<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 September 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to ________________.
Commission file number 333-64367
GOLDEN SKY SYSTEMS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 43-1749060
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Pegasus Communication Management Company
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
-----
As of November 14, 2000, the Registrant had 100 shares of common stock
outstanding.
The Registrant meets the conditions set forth in General Instruction H
(1)(a) and (b) of Form 10-Q and is therefore filing this Form with reduced
disclosure format.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 2000
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1999 and September 30, 2000................... 4
Consolidated Statements of Operations
Three months ended September 30, 1999 and 2000.............. 5
Consolidated Statements of Operations
Nine months ended September 30, 1999 and 2000............... 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 2000............... 7
Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Narrative Analysis of the Results of Operations.. 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signature.............................................................. 16
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
Golden Sky Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
----------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,236 | $3,115
Restricted cash 23,731 | -
Accounts receivable, net 5,263 | 10,633
Inventory 3,108 | -
Prepaid expenses and other 1,652 | 2,838
--------- | ----------
Total current assets 36,990 | 16,586
|
Property and equipment, net 5,853 | 3,965
Intangible assets, net 236,926 | 1,430,398
Deferred financing costs, net 7,318 | 6,920
Deposits and other 260 | 3,067
--------- | ----------
|
Total assets $287,347 | $1,460,936
========== | ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $3,248 | $3,091
Accounts payable 8,089 | 6
Accrued interest 11,659 | 5,442
Accrued satellite programming, fees and commissions 14,804 | 16,625
Accrued expenses and other 943 | 18,387
--------- | ----------
Total current liabilities 38,743 | 43,551
|
Long-term debt 254,035 | 250,977
Net advances from affiliates - | 2,401
Deferred taxes - | 468,716
--------- | ----------
Total liabilities 292,778 | 765,645
--------- | ----------
|
Commitments and contingent liabilities - | -
|
Minority interest 936 | 877
|
Common stockholder's equity (deficit): |
Common stock - | -
Other stockholder's equity (6,367) | 694,414
--------- | ----------
Total stockholder's equity (deficit) (6,367) | 694,414
--------- | ----------
|
Total liabilities and stockholder's equity (deficit) $287,347 | $1,460,936
========= | ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Golden Sky Systems, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 2000
-------------- -------------
(unaudited)
<S> <C> <C>
Net revenues:
DBS services $36,195 | $43,223
Lease and other 160 | 2,728
-------- | --------
Total net revenues 36,355 | 45,951
|
Operating expenses: |
Programming, technical, general and administrative 32,645 | 31,527
Marketing and selling 24,396 | 12,433
Incentive compensation 40 | -
Depreciation and amortization 9,204 | 42,268
Other expense, net - | 26
-------- | --------
Loss from operations (29,930) | (40,303)
|
Interest expense (7,879) | (8,688)
Interest income 494 | 185
Other non-operating expenses, net (138) | -
-------- | --------
Loss before income taxes (37,453) | (48,806)
|
Benefit for income taxes - | (12,297)
-------- | --------
Loss before extraordinary items (37,453) | (36,509)
|
Extraordinary loss from extinquishment of debt, net - | -
-------- | --------
Net loss ($37,453) | ($36,509)
======== | ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Golden Sky Systems, Inc.
