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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 SEPTEMBER 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 333-76413
GOLDEN SKY DBS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1839531
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(Address of principal executive offices) (Zip code)
(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 X NO
--- ---
AS OF OCTOBER 31, 1999, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 100 SHARES OF COMMON STOCK.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and December 31, 1998............................................. 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998 (Unaudited).............................. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 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.............. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 19
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.................................................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................................... 21
</TABLE>
<PAGE> 3
GOLDEN SKY DBS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
------------------ ------------------
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 4,460 $ 5,880
Restricted cash, current portion .................................... 28,083 23,612
Subscriber receivables (net of allowance for
uncollectible accounts of $293 and $852, respectively) ............ 8,632 12,095
Other receivables ................................................... 2,465 1,630
Inventory ........................................................... 10,146 7,223
Prepaid expenses and other .......................................... 1,859 4,086
------------------ ------------------
Total current assets ................................................... 55,645 54,526
Restricted cash, net of current portion ................................ 23,534 --
Property and equipment (net of accumulated depreciation of
$3,214 and $3,611, respectively) .................................... 4,994 6,507
Intangible assets, net ................................................. 233,139 244,504
Deferred financing costs ............................................... 10,541 12,249
Other assets ........................................................... 218 275
------------------ ------------------
Total assets ...................................................... $ 328,071 $ 318,061
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable .............................................. $ 13,539 $ 21,099
Interest payable .................................................... 11,009 4,658
Current portion of long-term obligations ............................ 8,916 3,227
Unearned revenue .................................................... 5,574 8,924
Accrued payroll and other ........................................... 1,403 1,516
Bank debt ........................................................... -- 52,000
------------------ ------------------
Total current liabilities .............................................. 40,441 91,424
Long-term obligations, net of current portion:
12 3/8% Notes ....................................................... 195,000 195,000
13 1/2% Notes ....................................................... -- 108,476
Bank debt ........................................................... 67,000 --
Seller notes payable ................................................ 6,912 6,932
Other notes payable and obligations under capital leases ............ 376 221
Minority interest ................................................... 2,420 --
------------------ ------------------
Total long-term obligations, net of current portion .................... 271,708 310,629
------------------ ------------------
Total liabilities ................................................. 312,149 402,053
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 September 30, 1999 ..... -- --
Additional paid-in capital .......................................... 97,600 97,684
Accumulated deficit ................................................. (81,678) (181,676)
------------------ ------------------
Total stockholder's equity (deficit) ................................ 15,922 (83,992)
------------------ ------------------
Total liabilities and stockholder's equity (deficit) .............. $ 328,071 $ 318,061
================== ==================
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------- ----------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
DBS services .................................. $ 19,673 $ 36,572 $ 50,139 $ 96,612
Lease and other .............................. 239 160 751 545
--------------- --------------- --------------- ---------------
Total revenue .................................... 19,912 36,732 50,890 97,157
Costs and Expenses:
Costs of DBS services ........................ 11,838 23,183 29,764 61,205
System operations ............................ 3,140 5,525 7,317 14,321
Sales and marketing .......................... 8,273 24,396 19,560 49,903
General and administrative ................... 2,062 4,354 4,737 10,994
Depreciation and amortization ................ 6,061 9,204 15,814 26,564
--------------- --------------- --------------- ---------------
Total costs and expenses ......................... 31,374 66,662 77,192 162,987
--------------- --------------- --------------- ---------------
Operating loss ................................... (11,462) (29,930) (26,302) (65,830)
Non-operating Items:
Interest and investment income ................ 837 494 866 2,146
Interest expense .............................. (6,729) (11,513) (11,966) (33,241)
Other ......................................... -- (138) -- (138)
--------------- --------------- --------------- ---------------
Total non-operating items ........................ (5,892) (11,157) (11,100) (31,233)
--------------- --------------- --------------- ---------------
Loss before income taxes ......................... (17,354) (41,087) (37,402) (97,063)
Income taxes ..................................... -- -- -- --
--------------- --------------- --------------- ---------------
Loss before extraordinary charge ................. (17,354) (41,087) (37,402) (97,063)
Extraordinary charge on early retirement
of debt ....................................... -- -- (2,577) (2,935)
--------------- --------------- --------------- ---------------
