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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER 333-64367
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GOLDEN SKY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 43-1749060
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
4700 BELLEVIEW AVENUE, SUITE 300 64112
KANSAS CITY, MO (Zip code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (816) 753-5544
605 W. 47TH STREET, SUITE 300
KANSAS CITY, MO 64112
(Former name, former address and former fiscal year, if changed since last
report)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 14, 1999, the Registrant's outstanding common stock consisted of
1,000 shares of Common Stock.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998........................... 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998 (Unaudited)...... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 (Unaudited)...... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings........................................... None
Item 2. Changes in Securities and Use of Proceeds................... None
Item 3. Defaults Upon Senior Securities............................. None
Item 4. Submission of Matters to a Vote of Security Holders......... None
Item 5. Other Information........................................... None
Item 6. Exhibits and Reports on Form 8-K............................ 14
</TABLE>
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GOLDEN SKY SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
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Current assets:
Cash and cash equivalents................................. $ 4,460 $ 39,276
Restricted cash, current portion.......................... 28,083 22,892
Subscriber receivables (net of allowance for uncollectible
accounts of $293 and $252, respectively)............... 8,632 9,448
Other receivables......................................... 2,465 994
Inventory................................................. 10,146 8,683
Prepaid expenses and other................................ 1,859 959
-------- --------
Total current assets........................................ 55,645 82,252
Restricted cash, net of current portion..................... 23,534 11,827
Property and equipment (net of accumulated depreciation of
$3,214 and $3,983, respectively).......................... 4,994 5,914
Intangible assets, net...................................... 233,139 245,773
Deferred financing costs.................................... 10,541 8,175
Other assets................................................ 218 475
-------- --------
Total assets...................................... $328,071 $354,416
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable.................................... $ 13,539 $ 15,012
Interest payable.......................................... 11,009 4,348
Current portion of long-term obligations.................. 8,916 2,819
Unearned revenue.......................................... 5,574 6,392
Accrued payroll and other................................. 1,403 1,503
Bank debt (Note 4)........................................ -- 35,000
-------- --------
Total current liabilities................................... 40,441 65,074
Long-term obligations, net of current portion:
12 3/8% Notes............................................. 195,000 195,000
Bank debt................................................. 67,000 --
Seller notes payable...................................... 6,912 6,912
Other notes payable and obligations under capital
leases................................................. 376 441
Minority interest......................................... 2,420 2,288
-------- --------
Total long-term obligations, net of current
portion......................................... 271,708 204,641
-------- --------
Total liabilities................................. 312,149 269,715
Commitments and contingencies
Stockholder's Equity:
Common Stock, par value $.01; 1,000 shares authorized,
issued and outstanding................................. -- --
Additional paid-in capital................................ 97,600 193,574
Accumulated deficit....................................... (81,678) (108,873)
-------- --------
Total stockholder's equity........................ 15,922 84,701
-------- --------
Total liabilities and stockholder's equity........ $328,071 $354,416
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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GOLDEN SKY SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- --------
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Revenue:
DBS services.............................................. $13,884 $ 30,502
Lease and other........................................... 245 197
------- --------
Total revenue..................................... 14,129 30,699
Costs and Expenses:
Costs of DBS services..................................... 8,250 19,186
System operations......................................... 1,787 4,270
Sales and marketing....................................... 4,670 12,809
General and administrative................................ 1,108 2,948
Depreciation and amortization............................. 4,348 8,220
------- --------
Total costs and expenses.......................... 20,163 47,433
------- --------
Operating loss.............................................. (6,034) (16,734)
Non-operating items:
Interest and investment income............................ 28 823
Interest expense.......................................... (2,281) (8,349)
------- --------
Total non-operating items......................... (2,253) (7,526)
------- --------
Net loss before income taxes................................ (8,287) (24,260)
Income taxes................................................ -- --
------- --------
Net loss before extraordinary charge........................ (8,287) (24,260)
Extraordinary charge on early retirement of debt............ -- (2,935)
------- --------
Net loss.................................................... $(8,287) $(27,195)
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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GOLDEN SKY SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (8,287) $(27,195)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 4,348 8,220
