- -- (8,846) Increase in deferred financing costs.... (869) -- (869) Capital contribution from minority partner ............................. 1,428 -- -- -- 1,428 Capital contribution from Golden Sky DBS, Inc............................. 95,391 -- -- -- 95,391 ------------------------------------------------------------------ Net cash provided by financing activities............................ 72,104 -- -- -- 72,104 ------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents...................... 2,023 (1,057) (2,190) -- (1,224) Cash and cash equivalents, beginning of period............................ 827 1,189 2,444 -- 4,460 ------------------------------------------------------------------ Cash and cash equivalents, end of period............................... $ 2,850 $ 132 $ 254 $ -- $ 3,236 ==================================================================
GOLDEN SKY SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 14. QUARTERLY FINANCIAL DATA (UNAUDITED) Golden Sky's 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, 1998: Total revenue.................................. $ 14,129 $ 16,849 $ 19,912 $ 25,034 Operating loss................................. (6,034) (8,806) (11,462) (16,884) Loss before extraordinary charge.............. (8,287) (11,761) (17,354) (24,748) Net loss....................................... (8,287) (14,338) (17,354) (24,748) Period Ended December 31, 1999: Total revenue.................................. $ 29,036 $ 31,389 $ 36,732 $ 43,416 Operating loss................................. (16,734) (19,166) (29,930) (18,619) Loss before extraordinary charge.............. (24,260) (26,547) (37,448) (26,644) Net loss....................................... (27,195) (26,547) (37,448) (26,644)
EXHIBIT INDEX 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. (Exhibit 2.1 to Registration Statement on Form S-4 No. 333-64367) 2.2 Asset Purchase Agreement, dated as of July 19, 1998, by and between Golden Sky Systems, Inc. and Volcano Vision, Inc. (Exhibit 2.2 to Registration Statement on Form S-4 No. 333-64367) 2.3 Agreement and Plan of Merger, dated as of September 1, 1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Western Montana DBS, Inc. d/b/a Rocky Mountain DBS and the stockholders of Western Montana DBS, Inc. named therein. (Exhibit 2.3 to Registration Statement on Form S-4 No. 333-64367) 3.1 Second Amended and Restated Certificate of Incorporation of Golden Sky Systems, Inc. (Exhibit 3.1 to Registration Statement on Form S-4 No. 333-64367) 3.2 By-Laws of Golden Sky Systems, Inc., adopted as of October 1, 1997. (Exhibit 3.2 to Registration Statement on Form S-4 No. 333-64367) 4.1 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 12 3/8% Senior Subordinated Notes due 2006, Series A and 12 3/8% Senior Subordinated Notes due 2006, Series B of Golden Sky Systems, Inc. (Exhibit 4.1 to Registration Statement on Form S-4 No. 333-64367) 4.2 Form of 12 3/8% Senior Subordinated Note due 2006, Series B of Golden Sky Systems, Inc. (Included in Exhibit 4.1 to Registration Statement on Form S-4 No. 333-64367) 4.3 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. (Exhibit 4.3 to Registration Statement on Form S-4 No. 333-64367) 4.4 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 as trustee under the Indenture, and Golden Sky Systems, Inc. (Exhibit 4.4 to Registration Statement on Form S-4 No. 333-64367) 4.5 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 as custodian and securities intermediary. (Exhibit 4.5 to Registration Statement on Form S-4 No. 333-64367) 10.1 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 12 3/8% Senior Subordinated Notes due 2006, Series A of Golden Sky Systems, Inc. (Exhibit 10.1 to Registration Statement on Form S-4 No. 333-64367) 10.2 Amended and Restated Credit Agreement, dated as of May 8, 1998, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National Bank, as administrative agent, and General Electric Capital Corporation, as documentation agent. (Exhibit 10.2 to Registration Statement on Form S-4 No. 333-64367) 10.3 First Amendment to Amended and Restated Credit Agreement, dated as of February 10, 1999, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as syndication agent, Fleet National Bank, as administrative agent, and General Electric Capital Corporation, as documentation agent. (Exhibit 10.17 to Registration Statement on Form S-4 No. 333-64367) 10.4 Form of NRTC/Member Agreement for Marketing and Distribution of DBS Services, as amended. (Exhibit 10.3 to Registration Statement on Form S-4 No. 333-64367) 10.6 Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Rodney A. Weary. (Exhibit 10.6 to Registration Statement on Form S-4 No. 333-64367)* 10.7 Non-Competition Agreement between Golden Sky Systems, Inc., and Rodney A. Weary. (Exhibit 10.11 to Registration Statement on Form S-4 No. 333-64367)* 10.8 Employment Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.7 to Registration Statement on Form S-4 No. 333-64367)* 10.9 Non-Competition Agreement between Golden Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.12 to Registration Statement on Form S-4 No. 333-64367)* 10.10 Employment Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski. (Exhibit 10.8 to Registration Statement on Form S-4 No. 333-64367)* 10.11 Employment Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.10 to Registration Statement on Form S-4 No. 333-64367)* 10.12 Non-Competition Agreement, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.13 to Registration Statement on Form S-4 No. 333-64367)* 10.13 Confidentiality and Proprietary Rights Agreements, dated August 24, 1998, between Golden Sky Systems, Inc. and John R. Hager. (Exhibit 10.15 to Registration Statement on Form S-4 No. 333-64367)* 10.14 Form of Director Indemnification Agreement, dated February 12, 1997, between Golden Sky Systems, Inc. and each of the members of its Board of Directors. (Exhibit 10.14 to Registration Statement on Form S-4 No. 333-64367) 10.15 Exchange Agency Agreement, dated as of November 24, 1998, between Golden Sky Systems, Inc. and State Street Bank and Trust Company of Missouri, N.A., as exchange agent. (Exhibit 10.16 to Registration Statement on Form S-4 No. 333-64367) 10.16 Office Building Lease, dated January 27, 1999, between Belletower Partners, L.L.C. and Golden Sky Systems, Inc. (Exhibit 10.18 to Registration Statement on Form S-4 No. 333-64367) 10.17 Amendment and Waiver, dated as of June 14, 1999, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., various banks, Paribas (formerly known as Banque Paribas), as Syndication Agent, Fleet National Bank, as Administrative Agent and General Electric Capital Corporation, as Documentation Agent. (Exhibit 10.24 to Registration Statement on Form S-4 No. 333-76413) 10.18 Employment Agreement, dated as of February 1, 1999, between Golden Sky Systems, Inc. and Scott R. Brown.* ** 10.19 Noncompetition Agreement, dated as of February 1, 1999, between Golden Sky Systems, Inc. and Scott R. Brown.* ** 10.20 Noncompetition Agreement, dated as of November 3, 1997, between Golden Sky Systems, Inc. and William J. Gerski.* ** 10.21 Stock and Warrant Purchase Agreement, dated as of January 4, 2000, by and among Golden Sky Holdings, Inc. and the investors identified therein.** 10.22 Agreement and Plan of Merger, dated as of January 10, 2000, among Pegasus Communications Corporation and certain of its shareholders, Pegasus GSS Merger Sub, Inc., Golden Sky Holdings, Inc. and certain of its shareholders. (Exhibit 2.1 to Registration Statement on Form S-4 No. 333-31080) 10.23 Second Amendment, Consent and Waiver, dated as of January 4, 2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., 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.** 10.24 Third Amendment, Consent and Waiver, dated as of January 20, 2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., 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.** 21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit 21.1 to Registration Statement on Form S-4 No. 333-64367) 24.2 Powers of Attorney of the members of the Board of Directors of Golden Sky Systems, Inc. (Included in the signature pages of this report)** 27.1 Financial Data Schedule. ** 99.1 Stock Purchase Agreement, dated as of February 12, 1997, among Golden Sky Systems, Inc., Rodney A. Weary and the investors named therein. (Exhibit 99.3 to Registration Statement on Form S-4 No. 333-64367) 99.2 Stock Purchase Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., Rodney A. Weary, and the investors named therein. (Exhibit 99.4 to Registration Statement on Form S-4 No. 333-64367) 99.3 Stockholders Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc. and the investors and other stockholders named therein. (Exhibit 99.5 to Registration Statement on Form S-4 No. 333-64367) ------------- * Management contract or compensatory plan or arrangement ** Filed herewith. EX-10.18 2 EXHIBIT 10.18 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT made and entered into as of the 1st day of February, 1999 by and between Golden Sky Systems, Inc., a Delaware corporation (the "Company"), and Scott Brown (the "Executive"). WHEREAS, the Executive is currently providing strategic direction and managerial services to the Company, and the Company desires to secure the continued employment of the Executive in accordance herewith; WHEREAS, the Executive is willing to commit himself to be employed by the Company on the terms and conditions herein set forth and forego opportunities elsewhere; and WHEREAS, the parties desire to enter into this Agreement as of the Effective Date (as hereinafter defined), setting forth the terms and conditions for the employment relationship of the Executive with the Company during the Employment Period (as hereinafter defined). NOW, THEREFORE, IN CONSIDERATION of the mutual premises, covenants and agreements set forth below, it is hereby agreed as follows: 1. Employment and Term. (a) Employment. The Company agrees to employ the Executive, and the Executive agrees to be employed by the Company, in accordance with the terms and provisions of this Agreement during the Employment Period. (b) Term and Extension. The term of this Agreement shall commence as of the date hereof (the "Effective Date") and shall continue until the third anniversary of the Effective Date (such term being referred to hereinafter as the "Employment Period"). The Employment Period shall automatically be extended for one year on the second anniversary of the Effective Date, and each anniversary thereafter, unless either party gives the other written notice of its intention not to extend the Employment Period at least 30 days prior to such automatic extension, in which case no further extensions will occur. (c) Non-Competition Agreement. As a condition precedent to the execution of this Agreement by the Company, the Executive shall simultaneously enter into a Non-Competition Agreement in form and substance satisfactory to the Company (the "Non-Competition Agreement"). 2. Duties and Powers of Executive. (a) Position; Location. During the Employment Period, the Executive shall serve as Vice President of Operations of the Company, and shall provide such services as are from time to time requested by the Chief Executive Officer of the Company. The title, authority, duties, and responsibilities of the Executive may be increased from time to time, but only with the mutual written agreement of the Executive and the Company. The Executives services shall be performed primarily at the Company's headquarters in the Kansas City metropolitan area. (b) Attention. During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive shall devote his full business time, best efforts and business judgement to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive under this Agreement, use the Executive's best efforts to carry out such responsibilities faithfully and efficiently. The Executive shall not engage in any other business activity, except as may be approved by the Board of Directors; provided, however, that nothing herein shall prevent the Executive from: (i) investing his assets in a manner not prohibited by the Non- Competition Agreement, and in such form or manner as shall not require the Executive to render any material services with respect to the operations or affairs of any company or other entity in which such investments are made; (ii) engaging in religious, charitable or other community or non-profit activities which do not impair his ability to fulfill his duties and responsibilities under this Agreement; (iii) serving on the board of directors of any company, other than the Company, in a manner not prohibited by the Non-Competition Agreement; or (iv) engaging in any trade and/or industry organizations or activities, provided that such activities do not impair his ability to fulfill his duties and responsibilities under this Agreement. 3. Compensation. The Executive shall receive the following compensation for his services hereunder to the Company: (a) Salary. During the Employment Period, the Executive's annual base salary (the "Annual Base Salary"), payable in accordance with the Company's general payroll practices and subject to withholding for federal, state and local taxes, in effect from time to time, shall be at the annual rate established by the Board, but in no event less than $129,000. The Board may from time to time direct such upward adjustments in Annual Base Salary as the Board deems to be necessary or desirable, including, without limitation, adjustments in order to reflect increases in the cost of living. The Annual Base Salary shall not be reduced after any increase thereof. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation of the Company under this Agreement. (b) Incentive Compensation. During the Employment Period, the Executive shall be entitled to participate in short-term incentive compensation plans and long-term incentive compensation plans (the latter to consist of plans offering stock options and other long-term incentive compensation) providing him with the opportunity to earn, on a year-by-year basis, short-term and long-term incentive compensation (the "Incentive Compensation"). Specifically, in 1999, the short term cash incentive compensation shall be up to 38% of the Executive's Base Salary. Additionally, the Executive shall be entitled to participate in the Company's 1997 Stock Option and Restricted Stock Purchase Plan as reflected in the Notice of Grant (including the Notice of Grant dated the date hereof and any subsequent Notices) issued by the Company pursuant to such plan. (c) Retirement, Incentive and Welfare Benefit Plans. During the Employment Period and so long as the Executive is employed by the Company, he shall be eligible to participate in all other incentive, stock option, restricted stock, performance unit, savings, retirement and welfare plans, practices, policies, and programs applicable generally to employees or executive officers of the Company and its subsidiaries, except with respect to any benefits under any plan, practice, policy, or program to which the Executive has waived his rights in writing. (d) Expenses. The Company shall reimburse the Executive for all expenses, including those for travel and entertainment, properly incurred by him in the performance of his duties hereunder in accordance with policies established from time to time by the Board. (e) Fringe Benefits. During the Employment Period and so long as the Executive is employed by the Company, he shall be entitled to receive fringe benefits in accordance with the plans, practices, programs and policies of the Company from time to time in effect, commensurate with this position and at least the same as those received by any executive officer of the Company. 4. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically during the Employment Period upon the Executive's death or a determination by a majority of the Board of Directors that, due to physical or mental disability or illness, the Executive is unable to perform substantially all of his duties and responsibilities under this Agreement. (b) By the Company for Cause. The Company may terminate the Executive's employment during the Employment Period for Cause without further liability on the part of the Company effective immediately by a vote of a majority of the Board of Directors of the Company after written notice to the Executive setting forth in reasonable detail the nature of such Cause. For purposes of this Agreement, "Cause" shall mean: (i) willfully dishonest and material statements or acts of the Executive with respect to the Company or any subsidiary thereof; (ii) conviction of the Executive of a crime involving moral turpitude, deceit, dishonesty or fraud; (iii) willful and substantial failure to perform his duties and obligations under this Agreement, which failure continues after the Executive is given written notice and a reasonable opportunity to cure; or (iv) material breach by the Executive of any obligations hereunder or under the Non-Competition Agreement; provided, however, that other than with respect to a material breach of the Non-Competition Agreement, the Executive shall first be given written notice from the Board of Directors of the breach and a reasonable opportunity to cure such breach. (c) By the Company without Cause. Notwithstanding any other provision of this Agreement, the Company may terminate the Executive's employment other than by a termination for Cause during the Employment Period. (d) By the Executive for Good Reason. The Executive may terminate his employment during the Employment Period for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the Company's failure to pay the Executive's Annual Base Salary as specified in Section 3 (a) of this Agreement, or to reduce the Executive's total compensation of Annual Base Salary plus Incentive Compensation below $180,000 annually, or to fulfill any other material obligations under this Agreement; (ii) a material adverse change in the Executive's title, authority, duties, or responsibilities as specified in Section 2 (a) of this Agreement, which such change constitutes a demotion; or (iii) the Company's requiring the Executive, without his consent, to be based at any office or location is beyond a reasonable commuting distance from the Kansas City metropolitan area. (e) Notice of Termination. Any termination by the Company for Cause or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9 (b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice indicating the specific termination provision in this Agreement relied upon, to the extent applicable, setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and if the Date of Termination (as defined in Section 4 (f)) is other than the date of receipt of such notice, specifying the termination date (which date shall not be more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstances that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (f) Date of Termination. "Date of Termination" means, if the Executive's employment is terminated by the Company for Cause or by the Executive for Good Reason, the date of receipt of the Notice of termination or any later date specified therein, as the case may be. If the Executive's employment is terminated by the Company other than for Cause, the Date of Termination shall be the date on which the Company notifies the Executive of such termination. If the Executive's employment is terminated by reason of death or disability, the Date of Termination shall be the date of the death or the date the determination of disability is first made. 5. Obligations of the Company Upon Termination. (a) Termination by Company other than for Cause or by the Executive for Good Reason. If the Executive's employment with the Company is terminated (A) by the Company for any reason other than for Cause or the Executive's death or disability, or (B) by the Executive for Good Reason, the Executive shall be entitled to the following benefits: (i) Continued payment of the Executive's Annual Salary at the rate in effect on the Date of Termination, said payments to be made for six (6) months following the Date of Termination or, in the event of termination of the Executive for Good Reason, for six (6) months following the Date of Termination, such payments to be made on the same periodic dates as salary payments would have been made to the Executive had the Executive not been terminated; (ii) Continuation of group health plan benefits to the extent authorized by and consistent with 29 U.S.C.ss.1161 et seq. (commonly known as "COBRA"), with -- --- the cost of such benefits shared in the same relative proportion by the Company and the Executive as in effect on the Date of Termination; and (iii) A lump sum payment equal to such portion of the Executive's cash Incentive Compensation for the then current fiscal year as shall be pro-rated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable milestones or objectives prior to the Date of Termination; and (iv) A release from Section 7 of the Executive's Non-Competition Agreement. Except as otherwise specifically provided above or otherwise required by law, all compensation and benefits to the Executive under this Agreement shall terminate on the date of the termination. (b) Termination by Reason of Death or Disability. During the Employment Period, if the Executive's employment shall terminate by reason of death or disability, the Company shall pay to the Executive or the Executive's estate, as appropriate, a lump sum amount in cash equal to the sum of (i) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) such position of the Executive's cash Incentive Compensation for the then current fiscal year as shall be pro-rated for a partial year based on the period worked for the Company during such year and the satisfaction of any applicable milestones or objectives prior to the Date of Termination, and (iii) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) an any accrued vacation pay, in each case to the extent not theretofore paid. (c) Termination by the Company for Cause or by the Executive other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, or if the Executive terminates employment during the Employment Period other than for Good Reason, the Company shall have no further obligations to the Executive under this Agreement other than the obligation to pay to the Executive the Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon), and any accrued vacation pay, in each case to the extent theretofore unpaid. 6. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit plan, program, policy or practice provided by the Company and for which the Executive may qualify (except with respect to any benefit to which the Executive has waived his rights in writing), nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement entered into after the Effective Date with the Company. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any benefit plan, policy, practice or program of, or any agreement entered into with, the Company shall be payable in accordance with such benefit plan, policy, practice or program or agreement except as explicitly modified by this Agreement. 7. Mitigation; Miscellaneous. Notwithstanding any other provision of this Agreement, nothing in this Section 7 shall be construed to (i) impose any obligation on the Executive to seek or accept any employment after termination of employment with the Company for any reason, or (ii) affect the Executive's right to receive COBRA benefits at his cost after the expiration of the benefits provided for herein. Notwithstanding anything in this Agreement to the contrary, if any portion of any payments to the Executive by the Company under this Agreement and any other present or future benefit plan of the Company or other present or future agreement between the Executive and the Company would not be deductible by the Company for federal income tax purposes by reason of application of section 162 (m) of the Code, then payment of that portion to the Executive may be deferred by the Company until the earliest date upon which payment thereof can be made to the Executive without being non-deductible pursuant to section 162 (m) of the Code. In the event of such deferral, the Company shall pay interest to the Executive on the deferred amount at 120% of the applicable federal rate provided for in section 1274 (d) (2) of the Code. 8. Successors. (a) Assignment by Executive. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) Successors and Assigns of Company. This Agreement shall inure to the benefit of an be binding upon the Company, its successors and assigns. (c) Assumption. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company, as previously defined, and any successor to its businesses and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law, or otherwise. 9. