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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------
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 JUNE 30, 1999
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 __________
GOLDEN SKY DBS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-1839531
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(Address of principal executive offices) (Zip code)
</TABLE>
(816) 753-5544
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 NO X
--- ---
AS OF JULY 31, 1999, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 100 SHARES OF COMMON STOCK.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 (Unaudited) and December 31, 1998.................................................. 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 (Unaudited).................................... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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.............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 15
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.................................................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................................................... 17
</TABLE>
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GOLDEN SKY DBS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 4,460 $ 14,749
Restricted cash, current portion ............................. 28,083 23,634
Subscriber receivables (net of allowance for
uncollectable accounts of $293 and $728, respectively) ..... 8,632 10,109
Other receivables ............................................ 2,465 1,315
Inventory .................................................... 10,146 6,662
Prepaid expenses and other ................................... 1,859 2,036
--------- ---------
Total current assets ............................................ 55,645 58,505
Restricted cash, net of current portion ......................... 23,534 11,647
Property and equipment (net of accumulated depreciation of
$3,214 and $4,518, respectively) ............................. 4,994 6,212
Intangible assets, net .......................................... 233,139 252,454
Deferred financing costs ........................................ 10,541 12,329
Other assets .................................................... 218 439
--------- ---------
Total assets ............................................... $ 328,071 $ 341,586
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable ....................................... $ 13,539 $ 18,774
Interest payable ............................................. 11,009 10,806
Current portion of long-term obligations ..................... 8,916 3,314
Unearned revenue ............................................. 5,574 7,290
Accrued payroll and other .................................... 1,403 1,906
--------- ---------
Total current liabilities ....................................... 40,441 42,090
Long-term obligations, net of current portion:
12 3/8% Notes ................................................ 195,000 195,000
13 1/2% Notes ................................................ -- 104,989
Bank debt .................................................... 67,000 35,000
Seller notes payable ......................................... 6,912 6,932
Other notes payable and obligations under capital leases ..... 376 251
Minority interest ............................................ 2,420 --
--------- ---------
Total long-term obligations, net of current portion ............. 271,708 342,172
--------- ---------
Total liabilities .......................................... 312,149 384,262
Commitments and contingencies ...................................
Stockholder's Equity (Deficit):
Common Stock, par value $.01; 1,000 shares authorized;
1,000 shares issued and outstanding at December 31,
1998; 100 shares issued and outstanding at June 30,
1999 ....................................................... -- --
Additional paid-in capital ................................... 97,600 97,913
Accumulated deficit .......................................... (81,678) (140,589)
--------- ---------
Total stockholder's equity (deficit) ......................... 15,922 (42,676)
--------- ---------
Total liabilities and stockholder's equity (deficit) ....... $ 328,071 $ 341,586
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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GOLDEN SKY DBS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
DBS services ............................................. $ 16,582 $ 31,201 $ 30,466 $ 60,040
Lease and other .......................................... 267 188 512 385
-------- -------- -------- --------
Total revenue ............................................... 16,849 31,389 30,978 60,425
Costs and Expenses:
Costs of DBS services ................................... 9,676 19,610 17,926 38,022
System operations ....................................... 2,390 4,526 4,177 8,796
Sales and marketing ..................................... 6,617 13,587 11,287 25,507
General and administrative .............................. 1,567 3,692 2,675 6,640
Depreciation and amortization ........................... 5,405 9,140 9,753 17,360
-------- -------- -------- --------
Total costs and expenses .................................... 25,655 50,555 45,818 96,325
-------- -------- -------- --------
Operating loss .............................................. (8,806) (19,166) (14,840) (35,900)
Non-operating Items:
Interest and investment income ........................... 1 829 29 1,652
Interest expense ......................................... (2,956) (11,767) (5,237) (21,728)
-------- -------- -------- --------
Total non-operating items ................................... (2,955) (10,938) (5,208) (20,076)
-------- -------- -------- --------
Loss before income taxes .................................... (11,761) (30,104) (20,048) (55,976)
Income taxes ................................................ -- -- -- --
Loss before extraordinary charge ............................ (11,761) (30,104) (20,048) (55,976)
Extraordinary charge on early retirement of debt ............ (2,577) -- (2,577) (2,935)
-------- -------- -------- --------
Net loss .................................................... $(14,338) $(30,104) $(22,625) $(58,911)
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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GOLDEN SKY DBS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................................. $ (22,625) $ (58,911)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ..................................... 9,753 17,360