Amortization of deferred financing costs and other........ 252 246
Extraordinary charge on early retirement of debt.......... -- 2,935
Change in operating assets and liabilities, net of
acquisitions:
Subscriber receivables, net of unearned revenue........ (622) 46
Other receivables...................................... (174) 1,471
Inventory.............................................. (859) 1,463
Prepaid expenses and other............................. (160) 683
Trade accounts payable................................. 3,897 1,473
Interest payable....................................... 533 (6,661)
Accrued payroll and other.............................. (1,305) 81
-------- --------
Net cash used in operating activities............. (2,377) (17,238)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets....................... (27,647) (20,334)
Purchases of property and equipment......................... (684) (1,144)
Proceeds from interest escrow account....................... -- 12,158
Investment earnings placed in escrow........................ -- (709)
Release of amounts reserved for contingent reduction of bank
debt...................................................... -- 5,449
Other....................................................... -- (48)
-------- --------
Net cash used in investing activities....................... (28,331) (4,628)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under the Credit Agreement....................... 21,000 --
Borrowings under the Credit Facility........................ -- 21,000
Principal payments on the Credit Facility................... -- (53,000)
Principal payments on notes payable and obligations under
capital leases............................................ (64) (6,032)
Capital contribution from Golden Sky DBS, Inc. ............. -- 95,661
Increase in deferred financing costs........................ (242) (947)
-------- --------
Net cash provided by financing activities................... 20,694 56,682
-------- --------
Net increase (decrease) in cash and cash equivalents........ (10,014) 34,816
Cash and cash equivalents, beginning of period.............. 13,632 4,460
-------- --------
Cash and cash equivalents, end of period.................... $ 3,618 $ 39,276
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................... $ 1,315 $ 14,390
Property and equipment acquired under capital leases...... 163 78
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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GOLDEN SKY SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
Golden Sky Systems, Inc. ("Systems" or the "Company") is the second largest
independent provider of DIRECTV subscription television services. DIRECTV is the
leading direct broadcast satellite ("DBS") company serving the continental
United States. Systems 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 March 31, 1999, Systems has
acquired 51 Rural DIRECTV Markets in 23 states representing approximately 1.8
million households. As of that same date, Systems served approximately 263,500
subscribers.
Organization and Legal Structure
Until February 1999, Systems was a wholly-owned subsidiary of Golden Sky
Holdings, Inc. ("Holdings"). In February 1999, Golden Sky DBS, Inc. ("Golden Sky
DBS") was formed for the purpose of completing a private offering (the "13 1/2%
Notes Offering") of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2%
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.
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. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
three-month period ended March 31, 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 Systems' Annual Report on Form 10-K for the year ended
December 31, 1998.
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 $730,000
and $1.1 million during the three-month periods ended March 31, 1998 and 1999,
respectively.
Comprehensive Income
Systems has no components of comprehensive income other than net loss.
4
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GOLDEN SKY SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming to new
subscribers. The retail price of such free programming promotions is expensed in
the month the subscriber activates service. During the three-months ended March
31, 1999, sales and marketing expenses attributable to such promotions totaled
$1.9 million. Related revenue is recognized in the month service is provided.
3. ACQUISITIONS
Systems continuously pursues opportunities to acquire additional Rural
DIRECTV Markets. During the three-month period ended March 31, 1999, Systems
acquired four Rural DIRECTV Markets in five states (the "1999 Acquired
Markets"). The 1999 Acquired Markets represent approximately 69,000 households
and served approximately 10,700 subscribers at the respective acquisition dates.
The acquisitions of the 1999 Acquired Markets were accounted for using the
purchase method. The aggregate purchase price (including direct acquisition
costs of $414,000) for the 1999 Acquired Markets was allocated as follows (in
thousands):
<TABLE>
<S> <C>
DIRECTV distribution rights................................ $17,200
Non-compete agreements..................................... 3,058
Working capital, net....................................... 76
-------
$20,334
=======
</TABLE>
In April 1999, Systems acquired three additional Rural DIRECTV Markets
serving approximately 6,500 subscribers in two states. The aggregate purchase
price of these acquisitions, which represent approximately 47,000 households,
totaled $11.6 million.
4. BANK DEBT
In February 1999, 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, 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 Systems and
totaled $53.0 million. As of March 31, 1999, no borrowings were outstanding
under the Amended Credit Facility's revolving loan commitment. As of that same
date, outstanding borrowings under the Amended Credit Facility's term loan
commitment totaled $35.0 million. Upon execution of the Amended Credit Facility,
Systems recognized an extraordinary charge of approximately $2.9 million to
write-off unamortized deferred financing costs associated with the Credit
Facility.
