<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 19, 1999
PEGASUS COMMUNICATIONS CORPORATION
---------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 0-21389 51-0374669
----------------- ---------------- ---------------------
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, Pennsylvania 19004
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 888-438-7488
------------
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
This Amendment No. 1 amends the current report on Form 8-K dated
November 19, 1999 and originally filed on January 12, 2000, by supplementing
Item 5 with additional information and adding Item 7, consisting of the
financial statements of Golden Sky Holdings, Inc. and pro forma financial
information.
Item 5. Other Events.
On January 20, 2000, Pegasus Communications Corporation issued a press
release announcing that it had priced and increased the size of its previously
announced private offering of Series C convertible preferred stock. A copy of
the press release is filed as Exhibit 99.1 and incorporated in this report by
reference.
On January 25, 2000, Pegasus completed a private offering to qualified
institutional buyers of $300 million in liquidation preference of its Series C
convertible preferred stock, including shares representing $50 million in
liquidation preference that were issued upon exercise of the initial purchasers'
over-allotment option. The Series C convertible preferred stock will pay an
annual dividend of 6.50% of the $100 per share liquidation preference, with
dividends payable in cash or, at Pegasus' option, in shares of the Company's
Class A common stock. The Series C convertible preferred stock is convertible at
any time into shares of the Company's Class A common stock. The initial
conversion price was set at $127.50 per common share, which is equal to an
initial conversion ratio of 0.7843 shares of the Company's Class A common stock
for each share of Series C convertible preferred stock, representing a 125%
conversion premium. Pegasus intends to use the $291 million in proceeds, after
giving effect to the initial purchasers' discount, for working capital and
general corporate purposes. The Series C convertible preferred stock and the
Class A common stock into which the Series C convertible preferred stock is
convertible has not been registered under the Securities Act of 1933 and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements. A copy of Pegasus' January 26, 2000
press release regarding the completion of the private offering is attached as
Exhibit 99.2 and incorporated in this report by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Acquired or to be Acquired Businesses.
The following historical financial statements are attached hereto:
<PAGE>
<TABLE>
<CAPTION>
Golden Sky Holdings, Inc. (a proposed merger) Page
------------------------- ----
<S> <C> <C>
(i) Report of KPMG LLP F-1
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1998 F-2
(iii) Consolidated Statements of Operations for the period from inception
(June 25, 1996) through December 31, 1996, and for the years ended
December 31, 1997 and 1998 F-3
(iv) Consolidated Statements of Stockholder's Equity (Deficit) for the period
from inception (June 25, 1996) through December 31, 1996, and for the
years ended December 31, 1997 and 1998 F-4
(v) Consolidated Statements of Cash Flows for the period from inception
(June 25, 1996) through December 31, 1996, and for the years ended
December 31, 1997 and 1998 F-5
(vi) Notes to Consolidated Financial Statements F-6
(vii) Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 F-30
(viii) Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1998 and 1999 (unaudited) F-31
(ix) Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1999 (unaudited) F-32
(x) Notes to Condensed Consolidated Financial Statements (unaudited) F-33
(b) Pro Forma Consolidated Financial Information.
(i) Basis of Presentation F-38
(ii) Pro Forma Consolidated Statement of Operations Data for the Year ended
December 31, 1998 F-39
(iii) Pro Forma Consolidated Statement of Operations Data for the Nine Months
ended September 30, 1999 F-40
(iv) Notes to Pro Forma Consolidated Statements of Operations Data F-41
(v) Pro Forma Consolidated Balance Sheet as of September 30, 1999 F-45
(vi) Notes to Pro Forma Consolidated Balance Sheet F-46
(c) Exhibits.
99.1 Press Release dated January 20, 2000.
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Scott A. Blank
-------------------------------
Scott A. Blank
Vice President
February 2, 2000
<PAGE>
Independent Auditors' Report
Board of Directors and Investors
Golden Sky Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
Holdings, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
period from inception (June 25, 1996) through December 31, 1996, and for the
years ended December 31, 1997 and 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Golden Sky Holdings,
Inc. as of December 31, 1997 and 1998 and the results of their operations and
their cash flows for the period from inception (June 25, 1996) through December
31, 1996, and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
February 22, 1999,
except for paragraph seven of note 5, which
is as of March 22, 1999 and note 15, which
is as of June 30, 1999
Kansas City, Missouri
F-1
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 13,636 $ 4,488
Restricted cash, current portion............................... -- 28,083
Subscriber receivables (net of allowance for uncollectible
accounts of $138 and $293, respectively).................... 3,843 8,632
Other receivables.............................................. 335 2,465
Inventory...................................................... 2,174 10,146
Prepaid expenses and other..................................... 127 1,859
--------- ----------
Total current assets.............................................. 20,115 55,673
Restricted cash, net of current portion........................... -- 23,534
Property and equipment (net of accumulated depreciation of
$1,061 and $3,214, respectively)............................... 2,936 4,994
Intangible assets, net............................................ 129,896 233,139
Deferred financing costs.......................................... 3,106 10,541
Other assets...................................................... 187 218
--------- ----------
Total assets................................................. $ 156,240 $ 328,099
========= ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable......................................... $ 8,471 $ 13,539
Interest payable............................................... 786 11,009
Current maturities of long-term obligations.................... 2,538 8,916
Unearned revenue............................................... 2,630 5,574
Accrued payroll and other...................................... 1,847 1,391
--------- ----------
Total current liabilities......................................... 16,272 40,429
Long-term obligations, net of current maturities:
12 3/8% Notes................................................. -- 195,000
Bank debt...................................................... 60,000 67,000
Seller notes payable........................................... 6,200 6,912
Other notes payable and obligations under capital leases....... 375 376
Minority interest.............................................. 2,928 2,420
--------- ----------
Total long-term obligations, net of current maturities............ 69,503 271,708
--------- ----------
Total liabilities................................................. 85,775 312,137
Mandatorily Redeemable Preferred Stock:
Series A Convertible Participating Preferred Stock, par value
$.01; 418,000 shares authorized, issued and outstanding..... 48,989 56,488
Series B Convertible Participating Preferred Stock, par value
$.01; 228,500 shares authorized, 228,442 shares issued and
outstanding................................................. 46,388 53,489
Series C Senior Convertible Preferred Stock, par value $.01;
no shares authorized, issued or outstanding at December 31,
1997; 51,000 shares authorized, issued and outstanding at
December 31, 1998........................................... -- 10,455
--------- ----------
95,377 120,432
Commitments and contingencies
Stockholders' Equity (Deficit):
Common Stock, par value $.01; 1,000,000 shares authorized,
100 shares issued and outstanding at December 31, 1997;
24,931 shares issued and outstanding at December 31, 1998.... -- --
Additional paid-in capital..................................... -- 25
Accumulated deficit............................................ (24,912) (104,495)
--------- ----------
Total stockholders' equity (deficit).............................. (24,912) (104,470)
--------- ----------
Total liabilities and stockholders' equity (deficit)......... $ 156,240 $ 328,099
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, ------------------------------
1996 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Revenue:
DBS services.................................. $ 219 $ 16,452 $ 74,910
Lease and other............................... 36 944 1,014
-------- -------- --------
Total revenue.................................... 255 17,396 75,924
Costs and Expenses:
Costs of DBS services......................... 130 9,304 45,291
System operations............................. 26 3,796 11,021
Sales and marketing........................... 73 7,316 32,201
General and administrative.................... 1,035 2,331 7,431
Depreciation and amortization................. 97 7,300 23,166
-------- -------- --------
Total costs and expenses......................... 1,361 30,047 119,110
-------- -------- --------
Operating loss................................... (1,106) (12,651) (43,186)
Non-operating items:
Interest and investment income................ 1 40 1,573
Interest expense.............................. (62) (3,246) (20,538)
-------- -------- --------
Total non-operating items........................ (61) (3,206) (18,965)
-------- -------- --------
Loss before income taxes......................... (1,167) (15,857) (62,151)
Income taxes..................................... -- -- --
-------- -------- --------
Loss before extraordinary charge................. (1,167) (15,857) (62,151)
Extraordinary charge on early retirement of debt. -- -- (2,577)
-------- -------- --------
Net loss......................................... (1,167) (15,857) (64,728)
Preferred stock dividend requirements............ -- (7,888) (14,855)
-------- -------- --------
Net loss attributable to common shareholders..... $ (1,167) $(23,745) $(79,583)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------ ---------- ----------- -------
<S> <C> <C> <C> <C>
Balance at inception (June 25, 1996)......................... $ -- $ -- $ -- $ --
Issuance of 1,000 shares of Golden Sky Systems Common Stock.. -- 1 -- 1
Net loss..................................................... -- -- (1,167) (1,167)
---- ---- --------- ---------
Balance at December 31, 1996................................. -- 1 (1,167) (1,166)
Cancellation of originally issued Golden Sky Systems
Common Stock............................................... -- (1) -- (1)
Issuance of 100 shares of Golden Sky Holdings Common Stock
upon formation of Golden Sky Holdings, Inc. ............... -- -- -- --
Dividends accrued on Series A Preferred Stock................ -- -- (7,189) (7,189)
Dividends accrued on Series B Preferred Stock............... -- -- (699) (699)
Net loss..................................................... -- -- (15,857) (15,857)
---- ---- --------- ---------
Balance at December 31, 1997................................. -- -- (24,912) (24,912)
Issuance of 24,831 shares of Golden Sky Holdings Common
Stock pursuant to stock options exercised.................. -- 25 -- 25
Dividends accrued on Series A Preferred Stock................ -- -- (7,499) (7,499)
Dividends accrued on Series B Preferred Stock................ -- -- (7,101) (7,101)
Dividends accrued on Series C Preferred Stock................ -- -- (255) (255)
Net loss..................................................... -- -- (64,728) (64,728)
---- ---- --------- ---------
Balance at December 31, 1998................................. $ -- $ 25 $(104,495) $(104,470)
==== ==== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, -----------------------------
1996 1997 1998
------------ --------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss.................................................... $(1,167) $(15,857) $ (64,728)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 97 7,300 23,166
Amortization of deferred financing costs................. -- 215 977
Extraordinary charge on early retirement of debt......... -- -- 2,577
Change in operating assets and liabilities, net of
acquisitions:
Subscriber receivables, net of unearned revenue........ (13) (2,501) (1,757)
Other receivables...................................... (123) (161) (1,568)
Inventory.............................................. (31) (1,604) (8,049)
Prepaid expenses and other............................. (17) (203) (1,228)
Trade accounts payable................................. 372 7,515 5,068
Interest payable....................................... 53 806 10,223
Accrued payroll and other.............................. 39 1,379 (1,270)
------- -------- ---------
Net cash used in operating activities....................... (790) (3,111) (36,589)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets....................... (2,806) (120,051) (104,487)
Offering proceeds and investment earnings placed in escrow.. -- -- (51,617)
Purchases of property and equipment......................... (105) (998) (3,317)
Other....................................................... (320) 320 (500)
------- -------- ---------
Net cash used in investing activities....................... (3,231) (120,729) (159,921)
Cash Flows From Financing Activities
Proceeds from investors' subscriptions to purchase
preferred stock.......................................... 2,499 -- --
Proceeds from issuance of Series A Preferred Stock.......... -- 35,489 --
Proceeds from bridge loan................................... -- 10,000 --
Proceeds from issuance of Series B Preferred Stock.......... -- 35,616 --
Net proceeds from issuance of 12 3/8% Notes................. -- -- 189,150
Borrowings on bank debt..................................... -- 75,000 90,000
Principal payments on bank debt............................. -- (15,000) (83,000)
Proceeds from issuance of notes payable..................... 2,396 2,115 --
Principal payments on notes payable and obligations under
capital leases........................................... (396) (2,902) (3,675)
Proceeds from issuance of Common Stock...................... 1 -- 25
Increase in deferred financing costs........................ -- (3,321) (5,138)
------- -------- ---------
Net cash provided by financing activities................... 4,500 136,997 187,362
------- -------- ---------
Net increase (decrease) in cash and cash equivalents..... 479 13,157 (9,148)
Cash and cash equivalents, beginning of period........... -- 479 13,636
------- -------- ---------
Cash and cash equivalents, end of period................. $ 479 $ 13,636 $ 4,488
======= ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest...................................... $ 9 $ 2,225 $ 9,337
Property and equipment acquired under capitalized lease
obligations.............................................. -- 554 609
Retirement of Credit Agreement from borrowings under the
Credit Facility.......................................... -- -- 88,000
Issuance of seller notes payable in acquisitions............ 2,450 8,600 10,157
Conversion of notes payable and subscriptions to Series A
Preferred Stock.......................................... -- 6,311 --
Conversion of notes payable to Series B
Preferred Stock.......................................... -- 10,073 --
Series C Preferred Stock issued in acquisition.............. -- -- 10,200
Preferred dividend requirements accrued and unpaid.......... -- 7,888 14,855
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
+<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Organization and Legal Structure
Golden Sky Holdings, Inc. (the "Company" or "Holdings") is a Delaware
corporation formed on September 9, 1997 for the purpose of holding all the
common and preferred stock of Golden Sky Systems, Inc. ("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. Accordingly, Systems has been treated as the predecessor to Holdings
and the historical financial statements of Holdings presented for periods prior
to September 9, 1997 are those of Systems.
Until February 1999, Systems was a wholly-owned subsidiary of Holdings. 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.
Principal Business
Systems is the second largest independent provider of DIRECTV subscription
television services. DIRECTV is the leading direct broadcast satellite ("DBS")
company serving the continental United States. Systems, a Delaware corporation
formed on June 25, 1996 ("Inception"), is a non-voting affiliate of the National
Rural Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with
Hughes Communications Galaxy, Inc. ("Hughes") for the exclusive right to
distribute DIRECTV programming to homes in certain rural territories of the
United States ("Rural DIRECTV Markets"). As of December 31, 1998, Systems had
acquired 48 Rural DIRECTV Markets in 22 states with approximately 1.7 million
households. As of that same date, Systems served approximately 230,500
subscribers.