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Nine Months 2000
Ended -------------------------------------
September 30, January 1 May 6
1999 to May 5 to September 30
------------ ---------- ---------------
(unaudited)
<S> <C> <C> <C>
Net revenues:
DBS services $95,765 $58,061 | $70,602
Lease and other 545 85 | 4,474
------- ------- | -------
Total net revenues 96,310 58,146 | 75,076
|
Operating expenses: |
Programming, technical, general and administrative 85,589 46,494 | 51,780
Marketing and selling 49,903 9,565 | 17,056
Incentive compensation 84 148 | 402
Depreciation and amortization 26,564 12,363 | 68,064
Other expense, net - 1,691 | 26
------- ------- | -------
Loss from operations (65,830) (12,115) | (62,252)
|
Interest expense (24,438) (11,162) | (14,281)
Interest income 2,146 291 | 206
Other non-operating expenses, net (138) (1,513) | (447)
------- ------- | -------
Loss before income taxes and extraordinary items (88,260) (24,499) | (76,774)
|
Benefit for income taxes - - | (20,751)
------- ------- | -------
Loss before extraordinary items (88,260) (24,499) | (56,023)
|
Extraordinary loss from extinquishment of debt (2,935) - | -
------- ------- | -------
Net loss ($91,195) ($24,499) | ($56,023)
======= ======= | =======
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
Golden Sky Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months 2000
Ended -------------------------------------------
September 30, January 1 May 6
1999 to May 5 to September 30
------------------- ------------------ ---------------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net cash used for operating activities ($58,414) ($17,726) | ($6,592)
------- ------- | -------
Cash flows from investing activities: |
Acquisitions (35,778) (1,509) | -
Merger costs allocated to intangible assets - - | (20,669)
Capital expenditures (3,075) (209) | (1,096)
Other 27 386 | 950
------- ------- | -------
Net cash used for investing activities (38,826) (1,332) | (20,815)
------- ------- | -------
Cash flows from financing activities: |
Repayments of long-term debt (8,537) (2,907) | -
Net repayments of bank credit facilities (15,000) 8,000 | (8,000)
Net advances from affiliates - - | 2,401
Restricted cash 28,005 11,850 | 11,881
Debt financing costs (1,016) (918) | -
Capital lease repayments (212) (203) | (105)
Contributions by parent 95,420 - | 24,345
------- ------- | -------
Net cash provided by financing activities 98,660 15,822 | 30,522
------- ------- | -------
|
Net increase (decrease) in cash and cash equivalents 1,420 (3,236) | 3,115
Cash and cash equivalents, beginning of year 4,460 3,236 | -
------- ------- | -------
Cash and cash equivalents, end of period $ 5,880 $ - | $ 3,115
======= ======= | =======
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Golden Sky Systems, Inc. ("Golden Sky" or together with its subsidiaries,
the "Company") provides direct broadcast satellite television ("DBS") services
to customers in rural areas of 24 states. The Company is a direct wholly owned
subsidiary of Golden Sky DBS, Inc. ("GSDBS"). GSDBS is a direct wholly owned
subsidiary of Golden Sky Holdings, Inc. ("GSH").
On May 5, 2000, GSH merged (the "Merger") with and into a subsidiary of
Pegasus Communications Corporation ("Pegasus" or the "Parent") in a transaction
accounted for as a purchase. In the Merger, the stockholders of GSH exchanged
all of their outstanding capital stock for approximately 12.2 million shares of
Pegasus' Class A common stock and options to purchase approximately 698,000
shares of Pegasus' Class A common stock. As a consequence of this exchange, GSH
became a wholly owned subsidiary of Pegasus. Pegasus did not assume, except only
for financial reporting presentation purposes, and does not guarantee or
otherwise have any liability for GSH's outstanding indebtedness or any other
liability of GSH or its subsidiaries. GSH did not assume and does not guarantee
or otherwise have any liability for any indebtedness or other liability of
Pegasus or any of Pegasus' subsidiaries.
Total consideration for the Merger was approximately $1.5 billion, of which
the Pegasus' Class A common stock received was valued at $579.0 million (based
on a price of $47.54 per share, which was the average closing price per share
five days prior and subsequent to the acquisition announcement) and the options
to purchase the shares of Pegasus' Class A common stock were valued at $33.2
million. The remaining consideration consisted of approximately $383.0 million
of net liabilities assumed by Pegasus and a deferred tax liability of
$489.5 million recognized in the Merger. The deferred tax liability was
allocated to DBS rights and was attributable to non-deductible amortization
related thereto.
