-----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, TRf5bLz6VhVxwaFK1+ZXWf/vDsJSPDlQR5Oipej01ZtaFJR7XXQsxD9+dihzuGAi teIp23rNPjvoPBXcsJlttQ== /in/edgar/work/20000814/0000950116-00-001935/0000950116-00-001935.txt : 20000921 0000950116-00-001935.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950116-00-001935 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOLDEN SKY DBS INC CENTRAL INDEX KEY: 0001082925 STANDARD INDUSTRIAL CLASSIFICATION: [4841 ] IRS NUMBER: 431839531 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-76413 FILM NUMBER: 697778 BUSINESS ADDRESS: STREET 1: 4700 BELEVIEW SUITE 300 CITY: KANSAS CITY STATE: MO ZIP: 64112 BUSINESS PHONE: 8167535544 10-Q 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2000 ------------- 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 333-76413 GOLDEN SKY DBS, INC. (Exact name of Registrant as specified in its charter) Delaware 43-1839531 -------- ---------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) c/o Pegasus Communication Management Company 225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 -------------- 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 ___ As of August 4, 2000, the Registrant had 100 shares of common stock outstanding. The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. GOLDEN SKY DBS, INC. Form 10-Q Table of Contents For the Quarterly Period Ended June 30, 2000 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets December 31, 1999 and June 30, 2000 .............................. 3 Consolidated Statements of Operations Three months ended June 30, 1999 and 2000.......................... 4 Consolidated Statements of Operations Six months ended June 30, 1999 and 2000............................ 5 Consolidated Statements of Cash Flows Six months ended June 30, 1999 and 2000............................ 6 Notes to Consolidated Financial Statements........................... 7 Item 2. Management's Narrative Analysis of the Results of Operations........ 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................... 15 Item 6. Exhibits and Reports on Form 8-K.................................... 15 Signature.................................................................... 16 2 Golden Sky DBS, Inc. Consolidated Balance Sheets (Dollars in thousands)
December 31, June 30, 1999 2000 ------------ ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents $3,241 | $1,538 Restricted cash 23,731 | 11,881 Accounts receivable, less allowance for doubtful | accounts of $973 and $1,000, respectively 4,797 | 9,098 Inventory 3,108 | 630 Prepaid expenses and other 1,652 | 861 -------- | ---------- Total current assets 36,529 | 24,008 | Property and equipment, net 5,853 | 4,205 Intangible assets, net 236,926 | 1,466,015 Deferred financing costs, net 11,462 | 11,307 Deposits and other 260 | 3,067 -------- | ---------- | Total assets $291,030 | $1,508,602 ======== | ========== LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $3,248 | $3,234 Accounts payable 8,089 | 350 Accrued interest 11,679 | 10,593 Accrued satellite programming, fees and commissions 14,804 | 8,361 Accrued expenses and other 943 | 16,356 -------- | ---------- Total current liabilities 38,763 | 38,894 | Long-term debt 366,130 | 370,554 Net advances from affiliates - | 2,844 Deferred taxes - | 481,012 -------- | ---------- Total liabilities 404,893 | 893,304 -------- | ---------- | Commitments and contingent liabilities - | - | Minority interest 936 | 904 | Common stockholder's equity (deficit): | Common stock; $0.01 par value; 1,000 shares | authorized; 100 shares issued and outstanding - | - Additional paid-in capital 97,754 | 878,819 Deficit (212,553) | (264,425) -------- | ---------- Total stockholder's equity (deficit) (114,799) | 614,394 -------- | ---------- | Total liabilities and stockholder's equity (deficit) $291,030 | $1,508,602 ======== | ==========
See accompanying notes to consolidated financial statements 3 Golden Sky DBS, Inc. Consolidated Statements of Operations (Dollars in thousands)
Three Months 2000 Ended ------------------------------- June 30, April 1 May 6 1999 to May 5 to June 30 -------- -------- -------- (unaudited) Net revenues: DBS services $ 31,182 $ 14,570 | $ 27,379 Lease and other 188 28 | 1,746 -------- -------- | -------- Total net revenues 31,370 14,598 | 29,125 | Operating expenses: | Programming, technical, general and administrative 27,783 11,840 | 20,253 Marketing and selling 13,587 1,979 | 4,623 Incentive compensation 26 33 | 402 Depreciation and amortization 9,140 3,028 | 25,796 Other expense, net -- 469 | -- -------- -------- | -------- Loss from operations (19,166) (2,751) | (21,949) | Interest expense (11,767) (4,193) | (8,268) Interest income 829 86 | 21 Other non-operating expenses, net -- (990) | (447) -------- -------- | -------- Loss before income taxes (30,104) (7,848) | (30,643) Benefit for income taxes -- -- | (8,454) -------- -------- | -------- Net loss ($30,104) ($ 7,848) | ($22,189) ======== ======== | ========
See accompanying notes to consolidated financial statements 4 Golden Sky DBS, Inc. Consolidated Statements of Operations (Dollars in thousands)