Net loss ......................................... $ (17,354) $ (41,087) $ (39,979) $ (99,998)
=============== =============== =============== ===============
</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>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................. $ (39,979) $ (99,998)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .......................................... 15,814 26,564
Amortization of debt discount, deferred financing costs
and other ............................................................ 563 9,863
Extraordinary charge on early retirement of debt ....................... 2,577 2,935
Change in operating assets and liabilities, net of acquisitions:
Subscriber receivables, net of unearned revenue .................... (737) (47)
Other receivables .................................................. (1,119) 835
Inventory .......................................................... (8,538) 2,923
Prepaid expenses and other ......................................... (707) (2,548)
Payable to parent .................................................. (574) --
Trade accounts payable ............................................. 3,260 7,560
Interest payable ................................................... 3,897 (6,351)
Accrued payroll and other .......................................... (132) 94
---------------- ----------------
Net cash used in operating activities ..................................... (25,675) (58,170)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets ..................................... (59,517) (35,778)
Purchases of property and equipment ....................................... (2,408) (3,075)
Proceeds from interest escrow account ..................................... -- 24,224
Offering proceeds and investment earnings placed in escrow ................ (50,940) (1,668)
Release of amounts reserved for contingent reduction of
bank debt .............................................................. -- 5,449
Other ..................................................................... (916) 27
---------------- ----------------
Net cash used in investing activities ..................................... (113,781) (10,821)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of 13 1/2% Notes ................................... -- 100,049
Proceeds from issuance of 12 3/8% Notes ................................... 189,150 --
Borrowings on bank debt ................................................... 58,000 38,000
Principal payments on bank debt ........................................... (83,000) (53,000)
Principal payments on notes payable and obligations
under capital leases ................................................... (2,578) (8,749)
Increase in deferred financing costs ...................................... (4,747) (5,889)
---------------- ----------------
Net cash provided by financing activities ................................. 156,825 70,411
---------------- ----------------
Net increase in cash and cash equivalents ................................. 17,369 1,420
Cash and cash equivalents, beginning of period ............................ 13,632 4,460
---------------- ----------------
Cash and cash equivalents, end of period .................................. $ 31,001 $ 5,880
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ................................................. $ 7,506 $ 29,121
Retirement of Credit Agreement from borrowings under the
Credit Facility ................................................... 88,000 --
Property and equipment acquired under capitalized
lease obligations ................................................. 609 78
Issuance of seller notes payable in acquisitions ....................... 10,157 2,925
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
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 September 30, 1999, Golden Sky Systems
had acquired 56 Rural DIRECTV Markets in 23 states representing approximately
1.9 million households. As of that same date, Golden Sky Systems served
approximately 325,200 subscribers.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
three- and nine-month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes thereto included in Golden Sky Systems' Annual Report on Form 10-K
for the year ended December 31, 1998.
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 $1.8
million and $2.2 million during the three-month periods ended September 30, 1999
and 1998, respectively, and $4.2 million and $3.9 million during the nine-month
periods ended September 30, 1999 and 1998, respectively.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). As a result of the
subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, the Company has no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on the Company's financial position or results of operations.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for periods of one to three months, to new subscribers. The cost of such free
programming is expensed as sales and marketing expense in the period the
services are provided. During the three- and nine-month periods ended September
30, 1999, sales and marketing expenses attributable to such promotions totaled
$639,000 and $2.3 million, respectively.
3. ACQUISITIONS
During the nine-month period ended September 30, 1999, Golden Sky Systems
acquired nine Rural DIRECTV Markets in five states (the "1999 Acquired
Markets"). In the aggregate, the 1999 Acquired Markets represent approximately
126,000 households and served approximately 18,200 subscribers at the respective
acquisition dates. The Company accounts for its acquisitions using the purchase
method. The Company's condensed consolidated statements of operations for the
three- and nine-month periods ended September 30, 1998 and 1999 include the
results of operations of acquired Rural DIRECTV Markets from the respective
acquisition dates. The aggregate purchase price (including direct acquisition
costs of $745,000) for the 1999 Acquired Markets was allocated as follows (in
thousands):
<TABLE>
<S> <C>
DIRECTV distribution rights...................... $ 30,819
Non-compete agreements........................... 4,859
Working capital, net............................. 100
------------
$ 35,778
============
</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.
5
<PAGE> 8
GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. LONG-TERM OBLIGATIONS
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.4 million (after initial purchasers' discount and other offering expenses).