The Merger was a change in control that required Golden Sky to make an
offer to purchase its 12.375% Senior Subordinated Notes due 2006 ("12.375% Notes
") from then existing holders. The offer expired June 30, 2000 without any of
the notes being tendered.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements are 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 unaudited consolidated financial statements reflect all
adjustments consisting of normal recurring items that 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. The amounts on the balance sheet as of December
31, 1999 were derived from the audited balance sheet as of that date. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
The financial statements include the accounts of Golden Sky and all of its
subsidiaries on a consolidated basis. All intercompany transactions and balances
have been eliminated. The balance sheet and statement of cash flows are
presented on a condensed basis. Certain amounts for 1999 have been reclassified
for comparative purposes.
As a result of the Merger and Pegasus' use of the purchase method of
accounting for its acquisition of GSH, Pegasus' purchase price was allocable to
the Company's assets and liabilities. This "push down" basis of the purchase
price increased the Company's intangible assets by approximately $1.2 billion,
of which virtually all was allocated to DBS rights. DBS rights are amortized
over 10 years. Costs related to the Merger aggregating $20.7 million at
September 30, 2000 have also been allocated to DBS rights. As a consequence of
the push down accounting applied to the Company, results prior to the Merger are
not comparable with those subsequent to the Merger and are segregated on the
statement of operations for the year to date period.
In May 2000, Pegasus completed a two-for-one stock split of its outstanding
Class A and Class B common stock in the form of a stock dividend. All references
herein to Pegasus' shares and options to purchase these shares reflect the
effects of the stock split.
8
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Relationship with Affiliate
In connection with the Merger, the management of sales and internal
administrative and support functions for the Company are performed by Pegasus
Satellite Television, Inc. ("PST"). PST is an indirect wholly owned subsidiary
of Pegasus. Revenue and related programming and certain subscriber acquisition
costs recognized by the Company are based on specific identification with NRTC
members operated by the Company. Interest expense recognized by the Company is
based on its own debt instruments. Other costs of operation are allocated by PST
based on a proportion of the Company's number of subscribers to the combined
number of subscribers of the Company and PST. PST owns and manages all
inventory, and supplies inventory to the Company to satisfy specific subscriber
demands. PST performs most of the Company's cash management functions, including
accounts payable. The cost of services provided and incurred by PST for or on
behalf of the Company is charged to the Company. Balances due to or from PST are
settled in cash periodically.
4. Long-Term Debt
In January 2000, the Company amended its $115.0 million senior revolving
credit facility and $35.0 million senior term credit facility. This amendment
waived the Company's third quarter 1999 covenant violations and amended certain
fourth quarter 1999 and year 2000 covenant requirements. The amendment limited
further availability under the revolving credit portion through December 31,
2000 to an additional $20.0 million above amounts already outstanding at the
time of the amendment. As of September 30, 2000, the Company was in compliance
with the credit facility's amended covenants. At September 30, 2000, amounts
outstanding under the revolving and term facilities were $17.0 million and $35.0
million, respectively, with $35.9 million of stand-by letters of credit issued
thereunder.
A portion of net proceeds from the issuance of the 12.375% Notes held in an
interest escrow account that had been included in restricted cash on the balance
sheet was released and used to pay interest due on the notes. No further escrow
balances or requirements exist with respect to these notes.
5. Other Stockholder's Equity
The increase in other stockholder's equity principally represents the net
effect of the increase in the volume of DBS rights and deferred taxes recognized
as a result of the push down accounting applied to the merger.
6. Income Taxes
With the Merger, the Company is included in the consolidated income tax
return of Pegasus. Prior to the Merger, the Company participated in the
consolidated income tax return of GSH. Pegasus is in a net operating loss
carryforward position for income tax purposes. The tax benefit recognized for
the three and nine months ended September 30, 2000 as shown on the statements of
operations represents the reversal of deferred tax liabilities recognized in the
Merger. No income taxes were reported for the 1999 periods because GSH was in a
net operating loss carryforward position.