Significant Risks and Uncertainties
Substantial Leverage. The Company is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December 31,
1998, the Company had outstanding long-term debt (including current portion)
totaling approximately $278.2 million. Substantially all of the Company's assets
are pledged as collateral on its long-term debt. Further, the terms associated
with the Company's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for the Company and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement the Company's business strategy.
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, the Company has sustained
significant losses since Inception. The Company's operating losses were $1.1
million, $12.7 million and $43.2 million for the periods ended December 31,
1996, 1997 and 1998, respectively. The Company's net losses during those same
periods aggregated $1.2 million, $15.9 million and $64.7 million, respectively.
Improvement in the Company's results of operations is principally dependent upon
its ability to cost effectively expand its subscriber base, control subscriber
churn (i.e., the rate at which subscribers terminate service), and effectively
manage its operating and overhead costs. No assurance can be given that the
Company will be effective with regard to these matters. The Company incurs
significant costs to acquire DIRECTV subscribers. The high cost of obtaining new
subscribers magnifies the negative effects of subscriber churn. The Company
anticipates that it will continue to experience operating losses through at
least 1999. There can be no assurance that such operating losses will not
continue beyond 1999 or that the Company's operations will generate sufficient
cash flows to pay its obligations, including its obligations on its long-term
debt.
F-6
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
1. Organization and Nature of Operations - continued
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. The Company obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result, the
Company would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, the Company relies upon DIRECTV to continue to
provide programming services on a basis consistent with its past practice. Any
change in such practice due to, for example, a failure to replace a satellite
upon the expiration of its useful orbital life or a delay in launching a
successor satellite may prevent the Company from continuing to provide DBS
services and could have a material adverse effect on the Company's financial
condition and results of operations. Additionally, the Company's ability to
offer DIRECTV programming services depends upon agreements between the NRTC and
Hughes and between the Company and the NRTC. The NRTC's interests may differ
from the Company's interests. The Company would be materially and adversely
affected by the termination of the NRTC's agreement with Hughes and/or the
termination of the Company's agreements with the NRTC. The Company'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 the Company's business.
Competition. The subscription television industry is highly competitive. The
Company faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than the Company. The
Company's ability to effectively compete in the subscription television industry
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Holdings and its majority-owned, direct and indirect subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Minority interest represents the cumulative earnings and losses, after capital
contributions, attributable to minority partners and stockholders.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number of
estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1997 and 1998,
cash and cash equivalents include cash on hand, demand deposits and money market
accounts.
F-7
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Summary of Significant Accounting Policies - continued
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, include 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, restricted cash was
composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and
consists of receivers, satellite dishes and accessories ("DBS Equipment"). The
Company subsidizes the cost to the consumer of such equipment, which is required
to receive DIRECTV programming services. Additionally, the Company subsidizes
the cost to the consumer of installation of DBS Equipment. Equipment and
installation revenues and related expenses are recognized upon delivery and
installation of DBS Equipment. Net transaction costs associated with the sale
and installation of DBS Equipment are reported as a component of sales and
marketing expenses in the accompanying consolidated statements of operations.
During the periods ended December 31, 1996, 1997 and 1998, aggregate proceeds
from the sale and installation of DBS Equipment totaled $57,000, $3.8 million
and $11.0 million, respectively; related cost of sales totaled $68,000, $4.6
million and $25.8 million during those same periods.
Long-lived Assets
The Company reviews its long-lived assets (e.g., property and equipment) and
certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For assets which are held and used in
operations, the asset would be impaired if the book value of the asset exceeded
the undiscounted future cash flows related to the asset. For those assets that
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. The Company considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited, generally up to
12 years. The expected period to be benefited corresponds to the remaining
estimated orbital lives of the satellites used by Hughes for distribution of
DIRECTV programming services. Hughes' satellites are estimated to have orbital
lives of approximately 15 years from the respective launch dates in December
1993, August 1994 and June 1995.
F-8
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Summary of Significant Accounting Policies - continued
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying value approximates fair value
as a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of the 12 3/8% Notes (as
defined) is based on quoted market prices. As of December 31, 1998, the
carrying value of the 12 3/8% Notes was $195.0 million; the fair value
of the 12 3/8% Notes approximated $199.9 million as of that same date.
The carrying value of Systems' Credit Facility (as defined) and other
notes payable approximate fair value, as interest rates are variable or
approximate market rates.
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months
and revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative costs
related to the Company's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $33,000,
$1.4 million and $5.1 million during the periods ended December 31, 1996, 1997
and 1998, respectively.
Income Taxes
Systems elected to be taxed as an S Corporation for federal income tax
purposes in 1996. As an S Corporation, Systems was generally not directly
subject to income taxation. On February 12, 1997, Systems terminated its S
Corporation status, and thereafter is subject to income taxation as a C
Corporation under Subchapter "C" of the Internal Revenue Code. Upon formation,
Holdings elected to be taxed as a C Corporation for federal income tax purposes.
Pro forma income taxes have not been presented because the Company has incurred
operating losses in all periods.
Effects of Recently Issued Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") during the first quarter
of 1998. FAS No. 130 established new rules for the reporting of comprehensive
income and its components. FAS No. 130 has no impact on net income or
stockholder's equity. The Company has no components of comprehensive income
other than net loss and thus, adoption of FAS No. 130 had no effect on its
financial statements.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS No. 133"). FAS No. 133 is effective for fiscal years beginning after June
15, 1999. FAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Currently, the Company has no
derivative instruments or hedging
F-9
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. Summary of Significant Accounting Policies - continued
arrangements. Accordingly, adoption of FAS No. 133 is not expected to have a
material effect on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, defines costs related to start-up activities and requires
that such costs be expensed as incurred. As the Company previously has expensed
all such costs, the adoption of SOP 98-5 is not expected to effect the Company's
financial position or results of operations.
Reclassifications
Certain amounts from the prior years consolidated financial statements have
been reclassified to conform with the current year presentation.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
3. Acquisitions
The Company accounts for its acquisitions using the purchase method. The
Company's consolidated statements of operations for the periods ended December
31, 1996, 1997 and 1998 include the results of operations of acquired Rural
DIRECTV Markets from the respective acquisition dates.
The aggregate purchase price (including direct acquisition costs) for the
acquisitions completed during 1996, 1997 and 1998 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
DIRECTV distribution rights................... $ 4,664 $ 116,394 $114,747
Customer lists................................ 453 9,450 7,114
Non-compete agreements........................ 35 4,879 2,587
Property and equipment........................ 135 1,953 204
Minority interest............................. -- (2,931) --
Working capital, net.......................... (31) (20) 192
---------- --------- --------
$ 5,256 $ 129,725 $124,844
========== ========= ========
</TABLE>
F-10
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. Acquisitions - continued
The following summarizes the Company's acquisitions of Rural DIRECTV Markets
consummated during 1996, 1997 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
- ----------------------------------------------- ------------------------ ----------------------- -----------------
<S> <C> <C>
Aurora Cable TV............................... November 15, 1996 Tennessee $ 1,092
TV Tennessee, Inc............................. November 22, 1996 Tennessee 4,164
--------
Total 1996 acquisitions.................... $ 5,256
========
Deep East Texas Telecommunications, Inc....... February 7, 1997 Texas $ 1,919
Images DBS Kansas, L.C., Images DBS
Oaklahoma, L.C. and Total Communications February 12, 1997 Kansas/Oklahoma 12,702
Inc.........................................
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
Cooperative ................................ August 26, 1997 Texas 9,453
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
========
</TABLE>
F-11
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
3. Acquisitions - continued
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
- ----------------------------------------------- ------------------------ ----------------------- -----------------
<S> <C> <C> <C>
Direct Broadcast Satellite, a segment of
Nemont Communications Inc................... January 14, 1998 Montana/Wyoming 8,284
Triangle Communications System, Inc........... January 20, 1998 Montana 9,765
Wyoming Mutual Telephone...................... January 21, 1998 Iowa 527
North Willamette Telephone.................... March 10, 1998 Oregon 6,015
Northwest Communications...................... March 10, 1998 North Dakota 1,363
Beulahland Communications, Inc................ March 19, 1998 Colorado 835
Direct Broadcast Satellite, a segment of SCS
Communications & Security, Inc.............. April 20, 1998 Oregon 5,386
PrimeWatch, Inc............................... May 8, 1998 North Carolina 7,988
Mega TV....................................... May 11, 1998 Georgia 2,103
Direct Broadcast Satellite, a division of
Baldwin County Electric Membership
Corporation ................................ June 29, 1998 Alabama 11,769
Frontier Corporation.......................... July 8, 1998 Wisconsin 734
North Texas Communications.................... August 6, 1998 Texas 3,118
SEMO Communications Corporation............... August 26, 1998 Missouri 2,918
DBS Segment of Cumby Cellular, Inc............ August 31, 1998 Texas 7,553
Minburn Telephone............................. September 18, 1998 Iowa 447
Western Montana DBS, Inc. dba Rocky
Mountain DBS ............................... October 2, 1998 Idaho/Montana 20,740
Direct Broadcast Satellite, a segment of
Volcano Vision, Inc......................... October 9, 1998 California 31,425
North Central Missouri Electric Coop........ November 2, 1998 Missouri 1,745
Star Search Rural Television, Inc............. November 5, 1998 Oklahoma 2,129
--------
Total 1998 acquisitions.................... $124,844
========
</TABLE>
The unaudited pro forma information presented below reflects the Company's
acquisitions of Rural DIRECTV Markets consummated during 1997 and 1998 as if
each such acquisition had occurred as of the beginning of the period presented.
These results are not necessarily indicative of future operating results or of
what would have occurred had the acquisitions been consummated at those times
(dollars in thousands).
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
Total revenue................................. $ 39,937 $ 87,857
Net loss before extraordinary charge.......... (26,654) (79,813)
</TABLE>
Subsequent to December 31, 1998, the Company acquired the exclusive rights
to provide DIRECTV programming in four additional Rural DIRECTV Markets. These
Rural DIRECTV Markets served approximately 10,600 subscribers as of the
respective acquisition dates. The aggregate purchase price of these
acquisitions, which represent approximately 54,000 television households,
totaled $19.9 million.
During 1997, Systems acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). Systems has an option to purchase, for approximately
$3.0 million, the remaining ownership interest in DCE that it does not own.
Systems may exercise this option by delivering no earlier than April 9, 1999,
and no later than April 23, 1999, written notice to DCE of its intention to
exercise such option. Pursuant to the related operating agreement between
Systems and DCE, closing shall occur no later than 30 days after the delivery of
such notice.
F-12
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. Intangible Assets
Intangible assets, which are amortized using the straight-line method over
the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------- Estimated
1997 1998 Useful Life
----------------- ---------------- ----------------
<S> <C> <C> <C>
DIRECTV distribution rights.............. $121,969 $236,531 10-12 years
Customer lists........................... 9,903 17,018 5 years
Non-compete agreements................... 4,914 7,501 3 years
-------- --------
136,786 261,050
Less accumulated amortization............ (6,890) (27,911)
-------- --------
Intangible assets, net............... $129,896 $233,139
======== ========
</TABLE>
5. Long-Term Obligations
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------- --------
<S> <C> <C>
12 3/8% Notes................................................. $ -- $195,000
Bank debt..................................................... 60,000 67,000
Seller notes payable.......................................... 8,600 15,407
Other notes payable and obligations under capital leases...... 513 797
Minority interest............................................. 2,928 2,420
------- --------
Total long-term obligations................................... 72,041 280,624
Less current maturities....................................... (2,538) (8,916)
------- --------
Long-term obligations, net of current maturities......... $69,503 $271,708
======= ========
</TABLE>
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, with the first interest payment due
February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes
Offering resulted in net proceeds to the Company of approximately $189.2 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $5.8 million). Approximately $45.2 million of the net proceeds of
the 12 3/8% Notes Offering were placed in escrow to fund the first four
semi-annual interest payments (through August 1, 2000) on the 12 3/8% Notes.
Additionally, $5.3 million was reserved to fund a portion of a contingent
reduction of the Company's availability under its Credit Facility. Such
contingent reduction will not occur as a result of the February 1999 amendment
to the Credit Facility (see Note 15).
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of payment to all existing and future subordinated indebtedness,
if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional,
joint and several basis by Argos Support Services Company ("Argos") and
PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned
subsidiaries of the Company.
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,
F-13
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. Long-Term Obligations - continued
Systems may, at its option, redeem up to 35% of the originally issued aggregate
principal amount of the 12 3/8% Notes, at a redemption price equal to 112.375%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of redemption solely with the net proceeds of a public equity
offering of Systems or Holdings yielding gross proceeds of at least $40.0
million and any subsequent public equity offerings (provided that, in the case
of any such offering or offerings by Holdings, all the net proceeds thereof are
contributed to Systems); provided, further that immediately after any such
redemption the aggregate principal amount of Notes outstanding must equal at
least 65% of the originally issued aggregate principal amount of the 12 3/8%
Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
Systems' ability to incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur indebtedness that is subordinate in right of
payment to any senior indebtedness and senior in right of payment to the 12 3/8%
Notes, incur liens, permit restrictions on the ability of subsidiaries to pay
dividends or make certain payments to Systems, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of Systems' assets.
In the event of a change of control, as defined in the 12 3/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase.
The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act"). During 1998,
Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective), Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin). At
December 31, 1997, the effective rates on these loans ranged from 9% to 11%.
During May 1998, Systems entered into a seven-year, $150.0 million amended
credit facility (the "Credit Facility") with a syndicate of lenders. The Credit
Facility provides for a term loan commitment of $35.0 million and a revolving
loan commitment of $115.0 million. Borrowings under the Credit Facility bear
interest at variable rates (approximately 10% as of December 31, 1998)
calculated on a base rate, such as the prime rate or LIBOR, plus an applicable
margin. As of December 31, 1998, aggregate borrowings outstanding under the
Credit Facility totaled $67.0 million, including $35.0 million borrowed pursuant
to the Credit Facility's term loan commitment.