Amortization of debt discount, deferred financing costs
and other ....................................................... 266 6,177
Extraordinary charge on early retirement of debt .................. 2,577 2,935
Change in operating assets and liabilities, net of acquisitions:
Subscriber receivables, net of unearned revenue ............... (2,035) 304
Other receivables ............................................. (652) 1,150
Inventory ..................................................... (679) 3,484
Prepaid expenses and other .................................... (633) (394)
Trade accounts payable ........................................ 644 5,235
Interest payable .............................................. (18) (203)
Accrued payroll and other ..................................... (837) 484
--------- ---------
Net cash used in operating activities ................................ (14,239) (22,379)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets ................................ (44,514) (35,160)
Purchases of property and equipment .................................. (1,360) (2,143)
Proceeds from interest escrow account ................................ -- 12,158
Investment earnings placed in escrow ................................. -- (1,271)
Release of amounts reserved for contingent reduction of
bank debt ......................................................... -- 5,449
Other ................................................................ (690) (12)
--------- ---------
Net cash used in investing activities ................................ (46,564) (20,979)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of 13 1/2% Notes .............................. -- 100,049
Borrowings on bank debt .............................................. 54,000 21,000
Principal payments on bank debt ...................................... -- (53,000)
Principal payments on notes payable and obligations
under capital leases .............................................. (2,479) (8,632)
Increase in deferred financing costs ................................. (3,494) (5,770)
--------- ---------
Net cash provided by financing activities ............................ 48,027 53,647
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. (12,776) 10,289
Cash and cash equivalents, beginning of period ....................... 13,632 4,460
--------- ---------
Cash and cash equivalents, end of period ............................. $ 856 $ 14,749
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ............................................ $ 2,920 $ 15,537
Property and equipment acquired under capitalized
lease obligations ............................................ 439 78
Issuance of seller notes payable in acquisitions .................. -- 2,925
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Organization and Legal Structure
Golden Sky DBS, Inc. was formed in February 1999 for the purpose of
completing an 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 Golden Sky Holdings, Inc. in exchange
for $100 and the subsequent transfer of all of the capital stock of Golden Sky
Systems, Inc. to Golden Sky DBS. Until February 1999, Golden Sky Systems was a
wholly-owned subsidiary of Golden Sky Holdings. Upon completion of the
aforementioned transfer, Golden Sky Systems became a wholly-owned subsidiary of
Golden Sky DBS. Accordingly, Golden Sky Systems has been treated as the
predecessor to Golden Sky DBS and the historical financial statements of Golden
Sky DBS are those of Golden Sky Systems.
Unless the context otherwise requires, the terms "Golden Sky DBS" and "the
Company" refer to Golden Sky DBS, Inc. and its subsidiaries.
Principal Business
Golden Sky Systems is the second largest independent provider of DIRECTV
subscription television services. DIRECTV is the leading direct broadcast
satellite ("DBS") company serving the continental United States. Golden Sky
Systems 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 June 30, 1999, Golden Sky Systems has
acquired 55 Rural DIRECTV Markets in 23 states representing approximately 1.9
million households. As of that same date, Golden Sky Systems served
approximately 297,000 subscribers.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three- and six-month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in Golden Sky Systems' Annual Report
on Form 10-K for the year ended December 31, 1998.
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.
4
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $1.3
million and $966,000 during the three-month periods ended June 30, 1999 and
1998, respectively, and $2.4 million and $1.7 million during the six-month
periods ended June 30, 1999 and 1998, respectively.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS No. 133"). As a result of
the subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, the Company has no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on the Company's financial position or results of operations.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming,
generally for periods of one to three months, to new subscribers. The cost of
such free programming is expensed as sales and marketing expense in the period
the services are provided. During the three- and six-month periods ended June
30, 1999, sales and marketing expenses attributable to such promotions totaled
$1.9 and $3.0 million, respectively.
3. ACQUISITIONS
During the six-month period ended June 30, 1999, Golden Sky Systems
acquired eight Rural DIRECTV Markets in five states (the "1999 Acquired
Markets"). The 1999 Acquired Markets represent approximately 124,000 households
and served approximately 18,100 subscribers at the respective acquisition
dates. The Company accounts for its acquisitions using the purchase method. The
Company's condensed consolidated statements of operations for the three- and
six-month periods ended June 30, 1998 and 1999 include the results of
operations of acquired Rural DIRECTV Markets from the respective acquisition
dates. The aggregate purchase price (including direct acquisition costs of
$658,000) for the 1999 Acquired Markets was allocated as follows (in
thousands):
<TABLE>
<S> <C>
DIRECTV distribution rights...................... $ 30,221
Non-compete agreements........................... 4,839
Working capital, net............................. 100
--------
$ 35,160
========
</TABLE>
During 1997, Golden Sky Systems acquired a controlling interest in DCE
Satellite Entertainment, LLC ("DCE"). In June 1999, Golden Sky Systems acquired
the remaining ownership interest in DCE that it did not hold in exchange for
cash of $1.0 million and the issuance of seller notes payable totaling $2.9
million.