7. Supplemental Cash Flow Information
Significant non-cash investing and financing activities were as follows (in
thousands):
<TABLE>
<CAPTION>
Nine months Ended September 30,
-------------------------------
1999 2000
---- ----
<S> <C> <C>
Acquisition of plant under capital leases..................................... $ 78 -
Notes payable and related acquisition of intangibles.......................... 2,925 -
Customer conversion costs and costs of related equipment...................... $4,107
Capital contribution received and related acquisition of intangibles.......... - 756,811
Deferred taxes, net and related intangibles................................... - 489,466
</TABLE>
9
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments and Contingent Liabilities
Legal Matters:
The Company is a rural affiliate of the National Rural Telecommunications
Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. The Company's
ability to distribute DIRECTV programming services is dependent upon agreements
between the NRTC and Hughes Electronics Corporation, DIRECTV's parent, and
between the Company and the NRTC.
On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the NRTC's contractual rights to obtain from
DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101(Degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(Degree) W orbital location. DIRECTV also alleges in its counterclaim
that the NRTC's right of first refusal, which is effective at the end of the
term of DIRECTV's contract with the NRTC, does not provide for certain
programming and other rights comparable to those now provided under the
contract.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV had failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Pegasus filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
law counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Pegasus. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the NRTC and its members and affiliates.
On February 10, 2000, the Company and Pegasus filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The Company and Pegasus later withdrew the class action
allegations previously filed to allow a new class action to be filed on behalf
of the members and affiliates of the NRTC. The class action was filed on
February 27, 2000. All four actions are pending before the same judge. On
November 20, 2000, the court will hear argument on the motion for class
certification and on DIRECTV's motion to dismiss certain of the Company's claims
and claims by the class members. DIRECTV's motion for partial summary judgment
on the right of first refusal will be heard on or about December 11, 2000. The
court has set a trial date of November 27, 2001 for all four actions.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
9. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, becomes effective for companies starting January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. At September 30, 2000, this statement does not have any
impact on the Company because the Company does not have any derivative
instruments, and does not expect to employ any in the foreseeable future.
10
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. New Accounting Pronouncements (continued)
The Securities and Exchange Commission issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" ("SAB 101".) SAB 101 addresses
revenue recognition policies and practices of companies that report to the SEC.
The Company will adopt SAB 101 in the fourth quarter of 2000. The Company
believes that the adoption of SAB 101 will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. The Company is still analyzing the requirements of this statement
and does not fully know whether or not the impact of this statement will be
material. At the present time, the Company is not involved with any
securitization transactions.
11
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
This Report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to us that are based on the beliefs of our management, as well as
assumptions made by and information currently available to our management. When
used in this Report, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to unknown risks, uncertainties and
other factors that may cause actual results to differ materially from those
contemplated in such forward-looking statements. Such factors include, among
other things, the following: general economic and business conditions, both
nationally, internationally and in the regions in which we operate;
relationships with and events affecting third parties like DIRECTV, Inc.;
litigation with DIRECTV; demographic changes; existing government regulations
and changes in, or the failure to comply with government regulations;
competition; the loss of any significant numbers of subscribers; changes in
business strategy or development plans; technological developments and
difficulties; the ability to attract and retain qualified personnel; our
significant indebtedness; the availability and terms of capital to fund the
expansion of our business; and other factors referenced in this Report and in
reports and registration statements filed by us and our parent companies, Golden
Sky DBS, Inc. and Pegasus Communications Corporation, from time to time with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
In reliance upon General Instruction (H)(2)(a) of Form 10-Q, we are
providing the limited disclosure set forth below. Such disclosure requires us
only to provide a narrative analysis of the results of operations which explains
the reasons for material changes in the amount of revenue and expense items
between the most recent fiscal year-to-date period presented and the
corresponding year-to-date period in the preceding fiscal year. The following
discussion of our results of operations should be read in conjunction with the
consolidated financial statements and related notes which are included on pages
4-11 herein.