Six Months 2000 Ended ------------------------------ June 30, January 1 May 6 1999 to May 5 to June 30 -------- -------- -------- (unaudited) Net revenues: DBS services $ 59,570 $ 58,061 | $ 27,379 Lease and other 385 85 | 1,746 -------- -------- | -------- Total net revenues 59,955 58,146 | 29,125 | Operating expenses: | Programming, technical, general and administrative 52,944 46,494 | 20,253 Marketing and selling 25,507 9,565 | 4,623 Incentive compensation 44 148 | 402 Depreciation and amortization 17,360 12,363 | 25,796 Other expense, net -- 1,691 | -- -------- -------- | -------- Loss from operations (35,900) (12,115) | (21,949) | Interest expense (21,728) (16,346) | (8,268) Interest income 1,652 291 | 21 Other non-operating expenses, net -- (1,513) | (447) -------- -------- | -------- Loss before income taxes (55,976) (29,683) | (30,643) Benefit for income taxes -- -- | (8,454) -------- -------- | -------- Loss before extraordinary items (55,976) (29,683) | (22,189) Extraordinary loss from | extinquishment of debt, net (2,935) -- | -- -------- -------- | -------- Net loss ($58,911) ($29,683) | ($22,189) ======== ======== | ========
See accompanying notes to consolidated financial statements 5 Golden Sky DBS, Inc. Consolidated Statements of Cash Flows (Dollars in thousands)
Six Months 2000 Ended ---------------------------- June 30, January 1 May 6 1999 to May 5 to June 30 ---------- ------------ ---------- (unaudited) Cash flows from operating activities: Net loss ($ 58,911) ($ 29,683) | ($ 22,189) Adjustments to reconcile net loss | to net cash used for operating activities: | Extraordinary loss on extinquishment of debt, net 2,935 -- | -- Depreciation and amortization 17,360 12,363 | 25,796 Amortization of debt discount, deferred financing costs and other 6,133 5,463 | 3,203 Stock incentive compensation 44 148 | 402 Bad debt expense 1,239 1,589 | 1,002 Deferred income taxes -- -- | (8,454) Change in assets and liabilities: | Accounts receivable 215 (1,214) | (5,322) Inventory 3,484 794 | 1,684 Prepaid expenses and other (394) 775 | 16 Accounts payable and accrued expenses 5,719 (2,917) | 3,911 Accrued interest (203) (5,136) | 4,050 Deposits and other -- 151 | (2,958) -------- -------- | --------- Net cash used for operating activities (22,379) (17,667) | 1,141 -------- -------- | --------- Cash flows from investing activities: | Acquisitions (35,160) (1,509) | -- Capital expenditures (2,143) (209) | (737) Purchase of intangible assets -- -- | (18,691) Other (12) 386 | 916 -------- -------- | --------- Net cash used for investing activities (37,315) (1,332) | (18,512) -------- -------- | --------- Cash flows from financing activities: | Proceeds from long-term debt 100,049 -- | -- Repayments of long-term debt (8,515) (2,907) | -- Borrowings on bank credit facilities 21,000 8,000 | -- Repayments of bank credit facilities (53,000) -- | (8,000) Net advances to/from affiliates -- -- | 2,844 Restricted cash 16,336 11,850 | -- Increase in deferred financing costs (5,770) (977) | -- Capital lease repayments (117) (203) | (46) Contributions by Parent -- -- | 24,106 -------- -------- | --------- Net cash provided by financing activities 69,983 15,763 | 18,904 -------- -------- | --------- | Net increase (decrease) in cash and cash equivalents 10,289 (3,236) | 1,533 Cash and cash equivalents, beginning of period 4,460 3,241 | 5 -------- -------- | --------- Cash and cash equivalents, end of period $ 14,749 $ 5 | $ 1,538 ======== ======== | =========
See accompanying notes to consolidated financial statements 6 GOLDEN SKY DBS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Golden Sky DBS, Inc. ("Golden Sky DBS" or together with its subsidiaries, the "Company") is a holding company which operates primarily through its subsidiaries. Golden Sky DBS' subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of 24 states. Golden Sky DBS was formed in February 1999 for the purpose of completing a private offering (the "13.5% Notes Offering") of 13.5% Senior Discount Notes due 2007 (the "13.5% Notes"). Upon formation, Golden Sky DBS issued 100 shares of its common stock to Golden Sky Holdings, Inc. ("GSH") in exchange for $100 and the subsequent transfer of all of the capital stock of Golden Sky Systems, Inc. ("GSS") to Golden Sky DBS. Until February 1999, GSS was a wholly owned subsidiary of GSH. Upon completion of the aforementioned transfer, GSS became a wholly owned subsidiary of Golden Sky DBS and Golden Sky DBS became a wholly owned subsidiary of GSH. Accordingly, GSS has been treated as the predecessor to Golden Sky DBS and the historical financial statements of Golden Sky DBS prior to February 1999 are those of GSS. On May 5, 2000, GSH merged (the "Merger") with Pegasus GSS Merger Sub, Inc., a wholly owned subsidiary of Pegasus Communications Corporation ("Pegasus" or the "Parent") in a transaction accounted for as a purchase. In connection with the Merger, the stockholders of GSH exchanged all of their outstanding capital stock for approximately 12.2 million shares of Pegasus' Class A Common Stock and options to purchase a total of approximately 698,000 shares of Pegasus' Class A Common Stock and, as a consequence, GSH became a wholly owned subsidiary of Pegasus. Pegasus did not assume, guarantee or otherwise have any liability for GSH's outstanding indebtedness or any other liability of GSH or its subsidiaries. After the Merger, except