Upon execution of the Credit Facility, Systems recognized an extraordinary
charge of approximately $2.6 million to write-off unamortized deferred financing
costs associated with the Credit Agreement.
In February 1999, Systems' Credit Facility was amended (the "Amended Credit
Facility") to permit, among other things, the offering of senior discount notes
by Golden Sky DBS (see Note 15). The Amended Credit Facility's term loan
commitment amortizes in specified quarterly installments from March 31, 2002
through maturity on December 31, 2005. The availability of revolving loan
borrowings under the Amended Credit Facility reduces by specified amounts over
the period from March 31, 2001 through maturity on September 30, 2005. In
February 1999, Systems repaid all outstanding borrowings under the revolving
loan commitment. Such repayment
F-14
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. Long-term Obligations - continued
was funded from the contribution by Golden Sky DBS of the net proceeds of the 13
1/2% Notes Offering to Systems and totaled $53.0 million. Upon execution of the
Amended Credit Facility, Systems recognized an extraordinary charge of
approximately $2.9 million to write off unamoritized deferred financing costs
associated with the Credit Facility.
The Amended Credit Facility contains a number of significant covenants that,
among other things, limit Systems' ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or transact
with affiliates. As of each of December 31, 1997 and 1998, no amounts were
available for distribution to Holdings.
The Amended Credit Facility also contains a number of financial covenants
that will require Systems to meet certain financial ratios and financial
condition tests. These financial covenants, in certain instances, become
effective at different points in time and vary over time. The covenants include
limitations on indebtedness per subscriber, limitations on subscriber
acquisition costs, maintenance of a minimum fixed charge coverage ratio,
maintenance of minimum interest coverage ratios, and limitations on indebtedness
to pro forma EBITDA (earnings before interest, taxes, depreciation and
amortization) ratios. Revolving credit availability under the Credit Facility
depends upon satisfaction of the various covenants as well as minimum subscriber
base requirements. As of December 31, 1998, the Company was in compliance with
all of the covenants under the Amended Credit Facility.
Commitment fees are payable on unused amounts available under the Amended
Credit Facility. Such commitment fees, which are payable quarterly in arrears,
range from 0.50% per annum to 1.25% per annum based on Systems' utilization of
such commitments.
Seller Notes Payable
In connection with certain 1996 acquisitions, the Company issued seller
notes payable totaling $2.5 million and bearing interest at an annual rate of
10%. These notes were repaid during 1997. The Company also issued seller notes
payable totaling $8.6 million in connection with certain 1997 acquisitions and
$10.2 million in connection with certain 1998 acquisitions. As of December 31,
1998, approximately $13.9 million of the outstanding seller notes payable were
collateralized by bank letters of credit. The seller notes payable bear interest
at rates ranging from 7% to 10%.
Other Notes Payable
In November 1996, the Company issued $2.0 million in promissory notes to a
group of lenders under a bridge financing agreement. The notes bore interest at
the rate of 10% per annum. In February 1997, these notes, along with $1.8
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems' issued warrants exercisable for 5,682 shares
of its Common Stock at an exercise price of $.01 per share. These warrants were
immediately exercisable and expire on February 12, 2007. At the date of
issuance, the fair value of the warrants was not material. These warrants were
assumed by Holdings after its formation and remained outstanding at December 31,
1998.
F-15
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
5. Long-Term Obligations - continued
Future maturities of amounts outstanding under Systems' long-term
obligations as of December 31, 1998 are summarized as follows (dollars in
thousands, bank debt amounts reflect February 1999 amendment):
<TABLE>
<CAPTION>
12 3/8% Seller Notes
Notes Bank Debt Payable Other Total
-------------- --------------- --------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year Ending December 31,
1999............................... $ -- $ -- $ 8,495 $421 $ 8,916
2000............................... -- -- 1,906 322 2,228
2001............................... -- -- 1,969 54 2,023
2002............................... -- 350 2,037 -- 2,387
2003............................... -- 350 1,000 -- 1,350
Thereafter......................... 195,000 66,300 -- -- 261,300
-------- ------- ------- ---- --------
Total debt........................ $195,000 $67,000 $15,407 $797 $278,204
======== ======= ======= ==== ========
</TABLE>
6. Mandatorily Redeemable Preferred Stock and Stockholders' 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.
At December 31, 1998, the Company's preferred stock consists of:
Series A Convertible Participating Preferred Stock ("Series A Preferred
Stock")
Holders of Series A Preferred Stock are entitled to voting rights equal
to the largest number of shares of common stock into which the Series A
Preferred Stock can be converted. These shares are entitled to
cumulative, compounded cash dividends at the rate of 19.5% of the
liquidation preference through December 31, 1997, and 14.5% thereafter,
payable upon redemption, liquidation, sale of substantially all of the
assets, or certain mergers. In addition the Series A Preferred Stock
shall be entitled to dividends at the same rate as dividends are paid
with respect to the common stock based upon the largest number of shares
of Common Stock into which the Series A Preferred Stock can be
converted. In the event of liquidation, holders of Series A Preferred
Stock are entitled to receive, to the extent available, the sum of $100
per share plus any unpaid dividends.
The Series A Preferred Stock ranks on par with the Series B Convertible
Participating Preferred Stock, while the Series C Senior Convertible
Preferred Stock ranks senior to the Series A Preferred Stock and Series
B Convertible Participating Preferred Stock for liquidation purposes. In
a liquidation, the Series C Senior Convertible Preferred Stock shall be
entitled to be paid out of assets
F-16
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
(Deficit) - continued
of the Company available for distribution to stockholders the sum of
$200 per share plus any unpaid dividends before any amount shall be paid
or distributed to the holders of the Series A Preferred Stock, Series B
Convertible Participating Preferred Stock, Series A Redeemable Preferred
Stock, Series B Redeemable Preferred Stock, Common Stock or any stock
ranking on liquidation junior to the Series C Senior Convertible
Preferred Stock. After such amounts have been paid to the holders of the
Series C Senior Convertible Preferred Stock, the Series A Preferred
Stock, together with other preferred stockholders ranking junior to the
Series C Senior Convertible Preferred Stock, will, after their
respective liquidation preferences have been satisfied, share ratably
with the holders of common stock in the value received for the remaining
assets, as if each share of Series A Preferred Stock had been converted
into Common Stock.
The Series A Preferred Stock may be converted in certain circumstances
into one share of common stock and 0.95 shares of Series A Redeemable
Preferred Stock, with such redeemable preferred shares each having a
liquidation preference equal to the sum of $100 plus accrued and unpaid
dividends on the redeemable preferred stock. Series A Preferred Stock
will be automatically converted upon the closing of the Company's first
underwritten public offering of common stock with net proceeds to the
Company equal to or exceeding $35 million, where the shares are offered
to the public at a price per share of no less than $300 per share,
appropriately adjusted for any stock split, combination, reorganization,
recapitalization, reclassification, stock distribution, stock dividend,
or similar event, and in which all redeemable preferred stock issuable
upon conversion is redeemed at the closing or sufficient cash to do so
is segregated for that purpose (a "QPO"). Each share of Series A
Preferred is also convertible upon election of 58% of the outstanding
shareholders. Any accrued but unpaid dividends on the Series A Preferred
at the time of conversion will remain deferred and accrued and will be
for the benefit of the shares of the Series A Redeemable Preferred Stock
into which the Series A Preferred Stock was converted. As of December
31, 1998, the cumulative, unpaid dividends associated with the Series A
Preferred Stock amounted to approximately $14.7 million, or $35.14 per
share.
Series A Preferred Stock is mandatorily redeemable for $100 per share,
plus unpaid cumulative dividends, plus the fair value of one share of
Common Stock, upon approval of holders of at least 58% of the
outstanding shares of Series A Preferred Stock on or after February 12,
2002. It is also redeemable at the option of the Company after December
31, 2002 at the same redemption price. In the event of a change of
management or control of the Company, and upon election of holders of at
least 58% of the outstanding shares, the Series A Preferred Stock is
redeemable on or after February 12, 2000.
Series B Convertible Participating Preferred Stock ("Series B Preferred
Stock")
The Series B Preferred Stock has features similar to the Series A
Preferred Stock except that mandatory, cumulative, compounded cash
dividends accrue at 14.5% of the liquidation preference, and upon
liquidation, the Series B Preferred Stock shareholders are entitled to a
preference of $200 per share plus any unpaid dividends. Upon conversion
each share of the Series B Preferred Stock is convertible into one share
of common stock and 0.95 shares of Series B Redeemable Preferred Stock
having a liquidation preference equal to the sum of $200 plus accrued
and unpaid dividends. A QPO with respect to Series B Preferred Stock
requires a price of $600 per share rather than the $300 per share
required with respect to Series A Redeemable Preferred Stock. As of
December 31, 1998, the cumulative unpaid dividends associated with the
Series B Preferred Stock amounted to approximately $7.8 million or
$34.15 per share.
F-17
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
(Deficit) - continued
Series C Senior Convertible Preferred Stock ("Series C Preferred Stock")
Holders of the Series C Preferred Stock are entitled to voting rights
equal to the largest number of shares of common stock into which each
share of Series C Preferred Stock can be converted. These shares are
entitled to cumulative, compound cash dividends at the rate of 10.0% of
the liquidation preference, payable upon any liquidation event, sale of
substantially all of the assets, certain mergers, or redemption. In the
event of liquidation, holders of Series C Preferred Stock are entitled
to receive, to the extent available, the sum of $200 per share plus any
unpaid dividends prior to any distributions to other stock.
The Series C Preferred Stock will be automatically converted upon the
closing of the Company's first underwritten public offering of common
stock with net proceeds to the Company equal to or exceeding $35 million
where the shares are offered to the public at a price per share of no
less than $200 per share, appropriately adjusted. The shares are
convertible upon election of holders of at least 58% of the outstanding
shares of the Series A Preferred Stock and the Series B Preferred Stock,
voting separately by class, to convert all outstanding shares of Series
A Preferred Stock and Series B Preferred Stock into shares of common
stock. Any holder of Series C Preferred Stock may also elect to convert
any or all of its shares at any time. Upon conversion, each share of the
Series C Preferred Stock is convertible into one share of Common Stock,
and unpaid dividends are also converted into common shares based on a
$200 per share valuation.
In addition the Series C Preferred Stock of any holder is mandatorily
redeemable for $200 per share plus unpaid cumulative dividends upon the
written request of such holder on or after September 30, 2003. All the
shares of Series C Preferred Stock are redeemable at the option of the
Company after September 30, 2004 at the same redemption price. As of
December 31, 1998, the cumulative unpaid dividends associated with the
Series C Preferred Stock amounted to approximately $255,000, or $5.00
per share.
Series A and Series B Redeemable Preferred Stock
A total of 646,500 shares of Series A and Series B Redeemable Preferred
Stock, $0.01 par value, have been authorized. No shares of Series A or
Series B Redeemable Preferred Stock were issued or outstanding at
December 31, 1998. The Series A and Series B Redeemable Preferred Stock
have the same dividend rights as the Series A Preferred Stock and the
Series B Preferred Stock and are redeemable under similar conditions as
the Series A Preferred Stock and Series B Preferred Stock. The Series A
and Series B Redeemable Preferred Stock are also redeemable upon
election of holders of at least 58% of the shares in the series
following certain mergers or sale of substantially all of the assets,
and are mandatorily redeemed as of the closing of a QPO. The redemption
price and the liquidation preference for Series A and Series B
Redeemable Preferred Stock are $100 and $200 per share, respectively,
plus unpaid dividends. Series A and Series B Redeemable Preferred Stock
have no voting rights, other than rights to elect certain directors and
to approve certain specified corporate actions.
Undesignated Preferred Stock
A total of 300,000 shares of Undesignated Preferred Stock has been
authorized by the Board of Directors. No shares of Undesignated
Preferred Stock, $.01 par value, were issued or outstanding at December
31, 1998. The Board of Directors has the authority to designate the
class of stock, dividend rates, voting powers, redemption options and
conversion options of these shares.
F-18
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Stock Incentive Plan
In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option and
Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide incentive
to attract and retain certain officers, directors and key employees. The options
are exercisable during a period of up to ten years after grant. Stock options
granted under the Stock Incentive Plan vest over a three-year period. Effective
September 9, 1997, Holdings assumed the Stock Incentive Plan. Participants in
the Holdings' Stock Incentive Plan received options with terms identical to
those under Systems' Stock Incentive Plan and all previously outstanding options
were canceled.
A summary of incentive stock option activity during 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------- --------------------------------
Weighted-Average
Weighted-Average Exercise
Options Exercise Price Options Price
--------------- --------------- --------------- ----------------
<S> <C> <C> <C>
Options outstanding, beginning of year.... -- $ -- 62,525 $1.00
Granted................................... 62,525 1.00 18,693 1.00
Exercised................................. -- -- (24,831) 1.00
Forfeited................................. -- -- (7,642) 1.00
------ ----- ------ -----
Options outstanding, end of year.......... 62,525 $1.00 48,745 $1.00
====== ===== ====== =====
Options exercisable, end of year.......... 8,684 $1.00 5,595 $1.00
====== ===== ====== =====
</TABLE>
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25,
because the exercise price of employee stock options granted pursuant to the
Stock Incentive Plan is equal to or greater than the fair value of the
underlying stock on the date of grant, no compensation expense is recognized. In
October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation" ("FAS No. 123"), which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt FAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if the Company 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:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1998
-------- --------
<S> <C> <C>
Risk-free interest rate........................................ 6.0% 6.0%
Dividend yield................................................. 0.0% 0.0%
Volatility factor.............................................. 0.0% 0.0%
Expected term of options....................................... 10 years 10 years
</TABLE>
The options granted during the years ended December 31, 1997 and 1998 had no
net value using the preceding assumptions. Therefore, there was no pro forma
effect on the Company's net loss.