For the three months ended March 31, 1999, Systems exceeded the limitation
on subscriber acquisition costs (i.e., sales and marketing expenses) prescribed
by the Amended Credit Facility. Excluding the effects of DIRECTV's national
sales promotions that offered free programming to new subscribers, and higher
incremental subscriber acquisition costs associated with the conversion of
Primestar subscribers to Systems' DIRECTV service, Systems would have been in
compliance with the Amended Credit Facility's limitation on subscriber
acquisition costs. Systems plans to request a waiver from the banks of this
technical violation. Systems will be unable to borrow on the revolving credit
commitment of the Amended Credit Facility until a waiver is received. In the
event a waiver of this technical violation is not received, the banks could,
among other remedies, terminate the Amended Credit Facility and declare any and
all amounts outstanding
5
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GOLDEN SKY SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
thereunder immediately due and payable. Pending resolution of this matter,
Systems has classified the $35.0 million balance outstanding under the term loan
commitment of the Amended Credit Facility as a current liability in its March
31, 1999 condensed consolidated balance sheet. Systems anticipates that in
future periods, its subscriber acquisition costs will continue to exceed the
applicable limitation set forth in the Amended Credit Facility. Accordingly,
Systems plans to seek an amendment to the Amended Credit Facility to modify this
covenant.
5. 13 1/2% NOTES OFFERING
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering. The 13 1/2% Notes Offering resulted in net proceeds to Golden Sky DBS
of approximately $95.7 million (after initial purchasers' discount and other
offering expenses). The 13 1/2% Notes have an aggregate balance due at stated
maturity of $193.1 million. Cash interest on the 13 1/2% Notes will not accrue
prior to March 1, 2004. Thereafter, cash interest 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 mature
on March 1, 2007. Golden Sky DBS contributed the net proceeds of the 13 1/2%
Notes Offering to Systems, which used $53.0 million of the contributed proceeds
to repay existing revolving credit indebtedness.
Systems is not obligated for repayment of the 13 1/2% Notes and is
restricted as to its ability to make payments to Golden Sky DBS. However, Golden
Sky DBS is dependent on Systems for dividends or other cash distributions in
amounts sufficient to make the required payments.
6. COMMITMENTS AND CONTINGENCIES
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.
6
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements involving known and unknown
risks, uncertainties and other important factors that could cause our actual
results, performance or achievements, or industry results, to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other factors
include, among others: a decrease in subscriber growth; an increase in
subscriber acquisition costs and subscriber equipment subsidies; an unexpected
equipment shortage; impediments to the retransmission of distant broadcast
network signals; an unexpected business interruption due to the failure of
third-parties to remediate Year 2000 issues; an increase in competition from
cable, other direct broadcast satellite system operators, and other providers of
subscription television services; the introduction of new technologies and
competitors into the subscription television business; general business and
economic conditions; and other risk factors described from time to time in our
reports filed with the Securities and Exchange Commission. All statements
herein, other than statements of historical fact, regarding our profitability,
financial position, liquidity and capital requirements are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurances that those
expectations will prove to have been correct. Certain other important factors
that could cause actual results to differ materially from our expectations
("Cautionary Statements") are disclosed in this report. All written
forward-looking statements by or attributable to us or persons acting on our
behalf contained in this report are expressly qualified in their entirety by the
Cautionary Statements.
OVERVIEW
Golden Sky Systems, Inc. (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.
Until February 1999, Systems was a wholly-owned subsidiary of Golden Sky
Holdings, Inc. (Holdings). In February 1999, Golden Sky DBS, Inc. (Golden Sky
DBS) was formed for the purpose of completing a private offering of 13 1/2%
Senior Discount Notes due 2007. 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.
The terms "our company," "us," "we," "our" and "ours" as used in this
report refer to Systems and its subsidiaries, its parent company, Golden Sky
DBS, and its ultimate parent company, Holdings, as a combined entity, except
where it is clear from the context that such terms refer only to Systems. We
also use certain other defined terms in this report, including the following:
"NRTC" refers to the National Rural Telecommunications Cooperative, an
organization whose members are engaged in the distribution of telecommunications
and other services in rural America and "Rural DIRECTV Markets" mean those areas
in the United States in which the NRTC and certain of its members and affiliates
(including our company) have the exclusive right to provide DIRECTV services to
residential customers.
We were formed in June 1996 to acquire rights to distribute DIRECTV
programming services in Rural DIRECTV Markets. We are a non-voting affiliate of
the NRTC and acquired our first Rural DIRECTV Market in November 1996. As of
March 31, 1999, we have acquired the rights to serve 51 Rural DIRECTV Markets
serving approximately 1.8 million households. The aggregate purchase price for
these acquisitions totaled approximately $279.5 million, or approximately $154
per household. We have created a strong local presence in each of our Rural
DIRECTV Markets following their acquisition. As of March 31, 1999, we operate 71
offices in our territories and have entered into distribution agreements with
over 350 local retailers of DBS equipment.
In April 1999, we acquired three additional Rural DIRECTV Markets for an
aggregate purchase price of approximately $11.6 million. These markets
represented approximately 47,000 households and 6,500 subscribers when acquired.