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Missouri, without reference to its principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended, modified, repealed, waived, extended, or discharged except by an agreement in writing signed by the party against whom enforcement of such amendment, modification, repeal, waiver, extension or discharge is sought. No person, other than pursuant to a resolution of the Board or the appropriate committee thereof, shall have authority on behalf of the Company to agree to amend, modify, repeal, waive, extend, or discharge any provision of this Agreement or anything in reference thereto. (b) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed, in either case, to the Company's headquarters or to such other address as either party shall have stated to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) Severability. The invalidity or uneforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) Taxes. The Company may withhold from any amounts payable under this Agreement such federal, state, or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) No Waiver. The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 4 (d) of this Agreement, or the right of the Company to terminate the Executive's employment for Cause pursuant to Section 4 (b) of this Agreement shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Entire Agreement. This instrument, together with the Non-Competition Agreement, contains the entire agreement of the Executive and the Company with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements are merged herein and superseded hereby. IN WITNESS WHEREOF, the Executive and the Company, have caused this Agreement to be executed as of the day and year first above written. GOLDEN SKY SYSTEMS, INC. ------------------------------- Rodney A. Weary, President EXECUTIVE -------------------------------------- Scott Brown EX-10.19 3 EXHIBIT 10.19 GOLDEN SKY SYSTEMS, INC. NON-COMPETITION AGREEMENT ------------------------- Employee Name: Scott Brown Date: February 1, 1999 In consideration of my employment by Golden Sky Systems, Inc. (the "Company"), I, Scott Brown, hereby agree with the Company as follows. 1. Definitions. (a) Proprietary Information. As used in this Agreement, "Proprietary Information" means information which the Company possesses or to which the Company has rights which has commercial value. Proprietary Information includes, by way of example and without limitation, trade secrets, product ideas, designs, configurations, processes, techniques, formulas, software, improvements, inventions, data, know-how, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, and customer lists. Proprietary Information includes information developed by me in the course of my employment by the Company or otherwise relating to Inventions which belong to the Company under Section 4 below, as well as other information to which I may have access in connection with my employment. (b) Inventions and Developments. As used in this Agreement, "Inventions and Developments" means any and all inventions, developments, creative works and useful ideas of any description whatsoever, whether or not patentable. Inventions and improvements which consist of or relate to any from of Proprietary Information. (c) Company-Related Inventions and Developments. For purposes of this Agreement, "Company-Related Inventions and Developments" means all Inventions and Developments which either (a) relate at the time of conception or development to the actual or demonstrably anticipated business of the Company or to its actual or demonstrably anticipated research and development; (b) result from or relate to any work performed for the Company, whether or not during normal business hours; (c) are developed on Company time; or (d) are developed through the use of the Company's Proprietary Information, equipment and software, or other facilities or resources. (d) Company. For purposes of this Agreement, all references to the "Company" will be deemed to include the Company and its direct or indirect subsidiaries and affiliates. 2. Confidentiality. I understand and agree that my employment creates a relationship of confidence and trust between me and the Company with respect to (a) all Proprietary Information, and (b) the confidential information of others with which the Company has a business relationship. The information referred to in clauses (a) and (b) of the preceding sentence is referred to in this Agreement, collectively, as "Confidential Information." At all times, both during my employment with the Company and after its termination, I will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Company, except as may be necessary in the ordinary course of performing my duties to the Company. The restrictions set forth in this Section 2 will not apply to information which is generally known to the public or in the trade, unless such knowledge results from an unauthorized disclosure by me, but this exception will not affect the application of any other provision of this Agreement to such information in accordance with the terms of such provision. 3. Documents, Records, etc. All documents, records, apparatus, equipment and other physical property, whether or not pertaining to Proprietary Information, which are furnished to me by the Company or are produced by me in connection with my employment will be and remain the sole property of the Company. I will return to the Company all such materials and property as and when requested by the Company. In any event, I will return all such materials and property immediately upon termination of my employment for any reason. I will not take with me any such material or property or any copies thereof upon such termination. 4. Ownership of Inventions and Developments. I agree that all Company-Related Inventions and Development which I conceive or develop, in whole or in part, either alone or jointly with others, during the term of my employment with the Company will be the sole property of the Company. The Company will be the sole owner of all patents, copyrights and other proprietary rights in and with respect to such Company-Related Inventions and Developments. To the fullest extent permitted by law, such Company-Related Inventions and Developments will be deemed works made for hire. I hereby transfer and assign to the Company and proprietary rights which I may have or acquire in any such Company-Related Inventions and Developments, and I waive any moral rights or other special rights which I may have or accrue therein. I agree to execute any documents and take any actions that may be required to effect and confirm such transfer and assignment and waiver. The provisions of this Section 4 will apply to all Company-Related Inventions and Developments which are conceived or developed during the term of my employment with the Company, whether before or after the date of this Agreement, and whether or not further development or reduction to practice may take place after termination of my employment, for which purpose it will be presumed that any Company-Related Inventions and Developments conceived by me which are reduced to practice within one year after termination of my employment were conceived during the term of my employment with the Company unless I am able to establish a later conception date by clear and convincing evidence. The provisions of this Section 4 will not apply, however, to any Inventions and Developments which may be disclosed in a separate Schedule attached to this Agreement prior to its acceptance by the Company, representing Inventions and Developments made by me prior to my employment by the Company. 5. Disclosure of Inventions and Developments. I agree promptly to disclose to the Company, or any persons designated by it, all Company-Related Inventions and Developments which are or may be subject to the provisions of Section 4. 6. Obtaining and Enforcing Proprietary Rights. I agree to assist the Company, at the Company's request from time to time and at the Company's expense, to obtain and enforce patents, copyrights or other proprietary rights with respect to Company- Related Inventions and Developments in any and all countries. I will execute all documents reasonably necessary or appropriate for this purpose. This obligation will survive the termination of my employment, provided that the Company will compensate me at a reasonable rate after such termination for time actually spent by me at the Company's request on such assistance. In the event that the Company is unable for any reason whatsoever to secure my signature to any document reasonably necessary or appropriate for any of the foregoing purposes (including renewals, extensions, continuations, divisions or continuations in part), I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agents and attorneys-in-fact to act for me and on my behalf, but only for the purpose of executing and filing any such document and doing all other lawfully permitted acts to accomplish the foregoing purposes with the same legal force and effect as if executed by me. 7. Competitive Activities. During the term of my employment with the Company, and for a period of six months thereafter (the "Non-Competition Period"), I will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any "Business Activity" in any market in which the Company then operates or any market in which the Company is obligated under contract to purchase in the United States. For purposes of this Agreement, "Business Activity" shall be defined as the direct-to-home satellite video delivery business or in the cable television business. In addition, and without limitation of the foregoing, I agree that during the Non-Competition Period, I will not, directly or indirectly, either as principal, or as agent or employee for any other person or entity, (a) hire or solicit for employment any individual who is then an employee of the Company or was an employee of the Company at any time within six months prior to such hiring or solicitation; (b) solicit from any of the Company's customers any business of a kind now or at any time during my employment carried on by the Company; or (c) offer to perform as an employee for such customers any services now or at any time during my employment offered by the Company. I understand that the restrictions set forth in this Section 7 are intended to protect the Company's interest in its Proprietary Information and established customer relationships and goodwill, and agree that such restrictions are reasonable and appropriate for this purpose. 8. Third-Party Agreements and Rights. I hereby confirm that I am not bound by the terms of any agreement with any previous employer or other party which restricts in any way my use or disclosure of information or my engagement in any business, except as is disclosed in a separate Schedule attached to this Agreement. I have delivered to the Company true and complete copies of any agreements listed on said Schedule. I represent to the Company that my execution of this Agreement, my employment with the Company and the performance of my proposed duties for the Company will not violate any obligations I may have to any such previous employer or other party. In my work for the Company, I will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and I will not bring to the premises of the Company any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. 9. Injunction. I agree that it would be difficult to measure any damages caused to the Company which might result from any breach by me of the promises set forth in this Agreement, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, I agree that if I breach any portion of this Agreement, the Company shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or proving any actual damage to the Company. 10. Binding Effect. This Agreement will be binding upon me and my heirs, executors, administrators and legal representatives and will inure to the benefit of the Company, any subsidiary of the Company, and its and their respective successors and assigns. 11. Enforceability. If any portion or provision of this Agreement is to any extent declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, will not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. In the event that any provision of this Agreement is determined by any court of competent jurisdiction to be unenforceable by reason of excessive scope as to geographic, temporal or functional coverage, such provision will be deemed to extend only over the maximum geographic, temporal and functional scope as to which it may be enforceable. 12. Entire Agreement. This Agreement constitutes the entire agreement between the Company and myself with respect to the subject matter hereof, and supersedes all prior representations and agreements with respect to such subject matter. This Agreement may not be amended, modified or waived except by a written instrument duly executed by the person against whom enforcement of such amendment, modification or waiver is sought. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, in any particular case will not prevent any subsequent enforcement of such term or obligation or to be deemed a waiver of any separate or subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement will be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to me at the last address which I have filed in writing with the Company or, in the case of any notice to the Company, at its main offices, to the attention of its Chief Executive Officer. 14. Governing Law. This is a Missouri contract and shall be construed under and be governed in all respects by the laws of the State of Missouri. I UNDERSTAND THAT THIS AGREEMENT AFFECTS IMPORTANT RIGHTS. I HAVE READ IT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY. ---------------------------------------- Scott Brown ACCEPTED AND AGREED TO BY GOLDEN SKY SYSTEMS, INC. By: ---------------------------- Name: Rodney A. Weary Title: President Date: February 1, 1999 SCHEDULE OF PRIOR INVENTIONS ---------------------------- Employee Name: Scott Brown Date: February 1, 1999 NONE ---------------------------------------- Scott Brown ACCEPTED BY GOLDEN SKY SYSTEMS, INC. By: -------------------------- Name: Rodney A. Weary Title: President Date: February 1, 1999 SCHEDULE OF THIRD-PARTY AGREEMENTS ---------------------------------- Employee Name: Scott Brown Date: February 1, 1999 NONE ---------------------------------------- Scott Brown ACCEPTED BY GOLDEN SKY SYSTEMS, INC. By: ------------------------ Name: Rodney A. Weary Title: President Date: February 1, 1999 EX-10.20 4 EXHIBIT 10.20 GOLDEN SKY SYSTEMS, INC. NON-COMPETITION AGREEMENT ------------------------- Employee Name: William J. Gerski Date: November 3, 1997 In consideration of my employment by Golden Sky Systems, Inc. (the "Company"), I, the above-named Employee, hereby agree with the Company as follows: 1. Definitions. ----------- (a) Proprietary Information. As used in this Agreement, "Proprietary Information" means information which the Company possesses or to which the Company has rights which has commercial value. Proprietary Information includes, by way of example and without limitation, trade secrets, product ideas, designs, configurations, processes, techniques, formulas, software, improvements, inventions, data, know-how, copyrightable materials, marketing plans and strategies, sales and financial reports and forecasts, and customer lists. Proprietary Information includes information developed by me in the course of my employment by the Company or otherwise relating to Inventions and Developments (as hereinafter defined) which belong to the Company under Section 4 below, as well as other information to which I may have access in connection with in employment. (b) Inventions and Developments. As used in this Agreement, "Inventions and Developments" means any and all inventions, developments, creative works and useful ideas of any description whatsoever, whether or not patentable. Inventions and Developments include, by way of example and without limitation, discoveries and improvements which consist of or relate to any form of Proprietary Information. (c) Company-Related Inventions and Developments. For purposes of this Agreement, "Company-Related Inventions and Developments" means all Inventions and Developments which either (a) relate at the time of conception or development to the actual or demonstrably anticipated business of the Company or to its actual or demonstrably anticipated research and development; (b) result from or relate to any work performed for the Company, whether or not during normal business hours; (c) are developed on Company time; or (d) are developed through the use of the Company's Proprietary Information, equipment and software, or other facilities or resources. (d) Company. For purposes of this Agreement, all references to the "Company" will be deemed to include the Company and its direct or indirect subsidiaries and affiliates. 2. Confidential. I understand and agree that my employment creates a relationship of confidence and trust between me and the Company with respect to (a) all proprietary Information, and (b) the confidential information of others with which the Company has a business relationship. The information referred to in clauses (a) and (b) of the preceding sentence is referred to in this Agreement, collectively, as "Confidential Information." At all times, both during my employment with the Company and after its termination, I will keep in confidence and trust all such Confidential Information, and will not use or disclose any such Confidential Information without the written consent of the Company, except as may be necessary in the ordinary course of performing my duties to the Company. The restrictions set forth in this Section 2 will not apply to information which is generally known to the public or in the trade, unless such knowledge results from an unauthorized disclosure by me, but this exception will not affect the application of any other provision of this Agreement to such information in accordance with the terms of such provision. 3. Documents, Records, etc. All documents, records, apparatus, equipment and other physical property, whether or not pertaining, to Proprietary Information, which are furnished to me by the Company or are produced by me in connection with my employment will be and remain the sole property of the Company. I will return to the Company all such materials and property as and when requested by the Company. In any event, I will return all such materials and property immediately upon termination of my employment for any reason. I will not take with me any such material or property or any copies thereof upon such termination. 4. Ownership of Inventions and Developments. I agree that all Company-Related Inventions and Developments which I conceive or develop, in whole or in part, either alone or jointly with others, during the term of my employment with the Company will be the sole property of the Company. The Company will be the sole owner of all patents, copyrights and other proprietary rights in and with respect to such Company-Related Inventions and Developments. To the fullest extent permitted by law, such Company-Related Inventions and Developments will be deemed works made for hire. I hereby transfer and assign to the Company any proprietary rights which I may have or acquire in any such Company-Related Inventions and Developments, and I waive any moral rights or other special rights which I may have or accrue therein. I agree to execute any documents and take any actions that may be required to effect and confirm such transfer and assignment and waiver. The provisions of this Section 4 will apply to all Company-Related Inventions and Developments which are conceived or developed during the term of my employment with the Company, whether before or after the date of this Agreement, and whether or not further development or reduction to practice may take place after termination of my employment, for which purpose it will be presumed that any Company-Related Inventions and Developments conceived by me which are reduced to practice within one year after termination of my employment were conceived during the term of my employment with the Company unless I am able to establish a later conception date by clear and convincing evidence. The provisions of this Section 4 will not apply, however, to any Inventions and Developments which may be disclosed in a separate Schedule attached to this Agreement prior to its acceptance by the Company, representing Inventions and Developments made by me prior to my employment by the Company. 5. Disclosure of Inventions and Developments. I agree promptly to disclose to the Company, or any persons designated by it, all Company-Related Inventions and Developments which are or may be subject to the provisions of Section 4. 6. Obtaining and Enforcing Proprietary Rights. I agree to assist the Company, at the Company's request from time to time and at the Company's expense, to obtain and enforce patents, copyrights or other proprietary rights with respect to Company-Related Inventions and Developments in any and all countries. I will execute all documents reasonably necessary or appropriate for this purpose. This obligation will survive the termination of my employment, provided that the Company will compensate me at a reasonable rate after such termination for time actually spent by me at the Company's request on such assistance. In the event that the Company is unable for any reason whatsoever to secure my signature to any document reasonably necessary or appropriate for any of the foregoing purposes (including renewals, extensions, continuations, divisions or continuations in part), I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agents and attorneys-in-fact to act for me and on my behalf, but only for the purpose of executing and filing, any such document and doing all other lawfully permitted acts to accomplish the foregoing purposes with the same legal force and effect as if executed by me. 7. Competitive Activities. During the term of my employment with the Company, and for a period of two years thereafter (the "Non-Competition Period"), I will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, engage, participate or invest in any business activity in any market in which the Company then operates or intends to operate anywhere in North America which develops, manufacturers or markets products or performs services which are competitive with or similar to the products or service of the Company, or products or services which the Company has under development or which are the subject of active planning at any time during the term of my employment. In addition, and without limitation of the foregoing, I agree that during the Non-Competition Period, I will not, directly or indirectly, either as principal, or as agent or employee for any other person or entity, (a) hire, or solicit for employment with any person other than the Company, any individual who is then an employee of the Company or was an employee of the Company at any time within one year prior to such hiring or solicitation; (b) solicit from any of the Company's customers business of a kind now or at any time during my employment carried on by the Company; or (c) offer to perform as an employee for such customers any services now or at any time during my employment offered by the Company. I understand that the restrictions set forth in this Section 7 are intended to protect the Company's interest in its Proprietary Information and established customer relationships and goodwill, and agree that such restrictions are reasonable and appropriate for this purpose. 8. Third-Party Agreements and Rights. I hereby confirm that I am not bound by the terms of any agreement with any previous employer or other party which restricts in any way my use or disclosure of information or my engagement in any business, except as may be disclosed in a separate Schedule attached to this Agreement prior to its acceptance by the Company. I have delivered to the Company true and complete copies of any agreements listed on said Schedule. I represent to the Company that my execution of this Agreement, my employment with the Company and the performance of my proposed duties for the Company will not violate any obligations I may have to any such previous employer or other party. In my work for the Company, I will not disclose or make use of any information in violation of any agreements with or rights of any such previous employer or other party, and I will not bring to the premises of the Company any copies or other tangible embodiments of non-public information belonging to or obtained from any such previous employment or other party. 9. Injunction. I agree that it would be difficult to measure any damages caused to the Company which might result from any breach by me of the promises set forth in this Agreement, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, I agree that if I breach, or propose to breach, any portion of this Agreement, the Company shall be entitled, in addition to all other remedies that it may have, to an injunction or other appropriate equitable relief to restrain any such breach without showing or province any actual damage to the Company. 10. Binding Effect. This Agreement will be binding upon me and my heirs, executors, administrators and legal representatives and will inure to the benefit of the Company, any subsidiary of the Company, and its and their respective successors and assigns. 