The 13 1/2% Notes have an aggregate balance due at stated maturity of $193.1
million. Golden Sky DBS contributed the net proceeds of the 13 1/2% Notes
Offering to Golden Sky Systems, of which $53.0 million was used to repay
existing revolving credit indebtedness. Cash interest on the 13 1/2% Notes will
not accrue prior to March 1, 2004. Thereafter, cash interest will accrue at a
rate of 13 1/2% per annum and be payable in arrears on March 1 and September 1
of each year, commencing September 1, 2004. The 13 1/2% Notes mature on March 1,
2007.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS' direct and indirect subsidiaries. Golden Sky DBS'
ability to pay interest on the notes when interest is due and to redeem the
notes at maturity will depend on whether its direct and indirect subsidiaries
can pay dividends or make other distributions to it under the terms of such
subsidiaries' indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the
13 1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 13 1/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets. In
the event of a change of control, as defined in the 13 1/2% Notes Indenture,
each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS
to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to
101% of the accreted value of the notes, plus accrued and unpaid interest, if
any, to the date of purchase.
Bank Debt
In February 1999, Golden Sky Systems' bank credit facility (the "Credit
Facility") was amended (the "Amended Credit Facility") to permit, among other
things, the offering of senior discount notes by Golden Sky DBS. The Amended
Credit Facility's term loan commitment amortizes in specified quarterly
installments from March 31, 2002 through maturity on December 31, 2005. The
availability of revolving loan borrowings under the Amended Credit Facility
reduces by specified amounts over the period from March 31, 2001 through
maturity on September 30, 2005. In February 1999, Golden Sky Systems repaid all
outstanding borrowings under the revolving loan commitment. Such repayment was
funded from the contribution by Golden Sky DBS of the net proceeds of the
13 1/2% Notes Offering to Golden Sky Systems and totaled $53.0 million. Upon
execution of the Amended Credit Facility, Golden Sky Systems recognized an
extraordinary charge of approximately $2.9 million to write-off unamortized
deferred financing costs associated with the Credit Facility. As of September
30, 1999, outstanding borrowings under the Amended Credit Facility totaled $52.0
million (composed of term loan borrowings of $35.0 million and revolving loan
borrowings of $17.0 million).
6
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by the Amended Credit Facility.
The Company has requested a waiver from the banks of these covenant violations
and is negotiating with the banks regarding an amendment to the Amended Credit
Facility with respect to future covenant requirements. Golden Sky Systems will
be unable to borrow on the revolving credit commitment of the Amended Credit
Facility until a waiver is received. In the event a waiver is not received, the
banks could, among other remedies, terminate the Amended Credit Facility and
declare any and all amounts outstanding thereunder immediately due and payable.
Based upon its discussions with the banks, Golden Sky Systems does not expect
the banks to accelerate repayment of balances outstanding under the Amended
Credit Facility. However, pending resolution of this matter and as required by
generally accepted accounting principles, Golden Sky Systems' outstanding
borrowings under the Amended Credit Facility have been classified as a current
liability in the Company's September 30, 1999 balance sheet.
5. COMMITMENTS AND CONTINGENCIES
DIRECTV/NRTC Litigation
In May 1999, Hughes acquired United States Satellite Broadcasting Company,
Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium
programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel
to subscribers throughout the United States, including those within the NRTC's
rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined
its DIRECTV business with USSB's assets to expand its programming lineup through
the addition of HBO, Showtime, Cinemax and The Movie Channel.
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging
breach of contract and seeking a court order requiring DIRECTV to provide NRTC
members and affiliates with HBO, Showtime, Cinemax and The Movie Channel
programming for exclusive distribution in the NRTC's rural DIRECTV markets and a
temporary restraining order and preliminary injunction preventing DIRECTV from
providing, marketing, selling or billing for this programming in the NRTC's
rural markets. On June 17, 1999, the court denied the NRTC's request for a
temporary restraining order and preliminary injunction. On July 12, 1999, the
NRTC amended its complaint to add a second claim for breach of contract and to
seek a declaratory judgment that, if the court determines that the NRTC does not
have the exclusive right to provide HBO, Showtime, Cinemax and The Movie Channel
programming in its rural markets, then the NRTC has the non-exclusive right to
distribute this programming in its rural markets. In July 1999, DIRECTV and
Hughes filed a motion to dismiss this portion of the NRTC's complaint on the
grounds that it fails to state a claim upon which relief may be granted because
DIRECTV is in the process of negotiating USSB programming distribution rights
with the NRTC and the DBS Distribution Agreement requires the parties to
arbitrate any claims regarding the terms and conditions of these rights. The
Court denied the motion to dismiss on September 8, 1999.