to the extent permitted under the terms of the 13.5% Notes and GSS' 12.375% Senior Subordinated Notes due 2006 (the "12.375% Notes"), GSH did not assume, guarantee or otherwise have any liability for any indebtedness or other liability of Pegasus or any of Pegasus' subsidiaries. Total consideration for the Merger was approximately $1.5 billion, which consisted of approximately 12.2 million shares of Pegasus' Class A Common Stock (amounting to $579.0 million at a price of $47.54 per share, the average closing price per share five days prior and subsequent to the acquisition announcement), options to purchase a total of approximately 698,000 shares of Pegasus' Class A Common Stock (amounting to $33.2 million), approximately $383.0 million of assumed net liabilities and a deferred tax liability of approximately $489.5 million, primarily as a result of timing differences related to DBS rights. GSS was required to and made an offer (the "12.375% Notes Offer") to purchase its 12.375% Notes for 101% of their principal amount plus accrued and unpaid interest as a result of the change of control that occurred effective with the Merger. The 12.375% Notes Offer expired on June 30, 2000. None of the 12.375% Notes had been tendered and, as a result, all of the 12.375% Notes remain outstanding. Golden Sky DBS was required to and made an offer (the "13.5% Notes Offer") to purchase its 13.5% Notes for 101% of their principal amount plus accrued and unpaid interest as a result of the change of control that occurred effective with the Merger. The 13.5% Notes Offer expired on June 30, 2000. None of the 13.5% Notes had been tendered and, as a result, all of the 13.5% Notes remain outstanding. 7 GOLDEN SKY DBS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 2. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of Golden Sky DBS and all of its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for 1999 have been reclassified for comparative purposes. The unaudited financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K for the year then ended. As a result of the Merger and Pegasus' use of the purchase method of accounting to record the acquisition of the Company, the "push down" effect of the purchase price increased the Company's intangible assets by approximately $1.2 billion. Substantially all of the $1.2 billion increase in the Company's intangible assets was allocated to DBS rights, which are being amortized over a 10-year period. Additionally, the Company recorded approximately $18.7 million of intangibles relating to costs associated with the Merger and restructuring charges, which are also being amortized over a 10-year period. As a consequence, results prior to the Merger are not comparable with those subsequent to the Merger. In May 2000, Pegasus completed a two-for-one stock split of its outstanding Class A and Class B Common Stock in the form of a stock dividend. All references to PCC's shares, including shares issued and option shares included in the accompanying notes to consolidated financial statements reflect the stock split and its retroactive effect. 3. Equity: On May 5, 2000, in connection with the Merger, the stockholders of GSH exchanged all of their outstanding capital stock for shares of Pegasus' Class A Common Stock and options to purchase shares of Pegasus' Class A Common Stock and, as a result, the Company became an indirect wholly owned subsidiary of Pegasus. As of December 31, 1999 and June 30, 2000, the Company had one class of Common Stock. The Company's ability to pay dividends on its Common Stock is subject to certain restrictions. 4. Long-Term Debt:
Long-term debt consists of the following (in thousands): December 31, June 30, 1999 2000 ------------ --------- Senior Subordinated Notes payable by GSS, due 2006, interest at 12.375%, payable semi-annually in arrears on February 1 and August 1............................................................ $195,000 $195,000 Senior Discount Notes payable by Golden Sky DBS, due 2007, interest at 13.5%, payable semi-annually on March 1 and September 1, commencing September 1, 2004, net of unamortized discount of $81.0 million and $73.4 million as of December 31, 1999 and June 30, 2000, respectively................................ 112,095 119,661 Senior seven-year $115.0 million revolving credit facility, payable by GSS, interest at GSS' option at either the bank's rate plus an applicable margin or LIBOR plus an applicable margin.............. 17,000 17,000 Senior seven-year $35.0 million term loan facility, payable by GSS, interest at GSS' option at either the bank's rate plus an applicable margin or LIBOR plus an applicable margin.............. 35,000 35,000 Sellers' notes, due 2000 to 2003, interest at 6.75% to 7%........... 9,823 6,916 Capital leases and other............................................ 460 211 -------- -------- 369,378 373,788 Less current maturities............................................. 3,248 3,234 -------- -------- Long-term debt...................................................... $366,130 $370,554 ======== ========