11. Enforceability. If any portion or provision of this Agreement is to any extent declared illegal or unenforceable by a court or competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal and unenforceable, will not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. In the event that any provision of this Agreement is determined by any court of competent jurisdiction to be unenforceable by reason of excessive scope as to geographic, temporal or functional coverage, such provision will be deemed to extend only over the maximum geographic, temporal and functional scope as to which it may be enforceable. 12. Entire Agreement. This Agreement constitutes the entire agreement between the Company and myself with respect to the subject matter hereof, and supersedes all prior representations and agreements with respect to such subject matter. This Agreement may not be amended, modified or waived except by a written instrument duly executed by the person against whom enforcement of such amendment, modification or waiver is sought. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, in any particular case will not prevent any subsequent enforcement of such term or obligation or to be deemed a waiver of any separate or subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement will be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to me at the last address which I have filed in writing with the Company or, in the case of any notice to the Company, at its main offices, to the attention of its Chief Executive Officer. 14. Governing Law. This is a Missouri contract and shall be construed under and be governed in all respect s by the laws of the State of Missouri. I UNDERSTAND THAT THIS AGREEMENT AFFECTS IMPORTANT RIGHTS. I HAVE READ IT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY. ------------------------------ Signature of Employee Accepted and Agreed to by GOLDEN SKY SYSTEMS, INC. By: ______________________________ Name: Rodney A. Weary Title: President Date: November 3, 1997 SCHEDULE OF PRIOR INVENTIONS ---------------------------- Employee Name: William J. Gerski Date: November 3, 1997 NONE ------------------------------ Employee Signature Accepted and Agreed to by GOLDEN SKY SYSTEMS, INC. By: ______________________________ Name: Rodney A. Weary Title: President SCHEDULE OF THIRD-PARTY AGREEMENTS ---------------------------------- Employee Name: William J. Gerski Date: November 3, 1997 NONE ------------------------------ Employee Signature Accepted by GOLDEN SKY SYSTEMS, INC. By: ______________________________ Name: Rodney A. Weary Title: President EX-10.21 5 TABLE OF CONTENTS PAGE EXHIBIT 10.21 SECTION 1 TERMS OF PURCHASE AND ISSUANCE.....................................1 1.1 Description of Series D Redeemable Preferred Stock and Funding Warrants.............................................................1 1.2 Sale and Purchase....................................................1 1.3 Letters of Credit....................................................1 1.4 Subscription Warrants................................................1 1.5 Closing..............................................................2 1.6 Offset of Purchase Price Payment Obligation..........................2 1.7 Use of Proceeds......................................................2 SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................3 2.1 Organization and Corporate Power.....................................3 2.2 Authorization........................................................4 2.3 Non-contravention....................................................4 2.4 Capitalization of the Company........................................4 2.5 Financial Statements.................................................6 2.6 Absence of Undisclosed Liabilities...................................6 2.7 Accounts Receivable..................................................7 2.8 Title to Properties..................................................7 2.9 Tax Matters..........................................................7 2.10 Contracts and Commitments............................................8 2.11 Proprietary Rights; Employee Restrictions............................8 2.12 Litigation...........................................................9 2.13 Offeree..............................................................9 2.14 Business; Compliance with Laws......................................10 2.15 Information Supplied to Series D Investors..........................10 2.16 Investment Banking; Brokerage.......................................10 2.17 Solvency............................................................11 2.18 Environmental Matters...............................................11 2.19 Employee Benefit Programs...........................................12 2.20 Product and Services Claims.........................................13 2.21 Employees; Labor Matters............................................14 2.22 Corporate Records; Copies of Documents..............................14 2.23 Affiliate Transactions..............................................14 2.24 Investments Related to Certain Foreign Countries....................14 2.25 Small Business Concern, Etc.........................................15 2.26 Insurance...........................................................15 2.27 Absence of Certain Developments.....................................15 SECTION 3 CONDITIONS OF PURCHASE............................................16 3.1 Satisfaction of Conditions..........................................16 3.2 Opinion of Counsel..................................................16 3.3 Authorization.......................................................16 3.4 Effectiveness of Preferred Stock Terms..............................16 3.5 Delivery of Documents...............................................16 3.6 SBIC Deliveries.....................................................17 3.7 Execution of Agreement and Providing Letters of Credit..............17 3.8 Compliance with Law.................................................17 SECTION 4 CONDITIONS OF SALE................................................18 4.1 Satisfaction of Conditions..........................................18 4.2 Compliance With Law.................................................18 4.3 Execution of Agreement and Providing Letters of Credit..............18 SECTION 5 COVENANTS OF THE COMPANY..........................................18 5.1 Financial Statements; Minutes.......................................18 5.2 Budget and Operating Forecast.......................................19 5.3 Conduct of Business.................................................19 5.4 Access to Books and Records.........................................19 5.5 Sales of Additional Securities......................................19 5.6 Stockholders' Agreement.............................................20 5.7 Distributions on, and Redemptions of, Capital Stock.................20 5.8 Merger, Consolidation, Sale of Assets, Acquisitions and Other Actions.............................................................21 5.9 Annual Updates; Number of Stockholders; Use of Proceeds; Regulatory Violation; Economic Impact Information; Amendment...................21 5.10 June and December Warrants..........................................23 SECTION 6 CONFIDENTIALITY...................................................23 SECTION 7 INVESTOR REPRESENTATIONS..........................................24 SECTION 8 INDEMNIFICATION...................................................25 8.1 Indemnification for Vicarious Liability.............................25 8.2 Notice; Defense of Claims...........................................27 8.3 Satisfaction of Indemnification Obligations.........................28 SECTION 9 GENERAL...........................................................28 9.1 Amendments, Waivers and Consents....................................28 9.2 Survival of Representations, Warranties and Covenants; Assignability of Rights.............................................29 9.3 Governing Law.......................................................29 9.4 Section Headings; Counterparts......................................29 9.5 Notices and Demands.................................................29 9.6 Severability........................................................29 9.7 Expenses............................................................30 9.8 Integration.........................................................30 9.9 Certain Provisions Applicable to SBIC Investors.....................30 9.10 No Assignment.......................................................30 APPENDICES Appendix A (Form of Warrant) Appendix B Securities Acquired Appendix C (Form of Legal Opinion) Appendix D (Form of Certificate of Designations, Preferences and Rights of (Series D Redeemable Preferred Stock) SCHEDULES Schedule 2.1 Certain Violations Schedule 2.4 Capitalization and Beneficial Ownership Schedule 2.6 Undisclosed Liabilities Schedule 2.7 Accounts Receivable Schedule 2.8 Title to Properties Schedule 2.9 Tax Matters Schedule 2.10 Material Contracts Schedule 2.11 Proprietary Rights Schedule 2.12 Litigation Schedule 2.14 Business; Compliance with Laws Schedule 2.18 Environmental Matters Schedule 2.20 Product and Services Claims Schedule 2.21 Employees; Labor Matters Schedule 2.23 Affiliate Transactions Schedule 2.27 Absence of Certain Developments - -------------------------------------------------------------------------------- GOLDEN SKY HOLDINGS, INC. Shares of Series D Redeemable Preferred Stock and Common Stock Warrants STOCK AND WARRANT PURCHASE AGREEMENT Dated as of January 4, 2000 - -------------------------------------------------------------------------------- STOCK AND WARRANT PURCHASE AGREEMENT AGREEMENT made as of this 4th day of January, 2000 by and among Golden Sky Holdings, Inc., a Delaware corporation (the "Company"), and the investors identified on the signature page hereto, who are herein collectively referred to, where no distinction is required, as the "Investors" and individually as an "Investor." SECTION 1. TERMS OF PURCHASE AND ISSUANCE 1.1 Description of Series D Redeemable Preferred Stock and Funding Warrants. The Company has authorized the issuance and sale to the Investors of an aggregate of 100,000 shares of its authorized but unissued Series D Redeemable Preferred Stock, par value $.01 per share (the "Series D Redeemable Preferred Stock"), along with warrants substantially in the form of and containing the terms set forth in Appendix A hereto (each a "Funding Warrant") exercisable for an aggregate of 3,500 shares of the Company's common stock, $.01 par value (the "Common Stock"), for a collective purchase price of $200 per share for the Series D Redeemable Preferred Stock and the associated Funding Warrants. 1.2 Sale and Purchase. At the Closing (as defined in Section 1.5 hereof) and subject to the terms and conditions herein set forth, the Company shall issue and sell to each of the Investors, and each Investor severally and not jointly shall purchase from the Company, the number of shares of Series D Redeemable Preferred Stock and the Funding Warrants set forth opposite the name of such Investor in Appendix B hereto for the aggregate purchase price set forth opposite the name of such Investor in Appendix B (the "Purchase Price"). 1.3 Letters of Credit. The Investors each intend severally to cause Fleet National Bank (the "LC Bank") to issue for the benefit of Paribas (formerly known as Banque Paribas) as Syndication Agent (the "Agent") on behalf of Paribas, Fleet National Bank, General Electric Capital Corporation, PAMCO Caymen Ltd., PAM Capital Funding, L.P., Citizen's Bank (formerly known as State Street Bank and Trust Company), Union Bank of California, IBJ Whitehall Financial Group, Fremont Financial Corporation and DLJ Capital Funding, Inc. (the "Lenders") under the Amended and Restated Credit Agreement, dated as of July 7, 1997 and amended and restated as of May 8, 1998, and further amended as of January 4, 2000, among the Company, Golden Sky Systems, Inc. ("GSS"), Banque Paribas, Fleet National Bank and General Electric Capital Corporation (the "Credit Facility"), letters of credit in the respective amounts set forth opposite each Investor's name under the heading "Purchase Price" in Appendix B hereof (collectively the "Letters of Credit" and each individually a "Letter of Credit") to be used as security for an advance under the Credit Facility in the principal amount of up to $20,000,000 from the Lenders to GSS (the "Loan"), with the Letters of Credit being on terms and conditions acceptable to the Lenders and the Investors. 1.4 Subscription Warrants. Upon the later to occur of (i) the execution and delivery of this Agreement by the Company and all the Investors, and (ii) the issuance of all of the Letters of Credit in a form acceptable to the Lenders, and in consideration of the execution and delivery of this Agreement by the Investors, the Company shall issue to each Investor warrants substantially in the form of and containing the terms set forth in Appendix A hereto (each a "Subscription Warrant" and, together with the Funding Warrants, the "Warrants") exercisable for the number of shares of Common Stock set forth opposite such Investor's name on Appendix B attached hereto. 1.5 Closing. The closing (the "Closing") of the sale and purchase of the Series D Redeemable Preferred Stock and the Funding Warrants shall take place upon the request of the Company only in the event that either (i) the Lenders have asserted that the Loan or credit facility is in default, or (ii) a principal payment is due under the terms of the Loan within ten days (the "Notice Condition"). Upon occurrence of a Notice Condition, the Company may provide written notice (the "Closing Notice") to the Investors of the date of the Closing, which shall in no event be earlier than two business days after receipt of the Closing Notice. The Closing shall take place at the offices of McDermott, Will & Emery, 600 13th Street, N.W., Washington, D.C. 20005, at 10:00 A.M., on the date specified in the Closing Notice, or such other date, time and place as shall be mutually agreed upon by the Company and a majority in interest of the Investors (the "Closing Date"). At the Closing, the Company will deliver the Series D Redeemable Preferred Stock and Funding Warrants being acquired by each Investor in the form of a stock certificate and a warrant certificate issued in such Investor's name or in the name of its nominee (of which the Investor shall notify the Company not less than one business day prior to the Closing), against payment of the full Purchase Price therefor by check or wire transfer by or on behalf of each Investor to the Company. The obligations of the Investors to consummate the purchase of the Series D Redeemable Preferred Stock and Funding Warrants are several, not joint, and the failure of any one or more of the Investors to fulfill their obligations hereunder shall not relieve any other Investor of its obligations hereunder. 1.6 Offset of Purchase Price Payment Obligation. Notwithstanding anything herein to the contrary, in the event that (i) the Agent prior to the Closing Date draws upon a Letter of Credit provided by any of the Investors, or (ii) any Investor makes a payment to reduce the amount outstanding under the Loan, the amount so drawn under the Letter of Credit or so paid to reduce the amount outstanding under the Loan shall be credited against such Investor's payment obligations to the Company under Sections 1.2 and 1.5 hereof. 1.7 Use of Proceeds. (a) It is the intention of the parties that proceeds received by the Company from the sale of Series D Redeemable Preferred Stock and Funding Warrants to the Investors pursuant to this Agreement shall be used for the purpose of repaying the Loan and terminating all obligations imposed by the Lender to maintain Letters of Credit provided by Investors who have purchased the shares of Series D Redeemable Preferred Stock specified in Appendix B. (b) Immediately upon receipt by the Company of a notice that (i) the Loan or Credit Facility is in default, or (ii) a principal payment is due under the terms of the Loan, the Company shall provide such notice to each Investor by means set forth in Section 9.5 below. (c) In the event that an Investor purchases the shares of Series D Redeemable Preferred Stock specified in Appendix B at the Closing as provided herein, and if the Letter of Credit provided by such Investor has not been drawn upon by the Agent, the Company shall cause Golden Sky DBS, Inc., a Delaware corporation and wholly-owned subsidiary of the company ("DBS") to cause GSS, a wholly-owned subsidiary of DBS, to promptly pay the proceeds of such sale to the Agent to be applied against payment obligations under the Loan and shall cause the Agent to terminate the obligation to continue the Letter of Credit provided by such Investor. (d) In the event that an Investor purchases the shares of Series D Redeemable Preferred Stock specified in Appendix B at the Closing as provided herein, and if subsequently the Letter of Credit provided by such Investor is drawn upon by the Agent to satisfy part of the Company's payment obligation under the Loan, the Company shall promptly pay such Investor the amount of the draw under the Letter of Credit, not to exceed the amount of the Purchase Price paid by such Investor. (e) Notwithstanding anything herein to the contrary, in the event that prior to the Closing Date (i) the Agent draws upon a Letter of Credit provided by any of the Investors, or (ii) an Investor makes a payment to the Company as full or partial consideration for shares of Series D Redeemable Preferred Stock, the Company shall promptly request that the Agent terminate or reduce the applicable Letter(s) of Credit by the amount so drawn or the amount so paid (as referenced in Section 12 of the Second Amendment, Consent and Waiver to the Amended and Restated Credit Agreement, dated as of the date hereof, among the Company, GSS, the Banks party thereto, Paribas, as Syndication Agent, Fleet National Bank, as Administrative Agent, and General Electric Capital Corporation, as Documentation Agent). SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY In order to induce the Investors to enter into this Agreement, the Company (which term shall be deemed to include, for purposes of this Section 2, any subsidiary or subsidiaries of the Company existing at the date of this Agreement, including without limitation GSS), subject to Section 9.2 hereof, hereby represents and warrants to the Investors that as of the date hereof: 2.1 Organization and Corporate Power. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to do business as a foreign corporation in each jurisdiction in which such qualification is required, except where failure to so qualify would not have a material adverse effect on the business, assets, operations or condition (financial or otherwise) of the Company. The Company has all required corporate power and authority to own its property, to carry on its business as presently conducted or contemplated, to enter into and perform this Agreement and the agreements contemplated hereby, and generally to carry out the transactions contemplated hereby and thereby. The copies of the Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and its By-laws, each as amended to date, which have been furnished to counsel for the Investors, are correct and complete at the date hereof. The Company is not in violation of any term of its Certificate of Incorporation or By-laws or, except as set forth in Schedule 2.1, any material agreement, instrument, judgment, decree, order, statute, rule or government regulation applicable to the Company. 2.2 Authorization. This Agreement and all documents and instruments executed pursuant hereto or contemplated hereby are valid and binding obligations of the Company, enforceable in accordance with their terms against the Company, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws or court decisions of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws or court decisions relating to the availability of specific performance, injunctive relief or other equitable remedies or to equitable principles of general applicability. The execution, delivery and performance of this Agreement and all documents and instruments contemplated hereby and the delivery and issuance of the Series D Redeemable Preferred Stock and the Warrants have been duly authorized by all necessary corporate or other action of the Company. Assuming the accuracy of the Investor representations set forth in Section 7 hereof, no consent, approval or authorization of, or designation, declaration or filing with, any governmental authority is required of the Company in connection with the execution, delivery and performance of this Agreement, or the issuance and delivery by the Company of the Series D Redeemable Preferred Stock or the Warrants in accordance with the terms of this Agreement, or the performance or consummation of any other transaction contemplated hereby. 2.3 Non-contravention. The execution, delivery and performance by the Company of this Agreement and each of the other agreements and instruments to which it is a party and which are contemplated hereby will not: (a) conflict with or result in any default under any contract, obligation or commitment of the Company or any charter provision, by-law or corporate restriction of the Company, other than such conflicts or defaults that have been waived in writing prior to the date hereof; (b) result in the creation of any lien, charge or encumbrance of any nature upon any of the properties or assets of the Company; or (c) violate any instrument, agreement, judgment, decree, order, statute, rule or regulation of any federal, state or local government or agency applicable to the Company or to which the Company is a party. 