We are continually evaluating acquisition prospects and expect to continue to
enter into acquisition agreements to purchase additional Rural DIRECTV Markets
consistent with our growth strategy.
7
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In addition to growth by acquisitions, we have increased our subscriber
base through increased penetration of our Rural DIRECTV Markets. We believe that
there is a substantial opportunity to increase penetration through local
marketing. Generally, most of the NRTC members from whom we acquire Rural
DIRECTV Markets have not engaged in significant marketing efforts. Rather, such
NRTC members primarily have relied on the consumer to take the initiative to
acquire service.
We have experienced net losses as well as negative EBITDA and operating
cash flows from operations since our inception. These operating shortfalls
primarily are the result of our rapid subscriber growth and numerous
acquisitions of Rural DIRECTV Markets. In particular, we have incurred
significant sales and marketing expense in our effort to rapidly build our
subscriber base. Typically, these costs are expensed as incurred and include
advertising and promotional expenses, sales commissions, and DBS equipment and
installation subsidies. The majority of these costs are incurred at or before
the time a new subscriber is activated. As a result, revenue attributable to new
subscribers lags the expense incurred in acquiring those subscribers. The impact
of this lag generally increases with the rate at which we acquire subscribers.
Our rapid subscriber growth and related subscriber acquisition costs have been
significant contributors to our net losses and negative EBITDA experienced to
date. We believe that our subscriber acquisition costs will continue to
negatively affect operating results for at least the next year as we continue to
add new subscribers. However, as long as a subscriber continues service, future
operating results benefit from a recurring monthly revenue stream with minimal
additional sales and marketing expense. Because we have experienced a relatively
low rate of subscriber disconnect, we believe that rapidly building our
subscriber base will enhance EBITDA and operating results in the longer term.
Our annual subscriber disconnect (also referred to as churn) rate approximated
10.6% during the last 12 months.
EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is not a measure of performance under generally accepted
accounting principles and should not be construed as a substitute for
consolidated net income (loss) as a measure of performance, or as a substitute
for cash flow as a measure of liquidity. Nevertheless, we believe that EBITDA is
a commonly recognized measure of performance in the communications industry.
Further, we believe that EBITDA provides useful information regarding an
entity's ability to incur and/or service debt. Increases or decreases in EBITDA
may indicate increases or decreases, respectively, in our free cash flows
available to incur and/or service debt and cover fixed charges. Notwithstanding
the above, EBITDA is not intended to represent cash flows for the period and
should not be considered in isolation or as a substitute for measures of
performance determined in accordance with generally accepted accounting
principles. Because EBITDA is commonly used in the communications industry as a
measure of performance and is the basis for many of our financial covenants, we
believe investors may use this data to analyze and compare other communications
companies with us in terms of operating performance, leverage and liquidity.
EBITDA as calculated by us is not necessarily comparable to similarly captioned
amounts of other companies.
During the three months ended March 31, 1999, we
- used net cash of $17.2 million in operating activities;
- used net cash of $4.6 million in investing activities; and
- provided net cash of $56.7 million from financing activities.
During the three months ended March 31, 1998, we:
- used net cash of $2.4 million in operating activities;
- used net cash of $28.3 million in investing activities; and
- provided net cash of $20.7 million from financing activities.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
8
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RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998.
Revenue. DBS services revenue for the three months ended March 31, 1999
totaled $30.5 million, which represented a 120% increase as compared to the same
period during the prior year. This increase was principally attributable to the
increase in the number of subscribers. The average number of subscribers during
the three-month period ended March 31, 1999 increased to approximately 248,000,
compared to approximately 109,700 during the comparable 1998 period. Average
monthly programming revenue per subscriber approximated $41 and $43 during those
same periods. This decrease resulted primarily from a change in sales mix toward
lower priced services.
Costs of DBS Services. Costs of DBS services increased $10.9 million, or
133%, during the three-month period ended March 31, 1999, to $19.2 million. This
increase is consistent with the increase in the average number of subscribers.
As a percentage of DBS services revenue, the costs of DBS services increased to
62.9% during the three-month period ended March 31, 1999, compared to 59.4%
during the same period of 1998. This increase resulted largely from a change in
sales mix toward lower margin services and increased charges by DIRECTV for
satellite and ground service operations.
System Operations. System operations costs totaled $4.3 million for the
three-month period ended March 31, 1999, a $2.5 million increase, or 139%, over
the comparable 1998 period. These costs rose as a result of the increased number
of field offices and related activity resulting from our continued acquisition
of Rural DIRECTV Markets, as well as from subscriber growth. As a percentage of
total revenue, system operations expenses increased to 13.9% during the
three-month period ended March 31, 1999, from 12.6% during the same 1998 period.