8 GOLDEN SKY DBS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Long-Term Debt: - (Continued) GSS maintains a $115.0 million senior revolving credit facility and a $35.0 million senior term credit facility (collectively, the "GSS Credit Facility"), which is collateralized by substantially all of the assets of GSS and its subsidiaries. The GSS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of June 30, 2000, $35.9 million of stand-by letters of credit were issued pursuant to the GSS Credit Facility, including $6.9 million collateralizing the Company's outstanding sellers' notes. In January 2000, GSS completed an amendment to the GSS Credit Facility. The amendment, which was effective as of December 31, 1999, waived GSS' third quarter 1999 covenant violations and amended certain fourth quarter 1999 and year 2000 covenant requirements. Pursuant to the amendment, GSS was authorized to borrow up to an additional $20.0 million under the GSS Credit Facility prior to March 31, 2000. These incremental borrowings, which were secured by letters of credit provided by certain of GSH's former shareholders, were required to be repaid by May 31, 2000. Upon repayment of the incremental borrowings, GSS will have potential incremental borrowing capacity during the remainder of the year ending December 31, 2000 equal to the lesser of equity contributed by Pegasus to repay the incremental borrowings and fund other working capital requirements or $20.0 million. In May 2000, Pegasus made an $8.1 million capital contribution to GSS that was used to repay the incremental borrowings and a $12.0 million capital contribution to GSS that was used for working capital. As of June 30, 2000, GSS was in compliance with the GSS Credit Facility's amended covenants. The 12.375% Notes may be redeemed, at the option of GSS, in whole or in part, at various points of time after August 1, 2003 at the redemption prices specified in the 12.375% Notes Indenture, plus accrued and unpaid interest thereon. The 13.5% Notes may be redeemed, at the option of Golden Sky DBS, in whole or in part, at various points of time after March 1, 2004 at the redemption prices specified in the 13.5% Notes Indenture, plus accrued and unpaid interest thereon. The Company's indebtedness contains certain financial and operating covenants, including restrictions on the Company's ability to incur additional indebtedness, to create liens and to pay dividends. 5. Supplemental Cash Flow Information:
Significant non-cash investing and financing activities are as follows (in thousands): Six Months Ended June 30, ------------------------- 1999 2000 ---- ---- Acquisition of plant under capital leases..................................... $78 - Notes payable and related acquisition of intangibles.......................... 2,925 - Capital contribution and related acquisition of intangibles................... - $756,811 Notes payable and related acquisition of intangibles.......................... - 489,466
For the six months ended June 30, 1999 and 2000, the Company paid cash for interest in the amount of $15.5 million and $17.0 million, respectively. The Company paid no federal income taxes for the six months ended June 30, 1999 and 2000. 6. Commitments and Contingent Liabilities: Legal Matters: From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. 9 GOLDEN SKY DBS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Commitments and Contingent Liabilities: - (Continued) The Company is a rural affiliate of the National Rural Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and affiliates are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. The Company's ability to distribute DIRECTV programming services is dependent upon agreements between the NRTC and Hughes Electronics Corporation, DIRECTV's parent, and between the Company and the NRTC. 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. On July 22, 1999, DIRECTV responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to exclusive distribution 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(Degree) W orbital location, without regard to the orbital lives of the other DIRECTV satellites at the 101(Degree) W 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 now provided under the contract. 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 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 January 10, 2000, the Company and Pegasus filed a lawsuit in federal court against DIRECTV which 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 Company and Pegasus. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first 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, the Company and Pegasus filed an amended complaint which added new tort claims against DIRECTV for interference with plaintiffs' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. The Company 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. The class action was filed on February 27, 2000. All four actions are now pending before the same judge, who has set various hearing dates, including the following. On October 2, 2000, the court will hear argument on the motion for class certification and on DIRECTV's motion to dismiss certain of our claims and claims by the class members. DIRECTV's motion for partial summary judgment on the right of first refusal will be heard on October 30, 2000. The court has set a trial date of November 27, 2001 for all four actions. Management is not currently able to predict the outcome of the DIRECTV litigation matters or the effect such outcome will have on the consolidated operations, liquidity, cash flows or financial position of the Company. 