In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In
the counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only
relevant satellite for determining the term of the DBS Distribution
Agreement; and
2. That the DIRECTV-1R satellite, which was launched in October 1999, is
a successor satellite to DBS-1 within the scope and meaning of the DBS
Distribution Agreement; that DIRECTV appropriately and prudently
exercised its discretion, including its sole discretion to determine
when and under what conditions a successor satellite should be
launched, in determining to launch DIRECTV-1R in order to prevent a
disruption in service; that the NRTC's right of first refusal under
the DBS Distribution Agreement will be based on the satellite
expiration date of DBS-1; and that pursuant to its right of first
refusal, the NRTC has no right to specified programming services
currently required to be provided under the DBS Distribution Agreement
or more than 20 program channels of transponder capacity.
7
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GOLDEN SKY DBS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and
Hughes in the United States District Court for the Central District of
California. In this suit, the NRTC alleges that DIRECTV and Hughes have breached
their fiduciary duty to the NRTC as well as the NRTC's agreement with Hughes and
have engaged in unfair business practices in violation of California law by
withholding from the NRTC various revenues, cost savings, discounts and other
benefits belonging to the NRTC under its agreement with Hughes.
A trial date has not been set on the merits of any of the claims made by
the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the
outcome of these matters or how they will impact the business relationship
between the NRTC and DIRECTV. While we are not a party to the lawsuits between
the NRTC and Hughes/DIRECTV, the outcome of these suits, or any damage that they
cause to the relationship between the NRTC and Hughes/DIRECTV, could have a
material adverse effect on our rights to provide DIRECTV programming in our
rural markets and, therefore our business, financial condition and results of
operations.
Meteoroid Hazard
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, that 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.
8
<PAGE> 11
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; equipment
shortages; 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; a decrease in the demand for direct
broadcast satellite programming or a change in preferences toward lower priced
services; any change in the scope or duration of our right to provide DIRECTV
programming in our rural DIRECTV markets or our costs of doing so; general
business and economic conditions; and other risk factors described from time to
time in our reports filed with the Securities and Exchange Commission (the "Risk
Factors"). All statements herein, that are not statements of historical fact 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
Risk Factors and 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
Company History
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of September 30, 1999, we were the
exclusive provider of DIRECTV programming services to approximately 325,200
subscribers.
DIRECTV, a division of Hughes Electronics Corporation, is one of two direct
broadcast satellite companies in the United States. Direct broadcast satellite
providers deliver digital television programming and related services to
subscribers via satellite. We provide DIRECTV programming services in rural
markets in the United States as 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. Under a 1992 agreement
with DIRECTV, the NRTC acquired exclusive rights for its members and affiliates
to distribute DIRECTV programming services in approximately 250 rural markets in
the United States, representing approximately 9.0 million households, or about
9% of total U.S. television households. Since our formation in June 1996, we
have acquired the exclusive right to provide DIRECTV programming in 56 rural
markets in 23 states serving approximately 1.9 million households and 141,400
subscribers. The aggregate purchase price for these acquisitions totaled
approximately $298.6 million, or about $160 per household.
We have sought to create a strong local presence in each of our markets and
attempt to increase our subscriber base through increased penetration of our
rural DIRECTV markets. We have established approximately 70 offices in our
territories and have established dealer relationships with approximately 450
local retailers of direct broadcast satellite ("DBS") equipment.
During 1999, we have acquired nine rural DIRECTV markets. These markets
included approximately 126,000 households and served approximately 18,200
subscribers as of the dates of acquisition. The aggregate purchase price for
these recent acquisitions, including direct acquisition costs, approximated
$35.8 million. While we continue to evaluate acquisition opportunities and
expect to enter into future agreements to purchase additional rural DIRECTV
markets consistent with our growth strategy, our pace of future acquisitions may
decrease in the near term. We expect that our pace of acquisitions will be
slower due to, among other factors, a reduction in the number of attractive
acquisition opportunities, increases in sellers' price expectations and capital
constraints.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Subscriber Data
We recently discovered an anomaly with respect to how we process the
accounts of customers who call our national customer service center to terminate
service and how the NRTC's subscriber billing system reports these subscriber
disconnects. Our standard business practice is to "suspend disconnect" these
accounts while local field office personnel process the "final" disconnect work
order (after completing standard customer retention efforts). The number of
accounts reflected as "suspend disconnect" status in the billing system has
accumulated over time. Recently, we discovered that the billing system reports
customers in "suspend disconnect" status as active subscribers even though these
subscribers are no longer being provided service. As of September 30, 1999, this
anomaly had, in the aggregate, resulted in our erroneously failing to recognize
approximately 13,500 subscriber disconnects. Consequently, our previously
reported subscriber data overstated our number of subscribers and understated
our rate of subscriber disconnect, or churn. Additionally, our previously
reported statistics with respect to average revenue per subscriber (commonly
referred to as ARPU or average revenue per unit) were understated. We have
implemented revised procedures with respect to our subscriber disconnect process
to avoid a recurrence of this situation.