The increase in system operations expenses as a percentage of total revenues
resulted primarily from the expansion of our national customer service center in
Kansas City. We expect that these expenses will increase as we continue to make
acquisitions and open additional field offices. However, many of these costs are
fixed in nature, and we do not expect that these expenses will increase in
direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses totaled $12.8 million
during the three-month period ended March 31, 1999, an increase of $8.1 million
compared to the same 1998 period. Sales and marketing costs per new subscriber
activation approximated $410 and $300 during the three-month periods ended March
31, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
- a 93% increase in the number of new subscriber activations during the
three months ended March 31, 1999, as compared to the same period of
1998;
- increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions,
- costs we experienced from our marketing efforts to convert Primestar
subscribers to our DIRECTV service (see "-- Liquidity and Capital
Resources"); and
- increased equipment and installation subsidies provided by us to our
subscribers.
Our sales and marketing expenses, also referred to as subscriber
acquisition costs, exceeded the limitations on those expenses prescribed by our
bank credit facility during the three months ended March 31, 1999. We plan to
seek a waiver of this technical violation of the provisions of our bank credit
facility. While there can be no assurance, we expect that our subscriber
acquisition costs, on a per new subscriber activation basis, generally will
approximate first quarter levels during the remainder of 1999. However, such
costs may exceed historical levels to the extent that competition for new
subscribers intensifies and we decide to increase our marketing and promotional
efforts. We plan to seek an amendment to our bank credit facility that will
permit, in future periods, our higher anticipated subscriber acquisition costs
(see "-- Liquidity and Capital Resources").
General and Administrative. During the three-month period ended March 31,
1999, general and administrative expenses totaled $2.9 million, compared to $1.1
million during the comparable 1998 period.
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<PAGE> 12
The increase in general and administrative expenses resulted from the addition
of administrative resources necessary to support our growth. As a percentage of
revenue, general and administrative expenses increased to 9.6% during the
three-month period ended March 31, 1999, from 7.8% during 1998. While there can
be no assurance, we expect that our general and administrative expenses will
decrease as a percentage of revenue over time as these costs, which are
partially fixed in nature, are leveraged over increased subscribers and revenue.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
the three months ended March 31, 1999 totaled negative $8.5 million, compared to
EBITDA of negative $1.7 million during the three months ended March 31, 1998.
This increase in negative EBITDA principally resulted from the increases in
sales and marketing activities and related new subscriber activations previously
described.
During the three months ended March 31, 1999, we:
- used net cash of $17.2 million in operating activities;
- used net cash of $4.6 million in investing activities; and
- provided net cash of $56.7 million from financing activities.
During the three months ended March 31, 1998, we:
- used net cash of $2.4 million in operating activities;
- used net cash of $28.3 million in investing activities; and
- provided net cash of $20.7 million from financing activities.
Depreciation and Amortization. Depreciation and amortization expenses
increased $3.9 million to $8.2 million during the three months ended March 31,
1999, compared to $4.3 million during the three months ended March 31, 1998.
This increase primarily reflects the increased amortization of higher intangible
assets balances resulting from our acquisitions of additional Rural DIRECTV
Markets.
Interest Expense. Interest expense totaled $8.3 million during the three
months ended March 31, 1999 and $2.3 million during the same 1998 period. This
increase of $6.0 million primarily resulted from higher outstanding debt
balances and an increase in our weighted-average interest rate resulting from
the issuance of our 12 3/8% Notes in July 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital for:
- acquisitions of Rural DIRECTV Markets;
- financing subscriber growth (including DBS equipment and installation
subsidies and marketing and selling expenses);
- investments in, and maintenance of, field offices in our Rural DIRECTV
Markets;
- financing infrastructure development costs necessary to support the
growth of our business; and
- funding of start-up losses and other working capital requirements.
Our capital expenditures, inclusive of acquisitions of Rural DIRECTV
Markets, totaled $21.5 million and $28.3 million during the three-month periods
ended March 31, 1999 and 1998, respectively. During those same periods, net cash
used in operations totaled $17.2 million and $2.4 million respectively.
To date, our acquisitions, subscriber growth and operations have been
financed from:
- borrowings under our bank facilities;
- proceeds of our July 1998 offering of 12 3/8% Notes;
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<PAGE> 13
- proceeds from the issuance of capital stock;
- contributions by our direct and indirect parent companies; and
- to a lesser extent, the issuance of promissory notes to sellers of Rural
DIRECTV Markets.