2.4 Capitalization of the Company. The authorized capital stock of the Company consists of: (a) 1,000,000 shares of Common Stock, of which 25,399 shares are, and will be as of the Closing, duly and validly issued, outstanding, fully paid, and nonassessable; (b) 1,593,000 shares of designated preferred stock, par value $.01 per share, of which (i) 418,000 shares have been designated as Series A Convertible Participating Preferred Stock, par value $.01 (the "Series A Convertible Preferred Stock"), and all of which are duly and validly issued, outstanding, fully paid, and nonassessable, (ii) 228,500 shares have been designated as Series B Convertible Preferred Stock, par value $.01 (the "Series B Convertible Preferred Stock"), 228,442 of which are duly and validly issued, outstanding, fully paid, and non assessable, (iii) 51,000 shares have been designated as Series C Senior Convertible Preferred Stock, par value $.01 (the "Series C Convertible Preferred Stock") all of which are duly and validly issued, outstanding, fully paid and nonassessable, (iv) 100,000 shares have been designated as Series D Redeemable Preferred Stock, all of which will be as of the Closing, and upon satisfaction of the obligations of the Investors hereunder, duly and validly issued, outstanding, fully paid and nonassessable, and (v) 418,000 shares have been designated as Series A Redeemable Preferred Stock, par value $.01 per share (the "Series A Redeemable Preferred Stock), and 228,500 shares have been designated as Series B Redeemable Preferred Stock, par value $.01 per share (the "Series B Redeemable Preferred Stock"), none of which are outstanding; and (c) 149,000 shares of undesignated preferred stock, par value $.01 per share. Except for 58,852 shares of Common Stock reserved for issuance under the Company's Stock Option Plan adopted on July 24, 1997 (the "Stock Option Plan"), 5,682 shares of Common Stock issuable upon the exercise of warrants (the "Alta Warrants") issued to certain investment funds affiliated with Alta Communications, Inc. in connection with loans extended by such investment funds to the Company, 7,000 shares of Common Stock issuable upon exercise of the Warrants, 7,000 shares issuable upon exercise of the June and December Warrants (if applicable, as described in Section 5.10 hereof) or as otherwise disclosed in Schedule 2.4, the Company has not issued any other shares of its capital stock and there are no outstanding warrants, options or other rights to purchase or acquire any of such shares, nor any outstanding securities convertible into such shares or outstanding warrants, options or other rights to acquire any such convertible securities. As of the Closing, all of the outstanding shares of capital stock of the Company will have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. The Series A Convertible Preferred Stock is currently convertible into 418,000 shares of Series A Redeemable Preferred Stock and 418,000 shares (the "Series A Conversion Shares") of Common Stock, together representing 52.2% of the Common Stock on a fully-diluted basis after giving effect to the issuance of the 58,852 shares reserved for issuance under the Stock Option Plan and the exercise, exchange or conversion of any other securities exercisable or exchangeable for or convertible into Common Stock (including the Series B Convertible Preferred Stock, the Series C Convertible Preferred Stock, the Alta Warrants and the Warrants). The Series B Convertible Preferred Stock is currently convertible into 228,442 shares of Series B Redeemable Convertible Preferred Stock and 228,442 shares (the "Series B Conversion Shares") of Common Stock, together representing 28.6% of the Common Stock on a fully diluted basis after giving effect to the issuance of the 58,852 shares reserved for issuance under the Stock Option Plan and the exercise, exchange or conversion of any other securities exercisable or exchangeable for or convertible into Common Stock (including the Series A Convertible Preferred Stock, the Series C Convertible Preferred Stock, the Alta Warrants and the Warrants). The Series C Convertible Preferred Stock is convertible, as of November 30, 1999, into 57,233 shares (the "Series C Conversion Shares" and, together with the Series A and B Conversion Shares, the "Conversion Shares") of Common Stock representing 7.2% of the Common Stock of the Company on a fully diluted basis after giving effect to the issuance of the 58,852 shares reserved for issuance under the Stock Option Plan and the exercise, exchange or conversion of any other securities exercisable or exchangeable for or convertible into Common Stock (including the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock, the Alta Warrants and the Warrants). The relative rights, preferences, restrictions and other provisions relating to the Company's capital stock are as set forth in the Certificate of Incorporation. The Company has authorized and reserved for issuance (i) upon conversion of the Series A Convertible Preferred Stock, 418,000 shares of Series A Redeemable Preferred Stock and 418,000 shares of Common Stock, (ii) upon conversion of the Series B Convertible Preferred Stock, 228,442 shares of Series B Redeemable Preferred Stock and 228,442 shares of Common Stock, and (iii) upon conversion of the Series C Convertible Preferred Stock, as of November 30, 1999, 57,233 shares of Common Stock. The Conversion Shares issuable upon such conversions will be, when issued in accordance with the Certificate of Incorporation, duly and validly authorized and issued, fully paid and nonassessable. The Company has authorized and reserved for issuance upon exercise of the Warrants and the Alta Warrants not less than 12,682 shares of Common Stock and such shares will be, when issued in accordance with the Certificate of Incorporation, duly and validly authorized and issued, fully paid and nonassessable. Except as set forth in the Certificate of Incorporation or the Stockholders' Agreement, dated as of November 24, 1997, by and among Golden Sky Holdings, Inc. and the Investors identified therein (the "Stockholders' Agreement"), there are no preemptive rights or rights of first refusal with respect to the issuance or sale of the Company's capital stock. No officer, director or employee of the Company or any other person or entity has, or to the best knowledge of the Company claims to have or has any right to claim to have any interest in the Company's capital stock other than (i) as disclosed in Schedule 2.4 hereof, (ii) options to acquire certain of the 58,852 shares of Common Stock granted pursuant to the Stock Option Plan, (iii) the Alta Warrants, or (iv) as an Investor hereunder. There are no restrictions on the transfer of the Company's capital stock other than those arising from federal and state securities laws or under this Agreement or the Stockholders' Agreement. Except as set forth in the Stockholders' Agreement, there are no rights, obligations or restrictions on the voting of any of the Company's capital stock or the registration of such capital stock for offering to the public pursuant to the Securities Act of 1933, as amended (the "Securities Act"). Except as set forth in Schedule 2.4, the Company has no subsidiaries or investments in any other corporation or business organization and does not own or have any direct or indirect interest in, a loan or advance to, or control over any corporation, partnership, joint venture or other entity of any kind. 2.5 Financial Statements. The Company has heretofor furnished to the Investors the following unaudited financial statements of the Company: (i) an income statement for the year ended December 31, 1998; (ii) a balance sheet, and related footnotes, as of December 31, 1998 (the "1998 Balance Sheet"); (iii) an income statement for the nine months ended September 30, 1999; and (iv) a balance sheet, and related footnotes, as of September 30, 1999 (the "Third Quarter Balance Sheet"). Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except that such unaudited financial statements have been prepared without footnote disclosures and year-end audit adjustments, which will not, in any event, be material. Such financial statements contain notations for all significant accruals or contingencies, fairly represent the financial condition of the Company in all material respects as of the date thereof, and are true and correct as of the date thereof in all respects. Nothing has come to the attention of management of the Company since such dates that would indicate that the financial statements were not true and correct in all material respects as of the date thereof. 2.6 Absence of Undisclosed Liabilities. The Company does not have any material liability or liabilities of any nature, whether accrued, absolute, contingent or otherwise, asserted or unasserted, known or unknown, which are or would be required to be disclosed in accordance with generally accepted accounting principles, except as and to the extent disclosed in Schedule 2.6 or as otherwise set forth in the 1998 Balance Sheet or the Third Quarter Balance Sheet, and, to the best knowledge of the Company, there exists no set of facts or circumstances which should be reasonably anticipated to form the basis for any such material liabilities. 2.7 Accounts Receivable. To the best knowledge of the Company, all of the accounts receivable of the Company represent bona fide completed sales made in the ordinary course of business and are valid and enforceable claims, subject to no express set-off or counterclaim. Except as disclosed on Schedule 2.7, the Company has no material accounts receivable from any person, firm or corporation which is affiliated with it or from any of its directors, officers, employees or shareholders or any affiliates of any of the foregoing. 2.8 Title to Properties. The Company has good and marketable title to all of its material properties and assets, free and clear of all liens, restrictions or encumbrances, except as disclosed in Schedule 2.8, and such properties and assets constitute all of the assets necessary for the conduct of the Company's business as presently conducted. All machinery and equipment included in such properties which is necessary to the business of the Company is in good condition and repair and all leases of real or personal property to which the Company is a party are fully effective and afford the Company peaceful and undisturbed possession of the subject matter of the lease. The Company is not in violation, in any material respect, of any zoning, building or safety ordinance, regulation or requirement or other law or regulation applicable to the operation of its owned or leased properties, nor has the Company received any notice of violation with which it has not complied. 2.9 Tax Matters. Except as set forth in Schedule 2.9 attached hereto: (a) The Company has paid or caused to be paid all federal, state, local, foreign, and other taxes, including without limitation, income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes, franchise taxes, employment and payroll-related taxes, withholding taxes, transfer taxes, and all deficiencies, or other additions to tax, interest, fines and penalties owed by it (collectively, "Taxes"), required to be paid by it through the date hereof whether disputed or not, other than possible sales and use tax obligations which in the aggregate are not material to the Company. All taxes and other assessments and levies which the Company is required to withhold or collect have been withheld and collected and have been paid over to the proper governmental authorities. The Company has, in accordance with applicable law, timely and properly filed all federal, state, local and foreign tax returns required to be filed by it through the date hereof, all such returns correctly and accurately set forth the amount of any Taxes relating to the applicable period and any deductions from, or credits against any Taxes or taxable income relating to such returns are valid and proper items of deduction or credit. (b) Neither the Internal Revenue Service ("IRS") nor any other governmental authority is now asserting or, to the knowledge of the Company is threatening to assert against the Company, any deficiency or claim for additional Taxes. No claim has ever been made by an authority in a jurisdiction where the Company does not file reports and returns that the Company is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Taxes. The Company is not and never has been a "personal holding company" as defined under Section 541 of the Internal Revenue Code of 1986, as amended (the "Code"). Except as set forth on Schedule 2.9 hereto, there has not be any audit of any tax return filed by the Company, no audit of any tax return of the Company or any subsidiary, as the case may be, is in progress and, to the Company's best knowledge, no tax authority is contemplating any such audit, nor is any such audit pending. No extension of time with respect to any date on which a tax return was or is to be filed by the Company is in force, and no waiver or agreement by the Company is in force for the extension of time for the assessment or payment of any Taxes. The Company does not have any liability for the Taxes of any person or entity other than the Company. (c) For purposes of this Agreement, all references to Sections of the Code shall include any predecessor provisions to such Sections and any similar provisions of federal, state, local or foreign law. 2.10 Contracts and Commitments. Except as set forth in Schedule 2.10, the Company does not know of any basis for the termination, expiration or modification of any material contract, obligation or commitment prior to the expiration date thereof, nor, to the Company's best knowledge, does any other party to any such contract, obligation or commitment plan or intend to so terminate, modify or fail to renew on substantially similar terms any such contract, obligation or commitment, which termination, expiration or modification, in any such case, or failure to renew, may have an adverse effect on the assets, liabilities, business, prospects or financial condition of the Company. Except as set forth in Schedule 2.10, the Company is not in default, nor to the Company's best knowledge, is any other party thereto in default, under any material contract, obligation or commitment, and to the best knowledge of the Company there is no state of facts which upon notice or lapse of time or both would constitute such a default. The Company is not a party to any material contract or arrangement the performance of which under circumstances now foreseeable is likely to have an adverse effect on the assets, liabilities, business or condition (financial or otherwise) of the Company. The Company does not have any liability for renegotiation of any government contracts or subcontracts. Without limiting the generality of the foregoing, all key employees of the Company and each of its subsidiaries listed on Schedule 2.10 hereof have entered into non-competition agreements with the Company containing non-competition, non-solicitation and confidentiality provisions, which agreements continue in full force and effect. 2.11 Proprietary Rights; Employee Restrictions. The Company owns or possesses exclusive licenses to use, free and clear of claims or rights of any other person, all patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, copyrights, licenses, sublicenses, trade secrets and know how (collectively "Intellectual Property") necessary to the conduct of its business as presently conducted and as proposed to be conducted. The Company is not aware of any infringement by any other person of any rights of the Company under any Intellectual Property. No claim is pending or currently, or during the past 12 months, threatened against the Company, nor has the Company received any notice from any third parties, to the effect that any Intellectual Property owned or licensed by the Company, or which the Company otherwise has the right to use, or the operation, products or services of the Company infringe upon or conflict with the asserted rights of any other person under any Intellectual Property, and, to the best knowledge of the Company, there is no basis for any such claim (whether or not pending or threatened). No claim is pending or, to the best knowledge of the Company, is threatened against the Company, nor has the Company received any notice from any third parties to the effect that any Intellectual Property owned or licensed by the Company, or which the Company otherwise has the right to use, is invalid or unenforceable by the Company, as the case may be, and, to the best knowledge of the Company, there is no basis for any such claim (whether or not pending or threatened). All technical information developed by or belonging to the Company which has not been patented and which is material to the business of the Company has been kept confidential. To the best knowledge of the Company, the Company is not making unlawful use of any Intellectual Property of any other person, including without limitation any former employer of any past or present employees of the Company. Except as disclosed in Schedule 2.11, neither the Company nor, to the best knowledge of the Company, any of its employees, officers or consultants has any agreements or arrangements with former employers of such employees, officers or consultants relating to any Intellectual Property of such employers, which interfere or conflict with the performance of such employee's duties for the Company or results in any former employers of such employees having any rights in, or claims on, the Company's Intellectual Property. To the best knowledge of the Company, the activities of the Company's employees and officers do not violate any agreements or arrangements which any such employees have with former employers. The Company has taken all commercially reasonable steps required to establish and preserve its ownership of all of the Intellectual Property. Without limitation of any of the foregoing and except as otherwise expressly disclosed in Schedule 2.11 hereto: (a) the Company has taken reasonable security measures to guard against unauthorized disclosure or use of any of the Intellectual Property; and (b) the Company has no reason to believe that any person (including without limitation any former employee of the Company) has unauthorized possession of any of the Intellectual Property, or any part thereof, or that any person has obtained unauthorized access to any of the Intellectual Property. 2.12 Litigation. Except as disclosed in Schedule 2.12, there is no litigation or governmental proceeding or investigation pending or, to the best knowledge of the Company, currently, or, during the past 12 months, threatened against the Company, or any officer or key employee of the Company, which (a) may call into question the validity or hinder the enforceability or performance of this Agreement or the agreements and transactions contemplated hereby, or (b) relates to the Company or its business or affairs and could be reasonably expected to have material adverse effect on the assets, liabilities, business or condition (financial or otherwise) of the Company, nor, to the best knowledge of the Company, has there occurred any event nor does there exist any condition on the basis of which any such litigation, proceeding or investigation might properly be instituted. 2.13 Offeree. Neither the Company nor anyone acting on its behalf has in the past or will in the future sell, offer for sale or solicit offers to buy any securities of the Company so as to bring the offer, issuance or sale of the Series D Redeemable Stock, the Warrants or the June or December Warrants (if applicable, as described in Section 5.10 hereof) as contemplated by this Agreement, within the provisions of Section 5 of the Securities Act, unless such offer, issuance or sale was or will be eligible for one or more of the registration exemptions under the Securities Act. The Company has in the past complied and will continue to comply in all material respects with all applicable state "blue-sky" or securities laws in connection with the issuance and sale of its Common Stock, preferred stock and all other securities heretofore issued and to be issued upon the closing of the Agreement. The Company has in the past complied in all material respects with all applicable federal and state securities laws in connection with the offer, solicitation of offers and sales of its securities. 2.14 Business; Compliance with Laws. Except as disclosed in Schedule 2.14, the Company has all material franchises, permits, licenses and other rights and privileges necessary to permit it to own its property and to conduct its business as it is presently conducted. The Company is not in violation, in any material respect, of any law, regulation, authorization or order of any public authority. The Company is in compliance, in all material respects, with all federal (including all laws and regulations of the Federal Communications Commission), state and local laws and regulations (including all applicable environmental laws and regulations) relating to its business as presently conducted, except as disclosed in Schedule 2.14. The Company has been approved as an NRTC affiliate member and DBS participant. Neither the Company nor any of its affiliates has been: (a) subject to a voluntary or involuntary petition under the federal bankruptcy laws or any state insolvency law or the appointment of a receiver, fiscal agent or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment, or decree (not subsequently reversed, suspended or vacated) of any court of competent jurisdiction permanently or temporarily enjoining it, him or her from, or otherwise imposing limits or conditions on its, his or her, engaging in any securities, investment advisory, banking, insurance or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated any federal or state commodities, securities or unfair trade practices law or regulations of any regulatory agency, which such judgment or finding has not been subsequently reversed, suspended or vacated. 2.15 Information Supplied to Series D Investors. This Agreement and the Schedules, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading. There is no material fact directly relating to the assets, liabilities, business, prospects or condition (financial or otherwise) of the Company (other than facts which relate to general economic or industry trends or conditions) presently known to the Company which has not been disclosed to the Investors that materially adversely affects or in the future may reasonably be expected to materially adversely affect the same. 2.16 Investment Banking; Brokerage. No broker, finder, agent or similar intermediary has acted on behalf of the Company in connection with this Agreement or the transactions contemplated hereby and there are no brokerage commissions, finders fees or similar fees or commissions payable in connection therewith. The Company agrees to indemnify and hold the Investors harmless from any losses, damages, costs or expenses they may suffer or incur as a result of a breach of this representation (including any dilution or diminution in value of their investment in the Company). 2.17 Solvency. The Company has not: (a) made a general assignment for the benefit of creditors; (b) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (c) suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (d) suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (e) admitted in writing its inability to pay its debts as they come due; or (f) made an offer of settlement, extension or composition to its creditors generally. 2.18 Environmental Matters. (a) Except as set forth in Schedule 2.18, (i) the Company has never generated, transported, used, stored, treated, disposed of, or managed any Hazardous Waste (as defined below); (ii) to the best knowledge of the Company, no Hazardous Material (as defined below) has ever been or is threatened to be spilled, released, or disposed of by the Company, at any site presently or formerly owned, operated, leased, or used by the Company, or has ever come to be located in the soil or groundwater at any such site; (iii) to the best knowledge of the Company, no Hazardous Material of the Company has ever been transported from any site presently or formerly owned, operated, leased, or used by the Company for treatment, storage, or disposal at any other place; (iv) to the best knowledge of the Company, the Company presently does not own, operate, lease, or use, nor has the Company previously owned, operated, leased, or used, any site on which underground storage tanks are or were located; and (v) to the best knowledge of the Company, no lien has ever been imposed by any governmental agency on any property, facility, machinery, or equipment owned, operated, leased, or used by the Company with the presence of any Hazardous Material and based upon any action or inaction of the Company. (b) Except as set forth in Schedule 2.18, (i) the Company has no liability under, nor has it ever violated in any material respect, any Environmental Law (as defined below); (ii) the Company, any property owned, operated, leased, or used by the Company and any facilities and operations thereon are presently in compliance in all material respects with all applicable Environmental Laws; (iii) the Company has never entered into or been subject to any judgment, consent decree, compliance order, or administrative order with respect to any environmental or health and safety matter or received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any Environmental Law; and (iv) to the best knowledge of the Company, none of the items enumerated in clause (iii) of this paragraph will be forthcoming. (c) Except as set forth in Schedule 2.18, to the best knowledge of the Company, no site owned, operated, leased or used by the Company contains any asbestos or asbestos-containing material, any polychlorinated biphenyls ("PCBs") or equipment containing PCBs, or any urea formaldehyde foam insulation. (d) The Investors have been provided with copies of all documents, records, and information available concerning any environmental or health and safety matter relevant to the Company, whether generated in connection with the Company's business or otherwise, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. (e) For purposes of this Section 2.18, (i) "Hazardous Material" shall mean and include any hazardous waste, hazardous material, hazardous substance, petroleum product, oil, toxic substance, pollutant, contaminant, or other substance which may pose a threat to the environment or to human health or safety, as defined or regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or regulated under any Environmental Law; (iii) "Environmental Law" shall mean any environmental or health and safety-related law, regulation, rule, ordinance, or by-law at the federal, state, or local level, whether existing as of the date hereof, or subsequently enacted; and (iv) "Company" shall include the Company, and any predecessor to the Company. 