F-19
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. 401(k) Retirement Plan
The Company sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. During the years
ended December 31, 1997 and 1998, the Company 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 the (provision for) benefit from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998
--------- ---------
<S> <C> <C>
Current (provision) benefit:
Federal......................................... $ 3,911 $ 16,325
State........................................... 742 3,097
Increase in valuation allowance................. (4,653) (19,422)
Total current (provision) benefit................. -- --
------- --------
Deferred benefit:
Federal......................................... 1,639 3,111
State........................................... 311 590
Increase in valuation allowance................. (1,950) (3,701)
------- --------
Total deferred benefit............................ -- --
------- --------
Total benefit (provision).................... $ -- $ --
======= ========
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $63.4 million. The
NOLs expire beginning in the year 2011. Use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. FAS No. 109,
"Accounting for Income Taxes" ("FAS No. 109"), requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1998, Holdings increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management frequently
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changed circumstances indicate that it
is more likely than not the additional benefits will be realized. Any future
adjustments to the valuation allowance will be recognized as a separate
component of Holdings' provision for income taxes.
F-20
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. Income Taxes - continued
The temporary differences that give rise to deferred tax assets and liabilities
as of December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998
------- --------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts................................. $ 52 $ 111
Amortization of intangible assets............................... 54 54
Accrued expenses................................................ -- 29
------- --------
Gross current deferred tax assets.................................. 106 194
Valuation allowance................................................ (106) (194)
------- --------
Net current deferred tax assets.................................... -- --
Non-current deferred tax assets:
Depreciation.................................................... 592 630
Amortization of intangible assets............................... 951 4,498
Net operating loss carryforwards................................ 5,254 24,677
------- --------
Total non-current deferred tax assets.............................. 6,797 29,805
Non-current deferred tax liabilities:
Amortization of intangible assets............................... (299) (271)
------- --------
Gross non-current deferred tax assets.............................. 6,498 29,534
Valuation allowance................................................ (6,498) (29,534)
------- --------
Net non-current deferred tax assets -- --
------- --------
Net deferred tax assets............................................ $ -- $ --
======= ========
</TABLE>
The actual income tax benefit (provision) for 1997 and 1998 are reconciled
to the amounts computed by applying the statutory federal tax rate to income
before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1998
----------------------- ------------------------
Tax Rate Tax Rate
------------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Statutory rate.............................................. $5,391 34.0% $ 21,131 34.0%
State income taxes, net of federal benefit.................. 695 4.4 2,433 3.9
Non-deductible amortization of intangible assets............ (291) (1.8) (415) (0.7)
Other....................................................... (12) -- (27) --
Increase in valuation allowance............................. (5,783) (36.5) (23,122) (37.2)
------ ----- ------- -----
Income taxes................................................ $ -- --% $ -- --%
====== ===== ======= =====
</TABLE>
F-21
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. Commitments and Contingencies
The Company has non-cancelable operating leases for office, warehouse and
storage space that expire at various dates. Future minimum lease payments as of
December 31, 1998 are summarized as follows (dollars in thousands):
1999......................................................... $1,522
2000......................................................... 1,186
2001......................................................... 733
2002......................................................... 443
2003......................................................... 121
------
Total.............................................. $4,005
======
In November 1999, certain meteoroid events will occur as the earth's orbit
passes through the particulate trail of Comet 55P (Tempel-Tuttle). These
meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites, including DBS satellites. The Company is unable to determine the
impact, if any, these meteoroid events could have on the DBS satellites used by
Hughes for distribution of DIRECTV programming services. In the event the Hughes
DBS satellites are adversely affected by these meteoroid or other events, the
Company's business and results of operations could be adversely impacted.
11. Related Party Transactions
During 1996, Systems purchased the assets of Cable-Video Management, Inc.
("CVM"), an entity owned by Systems' president, for $44,000. Prior to the
acquisition of CVM's assets, Systems obtained management and other services from
CVM. Aggregate management fees paid to CVM approximated $280,000 during 1996 and
are included in general and administrative expenses in the accompanying
consolidated statements of operations. Also during 1996, Systems reimbursed CVM
for salaries and other miscellaneous expenses aggregating $343,000. In 1997,
Systems paid $66,000 to a company affiliated with Systems' president for
consulting services received by Systems. Additionally, during 1996, 1997 and
1998, Systems paid $5,000, $77,000 and $159,000 (including $75,000 paid in
connection with a 1998 acquisition), respectively, to one of its directors for
consulting services.
During 1996, the Company's president provided Systems with a short-term loan
in the amount of $381,000. In 1997, the Company received an additional $150,000
short-term loan from its president and a $215,000 short-term loan from a
shareholder. Each of these loans bore interest at an annual rate of 10% and were
repaid during 1997.
The Company has contracted with an entity owned by its president for air
transportation services. Such services include the lease of an aircraft. This
lease is cancelable with six months notice and requires monthly payments equal
to the greater of $20,000 or an aggregate fixed hourly operating charge. The
fixed hourly operating charge is based on prevailing market prices. The total
cost of such services received by the Company approximated $31,000, $109,000 and
$506,000 during 1996, 1997 and 1998, respectively.
12. Valuation and Qualifying Accounts
The Company's valuation and qualifying accounts as of December 31, 1996,
1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period.... $ -- $ 4 $ 138
Charged to costs and expenses........................... 4 417 1,537
Deductions.............................................. -- (283) (1,382)
------ ------- --------
Allowance for doubtful accounts, end of period.......... $ 4 $ 138 $ 293
====== ======= ========
</TABLE>
F-22
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. Consolidating Financial Information and Subsidiary Guarantors
Consolidating financial information for the Company, the Company's
guarantor subsidiaries, and the Company's non-guarantor subsidiaries is as
follows (dollars in thousands):
Consolidating Balance Sheet -- December 31, 1997
<TABLE>
<CAPTION>
Consolidating
and
Guarantor Non-guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- -------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 4 $ 12,146 $1,077 $ 409 $ -- $ 13,636
Subscriber receivables, net......... -- 2,841 633 369 -- 3,843
Other receivables................... -- 307 28 -- -- 335
Intercompany receivables............ 12 2,570 -- -- (2,582) --
Inventory........................... -- 1,997 106 71 -- 2,174
Prepaid expenses and other.......... -- 127 -- -- -- 127
-------- -------- ------- ------ -------- --------
Total current assets................... 16 19,988 1,844 849 (2,582) 20,115
Property and equipment, net............ -- 2,759 77 100 -- 2,936
Investment in subsidiaries............. 70,449 26,735 -- -- (97,184) --
Intangible assets...................... -- 96,585 18,302 3,842 11,167 129,896
Deferred financing costs............... -- 3,106 -- -- -- 3,106
Other assets........................... -- 91 86 10 -- 187
-------- -------- ------- ------ -------- --------
Total assets...................... $70,465 $149,264 $20,309 $4,801 $ (88,599) $156,240
======== ======== ======= ====== ======== ========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable.............. $ -- $ 8,125 $ 194 $ 152 $ -- $ 8,471
Interest payable.................... -- 786 -- -- -- 786
Current maturities of long-term
obligations ....................... -- 2,538 -- -- -- 2,538
Unearned revenue.................... -- 1,857 511 262 -- 2,630
Accrued payroll and other........... -- 1,372 2,655 402 (2,582) 1,847
-------- -------- ------- ------ -------- --------
Total current liabilities.............. -- 14,678 3,360 816 (2,582) 16,272
Long-term obligations, net of current
maturities:
Bank debt........................... -- 60,000 -- -- -- 60,000
Seller notes payable................ -- 6,200 -- -- -- 6,200
Other notes payable and obligations
under capital leases............... -- 331 44 -- -- 375
Minority interest................... -- -- -- -- 2,928 2,928
-------- -------- ------- ------ -------- --------
Total long-term obligations, net of
current maturities................... -- 66,531 44 -- 2,928 69,503
-------- -------- ------- ------ -------- --------
Total liabilities...................... -- 81,209 3,404 816 346 85,775
Mandatorily redeemable preferred stock:
Series A Preferred Stock.......... 48,989 -- -- -- -- 48,989
Series B Preferred Stock.......... 46,388 -- -- -- -- 46,388
-------- -------- ------- ------ -------- --------
95,377 -- -- -- -- 95,377
Stockholders' Equity (Deficit):
Common Stock........................ -- -- 6 -- (6) --
Additional paid-in capital.......... -- 87,400 1,967 -- (89,367) --
Retained earnings (accumulated
deficit)........................... (24,912) (19,345) 14,932 3,985 428 (24,912)
-------- -------- ------- ------ -------- --------
Total stockholders' equity (deficit).. (24,912) 68,055 16,905 3,985 (88,945) (24,912)
-------- -------- ------- ------ -------- --------
Total liabilities and
stockholders' equity (deficit).. $ 70,465 $149,264 $20,309 $4,801 $(88,599) $156,240
======== ======== ======= ====== ======== ========
</TABLE>
F-23
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. Consolidating Financial Information and Subsidiary Guarantors - continued
Consolidating Statement of Operations - Year Ended December 31, 1997
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- ----------- ------------ ----------- -- ------------ -- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services ....................... $ -- $ 13,356 $ 2,787 $ 309 $ -- $16,452
Lease and other .................... -- 931 -- 13 -- 944
-------- ----------- --------- ------ ------ -------
Total revenue -- 2,787 322 -- 17,396
14,287
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 ................... (73) (3,170) (3) -- -- (3,246)
-------- ----------- --------- ------ ------ --------
Total non-operating items ............. (73) (3,140) 7 -- -- (3,206)
-------- ----------- --------- ------ ------ --------
Loss before income taxes .............. (73) (14,366) (544) (84) (790) (15,857)
Income taxes .......................... -- -- -- -- -- --
-------- ----------- --------- ------ ------ --------
Net loss .............................. $ (73) $(14,366) $ (544) $ (84) $ (790) $(15,857)
======== =========== ========= ====== ====== ========
</TABLE>
F-24
<PAGE>
GOLDEN SKY HOLDINGS, 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
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- --------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................... $ (73) $(14,366) $ (544) $ (84) $(790) $(15,857)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Depreciation and amortization....... -- 6,312 109 79 800 7,300
Amortization of deferred financing
costs............................. -- 215 -- -- -- 215
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue............... -- (1,827) (615) (59) -- (2,501)
Other receivables................. (586) (185) 24 -- 586 (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.................. 73 733 -- -- -- 806
Accrued payroll and other......... 574 (1,461) 2,460 402 (596) 1,379
------- -------- ------ ----- ----- --------
Net cash provided by (used in)
operating activities................ (12) (4,596) 1,088 409 -- (3,111)
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 provided by (used in)
investing activities................ -- (120,723) (6) -- -- (120,729)
Cash Flows From Financing Activities
Proceeds from issuance of Series A
Preferred Stock..................... 1,200 34,289 -- -- -- 35,489
Proceeds from bridge loan.............. 10,000 -- -- -- -- 10,000
Proceeds from issuance of Series B
Preferred Stock..................... 35,616 -- -- -- -- 35,616
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................ 16 136,986 (5) -- -- 136,997
Net increase in cash and cash
equivalents......................... 4 11,667 1,077 409 -- 13,157
Cash and cash equivalents, beginning
of period........................... -- 479 -- -- -- 479
------- -------- ------ ----- ----- --------
Cash and cash equivalents, end of
period.............................. $ 4 $ 12,146 $1,077 $ 409 $ -- $ 13,636
======= ======== ====== ===== ===== ========
</TABLE>
F-25
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
13. Consolidating Financial Information and Subsidiary Guarantors - continued
Consolidating Balance Sheet - December 31, 1998
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- --------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 28 $ 827 $ 1,189 $2,444 $ -- $ 4,488
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............ 12 11,521 -- -- (11,533) --
Inventory........................... -- 9,255 583 308 -- 10,146
Prepaid expenses and other.......... -- 1,819 37 3 -- 1,859
------- -------- ------- ------ -------- ---------
Total current assets................... 40 60,680 2,939 3,547 (11,533) 55,673
Restricted cash, net of current
portion............................. -- 23,534 -- -- -- 23,534
Property and equipment, net............ -- 4,418 381 195 -- 4,994
Investment in subsidiaries............. 15,922 34,200 -- -- (50,122) --
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...................... $15,962 $333,373 $28,456 $7,267 $(56,959) $ 328,099
======= ======== ======= ====== ======== =========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable.............. $ -- $ 13,482 $ 49 $ 8 $ -- $ 13,539
Interest payable.................... -- 11,009 -- -- -- 11,009
Current maturities of long-term
obligations....................... -- 8,916 -- -- -- 8,916
Unearned revenue.................... -- 4,380 789 405 -- 5,574
Accrued payroll and other........... -- 1,028 6,263 5,633 (11,533) 1,391
------- -------- ------- ------ -------- ---------
Total current liabilities.............. -- 38,815 7,101 6,046 (11,533) 40,429
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 (9,113) 312,137
Mandatorily redeemable preferred stock:
Series A Preferred Stock............. 56,488 -- -- -- -- 56,488
Series B Preferred stock............. 53,489 -- -- -- -- 53,489
Series C Preferred Stock............. 10,455 -- -- -- -- 10,455
------- -------- ------- ------ -------- ---------
120,432 -- -- -- -- 120,432
Stockholders' Equity (Deficit):
Common Stock........................ -- -- 896 -- (896) --
Additional paid-in capital.......... 25 97,600 1,967 -- (99,567) 25
Retained earnings (accumulated
deficit).......................... (104,495) (72,272) 18,434 1,221 52,617 (104,495)
------- -------- ------- ------ -------- ---------
Total stockholders' equity (deficit)... (104,470) 25,328 21,297 1,221 (47,846) (104,470)
------- -------- ------- ------ -------- ---------
Total liabilities and
stockholders' equity (deficit).. $15,962 $333,373 $28,456 $7,267 $(56,959) $ 328,099
======= ======== ======= ====== ======== =========
</TABLE>
F-26
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
13. Consolidating Financial Information and Subsidiary Guarantors - continued
Consolidating Statement of Operations - Year Ended December 31, 1998
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- --------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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.................... (1) (20,497) (28) (12) -- (20,538)
------- -------- ------- ------- ------- --------
Total non-operating items.............. (1) (18,926) (26) (12) -- (18,965)
------- -------- ------- ------- ------- --------
Loss before income taxes............... (1) (52,919) (4,486) (2,764) (1,981) (62,151)
Income taxes........................... -- -- -- -- -- --
------- -------- ------- ------- ------- --------
Loss before extraordinary charge....... (1) (52,919) (4,486) (2,764) (1,981) (62,151)
Extraordinary charge on early
retirement of debt.................. -- (2,577) -- -- -- (2,577)
------- -------- ------- ------- ------- --------
Net loss............................... $ (1) $(55,496) $(4,486) $(2,764) $(1,981) $(64,728)
======= ======== ======= ======= ======= ========
</TABLE>
F-27
<PAGE>
GOLDEN SKY HOLDINGS, 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
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
-------- --------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net loss............................... $ (1) $(55,496) $(4,486) $(2,764) $(1,981) $(64,728)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization....... -- 19,336 996 340 2,494 23,166
Amortization of deferred financing
costs............................. -- 977 -- -- -- 977
Extraordinary charge on early
retirement of debt................ -- 2,577 -- -- -- 2,577
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue................ -- (1,283) (222) (252) -- (1,757)
Other receivables................. 574 (2,144) 32 (18) (12) (1,568)
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......... (574) (10,253) 4,827 5,231 (501) (1,270)
------- -------- ------- ------- ------ --------
Net cash provided by (used in)
operating activities................ (1) (39,230) 489 2,153 -- (36,589)
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)
Proceeds from the issuance of
Common Stock........................ 25 -- -- -- -- 25
Increase in deferred financing costs... -- (5,138) -- -- -- (5,138)
------- -------- ------ ------- ------ --------
Net cash provided by (used in)
financing activities................ 25 187,373 (36) -- -- 187,362
------- -------- ------ ------- ------ --------
Net increase (decrease) in cash and
cash equivalents..................... 24 (11,319) 112 2,035 -- (9,148)
Cash and cash equivalents, beginning
of period........................... 4 12,146 1,077 409 -- 13,636
------- -------- ------ ------- ------ --------
Cash and cash equivalents, end of
period.............................. $ 28 $ 827 $1,189 $ 2,444 $ -- $ 4,488
======= ======== ====== ======= ====== ========
</TABLE>
<PAGE>
14. Quarterly Financial Data (Unaudited)
The Company's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Period Ended December 31, 1997:
Total revenue.................................. $ 1,255 $ 2,248 $ 5,634 $ 8,259
Operating loss................................. (766) (1,966) (3,918) (6,001)
Net loss....................................... (834) (2,024) (5,160) (7,839)
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) (24,749)
Net loss....................................... (8,287) (14,338) (17,354) (24,749)
</TABLE>
F-28
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
15. Subsequent Events
On February 19, 1999, Golden Sky DBS consummated an offering (the "13 1/2%
Notes Offering") of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2%
Notes"). The 13 1/2% Notes Offering resulted in net proceeds to Golden Sky DBS
of approximately $96.8 million (after initial purchasers' discount but before
other offering expenses). Golden Sky DBS contributed the net proceeds of the 13
1/2% Notes Offering to Systems. Systems used the contributed proceeds to repay
existing revolving credit indebtedness outstanding under its Amended Credit
Facility, to finance the acquisition of Rural DIRECTV Markets and related costs
and expenses, and for general corporate purposes. Interest on the 13 1/2% Notes
will not accrue prior to March 1, 2004. Thereafter, cash interest on the 13 1/2%
Notes will accrue at a rate of 13 1/2% per annum and be payable in arrears on
March 1 and September 1 of each year, commencing September 1, 2004. The 13 1/2%
Notes will mature on March 1, 2007. Systems is not obligated for repayment of
the 13 1/2% Notes and, as described in Note 5, is restricted as to its ability
to make payments to Golden Sky DBS. However, Golden Sky DBS is dependent on
Systems for dividends or other cash distributions in amounts sufficient to make
the required payments.