During the three months ended March 31, 1999, net cash flows from financing
activities totaled $56.7 million. This was comprised of:
- a contribution by Golden Sky DBS of approximately $95.7 million;
- net repayments of $32.0 million under our bank credit facilities;
- increased deferred financing costs of approximately $1.0 million
resulting from the amendment of our bank credit facility; and
- repayments totaling $6.0 million on our other indebtedness.
During the three months ended March 31, 1998, our net cash flows from
financing activities totaled $20.7 million. This was comprised of $20.9 million
of net borrowings under our bank credit facilities and other indebtedness, less
related deferred financing costs of $242,000.
13 1/2% Notes Offering
On February 19, 1999, Golden Sky DBS consummated an offering of 13 1/2%
senior discount notes. The offering resulted in net proceeds to Golden Sky DBS
of approximately $95.7 million (after initial purchasers' discount and other
offering expenses). The notes have an aggregate balance due at stated maturity
of $193.1 million. Cash interest on the notes will not accrue prior to March 1,
2004. Thereafter, cash interest on the 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 mature on March 1, 2007. Golden
Sky DBS contributed the net proceeds of the offering to us. We used $53.0
million of the contributed proceeds to repay existing revolving credit
indebtedness.
We are not obligated for repayment of the notes and are restricted as to
our ability to make payments to Golden Sky DBS. However, Golden Sky DBS is
dependent on us for dividends or other cash distributions in amounts sufficient
to make the required payments.
Bank Debt
In connection with the offering of 13 1/2% notes by Golden Sky DBS, we
entered into an amendment to our bank credit facility. As of March 31, 1999, we
had fully utilized the entire $35.0 million of term loan availability under our
bank credit facility, had no outstanding borrowings under the revolving credit
commitment of our bank credit facility, and had utilized approximately $13.1
million of a letter of credit sub-facility. Our term loan amortizes in specified
quarterly installments from March 31, 2002 through maturity on December 31,
2005. Availability of revolving loan borrowings under our bank credit facility
reduces by specified amounts over the period from March 31, 2001 through
maturity on September 30, 2005. Borrowings under our bank credit facility bear
interest at variable rates calculated on a base rate, such as the prime rate or
LIBOR, plus an applicable margin with reductions, under certain circumstances,
based on leverage.
Our bank credit facility contains a number of significant covenants that,
among other things, limit our ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of our capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to our organizational documents, or
transact with affiliates.
Our bank credit facility also contains a number of financial covenants that
require us to meet certain financial ratios and financial condition tests. These
financial covenants, in certain instances, become effective at different points
in time and vary over time. The covenants include limitations on indebtedness
per
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<PAGE> 14
subscriber, limitations on subscriber acquisition costs, maintenance of a
minimum fixed charge coverage ratio, maintenance of minimum interest coverage
ratios, and limitations on indebtedness to pro forma EBITDA ratios. Availability
under the revolving credit commitment of our bank credit facility depends upon
satisfaction of these various covenants, as well as minimum subscriber base
requirements.
For the three months ended March 31, 1999, we exceeded the limitation on
subscriber acquisition costs prescribed by our bank credit facility. Excluding
the effects of DIRECTV's national sales promotions that offered free programming
to new subscribers, and higher incremental subscriber acquisition costs
associated with the conversion of Primestar subscribers to our DIRECTV service,
we would have been in compliance with the bank credit facility's limitation on
subscriber acquisition costs. We plan to request a waiver from the banks of this
technical violation. We will be unable to borrow on the revolving credit
commitment of the bank credit facility until a waiver is received. In the event
a waiver of this technical violation is not received, the banks could, among
other remedies, terminate our bank credit facility and declare any and all
amounts outstanding thereunder immediately due and payable. Pending resolution
of this matter, we have classified the $35.0 million balance outstanding under
our term loan commitment of the bank credit facility as a current liability in
our March 31, 1999 condensed consolidated balance sheet. We anticipate that in
future periods, our subscriber acquisition costs will continue to exceed the
applicable limitation set forth in the bank credit facility. Accordingly, we
plan to seek an amendment to the bank credit facility to modify this covenant.
Future Capital Requirements
During April 1999, we acquired three additional Rural DIRECTV Markets.
These markets represent 47,000 households and served approximately 6,500
subscribers when acquired. Aggregate consideration for these three markets
approximated $11.6 million.
We continually evaluate acquisition prospects and expect to enter into
additional acquisition agreements and complete further acquisitions of Rural
DIRECTV Markets consistent with our growth strategy. There can be no assurance
that any such acquisitions will be consummated.