The following table compares our previously reported subscriber data for
1998 and 1999 to subscriber data adjusted to properly reflect all subscribers in
"suspend disconnect" status. Monthly churn represents the average monthly churn
during the applicable period while "LTM" churn reflects the annual churn rate
for the twelve-month period then ended.
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED AS ADJUSTED
--------------------------------------- ----------------------------------------
CHURN CHURN
NUMBER OF ------------------ NUMBER OF ----------------
THREE MONTHS ENDED: SUBSCRIBERS MONTHLY LTM ARPU SUBSCRIBERS MONTHLY LTM ARPU
- -------------------------- ----------- ------- -------- ------- ----------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1998......... 122,500 .2% 5.1% $43.00 120,900 .3% 6.1% $43.50
June 30, 1998.......... 151,000 .9 5.8 41.25 149,000 1.1 6.9 42.00
September 30, 1998..... 176,300 .9 6.3 40.50 173,200 1.1 7.6 41.25
December 31, 1998...... 230,500 .6 6.1 40.25 226,000 .8 7.5 41.00
March 31, 1999......... 263,500 1.1 8.1 39.00 257,100 1.3 9.8 40.00
June 30, 1999.......... 297,000 1.4 9.4 37.25 287,200 1.8 11.9 38.50
September 30, 1999..... 338,700 1.7 11.1 38.25 325,200 2.1 13.9 40.00
</TABLE>
As reflected above, our churn rate, on both an average monthly and last
twelve months basis, has increased in recent periods. Our increased churn rate
has resulted from several factors, many of which are non-recurring and external
in nature. Those factors have included, but are not limited to, the following:
o involuntary disconnects for non-payment of subscribers attracted to
our service during the first half of 1999 by DIRECTV's
free-programming promotions;
o voluntary disconnects by disenchanted subscribers who were adversely
affected by the termination of delivery of certain distant broadcast
network services in January and July 1999 as a result of an agreement
between DIRECTV and the National Association of Broadcasters;
o higher subscriber turnover among former Primestar subscribers; and
o decreases in up-front equipment and installation costs to new
subscribers, which has had the effect of making our service more
affordable for potentially less credit-worthy customers.
As a result of the factors described above, we anticipate that we may
experience higher churn rates for at least the next six months. However, as
previously described, many of the factors that have contributed to our recent
higher churn are not expected to recur. Consequently, while there can be no
assurance, we expect that our rate of subscriber churn will approach historical
levels during the latter half of 2000.
10
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
EBITDA
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 nine months ended September 30, 1999, we:
o used net cash of $58.2 million in operating activities;
o used net cash of $10.8 million in investing activities; and
o provided net cash of $70.4 million from financing activities.
During the nine months ended September 30, 1998, we:
o used net cash of $25.7 million in operating activities;
o used net cash of $113.8 million in investing activities; and
o provided net cash of $156.8 million from financing activities.
RESULTS OF OPERATIONS
As a result of our significant growth, our historical operating results may
not be comparable from period to period. All subscriber and revenue per
subscriber data have been adjusted to reflect subscribers in "suspend
disconnect" status as previously described.
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998.
Revenue. DBS services revenue for the three months ended September 30, 1999
totaled $36.6 million, which represented an 86% increase as compared to the same
period during the prior year. This increase resulted from 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 September 30, 1999 increased to approximately 307,400, compared to
approximately 161,300 during the comparable 1998 period. Average monthly revenue
per subscriber approximated $40.00 and $41.25 during those same periods. The
decrease in revenue per subscriber resulted primarily from lower distant
broadcast network services revenues as described below and, to a lesser extent,
a change in sales mix toward lower priced services. As a result of an agreement
between DIRECTV and the National Association of Broadcasters, provision of
certain distant broadcast network services to a number of our subscribers was
terminated during January and July 1999. The termination of these distant
broadcast network services has adversely impacted our revenues and increased our
subscriber turnover. We do not anticipate any further termination of these
services to our existing subscribers as a result of federal legislation that is
expected to be enacted in November 1999.
Costs of DBS Services. Costs of DBS services increased $11.3 million, or
96%, to $23.2 million during the three-month period ended September 30, 1999.