4. LONG-TERM OBLIGATIONS
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net
5
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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. Golden Sky DBS
contributed the net proceeds of the 13 1/2% Notes Offering to Golden Sky
Systems, of which $53.0 million was used to repay existing revolving credit
indebtedness. Cash interest on the 13 1/2% Notes will not accrue prior to March
1, 2004. Thereafter, cash interest will accrue at a rate of 13 1/2% per annum
and be payable in arrears on March 1 and September 1 of each year, commencing
September 1, 2004. The 13 1/2% Notes mature on March 1, 2007.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS's direct and indirect subsidiaries. Golden Sky
DBS's ability to pay interest on the notes when interest is due and to redeem
the notes at maturity will depend on whether its direct and indirect
subsidiaries can pay dividends or make other distributions to it under the
terms of such subsidiaries' indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption.
In addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the 13
1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 13 1/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets. In
the event of a change of control, as defined in the 13 1/2% Notes Indenture,
each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS
to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to
101% of the accreted value of the notes, plus accrued and unpaid interest, if
any, to the date of purchase.
Bank Debt
In February 1999, Golden Sky Systems' bank credit facility (the "Credit
Facility") was amended (the "Amended Credit Facility") to permit, among other
things, the offering of senior discount notes by Golden Sky DBS. The Amended
Credit Facility's term loan commitment amortizes in specified quarterly
installments from March 31, 2002 through maturity on December 31, 2005. The
availability of revolving loan borrowings under the Amended Credit Facility
reduces by specified amounts over the period from March 31, 2001 through
maturity on September 30, 2005. In February 1999, Golden Sky Systems repaid all
outstanding borrowings under the revolving loan commitment. Such repayment was
funded from the contribution by Golden Sky DBS of the net proceeds of the 13
1/2% Notes Offering to Golden Sky Systems and totaled $53.0 million. As of June
30, 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, Golden Sky 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, Golden Sky 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 Golden Sky Systems' DIRECTV service, Golden Sky
Systems would have been in compliance with the Amended Credit Facility's
limitation on subscriber acquisition costs. In June 1999, Golden Sky Systems
received a waiver from the
6
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
banks for this technical violation. The Amended Credit Facility's limitation on
subscriber acquisition costs was also increased as part of an amendment that
was executed in June 1999. As of June 30, 1999, the Company was in compliance
with all of the covenants of the Amended Credit Facility.
5. 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.
7
<PAGE> 10
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 Year 2000 issues;
an increase in competition; 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.
Unless the context otherwise requires, the terms "we," "our," "us" and
"Golden Sky DBS" refer to Golden Sky DBS, Inc. and its subsidiaries.
OVERVIEW
We were formed in June 1996 to acquire rights to distribute DIRECTV
programming services in rural markets in the United States. We are a non-voting
affiliate of the National Rural Telecommunications Cooperative, or the NRTC as
it is commonly known. The NRTC is a cooperative organization whose members are
engaged in the distribution of telecommunications and other services in rural
America. We acquired our first rural DIRECTV market in November 1996. From our
inception through June 30, 1999, we have acquired 55 rural DIRECTV markets in
23 states serving approximately 1.9 million households. The aggregate purchase
price for these acquisitions totaled approximately $294.9 million, or about
$159 per household. Following each acquisition, we have sought to create a
strong local presence in each of our markets. We have established over 70
offices in our territories and have established dealer relationships with
approximately 450 local retailers of direct broadcast satellite ("DBS")
equipment. We are continually evaluating acquisition prospects and we expect to
continue to enter into acquisition agreements to purchase additional rural
DIRECTV markets consistent with our growth strategy. As of June 30, 1999, we
were the exclusive provider of DIRECTV programming to approximately 292,400
subscribers.
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. Most of the NRTC members from which we acquire rural DIRECTV markets
generally have not engaged in significant marketing efforts, but rather have
relied primarily on the consumer to take the initiative to acquire service.
We have experienced net losses as well as negative EBITDA (as defined
below) and cash flows from operations since our inception. These shortfalls are
primarily the result of our rapid subscriber growth and acquisitions of rural
DIRECTV markets. In particular, we have incurred significant sales and
marketing expenses in our effort to rapidly build our subscriber base. Many of
these expenses, which are expensed as incurred and include advertising and
promotional expenses, sales commissions and DBS equipment and installation
subsidies, are incurred at or before the time a new subscriber is activated. As
a result, revenue attributable to new subscribers lags behind the expense
incurred in acquiring them. The impact of this lag generally increases with the
rate at which we add 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 our operating results for
at least the next year as we continue to add new subscribers. However, as long
as a subscriber remains in service, future operating results benefit from a
recurring monthly revenue stream
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
with minimal additional sales and marketing expense. Because we have
experienced a relatively low rate of customer disconnects, or churn, we believe
that our investment in building our subscriber base rapidly will enhance our
cash flow and operating results in the longer term. During the twelve-month
period ended June 30, 1999, our annual churn rate approximated 9.4%, compared
to 8.1% and 6.1% during the twelve-month periods ended March 31, 1999 and
December 31, 1998, respectively.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges and extraordinary items. EBITDA is not a measure
of performance under generally accepted accounting principles and should not be
construed as a substitute for consolidated net income or 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. Many of our financial covenants are
also based upon EBITDA. As a result, investors may use this data to analyze and
compare other communications companies with our company in terms of operating
performance, leverage and liquidity. Further, we believe that EBITDA provides
useful information regarding an entity's ability to incur and service debt.
