<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
333-36217
333-36217-01
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Commission file number
DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
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(Exact name of Registrants as specified in their respective charters)
Delaware 06-1473713
Delaware 58-2332106
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
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(Address of principal executive offices) (Zip code)
Registrants' telephone number, including area code: (888) 438-7488
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Indicate by check mark whether each of the Registrants: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes_X_ No___
Digital Television Services, Inc. and DTS Capital, Inc. each had 100
shares of common stock outstanding as of May 10, 1999.
The Registrants meet the conditions set forth in General Instruction H
(1)(a) and (b) of Form 10-Q and are therefore filing this Form with the reduced
disclosure format.
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended March 31, 1999
Page
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1998 and March 31, 1999 3
Consolidated Statements of Operations
Three months ended March 31, 1998 and 1999 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 14
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 14
Signature 15
2
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Digital Television Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
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ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,255,370 $ 4,971,221
Restricted cash 18,879,305 9,355,768
Accounts receivable, less allowance for doubtful
accounts of $183,000 2,718,783 2,303,136
Inventory 732,898 174,317
Prepaid expenses and other 228,962 227,123
------------ ------------
Total current assets 28,815,318 17,031,565
Property and equipment, net 3,268,884 3,061,659
Intangible assets, net 343,986,107 332,253,708
Deferred taxes 2,109,901 2,155,563
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Total assets $378,180,210 $354,502,495
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 4,061,677 $ 4,166,869
Accounts payable 1,369,324 230,043
Accrued interest 8,334,313 3,396,317
Accrued satellite programming and fees 8,080,181 9,321,387
Accrued expenses and other 3,033,709 4,376,722
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Total current liabilities 24,879,204 21,491,338
Long-term debt 204,804,632 204,721,572
Deferred taxes 66,941,018 66,434,180
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Total liabilities 296,624,854 292,647,090
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Commitments and contingent liabilities - -
Preferred Stock; $0.01 par value; 1,000 shares authorized - -
Common stockholder's equity:
Common stock; $0.01 par value; 1,000 shares
authorized; 100 shares issued and outstanding 1 1
Additional paid-in capital 124,264,836 124,264,836
Deficit (42,709,481) (62,409,432)
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Total stockholder's equity 81,555,356 61,855,405
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Total liabilities and stockholder's equity $378,180,210 $354,502,495
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Digital Television Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
December 31, March 31,
1998 1999
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(unaudited)
<S> <C> <C>
Net revenues:
Basic satellite service $11,788,970 | $19,184,332
Premium services 4,378,214 | 3,377,782
Other 948,609 | 1,437,652
----------- | -----------
Total net revenues 17,115,793 | 23,999,766
|
Operating expenses: |
Programming 7,945,217 | 10,851,766
General and administrative 5,363,171 | 5,872,101
Marketing and selling 3,876,093 | 9,348,779
Incentive compensation - | 65,000
Corporate expenses - | 299,340
Depreciation and amortization 5,208,602 | 11,529,652
----------- | -----------
Loss from operations (5,277,290) | (13,966,872)
|
Interest expense (6,194,532) | (6,517,791)
Interest income 452,392 | 184,318
Other income (expense), net (165,499) | 47,894
----------- | -----------
Loss before income taxes (11,184,929) | (20,252,451)
Benefit for income taxes - | (552,500)
----------- | -----------
Net loss ($11,184,929) | ($19,699,951)
============ | ============
</TABLE>
See accompanying notes to consolidated financial statements
4
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Digital Television Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
December 31, March 31,
1998 1999
------------ ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($11,184,929) | ($19,699,951)
Adjustments to reconcile net loss |
to net cash used for operating activities: |
Depreciation and amortization 5,208,602 | 11,529,652
Accretion on discount of bonds and seller notes 344,861 | 275,318
Stock incentive compensation - | 65,000
Gain on disposal of assets - | (35,343)
Bad debt expense 231,901 | 379,373
Change in assets and liabilities: |
Accounts receivable (396,103) | 34,386
Inventory 742,548 | 558,581
Prepaid expenses and other 5,427 | 1,839
Accounts payable and accrued expenses 431,108 | 827,438
Accrued interest (4,519,057) | (4,937,996)
----------- | ------------
Net cash used for operating activities (9,135,642) | (11,001,703)
----------- | ------------
Cash flows from investing activities: |
Acquisitions (37,172,504) | -
Capital expenditures (341,097) | (58,298)
Purchase of intangible assets (369,179) | (3,487)
Proceeds from sale of assets - | 508,988
----------- | ------------
Net cash provided (used) by investing activities (37,882,780) | 447,203
----------- | ------------
Cash flows from financing activities: |
Repayments of long-term debt and capital leases (9,583,090) | (4,053,187)
Borrowings on bank credit facilities 13,000,000 | 4,000,000
Repayments on bank credit facilities - | (200,000)
Restricted cash 9,345,320 | 9,523,537
Debt issuance costs (378,448) | -
----------- | ------------
Net cash provided by financing activities 12,383,782 | 9,270,351
----------- | ------------
Net decrease in cash and cash equivalents (34,634,640) | (1,284,149)
Cash and cash equivalents, beginning of year 39,113,152 | 6,255,370
----------- | ------------
Cash and cash equivalents, end of period $4,478,512 | $4,971,221
=========== | ============
</TABLE>
See accompanying notes to consolidated financial statements
5
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Digital Television Services, Inc. ("DTS" or together with its
subsidiaries, the "Company") is a holding company which operates primarily
through its wholly owned subsidiaries and is a successor to Digital Television
Services, LLC and DBS Holdings, L.P., originally formed on January 30, 1996.