For the three months ended March 31, 1999, the Company exceeded the
limitation on subscriber acquisition costs (i.e., sales and marketing expenses)
prescribed by the Amended Credit Facility. Excluding the effects of certain
DIRECTV national sales promotions that offered free programming to new
subscribers, and higher incremental subscriber acquisition costs associated with
the conversion of Primestar subscribers to the Company's DIRECTV service, the
Company would have been in compliance with the Amended Credit Facility's
limitation on subscriber acquisition costs. In June 1999, the Company received a
waiver from the banks of this technical violation. Further, the Amended Credit
Facility's limitation on subscriber acquisition costs were increased as part of
an amendment that was executed in June 1999.
In June 1999, the Company 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 $2.9 million.
F-29
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
-------------------- ----------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................... $ 4,488 $ 5,908
Restricted cash, current portion........................................ 28,083 23,612
Subscriber receivables (net of allowance for uncollectible
accounts of $293 and $852, respectively).............................. 8,632 12,095
Other receivables....................................................... 2,465 1,630
Inventory............................................................... 10,146 7,223
Prepaid expenses and other.............................................. 1,859 4,086
--------- ---------
Total current assets....................................................... 55,673 54,554
Restricted cash, net of current portion.................................... 23,534 ---
Property and equipment (net of accumulated depreciation of
$3,214 and $3,611, respectively)........................................ 4,994 6,507
Intangible assets, net..................................................... 233,139 244,504
Deferred financing costs................................................... 10,541 12,249
Other assets............................................................... 218 275
--------- ---------
Total assets.......................................................... $ 328,099 $ 318,089
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable.................................................. $ 13,539 $ 21,099
Interest payable........................................................ 11,009 4,658
Current portion of long-term obligations................................ 8,916 3,227
Unearned revenue........................................................ 5,574 8,924
Accrued payroll and other............................................... 1,391 1,504
--------- ---------
Total current liabilities.................................................. 40,429 39,412
Long-term obligations, net of current portion:
12 3/8% Notes........................................................... 195,000 195,000
13 1/2% Notes........................................................... --- 108,476
Bank debt............................................................... 67,000 52,000
Seller notes payable.................................................... 6,912 6,932
Other notes payable and obligations under capital leases................ 376 221
Minority interest....................................................... 2,420 ---
--------- ---------
Total long-term obligations, net of current portion........................ 271,708 362,629
--------- ---------
Total liabilities..................................................... 312,137 402,041
Mandatorily Redeemable Preferred Stock:
Series A Convertible Participating Preferred Stock, par value $.01;
418,000 shares authorized, issued and outstanding.................... 56,488 62,857
Series B Convertible Participating Preferred Stock, par value $.01;
228,500 shares authorized, 228,442 shares issued and outstanding 53,489 59,519
Series C Senior Convertible Preferred Stock, par value $.01;
51,000 shares authorized, issued and outstanding.................... 10,455 11,259
--------- ---------
120,432 133,635
Commitments and contingencies..............................................
Stockholders' Equity (Deficit):
Common Stock, par value $.01; 1,000,000 shares authorized; 24,931 shares
issued and outstanding at December 31, 1998; 25,399 shares
issued and outstanding at September 30, 1999.......................... --- ---
Additional paid-in capital.............................................. 25 109
Accumulated deficit..................................................... (104,495) (217,696)
--------- ---------
Total stockholders' equity (deficit).................................... (104,470) (217,587)
--------- ---------
Total liabilities and stockholders' equity (deficit).................. $ 328,099 $ 318,089
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Revenue:
DBS services............................................... $ 50,139 $ 96,612
Lease and other............................................ 751 545
-------- ---------
Total revenue................................................. 50,890 97,157
Costs and Expenses:
Costs of DBS services...................................... 29,764 61,205
System operations.......................................... 7,317 14,321
Sales and marketing........................................ 19,560 49,903
General and administrative................................. 4,737 10,994
Depreciation and amortization.............................. 15,814 26,564
-------- ---------
Total costs and expenses...................................... 77,192 162,987
-------- ---------
Operating loss................................................ (26,302) (65,830)
Non-operating Items:
Interest and investment income............................. 866 2,146
Interest expense........................................... (11,966) (33,241)
Other ..................................................... --- (138)
-------- ---------
Total non-operating items..................................... (11,100) (31,233)
-------- ---------
Loss before income taxes...................................... (37,402) (97,063)
Income taxes.................................................. --- ---
-------- ---------
Loss before extraordinary charge.............................. (37,402) (97,063)
Extraordinary charge on early retirement of debt ............. (2,577) (2,935)
-------- ---------
Net loss...................................................... (39,979) (99,998)
Preferred stock dividend requirements......................... (10,753) (13,203)
-------- ---------
Net loss attributable to common shareholders.................. $(50,732) $(113,201)
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss....................................................... $ (39,979) $ (99,998)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................... 15,814 26,564
Amortization of debt discount, deferred financing costs
and other................................................. 563 9,863
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......... (737) (47)
Other receivables....................................... (1,119) 835
Inventory............................................... (8,538) 2,923
Prepaid expenses and other.............................. (707) (2,548)
Payable to parent....................................... (574) ---
Trade accounts payable.................................. 3,260 7,560
Interest payable........................................ 3,897 (6,351)
Accrued payroll and other............................... (132) 94
--------- ---------
Net cash used in operating activities.......................... (25,675) (58,170)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets.......................... (59,517) (35,778)
Purchases of property and equipment............................ (2,408) (3,075)
Proceeds from interest escrow account.......................... --- 24,224
Offering proceeds and investment earnings placed in escrow..... (50,940) (1,668)
Release of amounts reserved for contingent reduction of
bank debt................................................... --- 5,449
Other.......................................................... (916) 27
--------- ---------
Net cash used in investing activities.......................... (113,781) (10,821)
Cash Flows From Financing Activities
Proceeds from issuance of 13 1/2% Notes........................ --- 100,049
Proceeds from issuance of 12 3/8% Notes........................ 189,150 ---
Borrowings on bank debt........................................ 58,000 38,000
Principal payments on bank debt................................ (83,000) (53,000)
Principal payments on notes payable and obligations
under capital leases ....................................... (2,578) (8,749)
Increase in deferred financing costs........................... (4,747) (5,889)
--------- ---------
Net cash provided by financing activities...................... 156,825 70,411
--------- ---------
Net increase in cash and cash equivalents...................... 17,369 1,420
Cash and cash equivalents, beginning of period................. 13,636 4,488
--------- ---------
Cash and cash equivalents, end of period....................... $ 31,005 $ 5,908
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest...................................... $ 7,506 $ 29,121
Retirement of Credit Agreement from borrowings under the
Credit Facility........................................... 88,000 --
Property and equipment acquired under capitalized
lease obligations......................................... 609 78
Issuance of seller notes payable in acquisitions............ 10,157 2,925
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business Activities
Organization and Legal Structure
Golden Sky Holdings, Inc. (the "Company" or "Golden Sky Holdings") is a
Delaware corporation formed on September 9, 1997 for the purpose of holding all
the common and preferred stock of Golden Sky Systems, Inc. ("Golden Sky
Systems"). Upon the formation of Golden Sky Holdings, Golden Sky Systems issued
1,000 shares of its common stock to Golden Sky Holdings and all the shareholders
of the then outstanding preferred stock of Golden Sky Systems were issued
equivalent shares of Golden Sky Holdings stock with identical features to Golden
Sky 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.
Golden Sky Holdings has no significant assets or liabilities other than its
investment in Golden Sky Systems. Accordingly, Golden Sky Systems has been
treated as the predecessor to Golden Sky Holdings and the historical financial
statements of Golden Sky Holdings presented for periods prior to September 9,
1997 are those of Golden Sky Systems.
Until February 1999, Golden Sky Systems was a wholly-owned subsidiary of
Golden Sky Holdings. 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
Golden Sky Holdings in exchange for $100 and the subsequent transfer of all of
the capital stock of Golden Sky Systems to Golden Sky DBS. Upon completion of
the aforementioned transfer, Golden Sky Systems became a wholly-owned subsidiary
of Golden Sky DBS.
Unless the context otherwise requires, the terms "Golden Sky Holdings" and
"the Company" refer to Golden Sky Holdings, Inc. and its subsidiaries.
Principal Business
Golden Sky Systems is the second largest independent provider of DIRECTV
subscription television services. DIRECTV is the leading direct broadcast
satellite ("DBS") company serving the continental United States. Golden Sky
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 within the continental United States ("Rural DIRECTV
Markets"). As of September 30, 1999, Golden Sky Systems had acquired 56 Rural
DIRECTV Markets in 24 states representing approximately 1.9 million households.
As of that same date, Golden Sky Systems served approximately 325,200
subscribers.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The consolidated financial statements include
the financial statements of Golden Sky Holdings and its majority-owned, direct
and indirect subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
nine-month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Golden Sky Systems' Annual Report on Form 10-K for the year
ended December 31, 1998.
F-33
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $4.2
million and $3.9 million during the nine-month periods ended September 30, 1999
and 1998, respectively.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). As a result of the
subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, the Company has no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on the Company's financial position or results of operations.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for periods of one to three months, to new subscribers. The cost of such free
programming is expensed as sales and marketing expense in the period the
services are provided. During the nine-month period ended September 30, 1999,
sales and marketing expenses attributable to such promotions totaled $2.3
million.
3. Acquisitions
During the nine-month period ended September 30, 1999, Golden Sky Systems
acquired nine Rural DIRECTV Markets in five states (the "1999 Acquired
Markets"). In the aggregate, the 1999 Acquired Markets represent approximately
126,000 households and served approximately 18,200 subscribers at the respective
acquisition dates. The Company accounts for its acquisitions using the purchase
method. The Company's condensed consolidated statements of operations for the
nine-month periods ended September 30, 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 of
$745,000) for the 1999 Acquired Markets was allocated as follows (in thousands):
DIRECTV distribution rights...................... $30,819
Non-compete agreements........................... 4,859
Working capital, net............................. 100
-------
$35,778
=======
During 1997, Golden Sky Systems acquired a controlling interest in DCE
Satellite Entertainment, LLC ("DCE"). In June 1999, Golden Sky Systems 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 $2.9
million.