Our costs of DBS services increased due to the 91% increase in our average
number of subscribers previously described, as well as from increased charges by
DIRECTV for satellite and ground service operations. As a percentage of DBS
services revenue, the costs of DBS services increased to
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
63.4% during the three-month period ended September 30, 1999, compared to 60.2%
during the same period of 1998. This increase resulted from the increased
DIRECTV charges described above.
System Operations. System operations expenses totaled $5.5 million for the
three-month period ended September 30, 1999, a $2.4 million increase, or 76%,
over the comparable 1998 period. These costs rose as a result of our increased
number of field offices and related activity resulting from our acquisitions of
rural DIRECTV markets, as well as from subscriber growth. System operations
expenses approximated 15.0% and 15.8% of total revenue during the three-month
periods ended September 30, 1999 and 1998, respectively. We expect that our
systems operations expenses may continue to increase as our subscriber base
grows. However, as many of these expenses are fixed in nature, we do not expect
that these expenses will increase in direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses totaled $24.4 million
during the three-month period ended September 30, 1999, an increase of $16.1
million compared to the same 1998 period. Sales and marketing costs per new
subscriber activation approximated $425 and $355 during the three-month periods
ended September 30, 1999 and 1998, respectively. The increase in sales and
marketing expenses resulted from:
o a 148% increase in the number of new subscriber activations during the
three months ended September 30, 1999, as compared to the same period
of 1998;
o higher subscriber acquisition costs associated with our conversions of
Primestar subscribers to our DIRECTV service;
o increased equipment and installation subsidies provided by us to our
subscribers; and
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions.
In April 1999, Hughes acquired Primestar's medium-power broadcast satellite
business and high-powered DBS assets. Subsequent to Hughes' announcement of its
proposed acquisition of Primestar, EchoStar Communications Corporation began to
offer increased promotional and other incentives to Primestar customers, as well
as to EchoStar retailers, to entice the conversion of Primestar subscribers to
EchoStar's competing DBS service, the DISH Network. EchoStar is the second
largest provider of DBS service in the United States. Consequently, beginning in
February 1999 we increased our marketing efforts with respect to Primestar
subscribers. Our increased Primestar conversion efforts include, among other
things, an offer of free equipment and installation to current Primestar
subscribers, as well as higher sales commission incentives to both our internal
and external sales forces. Approximately 54% of our gross subscriber additions
during the three-month period ended September 30, 1999 were conversions of
former Primestar subscribers. While we believe that opportunities continue to
exist to convert additional Primestar subscribers to our DIRECTV programming
service, we expect to accomplish such conversions at a slower rate than that
experienced during the 1999 third quarter. Consequently, while there can be no
assurance, we anticipate that our future subscriber acquisition costs per new
subscriber activation will decrease as compared to third quarter 1999 levels.
General and Administrative. During the three-month period ended September
30, 1999, general and administrative expenses totaled $4.4 million, compared to
$2.1 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 and an increase in bad debts expense. Bad debts
expenses increased from $303,000 during the three-month period ended September
30, 1998 to $1.4 million during the three-month period ended September 30, 1999.
This increase resulted not only from the increase in the number of subscribers
to our DIRECTV programming service and related revenues, but also from higher
bad debts associated with former Primestar subscribers and subscribers attracted
to our service during the first half of 1999 by DIRECTV's free-programming
promotions. While there can be no assurance, we expect our future bad debts
experience to approximate historical levels. As a percentage of total revenue,
general and administrative expenses increased to 11.9% during the three-month
period ended September 30, 1999, from 10.4% during the same period in 1998. This
increase was largely due to the increase in bad debts expenses previously
described. We expect that our general and administrative expenses will continue
to increase as we grow our business. However, since many of these expenses are
fixed in nature, our
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
general and administrative expenses are not expected to increase in direct
proportion to increases in subscribers and revenues.
EBITDA. EBITDA for the three months ended September 30, 1999 totaled
negative $20.7 million, compared to EBITDA of negative $5.4 million during the
three months ended September 30, 1998. This increase in negative EBITDA
principally resulted from the increases in sales and marketing expenses and
related new subscriber activations previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $3.1 million to $9.2 million during the three months ended September
30, 1999, compared to $6.1 million during the three months ended September 30,
1998. This increase reflects the increased amortization of higher intangible
asset balances resulting from our acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $11.5 million during the three
months ended September 30, 1999 and $6.7 million during the same 1998 period.