2.19 Employee Benefit Programs. (a) The Company has never maintained (as defined below) an Employee Program (as defined below) which has at any time been intended to satisfy the requirements under Section 501(c)(9) of the Code. (b) Each Employee Program that has ever been maintained by the Company has been maintained in compliance in all material respects with all applicable laws. With respect to any Employee Program ever maintained by the Company, there has occurred no "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code (for which there exists neither a statutory nor regulatory exception), or material breach of any duty under ERISA or other applicable law (including, without limitation, any health care continuation requirements or any other tax law requirements, or conditions to favorable tax treatment, applicable to such plan or to any person in regard to such plan), which could result, directly or indirectly (including, without limitation, through any obligation of indemnification or contribution), in any taxes, penalties or other liability to the Company or any of its affiliates. No litigation, arbitration or governmental administrative proceeding (or investigation) or other proceeding (other than those relating to routine claims for benefits) is pending or, to the best knowledge of the Company, threatened with respect to any such Employee Program. (c) Neither the Company nor any Affiliate (as defined below) (i) has ever maintained any Employee Program which has been subject to Title IV of ERISA or Section 412 of the Code (including, but not limited to, any Multiemployer Plan (as defined below)) or (ii) has ever provided health care or any other non-pension benefits to any employees after their employment is terminated (other than as required by part 6 of subtitle B of Title I of ERISA) or has ever promised to provide such post-termination benefits. (d) With respect to each Employee Program maintained by or on behalf of the Company or any affiliate since November 24, 1997, complete and correct copies of the following documents (if applicable to such Employee Program) have previously been delivered to the Investors: (i) all documents embodying or governing such Employee Program, and any funding medium for the Employee Program (including, without limitation, trust agreements), as they may have been amended to the date hereof; (ii) the most recent IRS determination or approval letter with respect to such Employee Program under Code Section 401 or 501(c)(9), and any applications for determination or approval subsequently filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; (iv) the summary plan description for such Employee Program (or other descriptions of such Employee Program provided to employees) and all modifications thereto; (v) any insurance policy (including any fiduciary liability insurance policy and any excess loss policy) related to such Employee Program; (vi) any documents evidencing any loan to an Employee Program that is a leveraged employee stock ownership plan; and (vii) all other materials reasonably necessary for the Company to perform any of its responsibilities with respect to any Employee Program subsequent to the Closing (including, without limitation, health care continuation requirements). (e) For purposes of this Section 2.19: (i) "Employee Program" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, employer welfare arrangements (within the meaning of ERISA Section 3(40)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; and (B) all stock or cash option plans, restricted stock plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements, and arrangements not described in (A) above. In the case of an Employee Program funded through an organization described in Code Section 501(c)(9), each reference to such Employee Program shall include a reference to such organization. (ii) An entity "maintains" an Employee Program if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Program, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Program, or if such Employee Program provides benefits to or otherwise covers employees of such entity (or their spouses, dependents, or beneficiaries). (iii) An entity is an "Affiliate" of the Company if it would have ever been considered a single employer with the Company or any Entity under ERISA Section 4001(b) or part of the same "controlled group" as the Company for purposes of ERISA Section 302(d)(8)(C). (iv) "Multiemployer Plan" means a (pension or non-pension) employee benefit plan to which more than one employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 2.20 Product and Services Claims. Except as set forth on Schedule 2.20, (i) there are no pending or, to the best knowledge of the Company, threatened material product or service claims with respect to any products or services provided by the Company prior to the date hereof nor are there any facts upon which a claim of such nature could reasonably be anticipated to be based and (ii) the Company does not have any contractual liability for breach of warranty or service claims. No claims have been made against the Company for renegotiation or price redetermination of any business transaction resulting from or relating to defective products or services, and, to the best knowledge of the Company, there are no facts upon which any such claim should reasonably be anticipated to be based. 2.21 Employees; Labor Matters. The Company is not delinquent in payments to any of its employees for any material amount of wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees. The Company does not have any policy, or practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment, except as set forth in Schedule 2.21. The Company is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, work place safety and health, terms and conditions of employment, and wages and hours. Except as set forth in Schedule 2.21, there are no material charges of employment discrimination or unfair labor practices, nor are there any strikes, slowdowns, stoppages of work or any other concerted interference with normal operations which are existing, pending or, to the best knowledge of the Company threatened against or involving the Company. The Company has not received any information indicating that any of its employment policies or practices is currently being audited or investigated by any federal, state or local government agency. The Company is, and at all times since November 24, 1997 has been, in material compliance with the requirements of the Immigration Reform Control Act of 1986. Schedule 2.21 sets forth a complete list of each officer, employee and sales representative who is scheduled to receive total remuneration from the Company on an annualized basis in excess of $100,000 for the calendar year ending December 31, 1999. 2.22 Corporate Records; Copies of Documents. The corporate record books of the Company accurately record all corporate action taken by its stockholders and board of directors and committees. The copies of the corporate records of the Company, as made available to the Investors for review, are true and complete copies of the originals of such documents. 2.23 Affiliate Transactions. Except as set forth in Schedule 2.23 hereto, neither the Company nor any officer, employee or director of the Company or any of their respective spouses or family members or any of their affiliates, owns, directly or indirectly, on an individual or joint basis, any material interest in, or serves as an officer, director, partner or in another similar capacity of, any competitor of the Company, or any organization which has a contract or arrangement with the Company. 2.24 Investments Related to Certain Foreign Countries. Neither the Company nor any affiliate of the Company has participated in, or is participating in, an anti-Israeli boycott within the scope of Chapter 7 of Part 2 of Division 4 of Title 2 of the California Government Code, as in effect from time to time. 2.25 Small Business Concern, Etc. (a) The Company, together with its "affiliates" (as that term is defined in 13 CFR Section 121.103), is a "smaller enterprise" within the meaning of SBIC Regulations, including 13 CFR Section 107.710. The information regarding the Company and its affiliates set forth in SBA Form 480, Form 652 and Section A of Form 1031 delivered on or prior to the date hereof is accurate and complete. The Company does not presently engage in, nor shall hereafter engage in, any activities, and the Company shall not use the proceeds of the sale of the Series D Redeemable Preferred Stock hereunder directly or indirectly for any purpose, for which an SBIC is prohibited from providing funds by SBIC Regulations (including 13 CFR Section 107.720). (b) As of the date hereof, the Company, together with its "affiliates," has a net worth of not more than $6.0 million and average net income after federal income taxes (excluding any carryover losses) for the preceding two years no greater than $2.0 million. (c) For all purposes of this Agreement, the following terms shall have the following meanings: (i) "SBA" means the United States Small Business Administration, and any successor agency performing the functions thereof; (ii) "SBIC" means a Small Business Investment Company licensed by the SBA under the SBIC Act; (iii) "SBIC Act" means the Small Business Investment Act of 1958, as amended; and (iv) "SBIC Regulations" means the SBIC Act and the regulations issued by the SBA thereunder, codified at Title 13 of the Code of Federal Regulations ("13 CFR"), Parts 107 and 121. 2.26 Insurance. The Company maintains insurance which is adequate to protect the Company against the risks involved in the business conducted by the Company. 2.27 Absence of Certain Developments. Except as disclosed in Schedule 2.27, since the date of the 1998 Balance Sheet there has been (i) no adverse change in the condition, financial or otherwise, of the Company or in the assets, liabilities, business or prospects of the Company, (ii) no declaration, setting aside or payment of any dividend or other distribution with respect to, or any direct or indirect redemption or acquisition of, any of the capital stock of the Company, (iii) no loan by the Company to any officer, director, employee or stockholder of the Company, or affiliates of any of the foregoing or any agreement or commitment therefor, excluding ordinary course of business items such as travel advances, (v) no increase in the compensation paid or payable to any officer, director, employee or agent of the Company or affiliates of any of the foregoing, other than as approved by the Compensation Committee of the Board of Directors, (vi) no material loss, destruction or damage to any property of the Company, whether or not insured, (vii) no labor trouble involving the Company and no material change in the personnel of the Company or the terms and conditions of their employment and (viii) no acquisition or disposition of any assets (or any contract or arrangement therefor) nor any other transaction by the Company otherwise than for fair value in the ordinary course of business. SECTION 3. CONDITIONS OF PURCHASE The Investors' obligation to purchase and pay for the Series D Redeemable Preferred Stock and the Funding Warrants shall be subject to compliance by the Company and each of its subsidiaries, including without limitation GSS, with the Company's agreements herein contained and to the fulfillment to the Investors' satisfaction on or before the Closing Date of the following conditions: 3.1 Satisfaction of Conditions. The representations and warranties of the Company contained in this Agreement (including, but not limited to, the representations and warranties made in Section 2 hereof) shall be true and correct in all material respects on and as of the Closing Date; each of the conditions specified in this Section 3 shall have been satisfied or waived in writing; and on the Closing Date, certificates to such effect executed by the President and the principal financial officer of the Company shall be delivered to the Investors. 3.2 Opinion of Counsel. The Investors shall have received an opinion, dated the Closing Date, in substantially the form of Appendix C attached hereto. 3.3 Authorization. The Board of Directors of the Company shall have duly adopted resolutions in form reasonably satisfactory to the Investors authorizing the Company to consummate the transactions contemplated hereby in accordance with the terms hereof, and the Investors shall have received a duly executed certificate of the Secretary of the Company setting forth a copy of such resolutions, the Company's Certificate of Designations, Preferences and Rights of Series D Redeemable Preferred Stock (the "Certificate of Designations") and the By-laws and such other matters as may be requested by the Investors. 3.4 Effectiveness of Preferred Stock Terms. The Board of Directors of the Company shall have adopted a resolution establishing the terms of the Series D Redeemable Preferred Stock as set forth in Appendix D hereto and such action shall have been made effective by the required approval thereof, if any, by the holders of the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock, the Series C Convertible Preferred Stock and the Common Stock and the filing of a certificate of designations with the Secretary of State for the State of Delaware. 3.5 Delivery of Documents. The Company shall have executed and delivered to the Investors (or shall have caused to be executed and delivered to the Investors by the appropriate persons) the following: (a) Certificates evidencing shares of the Series D Redeemable Preferred Stock and the Funding Warrants; (b) Certified copies of resolutions of the Board of Directors, and any required resolutions or consents by the stockholders of the Company, authorizing the execution and delivery of this Agreement, the Certificate of Designations creating the Series D Redeemable Preferred Stock and the issuance of the Series D Redeemable Preferred Stock, the Warrants, the June and December Warrants (if applicable, as described in Section 5.10 hereof) and the shares of Common Stock issuable upon exercise of such warrants; (c) A copy of the corporate charter of the Company, as amended, certified as of a recent date by the Secretary of State of the State of Delaware; (d) A copy of the By-laws of the Company certified by the Company's secretary; (e) Certificates issued by the Secretaries of State of the States of Delaware and Missouri, certifying that the Company and each of its subsidiaries is in good standing in their respective states; and (f) Such other supporting documents requested by the Investors as may be reasonably necessary for the Investors to carry out the transactions contemplated hereby. 3.6 SBIC Deliveries. The Company shall have delivered to Norwest Equity Partners V ("Norwest"): (a) duly completed and executed SBA Forms 480, 652 and Part A of 1031; (b) if not delivered prior to the Closing, a business plan showing the Company's financial projections for a five-year period from the Closing; (c) a written statement from the Company regarding its intended use of the proceeds from the sale of the Series D Redeemable Preferred Stock; and (d) a list, after giving effect to the Closing, of (i) the name of each of the Company's directors, (ii) the name and title of each of the Company's officers, and (iii) the name of each of the Company's stockholders setting forth the number and class of shares held. 3.7 Execution of Agreement and Providing Letters of Credit. Each of the Investors shall have executed and delivered this Agreement to the Company and shall have provided to the Agent the several Letters of Credit in the amounts contemplated by Section 1.3 hereof and specified in Appendix B. 3.8 Compliance with Law. The issuance and sale of the Series D Redeemable Preferred Stock, the Warrants and the June and December Warrants (if applicable, as described in Section 5.10 hereof) to the Investors shall be made in conformity with all applicable state and federal securities laws. SECTION 4. CONDITIONS OF SALE The Company's obligation to issue the Series D Redeemable Preferred Stock and the Funding Warrants to any Investor and perform its other obligations hereunder shall be subject to compliance by such Investor with the Investor's agreements herein contained and to the fulfillment to the Company's satisfaction on or before the Closing Date of the following conditions: 4.1 Satisfaction of Conditions. The representations and warranties of each Investor contained in this Agreement (including, but not limited to, the representations and warranties made in Section 7 hereof) shall be true and correct in all material respects on and as of the Closing Date; each of the conditions specified in this Section 4 shall have been satisfied or waived in writing; and on the Closing Date, certificates to such effect executed by an authorized officer of each Investor shall be delivered to the Company. 4.2 Compliance With Law. The issuance and sale of the Series D Redeemable Preferred Stock to the Investors shall be made in conformity with all applicable state and federal securities laws. 4.3 Execution of Agreement and Providing Letters of Credit. Each of the Investors shall have executed and delivered this Agreement to the Company and shall have provided to the Agent the several Letters of Credit in the amount contemplated by Section 1.3 hereof and specified in Appendix B. SECTION 5. COVENANTS OF THE COMPANY From and after the date hereof, the Company (which term shall be deemed to include, for purposes of this Section 5, any subsidiary or subsidiaries of the Company existing at or formed after the date of this Agreement) shall comply with the following covenants except as shall otherwise be expressly agreed pursuant to a written consent or consents executed by the holders of a majority in interest of the Series D Redeemable Preferred Stock, until such time as all of the Series D Redeemable Preferred Stock shall have been redeemed in accordance with their terms or upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock of the Company to the public in which the proceeds received by the Company, net of underwriting discounts and commissions, equal or exceed $35 million and the shares are offered to the public at a price per share of no less than $600 (in each case as appropriately adjusted for any stock split, combination, reorganization, recapitalization, reclassification, stock distribution, stock dividend or similar event) (a "Qualified Public Offering") or as otherwise provided in the Certificate of Incorporation, whichever first occurs. 5.1 Financial Statements; Minutes. The Company will maintain a comparative system of accounts in accordance with generally accepted accounting principles, keep full and complete financial records and make available to the Investors the following reports: (a) within 120 days after the end of each fiscal year, a copy of the consolidated balance sheet of the Company as at the end of such year, together with a consolidated statement of income and retained earnings of the Company for such year, audited and certified by independent public accountants of recognized national standing reasonably satisfactory to the Investors, prepared in accordance with generally accepted accounting principles and practices consistently applied; and (b) within 45 days after the end of each quarter, a consolidated unaudited balance sheet of the Company as at the end of such quarter and a consolidated unaudited statement of income and retained earnings for the Company for such quarter and for the year to date; and (c) such other financial information as the holders of a majority in interest of the Series D Redeemable Preferred Stock may reasonably request, including without limitation, certificates of the principal financial officer of the Company concerning compliance with the covenants of the Company under this Section 5. 5.2 Budget and Operating Forecast. The Company will prepare and submit to the Board of Directors of the Company a budget for the Company for each fiscal year of the Company at least 30 days prior to the beginning of such fiscal year, together with management's written discussion and analysis of such budget. The budget shall be accepted as the budget for such fiscal year when it has been approved by a majority of the full Board of Directors of the Company and, thereupon, a copy of such budget promptly shall be sent to the Investors. The Company shall review the budget periodically and shall advise the Board of Directors and the Investors of all changes therein and all material deviations therefrom. 5.3 Conduct of Business. So long as any shares of Series D Redeemable Preferred Stock shall remain outstanding, the Company shall conduct its business in a manner that does not cause the Outside Investors to recognize any item of gross income which would generate "unrelated business taxable income" (as that term is defined in Sections 512 through 514 of the Code), including without limitation any income derived from or on account of any "debt-financed property" (as defined in Section 514 of the Code), or gross income directly attributable to a "trade or business" (within the meaning of Sections 512 and 513 of the Code). 5.4 Access to Books and Records. The Investors may examine the books and records of the Company and inspect its facilities and may request information at reasonable times and intervals concerning the general status of the financial condition and operations of the Company, provided that access to highly confidential proprietary information and facilities need not be provided. 5.5 Sales of Additional Securities. (a) So long as any shares of Series D Redeemable Preferred Stock shall be outstanding, the Company covenants and agrees that it shall not accept subscriptions for or issue, sell, give away, transfer, pledge, mortgage, assign or otherwise dispose of any shares of capital stock or any other equity interests, or other securities convertible into or exchangeable for capital stock or other equity interests or options, warrants or rights carrying any rights to purchase capital stock or other equity interests or convertible or exchangeable securities, without the express written consent of holders of a majority in interest of the Series D Redeemable Preferred Stock, except as provided in Section 5.5(b) hereof. (b) Notwithstanding the foregoing, the Company may (i) issue shares of Common Stock, or options, warrants or other rights to purchase or subscribe for, shares of its Common Stock to officers, directors, employees, consultants or agents of the Company pursuant to employee stock option or similar compensatory plans or arrangements to the extent authorized by the Board of Directors and issue shares of its Common Stock upon the exercise of such stock options, warrants or other rights; (ii) issue Conversion Shares upon the conversion of shares of the Series A, B or C Convertible Preferred Stock; (iii) issue shares of Common Stock upon the exercise of the Warrants, the Alta Warrants and the June and December Warrants (if applicable, as described in Section 5.10 hereof); (iv) declare, make or issue a dividend or other distribution payable in shares of the Common Stock in respect of outstanding shares of the Common Stock, Series A, B or C Convertible Preferred Stock or Series A or B Redeemable Preferred Stock in accordance with the Certificate of Incorporation; (v) issue shares of Common Stock in connection with a Qualified Public Offering; (vi) issue shares of Common Stock, or options, warrants or rights to purchase or subscribe for shares of its Common Stock in connection with any debt, equipment or capital lease or other similar financing transaction authorized by the Board of Directors, or (vii) issue shares of capital stock or other securities in connection with joint ventures, acquisitions of the securities or assets of other entities, mergers, consolidations or other strategic transactions authorized by the Board of Directors. 5.6 Stockholders' Agreement. The Company will diligently enforce all of its rights under the Stockholders' Agreement. The Company will not effect any transfer of any of the outstanding capital stock of the Company on the stock record books of the Company unless such transfer is made in accordance with the terms of the Stockholders' Agreement. The Company will not waive or release any rights under, or consent to the amendment of, the Stockholders' Agreement without the requisite written approval of the parties thereto. The parties hereto agree that the provisions of the Stockholders' Agreement shall apply, according to the terms thereof, to the Series D Redeemable Preferred Stock, the Warrants, the June and December Warrants (if applicable, as described in Section 5.10 hereof) and the shares of Common Stock issuable upon exercise of the Warrants and the June and December Warrants (if applicable), except that the registration rights provisions contained in Article IV of the Stockholders' Agreement shall not apply with respect to the Series D Redeemable Preferred Stock, the Warrants or the June or December Warrants (if applicable). 5.7 Distributions on, and Redemptions of, Capital Stock. So long as any shares of Series D Redeemable Preferred Stock shall remain outstanding, except as otherwise expressly provided in this Agreement, the Certificate of Incorporation or the Certificate of Designations, the Company will not, without the prior written consent of a majority in interest of all outstanding shares of Series D Redeemable Preferred Stock, declare or pay any dividends or make any distributions of cash, property or securities of the Company with respect to any shares of its Common Stock or any other class of its capital stock, or directly or indirectly redeem, purchase, or otherwise acquire for consideration any shares of its Common Stock or any other class of its capital stock; provided, however, that this restriction shall not apply to the repurchase of shares of the Common Stock pursuant to stock repurchase agreements under which the Company has the option to repurchase such shares upon the occurrence of certain events, including the termination of employment and involuntary transfers, by operation of law, provided that the repurchase price paid by the Company does not exceed the purchase price paid to the Company for such shares. Any redemption, repurchase or other acquisition by the Company of any shares of its capital stock shall be made in compliance with all laws, including but not limited to federal and state securities laws. 5.8 Merger, Consolidation, Sale of Assets, Acquisitions and Other Actions. So long as any shares of Series D Redeemable Preferred Stock shall remain outstanding, the Company will not without the prior written consent of a majority in interest of the Series D Redeemable Preferred Stock: (a) merge or consolidate with or into another entity (with respect to which less than a majority of the outstanding voting power of such surviving entity is held by stockholders of the Company immediately prior to such event), or sell, lease or otherwise dispose of (whether in one transaction or a series of related transactions) all, or substantially all, of the assets of the Company determined on a consolidated basis, (b) voluntarily liquidate or wind up its operations, (c) issue any shares of its capital stock which are senior to or on a parity with the Series D Redeemable Preferred Stock with respect to dividends, conversion, liquidation or redemptions or with any special voting rights, (d) issue voting securities in a single transaction or series of related transactions that result in securities representing a majority of the voting power of the Company (with respect to actions to be voted on by holders of all voting securities of the Company voting as a single class) to be beneficially owned by a single person or group of affiliated persons, (e) increase or decrease the size of the Board of Directors from the number of directors in office on the date hereof, (f) adversely alter or change the preferences, rights or privileges of the Series D Redeemable Preferred Stock with respect to dividends, liquidation, preferences, conversion or redemption except as contemplated by this Agreement or as expressly provided in the Certificate of Incorporation or the Certificate of Designations, (g) increase or decrease the authorized number of shares of any series of Preferred Stock except as contemplated by this Agreement or as expressly provided in the Certificate of Incorporation or the Certificate of Designations, (h) enter into any agreement with any party which by its terms restricts the payments due the holders of the Series D Redeemable Preferred Stock pursuant to the Certificate of Incorporation or the Certificate of Designations. 