F-34
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. Long-Term Obligations
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.4 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. Golden Sky DBS contributed the net proceeds of the 13 1/2% Notes
Offering to Golden Sky Systems, of which $53.0 million was used to repay
existing revolving credit indebtedness. Cash interest on the 13 1/2% Notes will
not accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a
rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1
of each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1,
2007.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS' direct and indirect subsidiaries. Golden Sky DBS'
ability to pay interest on the notes when interest is due and to redeem the
notes at maturity will depend on whether its direct and indirect subsidiaries
can pay dividends or make other distributions to it under the terms of such
subsidiaries' indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the 13
1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 13 1/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets. In
the event of a change of control, as defined in the 13 1/2% Notes Indenture,
each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS
to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to
101% of the accreted value of the notes, plus accrued and unpaid interest, if
any, to the date of purchase.
Bank Debt
In February 1999, Golden Sky Systems' bank credit facility (the "Credit
Facility") was amended (the "Amended Credit Facility") to permit, among other
things, the offering of senior discount notes by Golden Sky DBS. The Amended
Credit Facility's term loan commitment amortizes in specified quarterly
installments from March 31, 2002 through maturity on December 31, 2005. The
availability of revolving loan borrowings under the Amended Credit Facility
reduces by specified amounts over the period from March 31, 2001 through
maturity on September 30, 2005. In February 1999, Golden Sky Systems repaid all
outstanding borrowings under the revolving loan commitment. Such repayment was
funded from the contribution by Golden Sky DBS of the net proceeds of the 13
1/2% Notes Offering to Golden Sky Systems and totaled $53.0 million. Upon
execution of the Amended Credit Facility, Golden Sky Systems recognized an
extraordinary charge of approximately $2.9 million to write-off unamortized
deferred financing costs associated with the Credit Facility. As of September
30, 1999, outstanding borrowings under the Amended Credit Facility totaled $52.0
million (composed of term loan borrowings of $35.0 million and revolving loan
borrowings of $17.0 million).
F-35
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by the Amended Credit Facility.
During January 2000, Golden Sky Systems completed an amendment to the Amended
Credit Facility. The amendment, which was effective as of December 31, 1999,
waived the Company's third quarter 1999 covenant violations and amended certain
future covenant requirements. Pursuant to the amendment, the Company may borrow
up to an additional $20.0 million under the Amended 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, Golden Sky Systems will have potential incremental borrowing capacity
during the year ending December 31, 2000 equal to the lessor of the proceeds
received from either a public or private equity offering or $20.0 million.
Coincident with the amendment of the Amended 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.
5. Commitments and Contingencies
DIRECTV/NRTC 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
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.
F-36
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
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 Holdings and Pegasus Communications
Corporation ("Pegasus") filed a class action lawsuit against DIRECTV and Hughes.
The lawsuit was filed in the United States District Court, Central District of
California. Golden Sky Holdings and Pegasus filed on behalf of themselves and as
representatives of a class of those similarly situated within the NRTC affiliate
and member universe. 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.
6. Subsequent Event
Merger with Pegasus Communications Corporation
Golden Sky Holdings entered into a definitive merger agreement with 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 Holdings 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 a
total of 6.5 million shares of its Class A common stock to Golden Sky Holdings
shareholders. The value of the Pegasus shares to be issued to Golden Sky
Holdings shareholders approximated $632 million as of the date of execution of
the definitive merger agreement. Upon completion of the merger, Golden Sky
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
second quarter of 2000.
F-37
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro forma consolidated statement of operations data and other data for the
year ended December 31, 1998 and the nine months ended September 30, 1999
include (i) the completed and pending direct broadcast satellite acquisitions,
(ii) the completed sale of our New England cable systems, (iii) the pending sale
of our Puerto Rico cable system, (iv) the exchange of Pegasus' senior notes due
2007 for senior subordinated notes of its subsidiaries, (v) the closing of the
new Pegasus Media & Communications credit facility, (vi) the convertible
preferred stock offering and (vii) the merger with Golden Sky, all as if these
events had occurred at the beginning of the periods.
The pro forma consolidated balance sheet as of September 30, 1999 gives
effect to (i) the completed and pending direct broadcast satellite acquisitions,
(ii) the investment in Personalized Media, (iii) the pending sale of our Puerto
Rico cable system, (iv) the exchange of Pegasus' senior notes due 2007 for
senior subordinated notes of its subsidiaries, (v) the new Pegasus Media &
Communications credit facility, (vi) the convertible preferred stock offering
and (vii) the merger with Golden Sky, all as if these events had occurred on
September 30, 1999.
The acquisitions are accounted for using the purchase method of
accounting. The total costs of such acquisitions are allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values. The allocation of the purchase price included in the
pro forma financial statements is preliminary. We do not expect that the final
allocation of the purchase price will significantly differ from the preliminary
allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that we believe are reasonable. The pro forma consolidated
financial information should be read in conjunction with Golden Sky's
consolidated financial statements and notes thereto, the notes to pro forma
consolidated statements of operations data and the notes to pro forma
consolidated balance sheet. The pro forma consolidated financial information is
not necessarily indicative of our future results of operations. There can be no
assurance whether or when the pending direct broadcast satellite acquisitions or
sale of our Puerto Rico cable system will be consummated.
F-38
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations Data
Year Ended December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
DBS Acquisitions
---------------------------- New England Pending
Actual Completed(a) Pending(b) Cable Sale(c) Cable Sale(d)
------------- -------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS ..................................... $147,142 $ 59,706 $16,376
Broadcast ............................... 34,311
Cable ................................... 13,768 ($3,277) ($ 10,491)
-------- --------- ------- ------ --------
Total net revenues ..................... 195,221 59,706 16,376 (3,277) (10,491)
Operating expenses:
DBS
Programming, technical and
general and administrative ............ 102,420 41,058 9,960
Marketing and selling .................. 45,706 13,390 4,379
Incentive compensation ................. 1,159
Depreciation and amortization .......... 59,077 8,717 677
Broadcast
Programming, technical and
general and administrative ............ 18,056
Marketing and selling .................. 5,993
Incentive compensation ................. 177
Depreciation and amortization .......... 4,557
Cable
Programming, technical and
general and administrative ............ 7,557 (1,602) (5,955)
Marketing and selling .................. 341 (12) (329)
Incentive compensation ................. 115 (75) (40)
Depreciation and amortization .......... 4,993 (835) (4,158)
Corporate expenses ...................... 3,614 581 203 (98) (371)
Corporate depreciation and
amortization ........................... 2,105
-------- --------- ------- ------ --------
Income (loss) from operations (60,649) (4,040) 1,157 (655) 362
Interest expense ......................... (44,604) (8,678) (547) 938 43
Interest income .......................... 2,036 (30)
Other income (expense), net .............. (1,523) 32 105 27 88
Gain on sale of cable system ............. 24,726
-------- --------- ------- ------ --------
Income (loss) before income
taxes and extraordinary
items ................................. (80,014) (12,686) 715 310 463
Provision (benefit) for income taxes ..... (896) 281 56 (5)
-------- --------- ------- ------ --------
Income (loss) before
extraordinary items ................... (79,118) (12,967) 659 315 463
Extraordinary loss from
extinguishment of debt, net .............
-------- --------- ------- ------ --------
Net income (loss) ...................... (79,118) (12,967) 659 315 463
Preferred stock dividends .............. 14,763
--------
Net income (loss) applicable
to common shares ...................... ($ 93,881) ($ 12,967) $ 659 $ 315 $ 463
======== ======== ======= ====== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Adjustments Subtotal
------------------ --------------
<S> <C> <C>
Net revenues:
DBS ..................................... $ 223,224
Broadcast ............................... 34,311
Cable ...................................
-------- ---------
Total net revenues ..................... 257,535
Operating expenses:
DBS
Programming, technical and
general and administrative ............ 153,438
Marketing and selling .................. 63,475
Incentive compensation ................. 1,159
Depreciation and amortization .......... $ 29,163(f) 97,634
Broadcast
Programming, technical and
general and administrative ............ 18,056
Marketing and selling .................. 5,993
Incentive compensation ................. 177
Depreciation and amortization .......... 4,557
Cable
Programming, technical and
general and administrative ............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Corporate expenses ...................... (315)(g) 3,614
Corporate depreciation and
amortization ........................... 2,105
-------- ---------
Income (loss) from operations (28,848) (92,673)
Interest expense ......................... (17,219)(h) (70,067)
Interest income .......................... 2,006
Other income (expense), net .............. 156 (i) (1,115)
Gain on sale of cable system ............. (24,726)(j)
-------- ---------
Income (loss) before income
taxes and extraordinary
items ................................. (70,637) (161,849)
Provision (benefit) for income taxes ..... (332)(k) (896)
-------- ---------
Income (loss) before
extraordinary items ................... (70,305) (160,953)
Extraordinary loss from
extinguishment of debt, net ............. -- (l)
-------- ---------
Net income (loss) ...................... (70,305) (160,953)
Preferred stock dividends .............. 20,857 (m) 35,620
-------- ---------
Net income (loss) applicable
to common shares ...................... ($ 91,162) ($ 196,573)
======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky
-----------------------------------------------------------------
Completed
Actual Acquisitions(e) Adjustments Subtotal Adjustments
------------ ----------------- ------------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS ..................................... $ 75,924 $12,030 ($ 28)(n) $ 87,926
Broadcast ...............................
Cable ...................................
-------- ------- -------- -------- --------
Total net revenues ..................... 75,924 12,030 (28) 87,926
Operating expenses:
DBS
Programming, technical and
general and administrative ............ 63,743 9,452 (21)(n) 73,174 ($ 457)(s)
Marketing and selling .................. 32,201 399 32,600
Incentive compensation ................. 457(s)
Depreciation and amortization .......... 23,166 490 5,819(o) 29,475 96,891(t)
Broadcast
Programming, technical and
general and administrative ............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Cable
Programming, technical and
general and administrative .............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Corporate expenses ......................
Corporate depreciation and
amortization ............................
-------- ------- -------- -------- --------
Income (loss) from operations (43,186) 1,689 (5,826) (47,323) (96,891)
Interest expense ......................... (20,538) (139) (25,402)(p) (46,079)
Interest income .......................... 1,573 222 (222)(n) 1,573
Other income (expense), net .............. 10,377 (10,377)(n)
Gain on sale of cable system .............
-------- ------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
items ................................. (62,151) 12,149 (41,827) (91,829) (96,891)
Provision (benefit) for income taxes ..... 3,074 (3,074)(k)
-------- ------- -------- -------- --------
Income (loss) before
extraordinary items ................... (62,151) 9,075 (38,753) (91,829) (96,891)
Extraordinary loss from
extinguishment of debt, net ............. (2,577) 2,577 (q)
-------- ------- -------- -------- --------
Net income (loss) ...................... (64,728) 9,075 (36,176) (91,829) (96,891)
Preferred stock dividends .............. 14,855 (14,855)(r)
-------- ------- -------- -------- --------
Net income (loss) applicable
to common shares ...................... ($ 79,583) $ 9,075 ($ 21,321) ($ 91,829) ($ 96,891)
======== ======= ========== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
-------------
<S> <C>
Net revenues:
DBS ..................................... $ 311,150
Broadcast ............................... 34,311
Cable ................................... ---------
Total net revenues ..................... 345,461
Operating expenses:
DBS
Programming, technical and
general and administrative ............ 226,155
Marketing and selling .................. 96,075
Incentive compensation ................. 1,616
Depreciation and amortization .......... 224,000
Broadcast
Programming, technical and
general and administrative ............ 18,056
Marketing and selling .................. 5,993
Incentive compensation ................. 177
Depreciation and amortization .......... 4,557
Cable
Programming, technical and
general and administrative ............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Corporate expenses ...................... 3,614
Corporate depreciation and
amortization ........................... 2,105
---------
Income (loss) from operations (236,887)
Interest expense ......................... (116,146)
Interest income .......................... 3,579
Other income (expense), net .............. (1,115)
Gain on sale of cable system .............
---------
Income (loss) before income
taxes and extraordinary
items ................................. (350,569)
Provision (benefit) for income taxes ..... (896)
---------
Income (loss) before
extraordinary items ................... (349,673)
Extraordinary loss from
extinguishment of debt, net .............
---------
Net income (loss) ...................... (349,673)
Preferred stock dividends .............. 35,620
---------
Net income (loss) applicable
to common shares ...................... ($ 385,293)
=========
</TABLE>
F-39
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations Data
Nine Months Ended September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
DBS Acquisitions
---------------------------- Pending
Actual Completed(a) Pending(b) Cable Sale(d)
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net revenues:
DBS ..................................... $ 198,181 $9,065 $16,182
Broadcast ............................... 26,512
Cable ................................... 14,870 ($ 14,870)
--------- ------- ------- --------
Total net revenues ..................... 239,563 9,065 16,182 (14,870)
Operating expenses:
DBS
Programming, technical and
general and administrative ............. 137,891 5,638 10,982
Marketing and selling .................. 88,720 3,443 7,540
Incentive compensation ................. 1,140
Depreciation and amortization .......... 62,334 233 501
Broadcast
Programming, technical and
general and administrative ............. 15,920
Marketing and selling .................. 4,448
Incentive compensation ................. 202
Depreciation and amortization .......... 3,801
Cable
Programming, technical and
general and administrative ............. 7,596 (7,596)
Marketing and selling .................. 504 (504)
Incentive compensation ................. 195 (195)
Depreciation and amortization .......... 5,026 (5,026)
Corporate expenses ...................... 4,316 272 193 (365)
Corporate depreciation and
amortization ........................... 2,195
--------- ------- ------- --------
Loss from operations ................... (94,725) (521) (3,034) (1,184)
Interest expense ......................... (47,541) (4) (393) 28
Interest income .......................... 1,055 (14)
Other income (expense), net .............. (1,449) 31 29 2
--------- ------- ------- --------
Loss before income taxes and
extraordinary items ................... (142,660) (494) (3,398) (1,168)
Provision (benefit) for income taxes ..... (4,031) (4) --
--------- ------- ------- --------
Loss before extraordinary items......... (138,629) (490) (3,398) (1,168)
Extraordinary loss from extinguishment
of debt, net ............................