Changes in our EBITDA may indicate changes in our free cash flows available to
incur and service debt and cover fixed charges. However, 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. EBITDA, as we
calculate it, is not necessarily comparable to similarly captioned amounts of
other companies.
During the six months ended June 30, 1999, we:
o used net cash of $22.4 million in operating activities;
o used net cash of $21.0 million in investing activities; and
o provided net cash of $53.6 million from financing activities.
During the six months ended June 30, 1998, we:
o used net cash of $14.2 million in operating activities;
o used net cash of $46.6 million in investing activities; and
o provided net cash of $48.0 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.
RESULTS OF OPERATIONS
Three Months Ended June 30,1999 Compared to the Three Months Ended June 30,
1998.
Revenue. DBS services revenue for the three months ended June 30, 1999
totaled $31.2 million, which represented an 88% increase as compared to the
same period during the prior year. This increase was principally attributable
to the increase in the number of subscribers to our DIRECTV service, offset
somewhat by lower revenues per subscriber. The average number of subscribers
during the three-month period ended June 30, 1999 increased to approximately
276,100, compared to approximately 135,100 during the comparable 1998 period.
Average monthly revenue per subscriber approximated $38 and $41 during those
same periods. The decrease in revenue per subscriber resulted primarily from a
change in sales mix toward lower priced services, as well as decreases in pay
per view and sports programming revenues.
Costs of DBS Services. Costs of DBS services increased $9.9 million, or
103%, to $19.6 million during the three-month period ended June 30, 1999. This
increase is consistent with the increase in the average number of subscribers
previously described. As a percentage of DBS services revenue, the costs of DBS
services increased to 62.9% during the three-month period ended June 30, 1999,
compared to 58.4% 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 $4.5 million for the
three-month period ended June 30, 1999, a $2.1 million increase, or 89%, over
the comparable 1998 period. These costs rose as a result of the increased
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
number of field offices and related activity resulting from our continued
acquisition of rural DIRECTV markets, as well as from subscriber growth. System
operations expenses approximated 14.4% and 14.2% of total revenue during the
three-month periods ended June 30, 1999 and 1998, respectively. We expect that
our system operations expenses will increase as we continue to make
acquisitions and open additional offices. However, many of these expenses 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 $13.6 million
during the three-month period ended June 30, 1999, an increase of $7.0 million
compared to the same 1998 period. Sales and marketing costs per new subscriber
activation approximated $355 and $300 during the three-month periods ended June
30, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
o a 72% increase in the number of new subscriber activations during the
three months ended June 30, 1999, as compared to the same period of
1998;
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions;
o costs we experienced from our marketing efforts to convert Primestar
subscribers to our DIRECTV service (see "-- Liquidity and Capital
Resources"); and
o increased equipment and installation subsidies provided by us to our
subscribers.
We expect that our subscriber acquisition costs per new subscriber
activation may be as high as $400 during the remainder of 1999. To the extent
that competition for new subscribers intensifies and we decide to increase our
marketing and promotional efforts, these costs may be higher.
General and Administrative. During the three-month period ended June 30,
1999, general and administrative expenses totaled $3.7 million, compared to
$1.6 million during the comparable 1998 period. 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 11.8% during the three-month period ended
June 30, 1999, from 9.3% during the same period in 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, Non-Cash
Charges and Extraordinary Items. EBITDA for the three months ended June 30,
1999 totaled negative $10.0 million, compared to EBITDA of negative $3.4
million during the three months ended June 30, 1998. This increase in negative
EBITDA principally resulted from the increases in sales and marketing
activities and related new subscriber activations previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $3.7 million to $9.1 million during the three months ended June 30,
1999, compared to $5.4 million during the three months ended June 30, 1998.
This increase primarily reflects the increased amortization of higher
intangible asset balances resulting from our acquisitions of rural DIRECTV
markets.
Interest Expense. Interest expense totaled $11.8 million during the three
months ended June 30, 1999 and $3.0 million during the same 1998 period. This
increase of $8.8 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% Senior Subordinated Notes Due 2006 (the "12 3/8%
Notes") in July 1998 and our 13 1/2% Notes in February 1999.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998.