This increase of $4.8 million primarily resulted from higher outstanding debt
balances and an increase in our weighted-average interest rate. Our
weighted-average interest rate increased as a result of the issuance of Golden
Sky Systems' 12 3/8% Senior Subordinated Notes Due 2006 (the "12 3/8% Notes") in
July 1998 and our 13 1/2% Senior Discount Notes due 2007 (the "13 1/2% Notes) in
February 1999.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998.
Revenue. DBS services revenue for the nine months ended September 30, 1999
totaled $96.6 million, which represented a 93% increase as compared to the same
period during the prior year. These higher revenues resulted from 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 nine-month period ended September 30, 1999 increased to
approximately 274,600, compared to approximately 134,500 during the comparable
1998 period. Average monthly revenue per subscriber approximated $39.25 and
$42.00 during those same periods. The decrease in revenue per subscriber
resulted primarily from lower distant broadcast network services revenues as
previously described, lower sports programming revenues and a change in sales
mix toward lower priced services.
Costs of DBS Services. Costs of DBS services increased $31.4 million, or
106%, during the nine-month period ended September 30, 1999, to $61.2 million.
This increase resulted from the 104% increase in the average number of
subscribers previously described and from higher fees charged by DIRECTV for
satellite and ground service operations. As a percentage of DBS services
revenue, the costs of DBS services increased to 63.4% during the nine-month
period ended September 30, 1999, compared to 59.4% during the same period of
1998. This increase resulted from the higher fees charged by DIRECTV previously
described.
System Operations. System operations expenses totaled $14.3 million for the
nine-month period ended September 30, 1999, a $7.0 million increase, or 96%,
over the comparable 1998 period. These costs rose as a result of the increased
number of field offices and related activity resulting from our acquisitions of
rural DIRECTV markets, as well as from subscriber growth. As a percentage of
total revenue, system operations expenses increased to 14.7% during the
nine-month period ended September 30, 1999, from 14.4% 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 $49.9 million
during the nine-month period ended September 30, 1999, an increase of $30.3
million compared to the same 1998 period. Sales and marketing costs per new
subscriber activation approximated $395 and $325 during the nine-month periods
ended September 30, 1999 and 1998, respectively.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The increase in sales and marketing expenses resulted from:
o a 108% increase in the number of new subscriber activations during the
nine months ended September 30, 1999, as compared to the same period
of 1998;
o higher subscriber acquisition costs associated with our conversions of
Primestar subscribers to our DIRECTV service;
o increased equipment and installation subsidies provided by us to our
subscribers; and
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions.
During the nine-month period ended September 30, 1999, approximately 35% of
our gross subscriber additions represented conversions of former Primestar
subscribers. As previously described, we expect the volume of Primestar
conversion activity to diminish in future periods.
General and Administrative. During the nine-month period ended September
30, 1999, general and administrative expenses totaled $11.0 million, compared to
$4.7 million during the comparable 1998 period. As a percentage of total
revenue, general and administrative expenses increased to 11.3% during the
nine-month period ended September 30, 1999, from 9.3% during 1998. These
increases in general and administrative expenses resulted from the addition of
administrative resources necessary to support our growth to date and increased
bad debts expenses. Our bad debts expenses increased from $1.2 million during
the nine-month period ended September 30, 1998 to $ 2.7 million during the
nine-month period ended September 30, 1999. This increase in bad debts expense
resulted from the increases in subscribers and revenues previously described, as
well as from higher bad debts associated with former Primestar subscribers and
subscribers attracted to our service during the first half of 1999 by DIRECTV's
free programming promotions.
EBITDA. EBITDA for the nine months ended September 30, 1999 totaled
negative $39.3 million, compared to EBITDA of negative $10.5 million during the
nine months ended September 30, 1998. This increase in negative EBITDA primarily
resulted from the higher sales and marketing expenses and related new subscriber
activations previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $10.8 million to $26.6 million during the nine months ended September
30, 1999, compared to $15.8 million during the nine months ended September 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 $33.2 million during the nine
months ended September 30, 1999 and $12.0 million during the same 1998 period.
This increase of $21.3 million resulted from higher outstanding debt balances
and an increase in our weighted-average interest rate. Our weighted-average
interest rate increased due to the issuance of Golden Sky Systems' 12 3/8% Notes
in July 1998 and our 13 1/2% Notes in February 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses as well as negative EBITDA 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
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
with minimal additional sales and marketing expense. As long as our churn
remains relatively low, we believe that our investment in building our
subscriber base rapidly will enhance our cash flow and operating results in the
longer term.
Our operations require substantial capital for:
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.