Net income (loss) ...................... (138,629) (490) (3,398) (1,168)
Preferred stock dividends .............. 12,400
--------- ------- ------- --------
Net income (loss) applicable to
common shares ......................... ($ 151,029) ($490) ($ 3,398) ($ 1,168)
========= ======= ======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky
----------------------------------------------
Adjustments Subtotal Actual Adjustments Subtotal
---------------- ------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS ..................................... $ 223,428 $ 97,157 $ 97,157
Broadcast ............................... 26,512
Cable ...................................
-------- --------- -------- -------- --------
Total net revenues ..................... 249,940 97,157 97,157
Operating expenses:
DBS
Programming, technical and
general and administrative ............. 154,511 86,520 86,520
Marketing and selling .................. 99,703 49,903 49,903
Incentive compensation ................. 1,140
Depreciation and amortization .......... $ 10,743(f) 73,811 26,564 26,564
Broadcast
Programming, technical and
general and administrative ............. 15,920
Marketing and selling .................. 4,448
Incentive compensation ................. 202
Depreciation and amortization .......... 3,801
Cable
Programming, technical and
general and administrative .............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Corporate expenses ...................... (100)(g) 4,316
Corporate depreciation and
amortization ........................... 2,195
-------- --------- -------- -------- --------
Loss from operations ................... (10,643) (110,107) (65,830) (65,830)
Interest expense ......................... (4,911)(h) (52,821) (33,241) ($ 1,748)(p) (34,989)
Interest income .......................... 1,041 2,146 2,146
Other income (expense), net .............. (59)(i) (1,446) (138) (138)
-------- --------- -------- -------- --------
Loss before income taxes and
extraordinary items ................... (15,613) (163,333) (97,063) (1,748) (98,811)
Provision (benefit) for income taxes ..... 4(k) (4,031)
-------- --------- -------- -------- --------
Loss before extraordinary items......... (15,617) (159,302) (97,063) (1,748) (98,811)
Extraordinary loss from extinguishment
of debt, net ............................ --(l) (2,935) 2,935(q)
-------- --------- -------- -------- --------
Net income (loss) ...................... (15,617) (159,302) (99,998) 1,187 (98,811)
Preferred stock dividends .............. 15,643(m) 28,043 13,203 (13,203)(r)
-------- --------- -------- -------- --------
Net income (loss) applicable to
common shares ......................... ($ 31,260) ($ 187,345) ($113,201) $ 14,390 ($ 98,811)
======== ========= ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
Net revenues:
DBS ..................................... $ 320,585
Broadcast ............................... 26,512
Cable ...................................
------- ---------
Total net revenues ..................... 347,097
Operating expenses:
DBS
Programming, technical and
general and administrative ............. ($ 496)(s) 240,535
Marketing and selling .................. 149,606
Incentive compensation ................. 496(s) 1,636
Depreciation and amortization .......... 72,668(t) 173,043
Broadcast
Programming, technical and
general and administrative ............. 15,920
Marketing and selling .................. 4,448
Incentive compensation ................. 202
Depreciation and amortization .......... 3,801
Cable
Programming, technical and
general and administrative .............
Marketing and selling ..................
Incentive compensation .................
Depreciation and amortization ..........
Corporate expenses ...................... 4,316
Corporate depreciation and
amortization ........................... 2,195
------- ---------
Loss from operations ................... (72,668) (248,605)
Interest expense ......................... (87,810)
Interest income .......................... 3,187
Other income (expense), net .............. (1,584)
------- ---------
Loss before income taxes and
extraordinary items ................... (72,668) (334,812)
Provision (benefit) for income taxes ..... (4,031)
------- ---------
Loss before extraordinary items......... (72,668) (330,781)
Extraordinary loss from extinguishment
of debt, net ............................
Net income (loss) ...................... (72,668) (330,781)
Preferred stock dividends .............. 28,043
------- ---------
Net income (loss) applicable to
common shares ......................... ($72,668) ($ 358,824)
======= =========
</TABLE>
F-40
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations Data
(a) Represents the combined financial results of the completed direct broadcast
satellite acquisitions from the beginning of the period presented to the
date of acquisition by Pegasus or the end of the period presented, as
follows (dollars in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Net income Net income
(loss) (loss)
Income applicable Income applicable
Completed Effective Net (loss) from to common Net (loss) from to common
DBS Acquisitions Date Revenues operations shares Revenues operations shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NRTC System No. 0334 3/9/98 $162 $8 $6
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0211 3/9/98 645 85 87
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0174 4/9/98 768 64 72
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 1011 4/9/98 105 29 32
- -------------------------------------------------------------------------------------------------------------------------
DTS 4/27/98 24,543 (5,574) (13,794)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 1017 4/27/98 179 17 19
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0368 5/11/98 152 47 53
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0379 5/11/98 223 29 44
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0267 5/11/98 359 55 34
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0364 6/10/98 116 (4) (3)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0121 6/10/98 209 39 40
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0128 6/10/98 843 77 76
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0365 6/10/98 202 45 51
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0037 7/10/98 535 54 60
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0250 7/10/98 1,104 118 78
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0460 7/10/98 1,019 (140) (158)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0289 8/10/98 375 32 22
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0378 9/9/98 720 (18) (29)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0433 9/9/98 704 46 52
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Net income Net income
(loss) (loss)
Income applicable Income applicable
Completed Effective Net (loss) from to common Net (loss) from to common
DBS Acquisitions Date Revenues operations shares Revenues operations shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0083 9/9/98 819 219 246
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0475 9/9/98 4,082 343 486
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0363 10/9/98 245 66 74
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0131 11/9/98 231 62 70
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0454 11/9/98 1,231 (193) (633)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0013 11/9/98 784 (126) (142)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 1027 12/9/98 661 30 34
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 1075 12/9/98 823 94 93
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 1015 1/9/99 411 129 145
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0377 1/9/99 683 (239) (290)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0348 1/9/99 315 47 53
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0087 1/9/99 499 3 3
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0177 2/9/99 2,926 58 (128) $289 ($83) ($74)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0248 3/12/99 678 20 7 195 (24) (18)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0171 4/12/99 1,091 (81) (92) 314 (13) (11)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0223 4/12/99 535 (6) (23) 235 (19) (17)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0459 6/13/99 3,546 267 180 1,936 (185) (166)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0347 6/13/99 632 39 44 428 162 92
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0469 8/14/99 801 6 7 555 46 39
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0236 9/14/99 1,775 20 31 1,431 (90) (87)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0110 10/14/99 436 74 91 334 (36) (51)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0119 10/14/99 565 81 83 484 (85) (32)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0442 12/14/99 1,238 113 145 1,188 (95) (99)
- -------------------------------------------------------------------------------------------------------------------------
NRTC System No. 0045 1/14/00 1,736 (75) (193) 1,676 (99) (66)
- -------------------------------------------------------------------------------------------------------------------------
Total $59,706 ($4,040) ($12,967) $9,065 ($521) ($490)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Entities with an effective date of 4/27/98 represent Digital Television
Services' acquisitions that occurred prior to the acquisition of Digital
Television Services by Pegasus.
F-41
<PAGE>
(b) Represents the combined financial results of the pending direct broadcast
satellite acquisitions from the beginning of the period presented to the
end of the period presented, as follows (dollars in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Net income Net income
(loss) (loss)
Income applicable Income applicable
Pending Effective Net (loss) from to common Net (loss) from to common
DBS Acquisitions Date Revenues operations shares Revenues operations shares
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pending A Pending $398 $207 $346 $334 ($63) ($70)
- -------------------------------------------------------------------------------------------------------------------------
Pending B Pending 458 221 369 472 (88) (99)
- -------------------------------------------------------------------------------------------------------------------------
Pending C Pending 4,446 51 (82) 4,618 (866) (970)
- -------------------------------------------------------------------------------------------------------------------------
Pending D Pending 587 281 472 604 (113) (127)
- -------------------------------------------------------------------------------------------------------------------------
Pending E Pending 5,161 63 (636) 5,185 (972) (1,088)
- -------------------------------------------------------------------------------------------------------------------------
Pending F Pending 3,966 196 (33) 3,457 (648) (726)
- -------------------------------------------------------------------------------------------------------------------------
Pending G Pending 1,360 138 223 1,512 (284) (318)
- -------------------------------------------------------------------------------------------------------------------------
Total $16,376 $1,157 $659 $16,182 ($3,034) ($3,398)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Financial results of the New England cable operations of Pegasus Cable
Television. The pro forma income statement data for the year ended December
31, 1998 does not include a $24.7 million gain resulting from the completed
sale of our New England cable systems.
(d) Financial results of the Puerto Rico cable operations of Pegasus Cable
Television. The pro forma income statement data for the year ended December
31, 1998 and the nine months ended September 30, 1999 does not include a
$88.3 million gain resulting from the pending sale of our Puerto Rico cable
operations.
<PAGE>
(e) Represents the combined financial results of Golden Sky's completed direct
broadcast satellite acquisitions from the beginning of the period presented
to the date of acquisition by Golden Sky or the end of the period
presented, as follows (dollars in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Year Ended December 31, 1998
- ----------------------------------------------------------------------------------------
Net income
(loss)
Income applicable
Completed Effective Net (loss) from to common
DBS Acquisitions Date Revenues operations shares
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NRTC System No. 0162/0163 1/14/98 $79 ($128) ($128)
- ----------------------------------------------------------------------------------------
NRTC System No. 0129 1/20/98 437 29 5,450
- ----------------------------------------------------------------------------------------
NRTC System No. 0118 3/10/98 50 5 5
- ----------------------------------------------------------------------------------------
NRTC System No. 0159 3/10/98 114 23 23
- ----------------------------------------------------------------------------------------
NRTC System No. 0343 4/20/98 170 12 12
- ----------------------------------------------------------------------------------------
NRTC System No. 0104 5/11/98 160 50 2,006
- ----------------------------------------------------------------------------------------
NRTC System No. 0213 5/8/98 681 (25) (47)
- ----------------------------------------------------------------------------------------
NRTC System No. 0164 6/29/98 961 81 81
- ----------------------------------------------------------------------------------------
NRTC System No. 0003 8/6/98 296 (6) 13
- ----------------------------------------------------------------------------------------
NRTC System No. 0465 8/31/98 910 128 63
- ----------------------------------------------------------------------------------------
NRTC System No. 1037 8/26/98 442 95 93
- ----------------------------------------------------------------------------------------
NRTC System No. 0417 10/2/98 3,194 777 935
- ----------------------------------------------------------------------------------------
NRTC System No. 0413 10/9/98 3,846 544 506
- ----------------------------------------------------------------------------------------
NRTC System No. 0451 11/5/98 690 104 63
- ----------------------------------------------------------------------------------------
Total $12,030 $1,689 $9,075
- ----------------------------------------------------------------------------------------
</TABLE>
F-42
<PAGE>
(f) To record additional amortization expense resulting from the purchase
accounting treatment of the completed and pending direct broadcast
satellite acquisitions. Substantially all of the purchase price for the
completed and pending direct broadcast satellite acquisitions has been
allocated to direct broadcast satellite rights. Such amounts are based on a
preliminary allocation of the total consideration. The actual amortization
may change insignificantly based upon the final allocation of the total
consideration to be paid.
(g) To eliminate corporate expenses charged by prior owners. These costs
represent management fees charged by the prior owners in addition to their
regular salaries, benefits and other related costs. These costs will not be
incurred in future periods as Pegasus' corporate expenses do not include
fees in excess of actual allocated costs.
(h) Interest expense is adjusted to give effect to the transactions as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
-------------- --------------
<S> <C> <C>
Senior notes ................................. $39,669 $29,752
Senior subordinated notes .................... 10,625 7,969
Credit facilities ............................ 18,129 14,156
Sellers' notes ............................... 1,622 937
Capital leases and other ..................... 22 7
------- -------
Total interest expense ............... 70,067 52,821
Interest expense previously recorded ......... 52,848 47,910
------- -------
Adjustment ................................... $17,219 $ 4,911
======= =======
</TABLE>
(i) To eliminate certain nonrecurring income and expenses, net. These expenses
are primarily comprised of legal and professional fees incurred by prior
owners.
(j) To eliminate the nonrecurring gain on the sale of the New England cable
systems.
(k) To eliminate the net tax provision in connection with the acquisitions.
(l) The pro forma income statement data for the year ended December 31, 1998
and the nine months ended September 30, 1999 do not include the $10.8
million and $10.0 million extraordinary net loss from the extinguishment of
debt resulting from the exchange of Pegasus' notes and closing of the new
Pegasus Media & Communications credit facility, respectively.
(m) To record preferred dividends as a result of preferred stock issued in
connection with the completed and pending direct broadcast satellite
acquisitions and the convertible preferred stock offering.
F-43
<PAGE>
(n) To eliminate the results of operations not acquired by Golden Sky.
(o) To record additional amortization expense resulting from the purchase
accounting treatment of Golden Sky's completed direct broadcast satellite
acquisitions. Substantially all of the purchase price for the completed
direct broadcast satellite acquisitions has been allocated to direct
broadcast satellite rights. Such amounts are based on a preliminary
allocation of the total consideration. The actual amortization may change
insignificantly based upon the final allocation of the total consideration
to be paid.