5.9 Annual Updates; Number of Stockholders; Use of Proceeds; Regulatory Violation; Economic Impact Information; Amendment. (a) As long as an SBIC Investor holds any of the Securities (as defined below), the Company shall, on an annual basis, provide to such SBIC Investor the information required under 13 CFR Section 107.620(b) and shall provide the information and access required by 13 CFR Section 107.620(c). For purposes of this Agreement, an "SBIC Investor" shall mean BancBoston and Norwest, an affiliate of BancBoston or Norwest that has been licensed as an SBIC and holds the Securities or any other Investor or any permitted transferee of an Investor that has been licensed as an SBIC and holds the Securities. (b) The Company has more than 50 record holders of its voting stock. (c) Within seventy-five (75) days after the Closing, and at the end of each month thereafter until all of the proceeds from the sale of Series D Preferred Redeemable Stock hereunder have been used by the Company, the Company shall deliver to all of the Investors a written statement certified by the Company's president or chief financial officer describing in reasonable detail the use of the proceeds of the purchase Series D Preferred Redeemable Stock hereunder by the Company. In addition to any other rights granted hereunder, the Company shall grant all of the Investors and the SBA access to the Company's records for the purpose of verifying the use of such proceeds. (d) Upon the occurrence of a Regulatory Violation (as defined below) or in the event that any SBIC Investor determines in its reasonable good faith judgment that a Regulatory Violation has occurred, in addition to any other rights and remedies to which it may be entitled (whether under this Agreement or any other agreement), such SBIC Investor shall have the right, to the extent required under SBIC Regulations, to demand the immediate repurchase of all of the outstanding Securities owned by such SBIC Investor at a price equal to the purchase price paid for such Securities hereunder plus accrued dividends by delivering written notice of such demand to the Company; provided, however, that, in the event of a Regulatory Violation, any SBIC Investor shall, prior to demanding the repurchase of all of the outstanding Securities owned by such SBIC Investor, use reasonable efforts to retain its investment in the Securities, including, without limitation, petitioning the SBA for its approval with respect to any unforeseen changes in the principal business activity of the Company. The Company shall pay the purchase price for such Securities by a cashier's or certified check or by wire transfer of immediately available funds to such SBIC Investor within thirty (30) days after the Company's receipt of the demand notice, and, upon such payment, such SBIC Investor shall deliver the certificates, if any, evidencing the Securities being repurchased duly endorsed for transfer or accompanied by duly executed forms of assignment. For purposes of this Agreement, "Regulatory Violation" means a change in the principal business activity of the Company to an ineligible business activity (within the meaning of the SBIC Regulations), if such change occurs within one (1) year after the date of the initial purchase by the affected SBIC Investor of Securities hereunder. (e) Promptly after the end of each fiscal year (but in any event prior to February 28 of each year), the Company shall deliver to each Investor a written assessment of the economic impact of the total investment by all SBIC Investors in the Company, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact of the investment on the businesses of the Company in terms of expanded revenue and taxes, and the other economic benefits resulting from the investment, including but not limited to, technology development or commercialization, minority business development, urban or rural business development and expansion of exports, together with all other information reasonably requested by any SBIC Investor in order to provide the information required by 13 CFR Section 107.630. (f) Notwithstanding anything herein to the contrary, the provisions of this Section 5.9 shall not be amended without the prior written consent of holders of a majority of the issued and outstanding Securities of any SBIC Investors (determined on an as converted basis). (g) For purposes of this Section 5.9, "Securities" shall refer to the shares of Series D Preferred Stock, the Warrants, the June and December Warrants (if applicable, as defined in Section 5.10 hereof) and the shares of Common Stock issuable upon exercise of the Warrants and the June and December Warrants (if applicable). 5.10 June and December Warrants. In the event that the Company does not redeem all of the outstanding shares of Series D Preferred Stock on or before June 30, 2000, the Company shall issue to the holders of the then outstanding shares of Series D Preferred Stock warrants exercisable for an aggregate of 3,500 shares of Common Stock (the "June Warrants"). In the event that the Company does not redeem all of the outstanding shares of Series D Preferred Stock on or before December 31, 2000, the Company will issue to the holders of the then outstanding shares of Series D Preferred Stock warrants exercisable for 3,500 shares of Common Stock (the "December Warrants"). The amount of June and December Warrants issued under this Section 5.10 shall be proportionately decreased for any shares of Series D Preferred Stock redeemed by the Company prior to the above dates. The form and terms of the June and December Warrants shall be substantially identical to those of the Warrants. SECTION 6. CONFIDENTIALITY Each Investor agrees to maintain the confidentiality of, and to not make or permit any disclosure regarding the existence or substance of, any and all Confidential Information received from the Company. For purposes of this Agreement, "Confidential Information" includes all information, regardless of the form in which it is communicated or maintained (whether prepared by the Company, its financial or other advisors or otherwise), which contains or otherwise reflects any non-public information concerning the Company and which is provided to the Investors by or on behalf of the Company, its advisors or their respective advisors or agents. Without limiting the foregoing in any manner, except as set forth in this Section 6 the Investors shall not disclose to any individual or entity their receipt of Confidential Information from the Company, the nature or substance of such Confidential Information or their response or plans with respect to such Confidential Information. Notwithstanding the foregoing, the Investors shall not be required to maintain the confidentiality of any portion of the Confidential Information to the extent that such portion is publicly disclosed by the Company by press release, filings with the Securities and Exchange Commission or similar manner. In addition, the Investors may make disclosure of Confidential Information to the extent advised, pursuant to the written opinion (a copy of which shall be provided to the Company prior to such disclosure) of their counsel, that such disclosure must be made in order to avoid a violation of law and, prior to such disclosure, the Company and its legal counsel are promptly advised and consulted with concerning the information to be disclosed (and, in such event, the Investors shall cooperate with the Company to the extent it may seek to limit such disclosure). In the event that any Investor is requested or required (by deposition, interrogatories, requests for information or documents in legal proceedings, subpoenas, civil investigative demand or similar process), in connection with any proceeding, to disclose any Confidential Information, such Investor shall (i) provide the Company with prompt written notice of such request or requirement so that the Company may seek an appropriate protective order or other remedy, and (ii) cooperate with the Company to obtain such protective order. In the event that such protective order or other remedy is not obtained or the Company waives compliance with the relevant provisions of this Agreement, such Investor shall (or shall cause such other person to whom such request is directed to) furnish only that portion of the Confidential Information which, in the written opinion (a copy of which shall be provided to the Company prior to furnishing such portion) of the counsel of such Investor, is legally required to be disclosed and, upon the Company's request, use such Investor's best efforts to obtain assurances that confidential treatment will be accorded to such information. The provisions of this Section 6 shall not apply to the extent of any communications of Confidential Information made solely among the Investors and between the Investors and their respective agents and advisors. SECTION 7. INVESTOR REPRESENTATIONS It is the understanding of the Company, and each Investor hereby severally represents with respect to such Investor's purchase of Series D Redeemable Preferred Stock and Funding Warrants and such Investor's receipt of Subscription Warrants (and such Investor's receipt of June and/or December Warrants, as applicable) hereunder that: (a) The execution of this Agreement has been duly authorized by all necessary action on the part of the Investor, has been duly executed and delivered by the Investor, and constitutes a valid, binding and enforceable agreement of the Investor. (b) The Investor is acquiring the Series D Redeemable Preferred Stock, the Warrants (and the June and December Warrants, if applicable) and any shares of Common Stock issued upon exercise of the Warrants (and the June and December Warrants, if applicable) for its own account, for investment, and not with a present view to any "distribution" thereof within the meaning of the Securities Act. The Investor was not formed or organized for the purpose of acquiring the Series D Redeemable Preferred Stock, the Warrants, the June or December Warrants (if applicable) or the shares of Common Stock issuable upon exercise of the Warrants or the June or December Warrants (if applicable). (c) The Investor understands that because none of the Series D Redeemable Preferred Stock, the Warrants, the June or December Warrants (if applicable) or the shares of Common Stock issuable upon exercise of the Warrants or the June or December Warrants (if applicable) have been registered under the Securities Act, it cannot dispose of any or all of the Series D Redeemable Preferred Stock, the Warrants, the June or December Warrants (if applicable) or the shares of Common Stock issuable upon exercise of the Warrants or the June or December Warrants (if applicable) unless such securities are subsequently registered under the Securities Act or exemptions from such registration are available. The Investor understands that each certificate representing the Series D Redeemable Preferred Stock, the Warrants, the June and December Warrants (if applicable) and the shares of Common Stock issuable upon exercise of the Warrants and the June and December Warrants (if applicable) will bear the following legend or one substantially similar thereto: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"). These securities have been acquired for investment and not with a view to distribution or resale, and may not be sold, mortgaged, pledged, hypothecated or otherwise transferred without an effective registration statement for such securities under the Act or the availability of an exemption from such registration requirements. (d) The Investor is sufficiently knowledgeable and experienced in the making of venture capital investments so as to be able to evaluate the risks and merits of its investment in the Company, and is able to bear the economic risk of loss of its investment in the Company. The Investor acknowledges that the Company may, subject to the restrictions set forth in this Agreement, enter into one or more acquisitions, joint ventures or additional types of financings in the future which could result in a valuation for the capital stock of the Company that is significantly below the purchase price for the Series D Redeemable Preferred Stock and Funding Warrants hereunder. (e) The Investors have been advised that none of the Series D Redeemable Preferred Stock, the Warrants, the June or December Warrants (if applicable) or the shares of Common Stock issuable upon exercise of the Warrants or the June or December Warrants (if applicable) have been registered under the Securities Act or under the "blue sky" laws of any jurisdiction and that the Company, in issuing the Series D Redeemable Preferred Stock, the Warrants, the June and December Warrants (if applicable) and the shares of Common Stock issuable upon exercise of the Warrants and the June and December Warrants (if applicable), is relying upon, among other things, the representations and warranties of the Investors contained in this Section 7. (f) No broker, finder, agent or similar intermediary has acted on behalf of the Investor in connection with this Agreement or the transactions contemplated hereby and there are no brokerage commissions, finder's fees or similar fees or commissions payable in connection therewith. (g) The Investor is a "qualified institutional buyer" as defined in Rule 144A under the Securities Act. SECTION 8. INDEMNIFICATION 8.1 Indemnification for Vicarious Liability. Subject to Section 9.2 hereof, the Company shall, to the full extent permitted by law, and in addition to any such rights that the Investors and persons serving as officers, directors, partners, employees or agents of each Investor may have pursuant to statute, the Certificate of Incorporation or By-laws, or otherwise, indemnify and hold harmless each Investor (including its respective directors, officers, partners, employees and agents, an "Indemnified Investor") and each person (a "Controlling Person") (collectively with the Indemnified Investors, the "Indemnified Parties" and individually an "Indemnified Party") who controls any of them within the meaning of Section 15 of the Securities Act, or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages, expenses and liabilities, joint or several, including any investigation, legal and other expenses incurred in connection with the investigation, defense, settlement or appeal of, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted ("Losses" or "Loss"), to which they, or any of them, may become subject by reason of their status as a security holder, creditor, director, agent, representative or controlling person of the Company (including, without limitation, any and all Losses under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relates directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or any of its subsidiaries or to any fiduciary obligation owed with respect thereto); provided, however, that the Company will not be liable to the extent that such Loss arises from and is based on an untrue statement or omission or alleged untrue statement or omission in a registration statement or prospectus which is made in reliance on and in conformity with written information furnished to the Company in an instrument duly executed by or on behalf of such Indemnified Party specifically stating that it is for use in the preparation thereof. The indemnification and contribution provided for in this Section 8.1 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Parties or any officer, director, employee, agent or Controlling Person of the Indemnified Parties. If the indemnification provided for in this Section 8.1 is for any reason held by a court of competent jurisdiction to be unavailable to an Indemnified Party in respect of any Losses referred to therein, then the Company, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Investor relating to such Indemnified Party or (ii) if the allocation provided by clause (i) above 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 and the Investor relating to such Indemnified Party in connection with the action or inaction which resulted in such Losses, as well as any other relevant equitable considerations. In connection with any registration of the Company's securities, the relative benefits received by the Company and the Investors shall be deemed to be in the same respective proportions as the net proceeds from the offering (before deducting expenses) received by the Company and the Investors, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Investors 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 the Investors and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investors agree that it would not be just and equitable if contribution pursuant to the foregoing paragraph were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. In connection with any registration of the Company's securities, in no event shall an Investor be required to contribute any amount under this Section 8.1 in excess of the lesser of (i) that proportion of the total of such Losses indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Investor or (ii) the proceeds received by such Investor from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. 8.2 Notice; Defense of Claims. Promptly after receipt by an Indemnified Party of notice of any third party or other claim, liability or expense to which the indemnification obligations hereunder would apply, including in connection with any governmental proceeding, the Indemnified Party shall give notice thereof in writing to the Company, but the omission to so notify the Company promptly will not relieve the Company from any liability except, and only to the extent, that the Company shall have been materially prejudiced as a result of the failure or delay in giving such notice. Such notice shall state the information then available regarding the amount and nature of such claim, liability or expense. In the case of any third party claim, if within 20 days after receiving the notice described in the preceding paragraph the Company (i) gives written notice to the Indemnified Party or Parties stating that it intends to defend in good faith against such claim, liability or expense at its own cost and expense and (ii) provides assurance and security reasonably acceptable to such Indemnified Party or Parties that such indemnification will be paid fully and promptly if required and such Indemnified Party or Parties will not incur cost or expense during the proceeding, then counsel for the defense shall be selected by the Company (subject to the consent of such Indemnified Party or Parties, which consent shall not be unreasonably withheld) and such Indemnified Party or Parties shall not be required to make any payment with respect to such claim, liability or expense as long as the Company is conducting a good faith and diligent defense at its own expense; provided, however, that the assumption of defense of any such matters by the Company shall relate solely to the claim, liability or expense that is subject or potentially subject to indemnification. If the Company assumes such defense in accordance with the preceding sentence, it shall have the right, with the consent of such Indemnified Party or Parties, which consent shall not be unreasonably withheld, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled provided the Company's obligation to indemnify such Indemnified Party or Parties therefor will be fully satisfied and the settlement includes a complete release of such Indemnified Party or Parties. The Company shall keep such Indemnified Party or Parties apprised of the status of the claim, liability or expense and any resulting suit, proceeding or enforcement action, shall furnish such Indemnified Party or Parties with all documents and information that such Indemnified Party or Parties shall reasonably request and shall consult with such Indemnified Party or Parties prior to acting on major matters, including settlement discussions. Notwithstanding anything herein stated, such Indemnified Party or Parties shall at all times have the right to fully participate in such defense at its or their own expense directly or through counsel; provided, however, if the named parties to the action or proceeding include both the Company and the Indemnified Party or Parties and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the expense of separate counsel for such Indemnified Party or Parties shall be paid by the Company. The Indemnified Party or Parties shall make available all information and assistance that the Company may reasonably request and shall cooperate with the Company in such defense. If the Company does not give notice of its intent to defend against any third party or other claim, liability or expense in accordance with the foregoing paragraph, or if such diligent good faith defense is not being or ceases to be conducted, the Indemnified Party or Parties will have the right to retain its or their own counsel in any such action and all fees, disbursements and other charges incurred in the investigation, defense and/or settlement of such action shall be advanced and reimbursed by the Company promptly as they are incurred and shall have the right to compromise or settle such claim, liability or expense; provided, however, that the Indemnified Party or Parties shall agree to repay any expenses so advanced hereunder if it is ultimately determined by a court of competent jurisdiction that the Indemnified Party or Parties to whom such expenses are advanced is or are not entitled to be indemnified as a matter of law or under the terms of this Agreement. 8.3 Satisfaction of Indemnification Obligations. Any indemnity payable pursuant to this Section 8 shall be paid within the later of (a) ten days after the Indemnified Party's request therefor or (b) ten days prior to the date on which the Loss upon which the indemnity is based is required to be satisfied by the Indemnified Party. SECTION 9. GENERAL 9.1 Amendments, Waivers and Consents. For the purposes of this Agreement and all agreements, documents and instruments executed pursuant hereto, except as otherwise specifically set forth herein or therein, no course of dealing between the Company and any Investor and no delay on the part of any party hereto in exercising any rights hereunder or thereunder shall operate as a waiver of the rights hereof and thereof. No covenant or other provision hereof or thereof may be waived otherwise than by a written instrument signed by the party so waiving such covenant or other provision; provided, however, that except as otherwise provided herein or therein, changes in or additions to, and any consents required by, this Agreement may be made, and compliance with any term, covenant, condition or provision set forth herein may be omitted or waived (either generally or in a particular instance and either retroactively or prospectively) with respect to the holders of the Series D Redeemable Preferred Stock by a consent or consents in writing signed by the holders of a majority in interest of such series; provided, however, that the amendment, modification or waiver of any provision which by its terms requires the consent or approval of holders of more than a majority in interest of such series shall only be effective if it is signed by holders of such requisite percentage. Any amendment or waiver effected in accordance with this Section 9.1 shall be binding upon each holder of the Series D Redeemable Preferred Stock at the time outstanding, each future holder of all such securities and the Company. 