General
On May 5, 2000, we became an indirect wholly owned subsidiary of
Pegasus Communications Corporation through a merger of a subsidiary of Pegasus
and our ultimate parent company Golden Sky Holdings. In the merger, the
stockholders of GSH exchanged all of their outstanding capital stock for
approximately 12.2 million shares of Pegasus' Class A common stock and options
to purchase approximately 698,000 shares of Pegasus' Class A common stock. Total
consideration for the merger was approximately $1.5 billion, of which the
Pegasus' Class A common stock received was valued at $579.0 million and the
options to purchase the shares of Pegasus' Class A common stock were valued at
$33.2 million. The remaining consideration consisted of approximately $383.0
million of net liabilities assumed by Pegasus and a deferred tax liability of
$489.5 million recognized in the merger. The deferred tax liability was
allocated to DBS rights and was attributable to non-deductible amortization
related thereto.
On September 15 2000, the board of directors of Pegasus Communications
Corporation approved a reorganization of the current corporate structure. Under
the new structure, a new publicly-held parent holding company ("New PCC") will
be formed and will assume the identity and capital stock structure of the
existing Pegasus Communications Corporation ("Old PCC"). Debt securities held by
Old PCC will remain with Old PCC. New PCC will not issue or hold any debt
securities as a consequence of the reorganization. In the reorganization, Old
PCC will become a wholly-owned direct subsidiary of New PCC and will be renamed
Pegasus Satellite Communications, Inc. We are presently a subsidiary of Old PCC,
and in the reorganization will be a subsidiary of Pegasus Satellite. It is
anticipated that the reorganization will be accounted for as a recapitalization
in which the historical basis of assets and liabilities are not changed. The
reorganization is expected to become effective by the end of 2000.
Pre-marketing and Location Cash Flows
In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow is calculated by taking the DBS revenues and
deducting from them their related programming, technical, general and
administrative expenses. Location cash flow is pre-marketing cash flow less DBS
marketing and selling expenses.
12
<PAGE>
The DBS marketing and selling expenses are also known as subscriber acquisition
costs. Subscriber acquisition costs are sales and marketing expenses incurred
and promotional programming provided in connection with the addition of new DBS
subscribers.
Pre-marketing and location cash flows are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing and location cash flows also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in our industry or the
economy generally. We believe that pre-marketing and location cash flows are
important for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
Results of Operations
In this section, amounts specified are for the nine months ended September
30, 2000 and the changes to these amounts are with respect to the corresponding
period ended September 30, 1999, unless indicated otherwise.
Comparison of Nine Months Ended September 30, 2000 and 1999
Revenues increased $36.9 million to $133.2 million. This increase was
primarily due to the growth in the average number of our subscribers over the
last 12 months. During the 12 months ended September 30, 2000, we added 48,800
subscribers through internal growth. At September 30, 2000, we had exclusive
DirecTV distribution rights to 1.9 million households and 374,000 subscribers.
Our subscriber penetration within territories in which we have exclusive DirecTV
distribution rights increased to 20.2% at September 30, 2000 from 17.6% at
September 30, 1999. Average monthly revenue per subscriber was $41.85 for the
nine months ended September 30, 2000 compared to $38.97 for the same period
ended September 30, 1999. The variance in the average monthly revenue per
subscriber was due to a combination of general price increases instituted by us
in the third quarter of 1999 and the mix of content packages subscribed to
within each period.
Programming, technical, general and administrative expenses increased $12.7
million to $98.3 million. This increase was due to the growth in the number of
subscribers. The rate of increase of these expenses in each period was
consistent with the increased average number of subscribers within each period.