10 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS This Report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to us that are based on the beliefs of our management, as well as assumptions made by and information currently available to our management. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to unknown risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated in such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions, both nationally, internationally and in the regions in which we operate; relationships with and events affecting third parties like DIRECTV, Inc.; litigation with DIRECTV; demographic changes; existing government regulations and changes in, or the failure to comply with government regulations; competition; the loss of any significant numbers of subscribers; changes in business strategy or development plans; technological developments and difficulties; the ability to attract and retain qualified personnel; our significant indebtedness; the availability and terms of capital to fund the expansion of our business; and other factors referenced in this Report and in reports and registration statements filed by Golden Sky DBS and its parent company, Pegasus Communications Corporation, from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as the date hereof. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. In reliance upon General Instruction (H)(2)(a) of Form 10-Q, Golden Sky DBS is providing the limited disclosure set forth below. Such disclosure requires us only to provide a narrative analysis of the results of operations which explains the reasons for material changes in the amount of revenue and expense items between the most recent fiscal year-to-date period presented and the corresponding year-to-date period in the preceding fiscal year. The following discussion of the results of operations of Golden Sky DBS should be read in conjunction with the consolidated financial statements and related notes which are included on pages 3-10 herein. General Golden Sky DBS, Inc. is: o A wholly owned subsidiary of Golden Sky Holdings, Inc., which is a wholly owned subsidiary of Pegasus Communications Corporation. o An independent provider of DIRECTV with 354,000 subscribers at June 30, 2000. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to approximately 1.9 million rural households in 24 states. We distribute DIRECTV through the Pegasus retail network, a network in excess of 3,000 independent retailers. We are a holding company and were originally formed in February 1999. We operate primarily through our subsidiary, Golden Sky Systems, Inc. Golden Sky Systems was originally formed in June 1996 to acquire, own and manage rights to distribute DIRECTV services to residential households and commercial establishments in certain rural areas of the United States. On May 5, 2000, we became a wholly owned subsidiary of Pegasus Communications Corporation, the largest independent provider of DIRECTV, through a merger of Golden Sky Holdings with a subsidiary of Pegasus. In connection with the merger, the stockholders of Golden Sky Holdings exchanged all of their capital stock for approximately 12.2 million shares of Pegasus' Class A Common Stock and options to purchase a total of approximately 698,000 shares of Pegasus' Class A Common Stock and, as a consequence, we became a wholly owned subsidiary of Pegasus Communications Corporation. Total consideration for the merger was approximately $1.5 billion, which consisted of: o approximately 12.2 million shares of Pegasus' Class A Common Stock (amounting to $579.0 million), 11 o options to purchase a total of approximately 698,000 shares of Pegasus' Class A Common Stock (amounting to $33.2 million), o approximately $383.0 million in assumed net liabilities, and o a deferred tax liability of approximately $489.5 million, primarily as a result of timing differences related to DBS rights. Revenues are principally derived from monthly customer subscription and pay-per-view services. In this section, we use the terms pre-marketing operating expenses, pre-marketing cash flow and location cash flow. Pre-marketing operating expenses consist of: o programming and technical expenses, including amounts paid to programming suppliers, digital satellite system authorization charges and satellite control fees, each of which is paid on a per subscriber basis, and DIRECTV royalties which are equal to 5% of DBS services revenue, and o general and administrative expenses, including administrative costs associated with our sales and customer service operations. Pre-marketing cash flow is calculated by taking our earnings and adding back the following expenses: o interest, o income taxes, o depreciation and amortization, o non-cash charges, such as incentive compensation under our stock option plan and Pegasus' restricted stock, stock option and 401(k) plans, o extraordinary items, o non-recurring charges, such as costs associated with our merger with Pegasus, and o subscriber acquisition costs, which are sales and marketing expenses incurred and promotional programming provided in connection with the