9.2 Survival of Representations, Warranties and Covenants; Assignability of Rights. All covenants, agreements, representations and warranties of the Company made herein and in the certificates, lists, exhibits, schedules or other written information delivered or furnished by or on behalf of the Company to any Investor in connection herewith or therewith shall be deemed material and to have been relied upon by such Investor, and, except as otherwise provided in this Agreement, shall survive the delivery of the Series D Redeemable Preferred Stock regardless of any instruction and shall not merge in the performance of any obligation and shall bind the Company's successors, assigns and heirs, whether so expressed or not, and, except as otherwise provided in this Agreement, all such covenants, agreements, representations and warranties shall inure to the benefit of such Investor's successors and assigns and to transferees of the Series D Redeemable Preferred Stock of such Investor, whether so expressed or not. The representations and warranties made by the Investors in Section 7 of this Agreement shall survive the delivery of the Series D Redeemable Preferred Stock and shall bind the Investors' successors and assigns and shall inure to the benefit of the Company's successors and assigns. 9.3 Governing Law. This Agreement shall be deemed to be a contract made under, and shall be construed in accordance with, the laws of the State of New York (without giving effect to principles of conflicts of law the effect of which would cause the application of domestic substantive laws of any other jurisdiction). 9.4 Section Headings; Counterparts. The descriptive headings in this Agreement have been inserted for convenience only and shall not be deemed to limit or otherwise affect the construction of any provision thereof or hereof. This Agreement may be executed simultaneously in any number of counterparts, each of which when so executed and delivered shall be taken to be an original; but such counterparts shall together constitute but one and the same document. 9.5 Notices and Demands. Any notice or demand which, by any provision of this Agreement or any agreement, document or instrument executed pursuant hereto or thereto, except as otherwise provided therein, is required or provided to be given shall be deemed to have been sufficiently given or served and received for all purposes when delivered or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or, in the case of a nationally recognized overnight courier service, on the day following the date of such mailing, or by express delivery providing receipt of delivery, to the following addresses: if to the Company, at its address as shown on the signature page hereof, or at any other address designated by the Company to each of the Investors in writing; if to a Investor, at its mailing address as shown on the records of the Company, or at any other address designated by such Investor to the Company and the other Investors in writing; and if to an assignee of a Investor, at its address as designated to the Company and the other Investor in writing. 9.6 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, and such prohibition or invalidity shall not invalidate the remainder of such provision or the other provisions of this Agreement. 9.7 Expenses. The Company shall pay the reasonable costs and expenses of one special counsel for the Investors in connection with the negotiation, execution, delivery and performance of this Agreement and any amendments hereto and the agreements, documents and instruments contemplated hereby or executed pursuant hereto, not to exceed $25,000. In addition to the foregoing, the Company shall pay the fees charged by the LC Bank for issuing and maintaining the Letters of Credit, including attorney's fees and other fees and expenses incurred in connection with the application for such letters of credit and the preparation, execution and delivery of any reimbursement agreement or similar document. 9.8 Integration. This Agreement together with the Stockholders' Agreement, including the exhibits, documents and instruments referred to herein or therein, constitute all of the agreements and supersede all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 9.9 Certain Provisions Applicable to SBIC Investors. Sections 2.25, 3.6 and 5.9 hereof contain certain provisions that are included herein solely for the benefit of SBIC Investors. A stockholder of the Company may not assert any rights or claims with respect to such provisions arising at any time after it has ceased to be an SBIC. 9.10 No Assignment. Except as otherwise provided herein, this Agreement may not be assigned, pledged, hypothecated or otherwise transferred by the Company without the consent of all of the parties hereto. [Signature page follows] IN WITNESS WHEREOF, the undersigned have executed this Agreement as a sealed instrument as of the day and year first above written. GOLDEN SKY HOLDINGS, INC. 605 W. 47th Street, Suite 300 Kansas City, MO 64112 By_______________________________________ Name: Title: ALTA SUBORDINATED DEBT PARTNERS III, L.P. By: Alta Subordinated Debt Management III, L.P. By:_______________________________________ Name: Title: ALTA COMMUNICATIONS VI, L.P. By: Alta Communications VI Management Partners, L.P. By:_______________________________________ Name: Title: ALTA-COMM S BY S, LLC By:_______________________________________ Name: Title: HARBOURVEST PARTNERS V-DIRECT FUND L.P. By: HVP V-Direct Associates, LLC Its General Partner By: HarbourVest Partners, LLC Its Managing Member By:_______________________ Name: Title: SPECTRUM EQUITY INVESTORS L.P. By: Spectrum Equity Associates, L.P., General Partner By:_______________________________________ Name: Title: SPECTRUM EQUITY INVESTORS II, L.P. By: Spectrum Equity Associates II, L.P., General Partner By:_______________________________________ Name: Title: NORWEST EQUITY PARTNERS VI, A MINNESOTA LIMITED PARTNERSHIP By: Itasca Partners V, L.L.P. General Partner By:_______________________________________ Name: Title: BANCBOSTON VENTURES INC. By:_______________________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By:_______________________________________ Name: Title: APPENDIX A (Form of Warrant) APPENDIX B Securities Acquired
- ---------------------------------------------------------------------------------------------------------------------- Shares of Series D Number of Number of Purchase Redeemable Funding Warrants Subscription Investor Price Preferred Stock Warrants - ---------------------------------------------------------------------------------------------------------------------- Alta Communications VI, L.P. $3,804,739.07 19,023.70 665.83 665.83 - --------------------------------------------------------------------------------------------------------------------- Alta Subordinated Debt Partners III, L.P. 2,287,468.87 11,437.34 400.31 400.31 - --------------------------------------------------------------------------------------------------------------------- Alta-Comm S by S, LLC 86,662.06 433.31 15.17 15.17 - --------------------------------------------------------------------------------------------------------------------- HarbourVest Partners V - Direct Fund L.P. 2,577,574.60 12,887.87 451.08 451.08 - --------------------------------------------------------------------------------------------------------------------- Spectrum Equity Investors II L.P. 3,431,877.16 17,159.39 600.58 600.58 - --------------------------------------------------------------------------------------------------------------------- Spectrum Equity Investors, L.P. 1,715,921.42 8,579.61 300.29 300.29 - --------------------------------------------------------------------------------------------------------------------- Norwest Equity Partners VI, L.P. 2,577,574.60 12,887.87 451.08 451.08 - --------------------------------------------------------------------------------------------------------------------- BancBoston Ventures Inc. 3,003,529.31 15,017.65 525.62 525.62 - --------------------------------------------------------------------------------------------------------------------- General Electric Capital Corporation 514,652.92 2,573.26 90.06 90.06 - --------------------------------------------------------------------------------------------------------------------- Totals: $20,000,000 100,000.00 3,500.00 3,500.00 - ----------------------------------------------------------------------------------------------------------------------
APPENDIX C (Form of Legal Opinion) APPENDIX D (Form of Certificate of Designations, Preferences and Rights of Series D Redeemable Preferred Stock) SCHEDULE 2.1 Certain Violations 1. Golden Sky was in violation of certain covenants under its credit facility for the quarter ended September 30, 1999. 2. While the Company has exclusive DIRECTV distribution rights in its markets, it is not allowed to have customers outside its markets. Further, DIRECTV and the Company are prohibited by law from providing DIRECTV programming outside the United States. Despite our customers' assurances that they receive programming within one or our 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 markets, our business could be adversely affected. 3. The Company makes no representation with respect to the possible application of state law to the Company's DBS equipment service agreement program. SCHEDULE 2.4 Capitalization and Beneficial Ownership 1. Holders of the Series A, B and C Convertible Preferred Stock are entitled to receive shares of Common Stock upon conversion of their shares of preferred stock, as provided in the Certificate of Incorporation. 2. See attached list of equity holders. 3. GSS owns a 76.25% interest in South Plains DBS, L.P. GSS funds the operating losses of South Plains and is periodically reimbursed by the minority interest of South Plains for its portion of such losses. 4. The Company owns all of the outstanding capital stock of DBS, which owns all of the outstanding capital stock of GSS. GSS owns all of the outstanding capital stock of Argos Support Services Company, Primewatch, Inc. and DCE Satellite Entertainment, LLC. The Company makes advances to fund the operations of its subsidiaries, from time to time. SCHEDULE 2.6 Undisclosed Liabilities 1. See Schedule 2.1. 2. See Schedule 2.10. 3. See Schedule 2.12. SCHEDULE 2.7 Accounts Receivable None. SCHEDULE 2.8 Title to Properties 1. GSS' credit facility is secured by a lien against all of the assets of GSS. 2. Certain promissory notes issued as consideration in Golden Sky's acquisitions have been secured by liens against the assets of the acquired entity. 3. Golden Sky has entered into equipment capital leases whereby the related capital lease obligations are secured by liens on the equipment that is the subject of the leases. The aggregate outstanding balance of capital lease obligations secured by such liens on equipment under capital leases approximated $550,000 at September 30, 1999. The original cost of the equipment under capital leases subject to such liens approximated $1.2 million as of the same date. 4. Golden Sky has entered into various operating leases providing the leased premises for its approximate 72 local sales and customer service offices, its national call center, its corporate office, warehouse and storage locations and various equipment. The future minimum non-cancelable lease payments related to these operating leases approximate $1.2 million in 2000; $700,000 in 2001; $450,000 in 2002; and $121,000 in 2003. 5. GSS owns a 76.25% interest in South Plains DBS, L.P. and, therefore, the assets of South Plains are partially owned by the minority interest. SCHEDULE 2.9 Tax Matters 1. Golden Sky was audited by the Missouri Department of Revenue in 1999 with respect to sales and use taxes and payroll taxes. The field work on the audit was completed in late October 1999. Golden Sky has been informally advised that no additional taxes, penalties or interest will be owed, however, a final report has not been issued. 2. Golden Sky is currently in the process of being audited by the Texas Comptroller of Public Accounts with respect to sales and use taxes. The field work on the audit is still in progress. Golden Sky has not received any notice of findings to date. SCHEDULE 2.10 Material Contracts 1. See Schedule 2.1. 2. See Schedule 2.12. 3. Golden Sky has entered into non-competition agreements with the following key employees: o Rodney A. Weary o Jo Ellen Linn o John R. Hager o William J. Gerski o Eric Tucker o Dennis O'Hara o Gordon Smith o Scott Brown o Laquita Allen 4. The Company makes no representation with respect to the possible effect on the Company of the NRTC/DIRECTV litigation described in Schedule 2.12. SCHEDULE 2.11 Proprietary Rights None. SCHEDULE 2.12 Litigation 1. The ongoing NRTC/DIRECTV litigation may have an adverse effect on Golden Sky. 2. On October 15, 1999, Schaller Telephone Company filed a Petition at Law in the Iowa District Court for Woodbury County naming Golden Sky Systems, Rodney A. Weary and Jo Ellen Linn as defendants. In the Petition, Schaller alleges that the named defendants represented to Schaller that Golden Sky intended to purchase Schaller's rights to provide satellite television services to homes located in Woodbury, Monona, Plymouth and Ida counties in Iowa, and that Golden Sky entered into an agreement with Schaller to purchase these rights for $13,500,000. Schaller further alleges, among other things, that the representations of the named defendants were fraudulent and that Golden Sky breached the agreement. Schaller seeks an unspecified amount of damages in the Petition. Golden Sky removed the lawsuit to the United States District Court for the Northern District of Iowa. On December 17, 1999, Golden Sky timely filed its Pre-answer Motion to Dismiss all counts where appropriate and answered Schaller's count for breach of contract by specifically denying the allegations. 3. In the ordinary course of business, the Company receives, from time to time, litigation threats from former employees, customers, dealers and others. 4. During August and September 1999, three former employees of the Company's Foley, Alabama office each filed charges of discrimination and harassment against the Company with the Birmingham, Alabama EEOC office following the end of their employment with the Company. The Company has scheduled an informal mediation of these charges with the EEOC for January 25, 2000. The Company will not be required to submit a position statement, if at all, until after the completion of the mediation. 5. Deborah Gay, a former employee of the Company's Rincon, Georgia office, filed a charge of age discrimination with the Savannah, Georgia EEOC office on July 21, 1999. The EEOC attempted to negotiate a conciliation agreement between the Company and Ms. Gay. When that attempt failed, the EEOC issued a "failure to conciliate" finding in late October 1999. Under federal law, Ms. Gay has 90 days from the date of the finding to file suit against the Company. 6. On June 28,1999, Golden Sky received a letter asserting it was engaged in concerted activity to destroy the cable business of Roxie and Ben Cartwright. On August 5, 1999, Golden Sky responded in writing to the Cartwright's allegations specifically denying the same. The Cartwrights have taken no further action to Golden Sky's knowledge. 7. On June 28, 1999, Golden Sky received a letter asserting that it had damaged Lynn and Gary Anderson, who had been Golden Sky dealers, by using its own sales force to market and sell equipment and programming. On August 5, 1999, Golden Sky responded in writing to the Andersons' allegations specifically denying the same. The Andersons have taken no further action to Golden Sky's knowledge. 8. On February 10, 1999, the Office of the Attorney General of the State of Minnesota notified Golden Sky of its investigation of possible violations of Minnesota's antitrust laws. On March 4, 1999 Golden Sky provided answers to interrogatories and responses to document requests from the Attorney General's office. The Attorney General's office has taken no further action to Golden Sky's knowledge. 9. Golden Sky has received and responded to a subpoena duces tecum from the United States Department of Agriculture which is investigating the sale of the Baldwin County Membership Cooperative Direct Broadcast Satellite franchise rights to Golden Sky. The Department advised Golden Sky that it is not a target of the investigation, merely a material witness. 10. A former employee of the Las Vegas branch office has informed Golden Sky that she believes she was subject to sexual harassment while employed. The alleged harasser is no longer employed by Golden Sky. Discussions are continuing with the former employee and her attorney. 11. An attorney representing three employees of the Gainesville, Texas office asserted on September 14, 1999 that they had been subject to sexual harassment and retaliation. Golden Sky investigated and took responsive action. One of the employees nonetheless quit her employment asserting that she was constructively discharged. The other two employees remained employed by Golden Sky through December 1999, when Golden Sky closed the Gainesville office and terminated all of the employees in the Gainesville office. Golden Sky had previously been advised by one of the employed women that she had withdrawn herself from representation and did not desire to pursue a claim. The two remaining claimants filed a charge against Golden Sky with the Houston, Texas office of the National Labor Relations Board on December 10, 1999, alleging retaliation for their engaging in concerted activity (the report of sexual harassment). Golden Sky denies the claimants' allegations and is in the process of preparing its position statement. 12. On June 18, 1999, an attorney representing two former employees in Michigan asserted that they had been subject to retaliatory discharge, gender discrimination, and sexual harassment. The employment of these employees ended in April 1999. Golden Sky responded to these assertions. The attorney indicated that he was continuing to investigate the claims, but nothing further has been heard. SCHEDULE 2.14 Business; Compliance with Laws 1. See Schedule 2.1. 2. See Schedule 2.10. 3. See Schedule 2.12. SCHEDULE 2.18 Environmental Matters None. SCHEDULE 2.20 Product and Services Claims 1. See Schedule 2.1. 2. See Schedule 2.10. 3. See Schedule 2.12. SCHEDULE 2.21 Employees; Labor Matters 1. Golden Sky has entered into employment agreements, the terms of which require Golden Sky to make severance payments, with the following individuals: o Rodney A. Weary o Jo Ellen Linn o John R. Hager o William J. Gerski o Eric Tucker o Dennis O'Hara o Gordon Smith o Scott R. Brown 2. The following officers, employees and sales representatives of Golden Sky received total remuneration from the Company on an annualized basis in excess of $100,000 for the calendar year 1999: o Rodney A. Weary o John R. Hager o William J. Gerski o Jo Ellen Linn o Scott R. Brown o Laquita J. Allen o Eric Tucker o Randall K. Duncan o Brad E. Behmer 3. The Company has a general practice of offering severance to employees upon termination of employment, the amount of which is based upon the time of service. 4. See Schedule 2.12. SCHEDULE 2.23 Affiliate Transactions 1. Rodney A. Weary is the sole shareholder of 421 Golden Eagle Gale, which subleases a 1979 Cessna Citation to GSS pursuant to an Aircraft Lease, dated as of October 23, 1987. This sublease was voluntarily terminated by the parties effective December 31, 1999. 2. GSS has an oral consulting agreement with Robert B. Liepold, a director of the Company, to provide expertise on an "as needed" basis. SCHEDULE 2.27 Absence of Certain Developments 1. See Schedule 2.6. EX-10.23 6 EXHIBIT 10.23 EXECUTION COPY SECOND AMENDMENT, CONSENT AND WAIVER ------------------------------------ SECOND AMENDMENT, CONSENT AND WAIVER TO THE AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of January 4, 2000, among GOLDEN SKY HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware ("Holdings"), GOLDEN SKY SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Borrower"), the Banks party hereto 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. Unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Banks, the Agents and the Documentation Agent are parties to an Amended and Restated Credit Agreement, dated as of July 7, 1997, amended and restated as of May 8, 1998 (as amended, modified and supplemented to the date hereof, the "Credit Agreement"); and WHEREAS, the parties hereto wish to consent to certain actions and waive certain provisions of the Credit Agreement; and WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. Section 8.10(b) of the Credit Agreement shall be amended by deleting the section in its entirety and inserting in lieu thereof the following new section: "(b) Holdings will cause the Borrower not to permit, and the Borrower will not permit, the Annualized Churn Rate for any fiscal quarter ending on a date set forth below to exceed the percentage set forth opposite such date below: Fiscal Quarter Ended Percentage -------------------- ---------- December 31, 1999 18.0% March 31, 2000 19.0% June 30, 2000 19.0% September 30, 2000 18.0% December 31, 2000 18.0% March 31, 2001 and thereafter 12.0%" 2. Section 8.12 of the Credit Agreement shall be amended by deleting the section in its entirety and inserting in lieu thereof the following new section: "8.12 Annualized Adjusted Consolidated Interest Coverage Ratio. Holdings will cause the Borrower not to permit, and the Borrower will not permit, the ratio of Annualized Adjusted Consolidated EBITDA to Annualized Adjusted Consolidated Interest Expense for any fiscal quarter ending on a date set forth below to be less than the ratio set forth opposite such date below: Fiscal Quarter Ended Ratio -------------------- ----- December 31, 1999 2.00x March 31, 2000 2.00x June 30, 2000 2.00x September 30, 2000 1.75x December 31, 2000 1.50x March 31, 2001 2.00x June 30, 2001 2.00x September 30, 2001 2.00x December 31, 2001 2.00x" 3. Section 8.14 of the Credit Agreement shall be amended by deleting the table appearing therein and inserting in lieu thereof the following table: Fiscal Quarter Ended Ratio -------------------- ----- December 31, 1999 13.50x March 31, 2000 10.25x June 30, 2000 7.25x September 30, 2000 6.55x December 31, 2000 5.75x March 31, 2001 4.50x June 30, 2001 4.00x 4. Section 8.15 of the Credit Agreement shall be amended by deleting the table appearing therein and inserting in lieu thereof the following table: Fiscal Quarter Ended Ratio -------------------- ----- December 31, 1999 3.75x March 31, 2000 through 3.00x June 30, 2001 5. Section 8.18(ii) of the Credit Agreement shall be amended by inserting immediately following the words "Permitted Seller Notes," the phrase "L/C Coverage Period Letters of Credit,". 6. Section 9 of the Credit Agreement is hereby amended by (x) inserting a semi-colon and the word "or" in lieu of the period at the end of Section 9.11 and (y) inserting the following new Section 9.12: "9.12 L/C Coverage Period Letter of Credit. The issuing bank under the L/C Coverage Period Letters of Credit shall not have paid the beneficiaries thereunder following a request by the beneficiaries pursuant to the terms thereof (and the provisions of Section 12 of the Second Amendment) for any reason." 7. The following definitions in Section 10 of the Credit Agreement are amended as set forth below: (a) The definition of "Annualized Churn Rate" shall be amended to read in its entirety as follows: "Annualized Churn Rate" shall mean, for any period, the net number of disconnected subscribers for such period divided by the sum of the number of subscribers at the beginning of such period, the number of gross subscriber additions during such period, and the number of subscribers acquired during such period, as measured on the last day of each fiscal quarter for the trailing twelve-month period then ended. (b) The definition of "Applicable Base Rate Margin" shall be amended by (x) deleting the number "2.50" and inserting the number "3.00" in lieu thereof and (y) deleting the number "2.75" and inserting the number "3.25" in lieu thereof. (c) The definition of "Applicable Eurodollar Rate Margin" shall be amended by (x) deleting the number "3.75" and inserting the number "4.25" in lieu thereof and (y) deleting the number "4.00" and inserting the number "4.50" in lieu thereof. (d) The definition of "Borrowing Base" shall be amended by (x) deleting the phrase "and $800 thereafter" and inserting in lieu thereof the following phrase "$800 from January 1, 2000 until and including December 31, 2000, and $700 thereafter" and (y) adding, immediately after the phrase "pursuant to Section 5.06", the following provision: "provided, however, that in any event the Borrowing Base shall be deemed to be equal to zero at any time during the periods set forth below that the ratio of Net Adjusted Consolidated Indebtedness to Annualized Adjusted Consolidated EBITDA for the immediately preceding three-month period shall exceed the ratio set forth opposite such period below: Period Ratio ------ ----- January 1, 2001 to and including March 31, 4.50x 2001 April 1, 2001 to and including December 31, 4.00x; 2001 provided further, that upon the receipt by the Administrative Agent of evidence that the Borrower has complied with the above ratios (with such evidence to be in form and substance reasonably satisfactory to the Administrative Agent) for two consecutive three-month periods at any time during the period from January 1, 2001 through and including December 31, 2001, the above proviso shall cease to be in force and effect and shall be excluded from the definition of the Borrowing Base". (e) The definition of "Leverage Reduction Discount" shall be amended by (x) deleting the table appearing in clause (ii) therein and inserting in lieu thereof the following table: Net Adjusted Consolidated Indebtedness to Percentage Annualized Consolidated EBITDA ---------- ------------------------------ 0.75% less than 7:1 but greater than or equal to 6:1 1.25% less than 6:1 but greater than or equal to 5:1 1.50% less than 5:1 but greater than or equal to 4:1 2.00% less than 4:1, and (y) deleting the number "0.75" appearing in clause (iii) therein and inserting the number "1.25" in lieu thereof. (f) The definition of "Net Adjusted Consolidated Indebtedness" shall be amended by inserting immediately following the words "Acceptable DBS Debt" the phrase "minus the amount of outstanding and unpaid L/C Loans and the amount of Letter of Credit Outstandings with respect to the L/C Letters of Credit." 