In December 1998, Hughes Electronics Corporation (Hughes), the parent
company of DIRECTV, announced that it had reached an agreement to acquire United
States Satellite Broadcasting (USSB). USSB operates a DBS service providing 28
channels of video programming consisting of multiple channels of Home Box
Office, Showtime and other premium movie channels. The video programming
provided by USSB is complimentary to DIRECTV's DBS service. In January 1999,
Hughes announced that it had reached an agreement to acquire Primestar, Inc., a
competing medium-power DBS business. Hughes completed its acquisition of
Primestar in April 1999. We are not yet able to assess whether and to what
extent the acquisitions by Hughes of USSB and Primestar may affect our future
capital requirements. The NRTC currently is in discussions with DIRECTV
regarding the effect these acquisitions will have on the NRTC and its members
and affiliates. We cannot determine at this time the amount of capital
contribution required by us, if any, for our beneficial interests in these
acquisitions. We also cannot determine at this time the additional subscribers,
revenue or other benefits we may acquire from any such transactions. The final
resolution of the ongoing discussions between DIRECTV and the NRTC related to
Hughes' acquisitions of USSB and Primestar may affect our future capital
requirements.
Recently, we have experienced increased subscriber acquisition costs due to
increased competition for subscribers. Subsequent to DIRECTV's announcement of
its proposed acquisition of Primestar, EchoStar Communications Corporation began
to offer increased promotional and other incentives to Primestar customers, as
well as to EchoStar retailers, to entice the conversion of Primestar subscribers
to EchoStar's competing DBS service, the DISH Network. EchoStar is the
second-largest provider of DBS service in the United States. Consequently, we
have increased our marketing efforts with respect to Primestar subscribers. Our
increased Primestar conversion efforts include, among other things, discounted
equipment and installation prices and higher sales commissions. We are unable to
estimate the number of Primestar subscribers we may be able to convert to our
DIRECTV service. Our subscriber acquisition costs also have increased as a
result of certain recent national DIRECTV promotions that offer new subscribers
two to three months of free programming services. Additionally, we have
increased our subscriber acquisition costs to attract new
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<PAGE> 15
customers in our markets, other than Primestar conversions, due to increased
competition. We expect that our subscriber acquisition costs will continue to
approximate as much as $400 or more on a per new subscriber basis (including the
incremental costs associated with converting existing Primestar subscribers)
during the remainder of 1999. While there can be no assurance, we believe we
have sufficient cash and availability under our bank credit facility (assuming
receipt of the waiver and amendment to the provision of the bank credit facility
limiting subscriber acquisition costs previously described) to finance our
expected continued internal growth during the remainder of 1999. However, there
can be no assurance that additional financing will not be required to finance
our growth and if required, that such financing would be available on terms
acceptable to us, or at all.
We are highly leveraged and expect to increase our leverage as we pursue
further acquisitions of Rural DIRECTV Markets by borrowing additional funds
under our bank credit facility or otherwise, and by the issuance of additional
acquisition-related notes payable. There are a number of factors, some of which
may be beyond our control or ability to predict, that could require us to raise
additional capital. Among other things, we may require additional capital as a
result of the pursuit of our acquisition strategy and increased costs associated
therewith, unexpected increases in our operating costs and expenses, subscriber
growth in excess of that currently expected, the acquisitions by Hughes of USSB
and Primestar (as previously described), and to meet our debt service
requirements. There can be no assurance that additional debt, equity or other
financing will be available on terms acceptable to us, or at all, and if
available, that the proceeds of such financing would be sufficient to enable us
to meet our debt service requirements or completely execute our business plan.
YEAR 2000
We continue to assess the impact of the year 2000 issue on our computer
systems and operations. 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. Many existing computer systems and applications
currently use two-digit date fields to designate a year. Date sensitive systems
and applications may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the year 2000 issue may cause computer
systems and applications to fail to process critical financial and operational
information correctly. This issue affects virtually all organizations and can be
very costly and time consuming to correct.
We have reviewed the year 2000 compliance of our internal systems and
believe that such systems are year 2000 compliant. However, there can be no
assurance that all of the software products currently used by us are in fact
year 2000 compliant. We have engaged the services of a consultant to assist in
our assessment of the impact of the year 2000 issue on our computerized systems
and operations. As of March 31, 1999, we have spent approximately $133,000 on
year 2000 compliance. Currently we believe our total costs to successfully
mitigate the year 2000 issue will approximate $200,000. Additionally, we have
gathered information from all of our significant vendors and other pertinent
relationships and continue to monitor and assess their readiness for year 2000
processing.