addition of new subscribers. Location cash flow is pre-marketing cash flow less subscriber acquisition costs. Pre-marketing cash flow and location cash flow are not, and should not be considered, an alternative to income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under generally accepted accounting principles. Pre-marketing cash flow and location cash flow also do not necessarily indicate whether our cash flow will be sufficient to fund working capital, capital expenditures, or to react to changes in our industry or the economy generally. We believe that pre-marketing cash flow and location cash flow are important, however, for the following reasons: o those who follow our industry frequently use them as measures of performance and ability to pay debt service, and o they are measures that we, our lenders and investors use to monitor our financial performance and debt leverage. Golden Sky DBS generally does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. 12 Certain of our DBS customers, primarily those converted from Primestar's medium-power DBS business, pay a monthly rental fee to us for use of our DBS subscriber equipment. The equipment is owned by us and, accordingly, the equipment costs are capitalized and depreciated over a period of three years. These equipment costs are not included as a component of subscriber acquisition costs in our results of operations. Results of Operations Six months ended June 30, 2000 compared to the six months ended June 30, 1999 Revenues for the six months ended June 30, 2000 were $87.3 million, an increase of $27.3 million, or 46%, compared to revenues of $60.0 million for the same period in 1999. The increase is primarily due to an increase in the average number of subscribers in the first half of 2000 compared to the first half of 1999. The average monthly revenue per subscriber was $41.70 for the six months ended June 30, 2000 compared to $38.79 for the same period in 1999. Pre-marketing operating expenses were $66.7 million for the six months ended June 30, 2000, an increase of $13.8 million, or 26%, compared to $52.9 million for the same period in 1999. The increase is attributable to significant growth in subscribers over the last twelve months. As a percentage of revenue, pre-marketing operating expenses were 76.5% for the six months ended June 30, 2000 compared to 88.3% for the same period in 1999. Subscriber acquisition costs were $14.2 million for the six months ended June 30, 2000, a decrease of $11.3 million, or 44%, compared to $25.5 million for the same period in 1999. Gross subscriber additions were 48,800 during the six months ended June 30, 2000 compared to 68,600 for the same period in 1999. Subscriber acquisition costs per gross subscriber addition were $291 for the six months ended June 30, 2000 compared to $372 for the same period in 1999. The decrease in subscriber acquisition costs per gross subscriber addition is primarily due to a decrease in promotional programming. Approximately $706,000 of DBS subscriber equipment was capitalized in the second quarter of 2000 related to rental units which are being depreciated over a three year period. Incentive compensation under our stock option plan and Pegasus' restricted stock, stock option and 401(k) plans was $550,000 for the six months ended June 30, 2000 compared to $44,000 for the same period in 1999. Incentive compensation under Pegasus' restricted stock, stock option and 401(k) plans is calculated based on increases in pro forma location cash flow. Depreciation and amortization expense was $38.2 million for the six months ended June 30, 2000, an increase of $20.8 million, or 120%, compared to $17.4 million for the same period in 1999. The increase in depreciation and amortization is primarily due to an increase in the intangible asset base as the result of the change in accounting basis resulting from the acquisition of Golden Sky Holdings by Pegasus and DBS acquisitions that occurred in 1999. Other expenses were $1.7 million for the six months ended June 30, 2000. These expenses primarily reflect lease termination and severance expenses incurred prior to and as a result of the merger with Pegasus. Interest expense was $24.6 million for the six months ended June 30, 2000, an increase of $2.9 million, or 13%, compared to $21.7 million for the same period in 1999. The increase in interest expense is primarily due to higher outstanding debt balances in the first half of 2000 as compared to the first half of 1999. Interest income was $312,000 for the six months ended June 30, 2000, a decrease of $1.3 million, or 81%, compared to interest income of $1.7 million for the same period in 1999. The decrease in interest income is due to lower average cash balances, including restricted cash, in the first half of 2000 as compared to the first half of 1999. Other non-operating expenses were $2.0 million for the six months ended June 30, 2000. These expenses primarily reflect costs relating to the merger with Pegasus and losses on the disposal of fixed assets. The benefit for income taxes amounted to $8.5 million for the six months ended June 30, 2000. The benefit for income taxes is primarily attributable to the amortization of deferred tax liabilities originating from the merger with Pegasus. 