8. Additional Definitions. Section 10 of the Credit Agreement is hereby amended by inserting the following new definitions in the appropriate alphabetical order therein: "L/C Coverage Period Letters of Credit" shall have the meaning provided in Section 19 of the Second Amendment. "L/C Loans" shall have the meaning provided in Section 10(a) of the Second Amendment. "L/C Letters of Credit" shall have the meaning provided in Section 10(a) of the Second Amendment. "Second Amendment" shall mean the Second Amendment, Consent and Waiver to this Agreement, dated as of December 31, 1999. 9. Notwithstanding anything to the contrary contained in the Credit Agreement, the Banks hereby waive, solely on a one-time basis, the requirement of the Borrower to comply with the financial covenants contained in Sections 8.10, 8.14 and 8.15 of the Credit Agreement for the fiscal quarter ended September 30, 1999 (as in effect before giving effect to this Amendment). 10. To induce the Banks to agree to the waiver and amendments described herein (and as a condition thereto), the Borrower agrees as follows: (a) from and after the Second Amendment Effective Date (as defined below) to and including December 31, 2000, the Borrower shall not incur additional Borrowings under the Credit Agreement and shall not be permitted to request the issuance of any Letters of Credit even if the Borrower is otherwise permitted to incur such Borrowings or have such Letters of Credit issued under the Credit Agreement, provided, however, the Borrower may incur additional Borrowings ("L/C Loans") or have Letters of Credit issued for its account ("L/C Letters of Credit", and together with the L/C Loans, "L/C Credit Events") in an aggregate amount of up to $20,000,000 less the Equity Retention Amount (as defined in Section 10 (c) hereof) during the period (the "L/C Coverage Period") commencing on the Second Amendment Effective Date (as defined below) and ending on March 31, 2000, unless a Sale Agreement (as defined in Section 11(a) hereof) has been executed and delivered, in which case the period shall be extended until the earlier of (x) May 31, 2000 or (y) the date on which the Sale Agreement is terminated so long as (i) no Default or Event of Default shall exist either before or after the occurrence of such L/C Credit Event, (ii) all of the representations, warranties and agreements contained in the Credit Documents shall be true and correct in all material respects both before and after the occurrence of such L/C Credit Event, (iii) the L/C Coverage Period Letters of Credit (as defined below) in the stated amount required by clause (iv) of this Section 10(a) shall be in full force and effect, (iv) the then effective stated amount of the L/C Coverage Period Letters of Credit shall be at least equal to the aggregate amount of all L/C Credit Events on and after the date hereof (including the amount of L/C Credit Events occurring on the date of determination) less the aggregate amount of L/C Loans repaid by the Borrower and less the stated amount of L/C Letters of Credit terminated (or, if drawn, less the amount of such drawing by the beneficiary thereof if such drawing has been repaid by the Borrower or the account parties on the L/C Coverage Period Letters of Credit), (v) the proceeds from such L/C Loans are used for, and the L/C Letters of Credit support, only working capital purposes and (vi) all other conditions to such Credit Event set forth in the Credit Agreement shall have been satisfied; and (b) Notwithstanding anything to the contrary contained in clause (a) above, upon the repayment of L/C Loans by the Borrower or through drawings on the L/C Coverage Period Letters of Credit (and the termination of all L/C Letters of Credit and repayment of all amounts owing with respect thereto), the Borrower may incur additional Borrowings or have Letters of Credit issued for its account during the period beginning on the date of such repayment and ending on December 31, 2000, in an amount equal to the gross cash proceeds that the Borrower has received from the issuance of Holding's capital stock; provided, that (i) the terms and conditions of any preferred stock issued shall be satisfactory to the Agents and the Documentation Agent, it being understood that the terms and conditions of Holdings' Series D Redeemable Preferred Stock and other preferred stock outstanding on the Second Amendment Effective Date (as defined below) shall be acceptable to the Agents and the Documentation Agent, (ii) the aggregate amount of such Borrowings or issuances of Letters of Credit shall not exceed $20,000,000 and shall be used only for working capital purposes, (iii) no Default or Event of Default shall exist before or after giving effect to such Borrowings or issuances of Letters of Credit and (iv) all other conditions to such Credit Event set forth in the Credit Agreement shall have been satisfied. (c) Notwithstanding anything to the contrary contained in the Credit Agreement, including without limitation, Section 3.02(A)(d)(i) and Section 8.05 of the Credit Agreement, Holdings may retain the cash proceeds from the issuance of capital stock in accordance with Section 10(b) hereof (so long as such proceeds do not exceed $20 million and are contributed as common equity to the Borrower) and shall not be required to repay Loans or reduce Commitments; provided, however that the $20 million amount of L/C Credit Events permitted in accordance with Section 10(a) hereof shall be reduced by the amount (the "Equity Retention Amount") of such proceeds not used to repay L/C Loans or cash collateralize L/C Letters of Credit or to repay Unpaid Drawings with respect to L/C Letters of Credit. 11. The Syndication Agent, as beneficiary of the L/C Coverage Period Letters of Credit, agrees that it will make drawings under the L/C Coverage Period Letters of Credit only under the following terms and conditions: (a) Ten Business Days following the earlier of (x) March 31, 2000 and (y) the occurrence of a Default or Event of Default, the Syndication Agent shall draw under L/C Coverage Period Letters of Credit an amount equal to the aggregate outstanding amount of L/C Loans on the date of drawing plus the aggregate Letter of Credit Outstandings with respect to L/C Letters of Credit issued during the L/C Coverage Period; provided however in the event that prior to March 31, 2000, the Borrower has executed and delivered a definitive acquisition or merger agreement with respect to the sale of all or substantially all of the capital stock of Holdings or the Borrower or all or substantially all of the assets of the Borrower on terms and conditions reasonably acceptable to each of the Agents and the Documentation Agent (the "Sale Agreement"), then the Syndication Agent shall not be permitted to draw under the L/C Coverage Period Letters of Credit until (and on such date the Syndication Agent shall draw) ten Business Days after the earlier of (x) May 31, 2000, (y) the occurrence of a Default or Event of Default or (z) termination of the Sale Agreement. (b) The Syndication Agent agrees, as beneficiary of the L/C Coverage Period Letters of Credit and for the benefit of the account parties thereunder, that it shall draw under the L/C Coverage Period Letters of Credit pro rata based on the stated amount of each such letter of credit as compared to the aggregate stated amount of all such letters of credit. 12. The Syndication Agent agrees, as beneficiary of the L/C Coverage Period Letters of Credit and for the benefit of the account parties thereunder, that it will request termination or reduction of one or more of the L/C Coverage Period Letters of Credit upon the request of the Borrower and in amounts requested by the Borrower; provided, however, in no event may the aggregate stated amount of the L/C Coverage Period Letters of Credit be less than the aggregate outstanding amount of L/C Loans and Letter of Credit Outstandings with respect to L/C Letters of Credit plus the remaining amount of Loans and Letters of Credit which may be incurred and/or issued in accordance with Section 10(a). 13. Each of the Borrower, the Agents, the Documentation Agent and the undersigned Banks hereby agree that no term or condition of any L/C Coverage Period Letter of Credit and neither Section 11(a) of this Amendment nor the proviso contained in Section 12 of this Amendment may be amended or waived without the written consent of those Banks for which the sum of whose outstanding Term Loans and Revolving Loan Commitments (or after the termination thereof, the sum of outstanding Revolving Loans and Letter of Credit Outstandings), represent an amount equal to or greater than 90% of the sum of all outstanding Term Loans and the Total Revolving Loan Commitment (or after the termination thereof, the sum of the then total outstanding Revolving Loans and Letter of Credit Outstandings). 14. Notwithstanding anything to the contrary contained in the Credit Agreement, including without limitation Section 7.01(e) thereof, the budget required to be delivered by the Borrower for fiscal year 2000 shall not be required to be delivered until February 28, 2000. 15. In order to induce the Banks to enter into this Amendment, the Borrower hereby represents and warrants that (i) no Default or Event of Default shall exist, both before and after giving effect to this Amendment (which has not been cured or waived by this Amendment) and (ii) all of the representations, warranties and agreements contained in the Credit Documents shall be true and correct in all material respects, in each case on the Second Amendment Effective Date, both before and after giving effect to this Amendment. 16. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 17. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Agents. 18. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 19. This Amendment shall become effective on the date (the "Second Amendment Effective Date") when (i) Paribas, as Syndication Agent, shall have received one or more standby letters of credit ("L/C Coverage Period Letters of Credit") from Fleet National Bank, as issuing bank, for the benefit of Paribas, on behalf of the Banks and with the account party with respect thereto being one or more members of the Investor Group or other stockholders of Holdings or their affiliates as of the Second Amendment Effective Date, (ii) the L/C Coverage Period Letters of Credit shall be in form and substance satisfactory to the each of the Agents and the Documentation Agent and shall have an initial stated amount which shall not be less than $20,000,000, (iii) the Agents and the Documentation Agent shall have received all agreements and documents relating to the L/C Coverage Period Letters of Credit (including, without limitation, any reimbursement agreements relating thereto) in form and substance satisfactory to the Agents and the Documentation Agent, (iv) the Banks shall have received a legal opinion in form and substance satisfactory to each of the Agents and the Documentation Agent from counsel to Fleet National Bank, the issuing bank, with respect to the L/C Coverage Period Letters of Credit, (v) each Credit Party, the Agents, the Documentation Agent and the Required Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office, (vi) each Bank which executes and delivers a counterpart hereof by Noon on January 4, 2000 shall have received from the Borrower a cash fee in an amount equal to 0.50% of the amount of such Bank's outstanding Term Loans and Revolving Loan Commitment, in each case as in effect on the Second Amendment Effective Date (after giving effect to this Amendment) and (vii) the Borrower shall have paid all fees and expenses then owing to the Banks (including, without limitation, legal fees and expenses) with respect to this Amendment. 20. From and after the Second Amendment Effective Date, all references in the Credit Agreement and each of the Credit Documents to the Credit Agreement shall be deemed to be references to such Credit Agreement as amended hereby. * * * IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. GOLDEN SKY HOLDINGS, INC. By: -------------------------------------- Name: Title: GOLDEN SKY SYSTEMS, INC. By: -------------------------------------- Name: Title: PARIBAS, Individually and as Syndication Agent and Managing Agent By: ------------------------------------- Name: Title: FLEET NATIONAL BANK, Individually and as Administrative Agent and Managing Agent By: ------------------------------------- Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION, Individually and as Documentation Agent By: -------------------------------------- Name: Title: PAMCO CAYMEN LTD. By: HIGHLAND CAPITAL MANAGEMENT, L.P., as Collateral Manager By: -------------------------------------- Name: Title: PAM CAPITAL FUNDING, L.P. By: HIGHLAND CAPITAL MANAGEMENT, L.P. as Collateral Manager By: -------------------------------------- Name: Title: CITIZENS BANK OF MASSACHUSETTS By: -------------------------------------- Name: Title: UNION BANK OF CALIFORNIA By: -------------------------------------- Name: Title: IBJ WHITEHALL FINANCIAL GROUP By: -------------------------------------- Name: Title: FREMONT FINANCIAL CORPORATION By: -------------------------------------- Name: Title: DLJ CAPITAL FUNDING, INC. By: -------------------------------------- Name: Title: The undersigned hereby acknowledge and consent to the execution of the foregoing amendment and transactions provided for herein. GOLDEN SKY HOLDINGS, INC. By: ----------------------------------------- Name: Title: GOLDEN SKY SYSTEMS, INC. By: ----------------------------------------- Name: Title: ARGOS SUPPORT SERVICES COMPANY By: ----------------------------------------- Name: Title: PRIMEWATCH, INC. By: ----------------------------------------- Name: Title: EX-10.24 7 EXHIBIT 10.24 EXECUTION COPY THIRD AMENDMENT, CONSENT AND WAIVER ----------------------------------- THIRD AMENDMENT, CONSENT AND WAIVER TO THE AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of January 20, 2000, among GOLDEN SKY HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware ("Holdings"), GOLDEN SKY SYSTEMS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Borrower"), the Banks party hereto 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. Unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings provided such terms in the Credit Agreement referred to below. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, the Banks, the Agents and the Documentation Agent are parties to an Amended and Restated Credit Agreement, dated as of July 7, 1997, amended and restated as of May 8, 1998 (as amended, modified and supplemented to the date hereof, the "Credit Agreement"); and WHEREAS, the parties hereto wish to consent to certain actions and waive certain provisions of the Credit Agreement; and WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided; NOW, THEREFORE, it is agreed: 1. Section 7.20 of the Credit Agreement shall be amended by deleting such section in its entirety and inserting in lieu thereof the following new section: "7.20 Corporate Separateness. Holdings will, and will cause each of its Subsidiaries to, satisfy customary corporate formalities, including the maintenance of corporate records. Neither Holdings nor any Subsidiary of Holdings shall make any payment to a creditor of Pegasus or any other Subsidiary of Pegasus in respect of any liability of Pegasus or any such Subsidiary, and no bank account of Pegasus or any other Subsidiary of Pegasus shall be commingled with any bank account of Holdings or any Subsidiary of Holdings. Any financial statements distributed to any creditors of Pegasus and its Subsidiaries shall, to the extent permitted by generally accepted accounting principles, clearly establish the corporate separateness of Pegasus and its Subsidiaries from Holdings and each of Holding's Subsidiaries. Neither Holdings nor any of its Subsidiaries shall take any action, or conduct its affairs in a manner, which is likely to result in the corporate existence of Pegasus and its Subsidiaries on the one hand and of Holdings or any Subsidiary of the Holdings on the other hand being ignored, or in the assets and liabilities of Holdings or any Subsidiary of Holdings being substantively consolidated with those of Pegasus and its Subsidiaries in a bankruptcy, reorganization or other insolvency proceeding; it being understood that Pegasus shall be permitted to file tax returns on a consolidated basis with its Subsidiaries." 2. Section 8.06 of the Credit Agreement is hereby amended by inserting the following new sentence immediately after the end of such section: "Notwithstanding anything to the contrary contained above, Holdings will not, and will not permit any of its Subsidiaries to, enter into any transaction with Pegasus or any Subsidiary of Pegasus (other than Holdings and its Subsidiaries), except for cost allocation arrangements which require each entity to pay its pro rata share of the overhead and customer care costs based on the number of subscribers and regional dealers and support costs based on the number of subscriber additions." 3. Section 9 of the Credit Agreement is hereby amended by (x) inserting a semi-colon and the word "or" in lieu of the period at the end of Section 9.12 and (y) inserting the following new Section 9.13: "9.13 Offer to Purchase. Holdings or its Subsidiaries shall become obligated to pay more than $25,000,000 to repurchase debt securities as a result of any "change-in-control" offers required to be made by Holdings or any of its subsidiaries to holders of outstanding debt securities of Holdings or any of its subsidiaries." 4. Section 10 of the Credit Agreement is hereby amended by inserting the following new definition in the appropriate alphabetical order therein: "Pegasus" shall mean the Pegasus Communications Corporation." 5. The definition of "Change in Control" in Section 10 of the Credit Agreement is hereby amended by inserting the following phrase at the end thereof: "Notwithstanding the foregoing, "Change in Control" shall not include any change in control which results from the Agreement and Plan of Merger, dated January 10, 2000, among Pegasus and certain of its shareholders, Pegasus GSS Merger Sub, Inc., Holdings and certain of its shareholders." 6. Notwithstanding anything to the contrary contained in the Credit Agreement, including without limitation, Section 8.02, the Banks hereby consent to the merger (the "Merger") of Holdings with Pegasus GSS Merger Sub, Inc. effected in accordance with the terms of the Agreement and Plan of Merger, dated January 10, 2000, among Pegasus Communication Corporation ("Pegasus") and certain of its shareholders, Pegasus GSS Merger Sub, Inc., Holdings and certain of its shareholders (the " Merger Agreement"), without waivers of any conditions thereunder, so long as such Merger is consummated not later than June 30, 2000. 7. Notwithstanding anything to the contrary contained in Section 8.18 of the Credit Agreement, the Banks hereby waive the restrictions contained in Section 8.18 to the extent same would prohibit Holdings from amending its Certificate of Incorporation, By-Laws or Shareholders' Agreement in order to consummate the Merger, provided, that such modifications or amendments are in form and substance satisfactory to the Agents. 8. Holdings, by its signature below, hereby confirms and agrees that its obligations pursuant to the Credit Agreement, the Credit Documents, Holdings Pledge Agreement and the guaranty issued by Holdings pursuant to Section 13 of the Credit Agreement shall remain in full force and effect after giving effect to this Third Amendment. 9. In order to induce the Banks to enter into this Amendment, the Borrower hereby represents and warrants that (i) no Default or Event of Default shall exist, both before and after giving effect to this Amendment (which has not been cured or waived by this Amendment) and (ii) all of the representations, warranties and agreements contained in the Credit Documents shall be true and correct in all material respects, in each case on the Third Amendment Effective Date, both before and after giving effect to this Amendment. 10. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreement or any other Credit Document. 11. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with the Borrower and the Agents. 12. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 13. This Amendment shall become effective on the date (the "Third Amendment Effective Date") when (i) the Banks shall have received true and correct copies of the Merger Agreement in form and substance satisfactory to the Required Banks, (ii) the Agents shall have received an opinion from McDermott, Will & Emery, counsel to Holdings, addressed to the Agents and the Banks, dated the Third Amendment Effective Date, in form and substance satisfactory to the Agents, and to the effect that the execution, performance and delivery of the Merger Agreement does not breach any material contracts that Holdings or any of its Subsidiaries are a party to, (iii) the Agents shall have received an opinion from Drinker Biddle & Reath LLP, counsel to Pegasus and Pegasus GSS Merger Sub, Inc., addressed to the Agents and the Banks, dated the Third Amendment Effective Date, in form and substance satisfactory to the Agents, and to the effect that the execution, performance and delivery of the Merger Agreement does not breach any material contracts that Pegasus or any of its Subsidiaries are a party to, (iv) each Credit Party, the Agents, the Documentation Agent and the Required Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of facsimile transmission) the same to the Administrative Agent at its Notice Office and (v) the Borrower shall have paid all fees and expenses then owing to the Banks (including, without limitation, legal fees and expenses) with respect to this Amendment. 14. From and after the Third Amendment Effective Date, all references in the Credit Agreement and each of the Credit Documents to the Credit Agreement shall be deemed to be references to such Credit Agreement as amended hereby. * * * IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. GOLDEN SKY HOLDINGS, INC. By: ------------------------------------- Name: Title: GOLDEN SKY SYSTEMS, INC. By: ------------------------------------- Name: Title: PARIBAS, Individually and as Syndication Agent and Managing Agent By: ------------------------------------- Name: Title: FLEET NATIONAL BANK, Individually and as Administrative Agent and Managing Agent By: ------------------------------------- Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION, Individually and as Documentation Agent By: ------------------------------------- Name: Title: PAMCO CAYMEN LTD. By: HIGHLAND CAPITAL MANAGEMENT, L.P., as Collateral Manager By: ------------------------------------- Name: Title: PAM CAPITAL FUNDING, L.P. By: HIGHLAND CAPITAL MANAGEMENT, L.P. as Collateral Manager By: ------------------------------------- Name: Title: CITIZENS BANK OF MASSACHUSETTS By: ------------------------------------- Name: Title: UNION BANK OF CALIFORNIA By: ------------------------------------- Name: Title: IBJ WHITEHALL FINANCIAL GROUP By: ------------------------------------- Name: Title: FREMONT FINANCIAL CORPORATION By: ------------------------------------- Name: Title: DLJ CAPITAL FUNDING, INC. By: ------------------------------------- Name: Title: The undersigned hereby acknowledge and consent to the execution of the foregoing amendment and transactions provided for herein. GOLDEN SKY HOLDINGS, INC. By: ----------------------------------------- Name: Title: GOLDEN SKY SYSTEMS, INC. By: ----------------------------------------- Name: Title: ARGOS SUPPORT SERVICES COMPANY By: ----------------------------------------- Name: Title: PRIMEWATCH, INC. By: ----------------------------------------- Name: Title: EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY SYSTEMS, INC. AS OF DECEMBER 31, 1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,236 0 13,306 (973) 3,108 45,659 11,771 (5,918) 296,016 47,412 195,000 0 0 0 (6,367) 296,016 0 140,573 0 88,690 132,423 3,909 32,441 (114,899) 0 (114,899) 0 (2,935) 0 (117,834) 0 0
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