(p) Interest expense is adjusted to give effect to the Golden Sky transactions
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
-------------- --------------
<S> <C> <C>
Historical interest expense -- Golden Sky .......................... $ 20,538 $33,241
Historical interest expense -- completed acquisitions .............. 139 --
-------- -------
20,677 33,241
Pro forma adjustments:
Elimination of historical interest expense of material
businesses Golden Sky acquired during 1998 ...................... (139) --
Interest expense on borrowings under the GSS senior
subordinated notes due 2006, sellers' notes payable and the
Golden Sky credit facility assumed to be incurred to
finance acquisitions as if these borrowings had occurred at
the beginning of the period presented at their respective
historical interest rates ....................................... 14,734 --
Aggregate interest expense and amortization of deferred
financing costs associated with the offering of the GSDBS
senior notes due 2007 as if the note offering has been
consummated as of the beginning of the period presented ......... 14,007 2,347
Reduction of historical interest expense as a result of the
paydown of outstanding debt from the proceeds of the
offering of the GSDBS senior notes due 2007 as if the
note offering had occurred at the beginning of the period
presented ....................................................... (3,200) (599)
-------- -------
Pro forma interest expense ....................................... $ 46,079 $34,989
======== =======
</TABLE>
(q) To eliminate the nonrecurring extraordinary net loss from the
extinguishment of debt.
(r) To eliminate Golden Sky preferred stock dividends as a result of the merger
with Pegasus.
(s) To reclassify incentive compensation.
(t) To record additional amortization expense resulting from the purchase
accounting treatment of the Golden Sky merger and capitalized acquisition
costs. Substantially all of the purchase price has been allocated to direct
broadcast satellite rights. Such amounts are based on a preliminary
allocation of the total consideration. The actual amortization may change
insignificantly based upon the final allocation of the total consideration
to be paid.
F-44
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
September 30, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
DBS Acquisitions
----------------------------
Actual Completed(a) Pending(b)
------------- -------------- ------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ............. $ 22,757 ($ 13,220) ($ 29,920)
Restricted cash ....................... 1,979
Accounts receivable, net .............. 25,165
Inventory ............................. 6,810
Prepaid expenses and other current
assets ............................... 13,131
Property and equipment, net ........... 42,601
Intangibles, net ...................... 771,972 21,219 102,420
Other non-current assets .............. 18,489
----------- ------- --------
Total assets ........................ $ 902,904 $ 7,999 $ 72,500
=========== ======= ========
LIABILITIES AND TOTAL EQUITY
Accounts payable and accrued
expenses ............................. $ 53,366 $ 2,000
Accrued interest ...................... 14,837
Current portion of long-term debt ..... 14,208 $ 701
Current portion of program rights
payable .............................. 4,048
Long-term debt, net ................... 11,973 1,591
Senior Notes .......................... 215,000
Senior Subordinated Notes ............. 236,093
Credit Facilities ..................... 147,600
Program rights payable, net ........... 4,772
Other long-term liabilities ........... 73,236
Minority Interest ..................... 3,000
Series A Preferred Stock .............. 138,428
Series B Preferred Stock .............. 5,707
Series C Preferred Stock ..............
Preferred Stock ....................... 32,500
Class A Common Stock .................. 152 4
Class B Common Stock .................. 46
Additional paid in capital ............ 240,665 37,996
Deficit ............................... (254,520)
----------- ------- --------
Total liabilities and equity ........ $ 902,904 $ 7,999 $ 72,500
=========== ======= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PMC Pending Golden Sky
Investment(c) Cable Sale(d) Other(e) Subtotal Actual
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ............. ($ 14,250) $ 170,000 $ 408,912 $ 544,279 $ 5,908
Restricted cash ....................... 1,979 23,612
Accounts receivable, net .............. 25,165 4,801
Inventory ............................. (515) 6,295 7,223
Prepaid expenses and other current
assets ............................... 13,131 4,086
Property and equipment, net ........... (16,488) 26,113 6,507
Intangibles, net ...................... (64,670) 619 831,560 256,753
Other non-current assets .............. 96,197 114,686 275
-------- --------- ----------- ---------- -----------
Total assets ........................ $ 81,947 $ 88,327 $ 409,531 $1,563,208 $ 309,165
======== ========= =========== ========== ===========
LIABILITIES AND TOTAL EQUITY
Accounts payable and accrued
expenses ............................. $ 55,366 $ 22,603
Accrued interest ...................... 14,837 4,658
Current portion of long-term debt ..... 14,909 3,227
Current portion of program rights
payable .............................. 4,048
Long-term debt, net ................... 13,564 7,153
Senior Notes .......................... $ 155,000 370,000 108,476
Senior Subordinated Notes ............. (153,417) 82,676 195,000
Credit Facilities ..................... 127,400 275,000 52,000
Program rights payable, net ........... 4,772
Other long-term liabilities ........... 73,236
Minority Interest ..................... 3,000
Series A Preferred Stock .............. 138,428
Series B Preferred Stock .............. 5,707
Series C Preferred Stock .............. 290,525 290,525
Preferred Stock ....................... 32,500 133,635
Class A Common Stock .................. $ 2 158
Class B Common Stock .................. 46
Additional paid in capital ............ 81,945 360,606 109
Deficit ............................... $ 88,327 (9,977) (176,170) (217,696)
-------- --------- ----------- ---------- -----------
Total liabilities and equity ........ $ 81,947 $ 88,327 $ 409,531 $1,563,208 $ 309,165
======== ========= =========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Adjustments(f) Pro Forma
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............. ($ 4,900) $ 545,287
Restricted cash ....................... 25,591
Accounts receivable, net .............. 29,966
Inventory ............................. 13,518
Prepaid expenses and other current
assets ............................... 17,217
Property and equipment, net ........... 32,620
Intangibles, net ...................... 4,900
617,955
346,055 2,057,223
Other non-current assets .............. 114,961
-------- ----------
Total assets ........................ $964,010 $2,836,383
======== ==========
LIABILITIES AND TOTAL EQUITY
Accounts payable and accrued
expenses ............................. $ 77,969
Accrued interest ...................... 19,495
Current portion of long-term debt ..... 18,136
Current portion of program rights
payable .............................. 4,048
Long-term debt, net ................... 20,717
Senior Notes .......................... 478,476
Senior Subordinated Notes ............. 277,676
Credit Facilities ..................... 327,000
Program rights payable, net ........... 4,772
Other long-term liabilities ........... $346,055 419,291
Minority Interest ..................... 3,000
Series A Preferred Stock .............. 138,428
Series B Preferred Stock .............. 5,707
Series C Preferred Stock .............. 290,525
Preferred Stock ....................... (133,635) 32,500
Class A Common Stock .................. 65 223
Class B Common Stock .................. 46
Additional paid in capital ............ 533,829 894,544
Deficit ............................... 217,696 (176,170)
-------- ----------
Total liabilities and equity ........ $964,010 $2,836,383
======== ==========
</TABLE>
F-45
<PAGE>
Notes to Pro Forma Consolidated Balance Sheet
(a) To record the four completed direct broadcast satellite acquisitions which
occurred from October 1, 1999 through January 31, 2000. Intangible assets
purchased consist of $20.5 million of direct broadcast satellite rights and
$690,000 of non-compete covenants, which are being amortized over a 10-year
period and the term of the related non-compete covenants (3-5 years),
respectively, as follows (dollars in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Completed Total Preferred
DBS Acquisitions Consideration Cash Notes Stock
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NRTC System No. 0110 $1,870 $93 $1,777
- ----------------------------------------------------------------------------------------------
NRTC System No. 0119 2,925 2,925
- ----------------------------------------------------------------------------------------------
NRTC System No. 0442 6,747 725 315 $5,707
- ----------------------------------------------------------------------------------------------
NRTC System No. 0045 $9,677 $9,477 $200
- ----------------------------------------------------------------------------------------------
Total $21,219 $13,220 $2,292 $5,707
- ----------------------------------------------------------------------------------------------
</TABLE>
(b) To record the seven pending direct broadcast satellite acquisitions at
January 31, 2000. Intangible assets to be purchased consist of $102.4
million of direct broadcast satellite rights which are being amortized over
a 10-year period, as follows (dollars in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Pending Total Assumed Preferred
DBS Acquisitions Consideration Cash Liabilities Stock Common Stock
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pending A $1,520 $1,520
- ---------------------------------------------------------------------------------------------------------------
Pending B 2,250 2,250
- ---------------------------------------------------------------------------------------------------------------
Pending C 25,250 2,750 $22,500
- ---------------------------------------------------------------------------------------------------------------
Pending D 3,300 3,300
- ---------------------------------------------------------------------------------------------------------------
Pending E 40,000 $2,000 $38,000
- ---------------------------------------------------------------------------------------------------------------
Pending F 20,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------------------
Pending G 10,100 10,100
- ---------------------------------------------------------------------------------------------------------------
Total $102,420 $29,920 $2,000 $32,500 $38,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(c) To record the investment in Personalized Media. The total investment of
$96.2 million consists of $14.3 million in cash, 200,000 shares of Pegasus'
Class A common stock, valued at $93.875 per share, Pegagus' agreement,
subject to certain conditions, to issue warrants to purchase 1.0 million
shares of Pegasus' Class A common stock.
(d) To record the pending sale of the Puerto Rico Cable operations resulting in
a nonrecurring gain of $88.3 million.
(e) To record the exchange of Pegasus' senior notes due 2007 for notes of its
subsidiaries, the closing of the new Pegasus Media & Communications
credit facility and the proceeds from the convertible preferred stock
offering and the uses of such proceeds.
(f) To record the pending acquisition of Golden Sky. This acquisition is being
accounted for using the purchase method of accounting. The purchase price
of $1.3 billion was determined by combining the approximately 6.5 million
shares and options of Pegasus' Class A common stock, valued at $95.07 per
share, issued to the shareholders of Golden Sky and the assumption of net
liabilities amounting to $340.7 million (total assets of $309.1 million
less intangibles of $256.8 million less total liabilities of $393.1
million). Pegasus also recorded approximately $346.1 million of a deferred
tax liability which was allocated to direct broadcast satellite rights.
The deferred tax liability was recorded primarily as a result of
non-deductible amortization. Of the $1.3 billion purchase price, $1.2
billion was allocated to direct broadcast satellite rights, which are
being amortized over a 10-year period. Additionally, Pegasus recorded $4.9
million of intangibles relating to the costs associated with the
acquisition of Golden Sky and restructuring charges. Such amounts are
based on a preliminary allocation of the total consideration. The actual
allocation may change insignificantly based upon the actual results of
Golden Sky from the period October 1, 1999 to closing.
F-46
<PAGE>
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
99.1 Press Release dated January 20, 2000
99.2 Press Release dated January 26, 2000
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION PRICES OFFERING OF
$250 MILLION IN CONVERTIBLE PREFERRED STOCK
BALA CYNWYD, PA, January 20, 2000 - Pegasus Communications Corporation (Nasdaq:
PGTV) announced today it has priced an offering of $250 million in liquidation
preference of its Series C convertible preferred stock. The issue, the size of
which was increased to $250 million from $175 million, is being sold in a
private offering to qualified institutional buyers. An additional $50 million of
the shares will be made available to cover over-allotments, if any. The Series C
convertible preferred stock will pay an annual dividend of 6.50% of the $100 per
share liquidation preference, with dividends payable in cash or, at Pegasus'
option, in Class A common stock. The Series C convertible preferred stock will
be convertible at any time into shares of the Company's Class A common stock.
The initial conversion price was set at $127.578 per common share, representing
a 125% conversion premium.
This offering will be made only by means of an offering memorandum.
Pegasus intends to use the proceeds of the offering for working capital and
general corporate purposes. The Series C convertible preferred stock and the
Class A common stock into which the Series C convertible preferred stock is
convertible has not been registered under the Securities Act of 1933 and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Pegasus Communications Corporation is one of the fastest growing media
companies in the United States. We are the largest independent provider of DBS
services to rural parts of the United States on the DIRECTV platform, serving
approximately 1.1 million DBS subscribers in 41 states. Pegasus is also a
broadcaster operating and/or programming ten TV stations serving 2 million TV
households in smaller markets affiliated with FOX, UPN and the WB.
This press release contains information about pending transactions and
there can be no assurance that these transactions will be completed.
For further information, please contact:
Yolanda Robins Jeff Majtyka/Ryan Barr
Pegasus Communications Corporation Brainerd Communicators, Inc.
(610) 934-7000 (212) 986-6667
[email protected] [email protected]
[email protected]
<PAGE>
Pegasus Communications Corporation COMPLETES OfferING OF
$300 Million in Convertible Preferred Stock
BALA CYNWYD, PA, January 26, 2000 - Pegasus Communications Corporation (Nasdaq:
PGTV) announced today it has completed a private offering to qualified
institutional buyers of $300 million in liquidation preference of its Series C
convertible preferred stock. The gross proceeds include an additional $50
million in liquidation preference of shares issued upon exercise of the initial
purchasers' over-allotment option in full. The Series C convertible preferred
stock will pay an annual dividend of 6.50% of the $100 per share liquidation
preference, with dividends payable in cash or, at Pegasus' option, in shares of
the Company's Class A common stock. The Series C convertible preferred stock is
convertible at any time into shares of the Company's Class A common stock. The
initial conversion price was set at $127.50 per common share, representing a
125% conversion premium.
This offering was made only by means of an offering memorandum. Pegasus
intends to use the net proceeds of approximately $291 million for working
capital and general corporate purposes. The Series C convertible preferred stock
and the Class A common stock into which the Series C convertible preferred stock
is convertible has not been registered under the Securities Act of 1933 and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Pegasus Communications Corporation (www.pgtv.com) is one of the fastest
growing media companies in the United States. We are the largest independent
provider of DBS services to rural parts of the United States on the DIRECTV
platform, serving approximately 1.1 million DBS subscribers in 41 states.
Pegasus is also a broadcaster operating and/or programming ten TV stations
serving 2 million TV households in smaller markets affiliated with FOX, UPN and
the WB.
This press release contains information about pending transactions,
including the acquisition of Golden Sky Holdings, Inc., and there can be no
assurance that these transactions will be completed.
For further information, please contact:
- ---------------------------------------
Yolanda Robins Jeff Majtyka/Ryan Barr
Pegasus Communications Corporation Brainerd Communicators, Inc.
(610) 934-7000 (212) 986-6667
[email protected] [email protected]
- ---------------- ----------------------
[email protected]
------------------