13 Pre-marketing cash flow approximated $20.5 million for the six months ended June 30, 2000, an increase of $13.5 million, or 193%, compared to $7.0 million for the same period in 1999. Pre-marketing cash flow increased as a result of acquisitions and internal growth in Golden Sky DBS' subscriber base and lower operating and corporate overhead expenses. Seasonality Golden Sky DBS' operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. Inflation Golden Sky DBS believes that inflation has not been a material factor affecting its business. In general, Golden Sky DBS' revenues and expenses are impacted to the same extent by inflation. A majority of Golden Sky DBS' indebtedness bears interest at a fixed rate. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent issuance of SFAS No. 137 in July 1999 and SFAS No. 138 in June 2000, SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Management believes that the adoption of SFAS No. 133 will not have a material effect on our business, financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met in order to recognize revenue and provides guidance for disclosure related to revenue recognition policies. The subsequent issuance of SAB 101B has deferred the timing of the adoption of the requirements until the fourth quarter of 2000. Management believes that the adoption of SAB 101 will not have a material effect on our business, financial position or results of operations. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS DIRECTV/NRTC Litigation. We hereby incorporate by reference the disclosure relating to "DIRECTV/NRTC Litigation" set forth under "Item 3: Legal Proceedings" on pages 25 and 26 of Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the fiscal year ended December 31, 1999. The last paragraph of this disclosure is deleted and replaced in its entirety by the paragraphs set forth below. To the extent the disclosure set forth below supersedes or updates other disclosure under "Item 3: Legal Proceedings," such disclosure is hereby deemed to be modified, superseded and/or updated. On February 10, 2000, we and Pegasus filed an amended complaint which added new tort claims against DIRECTV for interference with plaintiffs' 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 National Rural Telecommunications Cooperative. The class action was filed on February 27, 2000. All four actions are now pending before the same judge, who has set various hearing dates, including the following. On October 2, 2000, the court will hear argument on the motion for class certification and on DIRECTV's motion to dismiss certain of our claims and claims by the class members. DIRECTV's motion for partial summary judgment on the right of first refusal will be heard on October 30, 2000. The court has set a trial date of November 27, 2001 for all four actions. The outcome of this litigation and the litigation filed by the National Rural Telecommunications Cooperative could have a material adverse effect on our direct broadcast satellite business. Other Matters. 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 consolidated operations, cash flows or financial position. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following documents are filed as Exhibits to this Report on Form 10-Q. 27.1 Financial Data Schedule. 99.1 Material incorporated by reference from Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the fiscal year ended December 31, 1999. (b) Reports on Form 8-K On May 19, 2000, we filed a Current Report on Form 8-K dated May 5, 2000 reporting under Item 1 that (i) a change of control had occurred with respect to the merger (the "Merger") of Golden Sky Holdings, Inc. into a wholly-owned subsidiary of Pegasus on May 5, 2000, which resulted in Golden Sky DBS becoming a wholly-owned subsidiary of Pegasus and (ii) the resignation of our directors and the election of three new directors to our Board of Directors. 15 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Golden Sky DBS, Inc. has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN SKY DBS, INC. August 11, 2000 By: /s/ M. Kasin Smith - ------------------------------- ----------------------- Date M. Kasin Smith Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-27.1 2 0002.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Golden Sky DBS, Inc. as of June 30, 2000 (unaudited) and the related consolidated statements of operations for the three and six months ended June 30, 2000 (unaudited). This information is qualified in its entirety by reference to such financial statements. (Dollars in thousands, except per share data) 1 U.S. DOLLARS 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 JUN-30-2000 JUN-30-2000 1 1 1,538 1,538 0 0 10,098 10,098 1,000 1,000 630 630 24,008 24,008 9,047 9,047 4,842 4,842 1,508,602 1,508,602 38,894 38,894 314,661 314,661 0 0 904 904 0 0 614,394 614,394 1,508,602 1,508,602 43,723 87,271 43,723 87,271 0 0 68,423 121,335 1,330 1,648 0 0 12,461 24,614 (38,491) (60,326) (8,454) (8,454) (30,037) (51,872) 0 0 0 0 0 0 (30,037) (51,872) (300,370.00) (518,720.00) (300,370.00) (518,720.00)