Subscriber acquisition costs decreased $23.3 million to $26.6 million.
Subscriber acquisition costs per gross subscriber based on subscribers added
through internal growth for the nine months ended September 30, 2000 were $316
for 84,100 subscribers added compared to $395 for 126,300 subscribers added for
the same period in 1999. The decreased expenses and per subscriber costs
principally reflect economies gained in the merger with Pegasus through
integration of our marketing and selling function into that of Pegasus. This has
allowed us to leverage their existing resources with little incremental cost to
the overall organization. This significantly reduces our gross expenditures,
particularly with respect to advertising and promotional programming, and
permits spreading of costs over a greater subscriber base between both of us. We
have additionally reduced occupancy costs significantly by conforming our
distribution approach to that of Pegasus wherein a network of independent
distributors is used for the sales function. Prior to the merger, our sales
function had been conducted largely through rented store space.
Depreciation and amortization increased $53.9 million to $80.4 million.
This increase was primarily due to increased amortization of DBS rights
resulting from an increase in DBS rights of $1.28 billion. This increase in DBS
rights reflects the push down and allocation of the purchase price in our merger
with Pegasus.
Other expense, net of $1.7 million represents costs incurred by us in our
merger with Pegasus.
13
<PAGE>
The benefit for income taxes amounted to $20.8 million and is attributable
to the reversal of deferred tax liabilities originating in the merger with
Pegasus.
Pre-marketing cash flow was $34.9 million compared to $10.7 million.
Location cash flow was $8.3 million compared to $(39.2) million.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
becomes effective for companies starting January 1, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. At September 30, 2000, this statement does not have any impact on us
because we do not have any derivative instruments, and we do not expect to
employ any in the foreseeable future.
The Securities and Exchange Commission issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements". SAB 101 addresses revenue
recognition policies and practices of companies that report to the SEC. We will
adopt SAB 101 in the fourth quarter of 2000. We believe that our adoption will
not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS No.
140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. We are still analyzing the requirements of this statement and we do
not fully know whether or not the impact of this statement will be material. At
the present time, we are not involved with any securitization transactions.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation:
We hereby incorporate by reference the disclosure relating to "DIRECTV/NRTC
Litigation" set forth under "Item 3: Legal Proceedings" on pages 25 and 26 of
Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the
fiscal year ended December 31, 1999. The last paragraph of this disclosure is
deleted and replaced in its entirety by the paragraphs set forth below. To the
extent the disclosure set forth below supersedes or updates other disclosure
under "Item 3: Legal Proceedings," such disclosure is hereby deemed to be
modified, superseded and/or updated.
On February 10, 2000, Pegasus and we filed an amended complaint which added
new tort claims against DIRECTV for interference with our relationships with
manufacturers, distributors and dealers of direct broadcast satellite equipment.
Pegasus and we later withdrew the class action allegations previously filed to
allow a new class action to be filed on behalf of the members and affiliates of
the National Rural Telecommunications Cooperative. The class action was filed on
February 27, 2000. All four actions are pending before the same judge. On
November 20, 2000, the court will hear argument on the motion for class
certification and DIRECTV's motion to dismiss certain of our claims and claims
by the class members. DIRECTV's motion for partial summary judgment on the right
of first refusal will be heard on or about December 11, 2000. The court has set
a trial date of November 27, 2001 for all four actions.
The outcome of this litigation and the litigation filed by the National
Rural Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.
Other Matters:
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following documents are filed as Exhibits to this Report on Form 10-Q.
27.1 Financial Data Schedule.
99.1 Material incorporated by reference from Pegasus' Annual
Report on Form 10-K filed with the SEC on March 10, 2000 for
the fiscal year ended December 31, 1999.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended September
30, 2000.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Golden Sky Systems, Inc. has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
GOLDEN SKY SYSTEMS, INC.
November 14, 2000 By: /s/ M. Kasin Smith
------------------- -----------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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