DTS' significant direct operating subsidiaries provide direct broadcast
satellite television ("DBS") services to customers in certain rural areas of
eleven states.
Until April 27, 1998, the sole member and manager of the operating
subsidiaries was DTS Management, LLC ("DTS Management"), which is a subsidiary
of DTS. The Company's other direct subsidiary, DTS Capital, Inc. ("DTS
Capital"), was formed in 1997 and has nominal assets and does not conduct any
operations. DTS Capital was formed to facilitate the issuance of $155.0 million
of 12.5% Series A Senior Subordinated Notes due 2007 (the "Series A Notes") in
July 1997.
On April 27, 1998, the Company merged (the "Merger") with Pegasus DTS
Merger Sub, Inc., a wholly owned subsidiary of Pegasus Communications
Corporation ("Pegasus" or the "Parent") in a transaction accounted for as a
purchase. In connection with the Merger, the stockholders of the Company
exchanged all of their outstanding capital stock for approximately 5.5 million
shares of Pegasus' Class A Common Stock and, as a consequence, the Company
became a wholly owned subsidiary of Pegasus. Pegasus did not assume, guarantee
or otherwise have any liability for DTS' outstanding indebtedness or any other
liability of the Company or its subsidiaries. After the Merger, except to the
extent permitted under the terms of the Notes, the Company did not assume,
guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of Pegasus' subsidiaries.
Total consideration for the Merger was approximately $363.9 million,
which consisted of approximately 5.5 million shares of Pegasus' Class A Common
Stock (amounting to $118.8 million at a price of $21.71 per share, the average
closing price per share five days prior and subsequent to the acquisition
announcement), options and warrants to purchase a total of 224,038 shares of
Pegasus' Class A Common Stock (amounting to $3.3 million at the time of
issuance), approximately $158.9 million in assumed net liabilities and
approximately $82.9 million of a deferred tax liability, primarily as a result
of non-deductible amortization.
2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements include the accounts of DTS and
all of its subsidiaries. All intercompany transactions and balances have been
eliminated. Certain amounts for 1998 have been reclassified for comparative
purposes.
The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and its cash flows for
the interim period. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K for the year then ended.
As a result of the Merger and Pegasus' use of the purchase method of
accounting to record the acquisition of the Company, the "push down" effect of
the purchase price increased the Company's intangible assets by approximately
$205.0 million. As a consequence, results prior to the Merger are not comparable
with those subsequent to the Merger.
6
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Equity:
On April 27, 1998, in connection with the Merger, the stockholders of
the Company exchanged all of their outstanding capital stock for shares of
Pegasus' Class A Common Stock and warrants to purchase Pegasus' Class A Common
Stock and, as a result, the Company became a wholly owned subsidiary of Pegasus.
As of December 31, 1998 and March 31, 1999, the Company had one class
of Common Stock. The Company's ability to pay dividends on its Common Stock is
subject to certain restrictions.
4. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following : December 31, March 31,
1998 1999
---- ----
<S> <C> <C>
Series B Notes payable by DTS, due 2007, interest at
12.5%, payable semi-annually in arrears on February 1
and August 1, net of unamortized discount of
$1,784,844 and $1,716,377 as of December 31, 1998
and March 31, 1999,
respectively............................................... $153,215,156 $153,283,623
Senior six-year $70.0 million revolving credit facility,
payable by DTS, interest at the Company's option at
either the bank's base rate or the Eurodollar Rate......... 26,800,000 30,800,000
Senior six-year $20.0 million term loan facility, payable
by DTS, interest at the Company's option at either the
bank's base rate or the Eurodollar Rate.................... 19,600,000 19,400,000
Sellers' notes, due 1999 to 2001, interest at 3% to 4%, net
of unamortized discount of $1,576,895 and $1,370,044 as
of December 31, 1998 and March 31, 1999, respectively...... 9,161,681 5,337,084
Capital leases and other..................................... 89,472 67,734
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208,866,309 208,888,441
Less current maturities...................................... 4,061,677 4,166,869
------------ ------------
Long-term debt............................................... $204,804,632 $204,721,572
============ ============
</TABLE>
The Company maintains a $70.0 million senior revolving credit facility
and a $20.0 million senior term credit facility (collectively, the "DTS Credit
Facility") which expires in 2003 and is collateralized by substantially all of
the assets of DTS and its subsidiaries. The DTS Credit Facility is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. As of March 31, 1999, $18.5 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility, including
$10.7 million collateralizing certain of the Company's outstanding sellers'
notes.
The Company's 12.5% Series B Notes due 2007 (the "12.5% Series B
Notes") may be redeemed, at the option of the Company, in whole or in part, at
various points in time after August 1, 2002 at the redemption prices specified
in the indenture governing the 12.5% Series B Notes, plus accrued and unpaid
interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
7
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
---------- --------
<S> <C> <C>
Notes payable and related acquisition of intangibles...... $9,500,000 -
</TABLE>
For the three months ended March 31, 1998 and 1999, the Company paid
cash for interest in the amount of $10.7 million and $11.5 million,
respectively. The Company paid no federal income taxes for the three months
ended March 31, 1998 and 1999.
6. Commitments and Contingent Liabilities:
Legal Matters:
The Company was notified that is has been sued in Indiana for allegedly
charging DBS subscribers excessive fees for late payments. The plaintiffs, who
purport to represent a class consisting of residential DIRECTV(R) ("DIRECTV")
customers in Indiana, seek unspecified damages for the purported class and
modification of the Company's late-fee policy. The Company is advised that
similar suits have been brought against DIRECTV and various cable operators in
other parts of the United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to
the aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In reliance upon General Instruction (H)(2)(a) of Form 10-Q, Digital
Television Services is providing the limited disclosure set forth below. Such
disclosure requires us only to provide narrative analysis of the results of
operations which explains the reasons for material changes in the amount of
revenue and expense items between the most recent fiscal year-to-date period
presented and the corresponding fiscal year-to-date period immediately preceding
it. The following discussion of the financial condition and results of
operations of Digital Television Services should be read in conjunction with the
consolidated financial statements and related notes which are included on pages
3-8 herein.
General
Digital Television Services, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 204,000 subscribers at
April 30, 1999. We have the exclusive right to distribute DIRECTV
digital broadcast satellite services to approximately 1.8 million
rural households in 11 states. We distribute DIRECTV through the
Pegasus retail network, a network of approximately 2,000 independent
retailers.
We were originally formed on January 30, 1996, to acquire, own and
manage rights to distribute DIRECTV services to residential households and
commercial establishments in certain rural areas of the United States. On April
27, 1998, we became a wholly owned subsidiary of Pegasus Communications
Corporation, the largest independent provider of DIRECTV, through a merger with
a subsidiary of Pegasus.
In connection with the merger, the stockholders of Digital Television
Services exchanged all of their capital stock for approximately 5.5 million
shares of Pegasus' Class A Common Stock and, as a consequence, we became a
wholly owned subsidiary of Pegasus Communications Corporation.
Total consideration for the merger was approximately $363.9 million,
which consisted of:
o approximately 5.5 million shares of Pegasus' Class A Common Stock
(amounting to $118.8 million),
o options and warrants to purchase a total of 224,038 shares of
Pegasus' Class A Common Stock (amounting to $3.3 million),
o approximately $158.9 million in assumed net liabilities, and
o approximately $82.9 million of a deferred tax liability, primarily as
a result of non-deductible amortization.
Pegasus has accounted for the acquisition as a purchase and applied
"push down" accounting, thereby adjusting our accounting basis. The effect of
the change in accounting basis has been a $205.0 million increase in our
intangible assets. Results prior to and subsequent to the acquisition of Digital
Television Services by Pegasus are not comparable.