We are significantly reliant on contracted data processing services from
the NRTC and DIRECTV for customer service, billing and remittance processing
pursuant to our contractual relationship with the NRTC. The NRTC has informed us
that the computer systems that provide such services are not currently year 2000
compliant, but that the majority of such systems will be compliant by September
1999. With respect to the NRTC's billing and authorization system, the NRTC has
informed us that a small number of year 2000 issues exist, and that the
appropriate changes have been requested and scheduled for development action. We
are reliant on DIRECTV for distribution of its DBS programming services. The
NRTC has informed us that DIRECTV expects to establish year 2000 compliance for
its billing and authorization systems by the end of the second calendar quarter
of 1999. In addition to the NRTC and DIRECTV, we are significantly reliant on
other parties (such as our suppliers of DBS equipment) for the successful
conduct of our business. As previously described, we continue to monitor the
year 2000 readiness of these third parties.
If our plan is not successful or is not completed in a timely manner, the
year 2000 issue could significantly disrupt our ability to transact business
with our customers and suppliers, and could have a material impact on
13
<PAGE> 16
our operations. There can be no assurance that the systems of the NRTC, DIRECTV
and other companies with which our systems interact or depend will be compliant
by the end of 1999, or that any such third party failure would not have an
adverse effect on our business or operations.
We are currently developing our year 2000 contingency plan. Contingency
plans for mission critical systems primarily involve development and testing of
manual procedures or the use of alternate systems. Viable contingency plans are
difficult to develop for certain third party failures, especially in
high-technology industries such as the DBS industry, due to the lack of
alternate suppliers. However, we will continue to monitor the progress of third
party remediation efforts and contingency plans. Substantial completion of our
year 2000 contingency plan is expected during the third quarter of 1999. There
can be no assurance that such contingency plans will successfully mitigate any
adverse effects that the year 2000 issue may have on our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market sensitive financial instruments is provided
below and constitutes a "forward-looking statement." Our major market risk
exposure is changing interest rates. Our policy is to manage interest rates
through the use of floating rate debt. Our objective in managing our exposure to
interest rate changes is to limit the impact of interest rate changes in
earnings and cash flow and to lower our overall borrowing costs. The table below
provides information about our outstanding financial instruments that are
sensitive to interest rate changes. The table presents principal cash flows by
expected maturity dates (assuming receipt of the waiver and amendment to the
provision limiting subscriber acquisition costs previously described) for our
variable rate term loan under our bank credit facility as of December 31, 1998
and March 31, 1999 (in thousands).
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------
2002 2003 2004 2005 TOTAL FAIR VALUE
---- ---- ---- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
BANK DEBT
Variable rate term loan........... $350 $350 $350 $33,950 $35,000 $35,000
</TABLE>
Interest on the term loan is calculated on a base rate, such as the prime
rate or LIBOR, plus an applicable margin.
At December 31, 1998, we also had $32.0 million of borrowings outstanding
under the revolving loan commitment of our bank credit facility. Outstanding
borrowings on these revolving loans bore interest at variable rates. All
outstanding borrowings under our revolving loan commitment were repaid in
February 1999 from the capital contribution by Golden Sky DBS of the net
proceeds of its 13 1/2% notes offering. As of March 31, 1999, no borrowings were
outstanding under our bank credit facility revolving loan commitment.
Availability of revolving loan borrowings under our bank credit facility reduces
by specified amounts quarterly from March 31, 2001 through maturity on September
30, 2005 (assuming receipt of the waiver and amendment to the provision limiting
subscriber acquisition costs previously described). Interest on revolving loan
borrowings will be calculated on a base rate, such as the prime rate or LIBOR,
plus an applicable margin.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
14
<PAGE> 17
SIGNATURES
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.
GOLDEN SKY SYSTEMS, INC.
By: /s/ JOHN R. HAGER
----------------------------------
John R. Hager
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 14, 1999
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY SYSTEMS, INC. AT MARCH
31, 1999 AND FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001070669
<NAME> GOLDEN SKY SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,276
<SECURITIES> 0
<RECEIVABLES> 9,700
<ALLOWANCES> (252)
<INVENTORY> 8,683
<CURRENT-ASSETS> 82,252
<PP&E> 9,897
<DEPRECIATION> (3,983)
<TOTAL-ASSETS> 354,416
<CURRENT-LIABILITIES> 65,074
<BONDS> 202,353
0
0
<COMMON> 0
<OTHER-SE> 84,701
<TOTAL-LIABILITY-AND-EQUITY> 354,416
<SALES> 0
<TOTAL-REVENUES> 30,699
<CGS> 0
<TOTAL-COSTS> 19,186
<OTHER-EXPENSES> 28,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,349
<INCOME-PRETAX> (24,260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,260)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,935)
<CHANGES> 0
<NET-INCOME> (27,195)
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</TABLE>