Revenue. DBS services revenue for the six months ended June 30, 1999
totaled $60.0 million, which represented a 97% increase as compared to the same
period during the prior year. This increase was principally attributable to the
increase in the number of subscribers to our DIRECTV service, offset somewhat
by lower revenues per subscriber. The average number of subscribers in our
rural DIRECTV markets during the six-month period ended June 30, 1999 increased
to approximately 259,900, compared to approximately 122,300 during the
comparable 1998 period. Average monthly revenue per subscriber approximated $38
and $42 during those same
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
periods. The decrease in revenue per subscriber resulted primarily from a
change in sales mix toward lower priced services.
Costs of DBS Services. Costs of DBS services increased $20.1 million, or
112%, during the six-month period ended June 30, 1999, to $38.0 million. This
increase is consistent with the increase in the average number of subscribers
previously described. As a percentage of DBS services revenue, the costs of DBS
services increased to 63.3% during the six-month period ended June 30, 1999,
compared to 58.8% 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 expenses totaled $8.8 million for the
six-month period ended June 30, 1999, a $4.6 million increase, or 111%, 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
acquisitions of rural DIRECTV markets, as well as from subscriber growth. As a
percentage of total revenue, system operations expenses increased to 14.6%
during the six-month period ended June 30, 1999, from 13.5% 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.
Sales and Marketing. Sales and marketing expenses totaled $25.5 million
during the six-month period ended June 30, 1999, an increase of $14.2 million
compared to the same 1998 period. Sales and marketing costs per new subscriber
activation approximated $370 and $295 during the six-month periods ended June
30, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
o an 79% increase in the number of new subscriber activations during the
six months ended June 30, 1999, as compared to the same period of
1998;
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions;
o costs we experienced from our marketing efforts to convert Primestar
subscribers to our DIRECTV service (see "-- Liquidity and Capital
Resources"); and
o increased equipment and installation subsidies provided by us to our
subscribers.
We expect that our subscriber acquisition costs per new subscriber
activation may be as high as $400 during the remainder of 1999. To the extent
that competition for new subscribers intensifies and we decide to increase our
marketing and promotional efforts, these costs may be higher.
General and Administrative. During the six-month period ended June 30,
1999, general and administrative expenses totaled $6.6 million, compared to
$2.7 million during the comparable 1998 period. As a percentage of total
revenue, general and administrative expenses increased to 11.0% during the
six-month period ended June 30, 1999, from 8.6% during 1998. These increases in
general and administrative expenses resulted from the addition of
administrative resources necessary to support our growth.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the six months ended June 30, 1999
totaled negative $18.5 million, compared to EBITDA of negative $5.1 million
during the six months ended June 30, 1998. This increase in negative EBITDA
resulted from the increases in sales and marketing activities and related new
subscriber activations previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $7.6 million to $17.4 million during the six months ended June 30,
1999, compared to $9.8 million during the six months ended June 30, 1998. This
increase reflects the amortization of higher intangible asset balances
resulting from our acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $21.7 million during the six
months ended June 30, 1999 and $5.2 million during the same 1998 period. This
increase of $16.5 million 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 and our 13 1/2% Notes in February 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial capital for:
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
o acquisitions of rural DIRECTV markets;
o financing subscriber growth (including DBS equipment and installation
subsidies and marketing and selling expenses);
o investments in, and maintenance of, field offices in our rural DIRECTV
markets;
o financing infrastructure development costs necessary to support the
growth of our business; and
o funding of start-up losses and other working capital requirements.
Our capital expenditures, inclusive of acquisitions of rural DIRECTV
markets, totaled $37.3 million and $45.9 million during the six-month periods
ended June 30, 1999 and 1998, respectively. During those same periods, our net
cash used in operations totaled $22.4 million and $14.2 million, respectively.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under our bank facility, proceeds from Golden Sky
Systems' offering of its 12 3/8% Notes, proceeds of the offering of our 13 1/2%
Notes, proceeds from the issuance of capital stock, and to a lesser extent, the
issuance of promissory notes to sellers of rural DIRECTV markets.
During the six months ended June 30, 1999, our net cash flows from
financing activities totaled $53.6 million. This was comprised of:
o gross proceeds of $100.0 million from the offering of our 13 1/2%
Notes, which we completed in February 1999;
o net repayments of $32.0 million under Golden Sky Systems' bank credit
facility;
o increased deferred financing costs of $5.8 million resulting from the
amendment of Golden Sky Systems' bank credit facility and the offering
of our 13 1/2% Notes; and
o repayments of other debt totaling $8.6 million.
During the six months ended June 30, 1998, our net cash flows from
financing activities totaled $48.0 million. This was comprised of $51.5 million
of net borrowings under our bank credit facility and other debt, less deferred
financing costs of $3.5 million.