Revenues are principally derived from monthly customer subscriptions
and pay-per-view services.
In this section we use the terms pre-marketing operating expenses,
pre-marketing cash flow and location cash flow. Pre-marketing operating expenses
consist of:
9
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o programming expenses, including amounts paid to program suppliers,
digital satellite system authorization charges and satellite control
fees, each of which is paid on a per subscriber basis, and DIRECTV
royalties which are equal to 5% of DBS program service revenues, and
o general and administrative expenses, including administrative costs
associated with our sales and customer service operations.
Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest,
o income taxes,
o depreciation and amortization,
o non-cash charges, such as incentive compensation under Pegasus'
restricted stock plan and 401(k) plans,
o corporate overhead, and
o subscriber acquisition costs, which are sales and marketing expenses
incurred to acquire new subscribers.
Location cash flow is pre-marketing cash flow less subscriber
acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not
be considered, an alternative to net income from operations, net income, net
cash provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Digital
Television Services' industry or the economy generally. We believe that
pre-marketing cash flow and location cash flow are important, however, for the
following reasons:
o those who follow our industry frequently use them as measures of
performance and ability to pay debt service, and
o they are measures that our lenders, investors and we use to monitor
our financial performance and debt leverage.
Results of Operations
Three months ended March 31, 1999 compared to three months ended March 31, 1998
During the first quarter of 1998, Digital Television Services acquired
approximately 5,000 subscribers and the exclusive DIRECTV distribution rights to
approximately 42,000 households in rural areas of the United States. At March
31, 1998 and 1999, Digital Television Services had exclusive DIRECTV
distribution rights to 1.8 million households. At March 31, 1999, Digital
Television Services had 197,000 subscribers as compared to 144,000 subscribers
at March 31, 1998. Subscriber penetration increased from 8.0% at March 31, 1998
to 10.8% at March 31, 1999.
10
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Total net revenues were $24.0 million for the three months ended March
31, 1999, an increase of $6.9 million, or 40%, compared to total net revenues of
$17.1 million for the same period in 1998. The increase is primarily due to an
increase in the average number of subscribers in the first quarter of 1999
compared to the first quarter of 1998. The average monthly revenue per
subscriber was $42.97 for the three months ended March 31, 1999 compared to
$42.20 for the same period in 1998.
Pre-marketing operating expenses were $16.7 million for the three
months ended March 31, 1999, an increase of $3.4 million, or 26%, compared to
$13.3 million for the same period in 1998. The increase is attributable to
significant growth in subscribers over the last twelve months. As a percentage
of revenue, pre-marketing operating expenses were 69.7% for the three months
ended March 31, 1999 compared to 77.8 % for the same period in 1998.
Subscriber acquisition costs were $9.3 million for the three months
ended March 31, 1999, an increase of $5.5 million compared to $3.9 million for
the same period in 1998. The total subscriber acquisition costs per gross
subscriber addition were $404 for the three months ended March 31, 1999 compared
to $235 for the same period in 1998. The increase is principally due to an
increase in promotional programming.
Incentive compensation, through a plan that became applicable to us on
April 27, 1998, when Pegasus acquired Digital Television Services, was $65,000
for the three months ended March 31, 1999. Incentive compensation is calculated
from increases in pro forma location cash flow.
Corporate expenses were $299,000 for the three months ended March 31,
1999. Corporate expenses represent an allocated portion of Pegasus' corporate
overhead, which Digital Television Services began incurring in 1999.
Depreciation and amortization was $11.5 million for the three months
ended March 31, 1999, an increase of $6.3 million, or 121%, compared to $5.2
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as a result of the change in accounting basis resulting from the
acquisition of Digital Television Services by Pegasus.
Interest expense was $6.5 million for the three months ended March 31,
1999, an increase of $323,000, or 5%, compared to interest expense of $6.2
million for the same period in 1998. The increase in interest expense is
primarily due to an increase in bank borrowings, partially offset by a reduction
in seller debt. Interest income was $184,000 for the three months ended March
31, 1999, a decrease of $268,000, or 59%, compared to interest income of
$452,000 for the same period in 1998. The decrease in interest income is due to
lower average cash balances, including restricted cash, in the first quarter of
1999 as compared to the first quarter of 1998.
Other income was $48,000 for the three months ended March 31, 1999, as
compared to other expense of $165,000 for the same period in 1998. The change of
$213,000, or 129%, in other income (expense), net is primarily due to a gain on
the disposal of certain DBS assets of $35,000 and a decrease in bank charges and
income taxes for the three months ended March 31, 1999 as compared to the same
period in 1998.