EX-99 3 0003.txt EXHIBIT 99.1 Exhibit 99.1 Material incorporated by reference from Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the fiscal year ended December 31, 1999 The following material has been incorporated by reference from Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the fiscal year ended December 31, 1999 and is being filed as Exhibit 99.1 to the Form 10-Q for Golden Sky DBS, Inc. for the quarter ended June 30, 2000 pursuant to Rule 12b-23(a)(3) of the Exchange Act of 1934, as amended. ITEM 3: LEGAL PROCEEDINGS DIRECTV/NRTC Litigation. On June 3, 1999, the National Rural Telecommunications Cooperative filed a lawsuit in federal court against DIRECTV seeking a court order to enforce the National Rural Telecommunications Cooperative's contractual rights to obtain from DIRECTV certain premium programming formerly distributed by United States Satellite Broadcasting Company, Inc. for exclusive distribution by the National Rural Telecommunications Cooperative's members and affiliates in their rural markets. The National Rural Telecommunications Cooperative also sought a temporary restraining order preventing DIRECTV from marketing the premium programming in such markets and requiring DIRECTV to provide the National Rural Telecommunications Cooperative with the premium programming for exclusive distribution in those areas. The court, in an order dated June 17, 1999, denied the National Rural Telecommunications Cooperative a preliminary injunction on such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV responded to the National Rural Telecommunications Cooperative's continuing lawsuit by rejecting the National Rural Telecommunications Cooperative's claims to exclusive distribution rights and by filing a counterclaim seeking judicial clarification of certain provisions of DIRECTV's contract with the National Rural Telecommunications Cooperative. In particular, DIRECTV contends in its counterclaim that the term of DIRECTV's contract with the National Rural Telecommunications Cooperative is measured solely by the orbital life of DBS-1, the first DIRECTV satellite launched into orbit at the 101 (degree) W orbital location, without regard to the orbital lives of the other DIRECTV satellites at the 101 (degree) W orbital location. DIRECTV also alleges in its counterclaim that the National Rural Telecommunications Cooperative's right of first refusal, which is effective at the end of the term of DIRECTV's contract with the National Rural Telecommunications Cooperative, does not provide for certain programming and other rights comparable to those now provided under the contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss certain of the National Rural Telecommunications Cooperative's claims, leaving all of the causes of action asserted by the National Rural Telecommunications Cooperative at issue. On September 9, 1999, the National Rural Telecommunications Cooperative 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 National Rural Telecommunications Cooperative filed a separate lawsuit in federal court against DIRECTV claiming that DIRECTV had failed to provide to the National Rural Telecommunications Cooperative 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 a portion of the National Rural Telecommunications Cooperative's lawsuit regarding launch fees and other benefits. In particular, the court dismissed the tort claim asserted by the National Rural Telecommunications Cooperative, but left in place the remaining claims asserted by the National Rural Telecommunications Cooperative. The court also consolidated that lawsuit with the other pending National Rural Telecommunications Cooperative/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 National Rural Telecommunications Cooperative's right of first refusal, effective at the termination of DIRECTV's contract with the National Rural Telecommunications Cooperative, 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 anew lawsuit we and Golden Sky filed against DIRECTV, discussed below. The court has not yet set a trial date on the merits of the motion for partial summary judgment. On January 10, 2000, we and Golden Sky 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 National Rural Telecommunications Cooperative 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 National Rural Telecommunications Cooperative with premium programming, thereby preventing the National Rural Telecommunications Cooperative from providing this programming to the class members and affiliates. The claims are also based on DIRECTV's position with respect to launch fees and other benefits, term and rights of first refusal. The complaint seeks monetary damages and a court order regarding the rights of the National Rural Telecommunications Cooperative and its members and affiliates. On February 10, 2000, we and Golden Sky filed an amended complaint which added new tort claims against DIRECTV for interference with plaintiffs' relationships with manufacturers, distributors and dealers of direct broadcast satellite equipment. We and Golden Sky also withdrew the class action allegations to allow a new class action to be filed on behalf of the members and affiliates of the National Rural Telecommunications Cooperative. The outcome of this litigation and the litigation filed by the National Rural Telecommunications Cooperative could have a material adverse effect on our direct broadcast satellite business. -----END PRIVACY-ENHANCED MESSAGE-----