Credit Facility
Golden Sky Systems has a credit facility with a group of banks that
provides for a $150.0 million line of credit to fund acquisitions and working
capital requirements. Of this amount, $35.0 million is in the form of a term
loan facility and $115.0 million is in the form of a revolving credit facility,
including a letter of credit sub-limit of $40.0 million. As of June 30, 1999,
Golden Sky Systems had (1) fully utilized the entire $35.0 million of term loan
availability, (2) utilized approximately $20.6 million of the letter of credit
sub-facility and (3) had no outstanding borrowings under the revolving credit
line. Availability under the revolving credit line depends upon satisfaction of
various financial and operating covenants as well as minimum subscriber base
requirements.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings decreases by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under the credit facility
bear interest at variable rates calculated on a base rate, which is either the
prime rate or LIBOR, plus an applicable margin, with reductions under some
circumstances, based on leverage.
13 1/2% Notes
On February 19, 1999, we completed the sale of $193.1 million aggregate
principal amount at maturity of our 13 1/2% Notes. Interest on these notes is
payable in cash semi-annually on March 1 and September 1 of each year, with the
first cash interest payment due on September 1, 2004. The 13 1/2% Notes mature
on March 1, 2007. These notes were offered at a substantial discount and
resulted in net proceeds of approximately $95.7 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.4
million.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
Future Capital Requirements
Our future capital requirements will depend upon a number of factors,
including the extent of our acquisition activities, the rate of our subscriber
growth and the working capital needs necessary to accommodate our anticipated
growth. We expect that increased investments in our administrative and computer
systems will be necessary to support our increased size and continued growth.
We currently subsidize a portion of the cost of DBS equipment and subscriber
installations. The extent of our future subsidies of DBS equipment may
materially affect our liquidity and capital requirements. In addition, our
favorable working capital position relies, in part, upon the existing terms of
our agreements with the NRTC and the timing of required payments to the NRTC.
Excluding costs associated with the acquisition of additional rural DIRECTV
markets, we anticipate that our total capital expenditures, primarily related
to expanding facilities and information systems for our corporate office,
customer service operations and field offices, will approximate $5.0 million
during the year ending December 31, 1999. During 1999, we expect to continue to
expand our marketing efforts in order to increase our subscriber penetration.
As of June 30, 1999, we had cash on hand of approximately $14.7 million. As of
the same date, we had approximately $43.3 million available for borrowing under
Golden Sky Systems' revolving credit facility. While we cannot assure you, we
believe our existing cash balances and amounts available for borrowing under
the credit facility will be sufficient to finance our operations during the
remainder of 1999.
Since December 31, 1998, we have acquired eight rural DIRECTV markets.
These markets include approximately 124,000 households and 18,100 subscribers.
The aggregate purchase price for these recent acquisitions, excluding direct
acquisition costs, was approximately $34.5 million. We are continually
evaluating acquisition prospects and expect to enter into additional
acquisition agreements and complete further acquisitions of rural DIRECTV
markets consistent with our growth strategy. We currently have non-binding
letters of intent to acquire three additional rural DIRECTV markets for
aggregate consideration of approximately $32.5 million in cash. These markets
include approximately 161,000 households and 10,200 subscribers. Completion of
these acquisitions is contingent upon negotiation of satisfactory definitive
agreements and other customary conditions to closing. We cannot assure you that
we will complete these or any other future acquisitions.
As noted above, our operating costs and working capital requirements are
partly a function of our rights under our agreements with the NRTC and the
NRTC's agreement with Hughes. The NRTC is currently in litigation with Hughes
and its subsidiary DIRECTV over the scope and extent of certain of these rights.
See "Item 5. Other Events." While we are not a party to the suit, the outcome
could have a material adverse effect on the scope and duration of our right to
provide DIRECTV programming in our rural markets, our capital requirements and
our costs of operations. If determined adversely, this matter could have a
material adverse effect upon our business, financial condition and results of
operations.
Recently, we have experienced increased subscriber acquisition costs due
to greater competition for subscribers. In April 1999, Hughes acquired
Primestar, Inc.'s medium-power broadcast satellite business and high-powered
DBS assets. Subsequent to Hughes' announcement of its proposed acquisition of
Primestar, EchoStar 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 during 1999 as a result of recent
national DIRECTV promotions that offer new subscribers one to three months of
free programming services. We expect that our subscriber acquisition costs may
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.
We are highly leveraged and expect to increase our leverage as we pursue
further acquisitions of rural DIRECTV markets by borrowing additional funds,
under Golden Sky Systems' credit facility or otherwise, and by the issuance of
additional acquisition-related notes payable. The approximately $9.8 million of
seller notes payable outstanding at June 30, 1999 mature as follows: $2.9
million in 2000, $3.0 million in 2001, $2.9 million in 2002, and $1.0 million
in 2003.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
As a holding company, we must rely on dividends and other distributions
from our subsidiaries to meet our obligations. The ability of our subsidiaries
to pay dividends and make other distributions and advances to us is subject to,
among other things, the terms of their debt instruments and applicable law.