The benefit for income taxes was $553,000 for the three months ended
March 31, 1999. The benefit for income taxes is primarily a result of the
amortization of the deferred tax liability that originated from the acquisition
of Digital Television Services by Pegasus. There was no income tax provision for
the three months ended March 31, 1998 as a result of Digital Television
Services' status as a nontaxable entity for federal and state income tax
purposes prior to its conversion to a corporation in October 1997 and the
incurrence of net operating losses subsequent to that event.
11
<PAGE>
Liquidity and Capital Resources
Digital Television Services has required significant capital since its
formation in order to fund acquisitions, to implement the infrastructure to
support its operations, to meet debt service obligations and to fund subscriber
acquisition costs. Digital Television Services' primary sources of liquidity
have been credit available under its credit facilities, the issuance of seller
notes and proceeds from private offerings.
Pre-marketing cash flow was approximately $7.3 million for the three
months ended March 31, 1999, an increase of $3.5 million, or 91%, as compared to
$3.8 million for the same period in 1998. The increase is primarily attributable
to the increase in our subscriber base.
During the three months ended March 31, 1999, $6.3 million of cash on
hand, together with $447,000 of net cash provided by Digital Television
Services' investing activities and $9.3 million provided by financing activities
was used to fund operating activities of approximately $11.0 million. Investing
activities consisted of:
o proceeds from the sale of certain DBS assets of $509,000, and
o maintenance and other capital expenditures and intangibles totaling
approximately $62,000.
Financing activities consisted of:
o net borrowings on bank credit facilities totaling $3.8 million,
o the repayment of approximately $4.1 million of long-term debt,
primarily sellers' notes and capital leases, and
o net restricted cash draws of approximately $9.5 million to pay
interest on our $155.0 million notes.
As of March 31, 1999, cash on hand amounted to $5.0 million plus
restricted cash of $9.4 million.
Digital Television Services maintains a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility.
Borrowings under the credit facilities are available to refinance certain
indebtedness and for acquisitions, subject to the approval of the lenders in
certain circumstances, working capital, capital expenditures and for general
corporate purposes. As of March 31, 1999, $50.2 was outstanding and stand-by
letters of credit amounting to $18.5 million were issued under its $90.0 million
credit facilities. The credit facilities expire in July 2003.
Digital Television Services believes that it has adequate resources to
meet its working capital, maintenance capital expenditure and debt service
obligations for at least the next twelve months. However, our ability in the
future to repay our existing indebtedness will depend upon the success of our
business strategy, prevailing economic conditions, regulatory matters, levels of
interest rates and financial, business and other factors that are beyond our
control. We cannot assure you that we will be able to generate the substantial
increases in cash flow from operations that we will need to meet the obligations
under our indebtedness. Furthermore, our agreements with respect to our
indebtedness contain numerous covenants that, among other things, restrict our
ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o to sell our assets.
12
<PAGE>
Failure to make debt payments or comply with our covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on us.
Digital Television Services closely monitors conditions in the capital
markets to identify opportunities for the effective use of financial leverage.
In financing its future expansion requirements, Digital Television Services
would expect to avail itself of such opportunities and thereby increase its
indebtedness. This could result in increased debt service requirements. We
cannot assure you that such debt financing can be completed on terms
satisfactory to Digital Television Services or at all. Digital Television
Services may also issue additional equity to fund its future expansion
requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the 2000s from dates in the 1900s. These problems may also
arise from additional sources, such as the use of special codes and conventions
in software utilizing the date field.
Digital Television Services has reviewed all of its systems as to the
year 2000 issue. Digital Television Services' primary focus has been on its own
internal systems. Digital Television Services has replaced its corporate
accounting system. However, if any other necessary changes are not made or
completed in a timely fashion or unanticipated problems arise, the year 2000
issue may take longer for Digital Television Services to address and may have a
material impact on Digital Television Services' financial condition and its
results of operations.
Digital Television Services relies on outside vendors for the operation
of its DBS satellite control and billing systems, including DIRECTV, the
National Rural Telecommunications Cooperative and their respective vendors.
Digital Television Services has established a policy to ensure that these
vendors are currently in compliance with the year 2000 issue or have a plan in
place to be in compliance with the year 2000 issue by the first quarter of 1999.