Golden Sky Systems' credit facility and the indenture governing Golden Sky
Systems' 12 3/8% Notes contain restrictive covenants that limit its ability to
pay dividends or make distributions to us. We cannot assure you that we will be
in compliance with these covenants at the time of a required interest payment
on our debt instruments. We currently expect that it may be difficult for
Golden Sky Systems to generate the requisite dividend capacity to enable us to
make the initial cash interest payments on our 13 1/2% Notes. Our ability to
generate sufficient dividend capacity under the indenture governing the 12 3/8%
Notes to service our 13 1/2% Notes and to comply with the financial and other
covenants in Golden Sky Systems' credit facility will depend upon the extent to
which we pursue acquisitions, incur additional indebtedness, incur operating
expenses, make capital expenditures and generate adequate subscriber revenue,
among other things. To the extent these vary significantly from our current
expectations, it is likely that we will not be able to make our initial
interest payments absent consents from our lenders and existing bondholders.
Moreover, any significant adverse developments would likely preclude us from
being able to access Golden Sky Systems' cash flow for these initial interest
payments.
There may be a number of factors, some of which may be beyond our control
or ability to predict, that could require us to raise additional capital. These
factors include possible acquisitions of additional rural DIRECTV markets,
increased costs associated with potential future acquisitions of rural DIRECTV
markets, unexpected increases in operating costs and expenses, subscriber
growth in excess of that currently expected, or an increase in the cost of
acquiring subscribers. Additional financing also may be required to meet our
debt service requirements. There can be no assurance that additional financing
will be available on terms acceptable to us, or at all, and if available, that
the proceeds of this financing would be sufficient to enable us to meet our
debt service requirements or completely execute our business plan.
On July 9, 1999, we filed a registration statement with the Securities and
Exchange Commission for an initial public offering of our common stock. We can
provide no assurance with respect to the proceeds that may result from the
initial public offering of our common stock, or that the offering will be
consummated.
YEAR 2000
We are in the process of assessing the impact of the year 2000 issue on
our computer systems and operations. 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 these systems are year 2000 compliant. However, we cannot assure
you that all of the software products that we currently use 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. Currently, we believe our costs to successfully mitigate the year
2000 issue will approximate $200,000.
We rely heavily on contracted data processing services from the NRTC and
DIRECTV for customer service, billing, remittance processing and distribution
of our direct broadcast satellite programming services under our contractual
relationship with the NRTC. The NRTC has informed us that the majority of the
computer systems that provide these services are currently year 2000 compliant,
and that the remainder of these systems will be compliant by September 1999.
The NRTC has further informed us that DIRECTV has achieved year 2000 compliance
for its billing and authorization systems. In addition to the NRTC and DIRECTV,
we rely heavily on other parties, like suppliers of DBS equipment, for the
successful conduct of our business. We are in the process of conducting surveys
of all of our significant vendors and other pertinent relationships to assess
their readiness for year 2000 processing.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- (Continued)
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 adverse effect on
our business, financial condition and results of operations. Any failure by the
NRTC, DIRECTV or other companies on which we depend to achieve year 2000
compliance by the end of 1999 could have a material adverse effect on our
business, financial condition and results of operations.
To date, we have not implemented a 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 some third party failures, especially in high-
technology industries like the DBS industry, due to the lack of alternate
suppliers. 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 in September 1999. There can be no assurance that
any contingency plans we may develop will successfully mitigate any adverse
effects that the year 2000 issue may have on our business, financial condition
and results of 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 under Golden Sky Systems' credit facility.
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 on earnings and cash flow and to lower our
overall borrowing costs.
Golden Sky Systems currently has $35.0 million of outstanding borrowings
under the variable rate term loan portion of its credit facility. This loan is
to be repaid in 15 consecutive quarterly installments of approximately $88,000,
beginning on March 31, 2002, with approximately $33.7 million due as a final
payment at maturity on December 31, 2005. Interest on the loan is calculated on
a base rate, which is either the lender's prime rate or LIBOR, plus an
applicable margin.
At December 31, 1998, Golden Sky Systems had $32.0 million of borrowings
outstanding under the $115.0 million revolving loan commitment of its credit
facility. Interest on revolving loan borrowings also is calculated on a base
rate, which is either the lenders' prime rate or LIBOR, plus an applicable
margin. All outstanding borrowings under the revolving loan commitment were
repaid in February 1999 from the proceeds of the offering of our 13 1/2% Notes.
As of June 30, 1999, no borrowings were outstanding under the credit facility's
revolving loan commitment. Availability of revolving loan borrowings under the
credit facility reduces by specified amounts quarterly from March 31, 2001
through maturity on September 30, 2005.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
We have the exclusive right to distribute certain DIRECTV programming to
homes in 55 rural territories within the continental United States through
contractual arrangements with the National Rural Telecommunications Cooperative
(the "NRTC"). The NRTC obtained the right to distribute DIRECTV programming in
approximately 250 rural markets in the United States through a 1992 agreement
with Hughes Communications ("Hughes"), the parent of DIRECTV (the "DBS
Distribution Agreement").
In May 1999, Hughes acquired United States Satellite Broadcasting Company,
Inc. ("USSB"). Prior to its acquisition by Hughes, USSB operated a DBS service
providing 28 channels of video programming consisting of multiple channels of
HBO, Showtime, Cinemax and The Movie Channel. The video programming provided by
USSB was complementary to DIRECTV's DBS service. After completing its
acquisition of USSB, Hughes combined its DIRECTV business with USSB's assets to
expand its programming lineup through the addition of HBO, Showtime, Cinemax
and The Movie Channel.
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes
(collectively, "DIRECTV") seeking a court order requiring DIRECTV to provide
NRTC members and affiliates with HBO, Showtime, Cinemax and The Movie Channel
programming for exclusive distribution in the NRTC's rural markets
15
<PAGE> 18
and a temporary restraining order and preliminary injunction preventing DIRECTV
from providing, marketing, selling or billing for this programming in the NRTC's
rural markets. On June 17, 1999, the court denied the NRTC's request for a
temporary restraining order and preliminary injunction. On July 12, 1999, the
NRTC amended its complaint to seek a declaratory judgment that, if the court
determines that the NRTC does not have the exclusive right to provide HBO,
Showtime, Cinemax and The Movie Channel programming in its rural markets, then
the NRTC has the non-exclusive right to distribute this programming in its rural
markets. In July 1999, DIRECTV filed a motion to dismiss this portion of the
NRTC's complaint on the grounds that it fails to state a claim upon which relief
may be granted because DIRECTV is in the process of negotiating USSB programming
distribution rights with the NRTC and the DBS Distribution Agreement requires
the parties to arbitrate any claims regarding the terms and conditions of such
rights.
In July 1999, DIRECTV filed a counterclaim against the NRTC. In the
counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only
relevant satellite for determining the expiration date of the NRTC's
rights (other than its right of first refusal) under the DBS
Distribution Agreement; and
2. That the DIRECTV-1R satellite that Hughes intends to launch in
September 1999 is a successor satellite to DBS-1 within the meaning of
the DBS Distribution Agreement; that DIRECTV appropriately and
prudently exercised its discretion, including its sole discretion to
determine when and under what conditions a successor satellite should
be launched, in determining to launch DIRECTV-1R in order to prevent a
disruption in service; that the NRTC's right of first refusal under
the DBS Distribution Agreement will be based on the satellite
expiration date of DBS-1; and that the NRTC has no right to
programming services on more than 20 channels of transponder capacity
pursuant to its right of first refusal.
A trial date has not been set on the merits of this lawsuit. While Golden
Sky is not a party to the suit, the outcome could have a material adverse
effect on the scope and duration of our right to provide DIRECTV programming in
our rural markets and our costs of operations. If determined adversely, this
matter could have a material adverse effect upon our business, financial
condition and results of operations.
16
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Amendment and Waiver, dated as of June 14, 1999, among Golden
Sky Holdings, Inc., Golden Sky Systems, Inc., various banks,
Paribas (formerly known as Banque Paribas), as Syndication
Agent, Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent
(incorporated by reference to Exhibit 10.24 to Golden Sky DBS,
Inc.'s Registration Statement on Form S-4 (Commission File No.
333-76413) which became effective on July 28, 1999).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
17
<PAGE> 20
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 DBS, INC.
By: /s/ John R. Hager
---------------------------------------------
John R. Hager
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 13, 1999
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.1 Amendment and Waiver, dated as of June 14, 1999, among Golden
Sky Holdings, Inc., Golden Sky Systems, Inc., various banks,
Paribas (formerly known as Banque Paribas), as Syndication
Agent, Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent
(incorporated by reference to Exhibit 10.24 to Golden Sky DBS,
Inc.'s Registration Statement on Form S-4 (Commission File No.
333-76413) which became effective on July 28, 1999).
27.1 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY DBS, INC. AS OF JUNE
30, 1999 AND FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,749
<SECURITIES> 0
<RECEIVABLES> 10,837
<ALLOWANCES> (728)
<INVENTORY> 6,662
<CURRENT-ASSETS> 58,505
<PP&E> 10,730
<DEPRECIATION> (4,518)
<TOTAL-ASSETS> 341,586
<CURRENT-LIABILITIES> 42,090
<BONDS> 334,989
0
0
<COMMON> 0
<OTHER-SE> (42,676)
<TOTAL-LIABILITY-AND-EQUITY> 341,586
<SALES> 0
<TOTAL-REVENUES> 60,425
<CGS> 0
<TOTAL-COSTS> 38,022
<OTHER-EXPENSES> 58,303
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<EXTRAORDINARY> (2,935)
<CHANGES> 0
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</TABLE>