In addition, Digital Television Services has had initial communications with
certain of its other significant suppliers, distributors, financial
institutions, lessors and parties with which it conducts business to evaluate
their year 2000 compliance plans and state of readiness and to determine the
extent to which Digital Television Services' systems may be affected by the
failure of others to remediate their own year 2000 issues. To date, however,
Digital Television Services has received only preliminary feedback from such
parties and has not independently confirmed any information received from other
parties with respect to the year 2000 issue. As such, we cannot assure you that
these other parties will complete their year 2000 conversion in a timely fashion
or will not suffer a year 2000 business disruption that may adversely affect
Digital Television Services' financial condition and its results of operations.
Because Digital Television Services' year 2000 conversion is expected
to be completed prior to any potential disruption to Digital Television
Services' business, Digital Television Services has not yet completed the
development of a comprehensive year 2000-specific contingency plan. However, as
part of our year 2000 contingency planning effort, Digital Television Services
examines information received from external sources for date integrity before
bringing it into its internal systems. If Digital Television Services determines
that its business or a segment thereof is at material risk of disruption due to
the year 2000 issue or anticipates that its year 2000 conversion will not be
completed in a timely fashion, it will work to enhance its contingency plan.
Costs to be incurred beyond March 31, 1999 relating to the year 2000 issue are
not expected to be significant.
13
<PAGE>
Seasonality
Digital Television Services' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
Inflation
Digital Television Services believes that inflation has not been a
material factor affecting its business. In general, Digital Television Services'
revenues and expenses are impacted to the same extent by inflation. A majority
of Digital Television Services' indebtedness bears interest at a fixed rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule of Digital Television
Services, Inc.
Exhibit 27.2 Financial Data Schedule of DTS Capital, Inc.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended March 31, 1999.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Digital Television Services, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, thereto duly authorized.
Digital Television Services, Inc.
May 12, 1999 By: /s/ Robert N. Verdecchio
- ----------------------- -------------------------------------
Date Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DTS Capital, Inc. has duly caused this Report to be signed
on its behalf by the undersigned, thereto duly authorized.
DTS Capital, Inc.
May 12, 1999 By: /s/ Robert N. Verdecchio
- ----------------------- -------------------------------------
Date Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Digital Television Services, Inc. as March 31,
1999 (unaudited) and the related consolidated statements of operations and cash
flows for the three months ended March 31, 1999 (unaudited). This information is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001035722
<NAME> DIGITAL TELEVISION SERVICES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,971,221
<SECURITIES> 0
<RECEIVABLES> 2,486,136
<ALLOWANCES> 183,000
<INVENTORY> 174,317
<CURRENT-ASSETS> 17,031,565
<PP&E> 4,842,734
<DEPRECIATION> 1,781,075
<TOTAL-ASSETS> 354,502,495
<CURRENT-LIABILITIES> 21,491,338
<BONDS> 153,283,623
0
0
<COMMON> 1
<OTHER-SE> 61,855,404
<TOTAL-LIABILITY-AND-EQUITY> 354,502,495
<SALES> 23,999,766
<TOTAL-REVENUES> 23,999,766
<CGS> 0
<TOTAL-COSTS> 37,966,638
<OTHER-EXPENSES> (232,212)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,517,791
<INCOME-PRETAX> (20,252,451)
<INCOME-TAX> (552,500)
<INCOME-CONTINUING> (19,699,951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,699,951)
<EPS-PRIMARY> (196,999.51)
<EPS-DILUTED> (196,999.51)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Digital Television Services, Inc. as March 31,
1999 (unaudited) and the related consolidated statements of operations and cash
flows for the three months ended March 31, 1999 (unaudited). This information is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001045973
<NAME> DTS CAPITAL, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,971,221
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<ALLOWANCES> 183,000
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<CURRENT-ASSETS> 17,031,565
<PP&E> 4,842,734
<DEPRECIATION> 1,781,075
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<BONDS> 153,283,623
0
0
<COMMON> 1
<OTHER-SE> 61,855,404
<TOTAL-LIABILITY-AND-EQUITY> 354,502,495
<SALES> 23,999,766
<TOTAL-REVENUES> 23,999,766
<CGS> 0
<TOTAL-COSTS> 37,966,638
<OTHER-EXPENSES> (232,212)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,517,791
<INCOME-PRETAX> (20,252,451)
<INCOME-TAX> (552,500)
<INCOME-CONTINUING> (19,699,951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,699,951)
<EPS-PRIMARY> (196,999.51)
<EPS-DILUTED> (196,999.51)
</TABLE>