Historically, we also have utilized substantial capital to acquire rural
DIRECTV markets. Our capital expenditures, inclusive of acquisitions of rural
DIRECTV markets, totaled $38.9 million and $61.9 million during the nine-month
periods ended September 30, 1999 and 1998, respectively. During those same
periods, our net cash used in operations totaled $58.2 million and $25.7
million, respectively.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under our bank credit 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 nine months ended September 30, 1999, our net cash flows from
financing activities totaled $70.4 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 $15.0 million under Golden Sky Systems' bank credit
facility;
o increased deferred financing costs of $5.9 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 $8.7 million.
During the nine months ended September 30, 1998, our net cash flows from
financing activities totaled $156.8 million. Gross proceeds from Golden Sky
Systems July 1998 offering of 12 3/8% Notes were the primary source of these net
cash flows from financing activities. Those gross proceeds totaled $189.2
million and were partially offset by net repayments of bank and other debt
totaling $27.6 million and deferred financing costs of $4.7 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 September 30,
1999, Golden Sky Systems (1) had fully utilized the entire $35.0 million of term
loan availability, (2) had borrowed $17.0 million under the revolving credit
line, and (3) had utilized approximately $20.6 million of the letter of credit
sub-facility. 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.
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by its credit facility. We have
requested a waiver from the banks of these covenant violations and are
negotiating with the banks regarding an amendment to the credit facility with
respect to future covenant requirements. Golden Sky Systems will be unable to
borrow on the revolving credit commitment of the credit facility until a waiver
is received. In the event a waiver is not received, the banks could, among other
remedies, terminate the credit facility and declare any and all amounts
outstanding thereunder immediately due and payable. Based upon our discussions
with the banks, we do not expect the banks to accelerate repayment of balances
outstanding under the credit facility. However, pending resolution of this
matter and as required by generally accepted accounting principles, Golden Sky
Systems' outstanding borrowings under the credit facility have been classified
as a current liability in our September 30, 1999 balance sheet.
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 $95.4 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.7
million.
Future Capital Requirements
Our future capital requirements will depend upon a number of factors,
including the rate of our internal subscriber growth, the extent to which we
complete additional acquisitions, if any, and the working capital needs
necessary to accommodate such growth. During the remainder of 1999 and
throughout the year ending December 31, 2000, we expect to continue to expand
our marketing efforts in order to increase our subscriber penetration. As
previously described, we subsidize a portion of the cost of DBS equipment and
subscriber installations. The extent of our future subsidies of DBS equipment
and installations may materially affect our liquidity and capital requirements.
We also expect that continued investment in our administrative and computer
systems will be necessary to support our increased size and continued internal
growth. Excluding any 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 not exceed $5.0
million during the year ending December 31, 1999.
Our operating costs and working capital requirements are partly a function
of our rights and obligations 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. 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. See "Item 5. Other
Information."
As noted above under "- Overview - Company History," while we continue to
evaluate acquisition opportunities and expect to purchase additional rural
DIRECTV markets in the future consistent with our growth strategy, our pace of
future acquisitions may decrease in the near term. To the extent we identify
attractive acquisition candidates in the future, we may require additional
capital to complete such acquisitions.
We are highly leveraged and, to the extent we are able to borrow additional
funds under Golden Sky Systems' credit facility or otherwise, our leverage will
continue to increase. The approximately $9.8 million of seller notes payable
outstanding at September 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.
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
16
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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 unexpected increases in operating costs and expenses, subscriber
growth in excess of that currently expected, an increase in the cost of
acquiring subscribers or possible acquisitions of additional rural DIRECTV
markets. 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. There
can be no assurance that this offering will be consummated during 1999 or at
all, or that the proceeds therefrom will be sufficient to meet our short-term
capital requirements. Costs totaling approximately $400,000 associated with this
offering had been incurred as of October 31, 1999. These offering costs have
been included in deferred financing costs pending completion of the offering. In
the event our initial public offering is not consummated, we will be required to
expense such costs in the period in which a determination not to proceed with
the offering is made.
As of September 30, 1999, we had unrestricted cash on hand of approximately
$5.9 million. While there can be no assurance, assuming receipt of the waiver
and amendment to our bank credit facility previously described, we believe we
have sufficient cash and availability under our bank credit facility to finance
our expected internal growth through at least December 31, 2000. If we are
unable to borrow under our bank credit facility, we expect that we will require
additional capital from other sources before the end of 1999. Our future
subscriber growth and results of operations will be adversely affected in the
event we are unable to access additional borrowings under our bank credit
facility or secure alternative sources of capital.
YEAR 2000 READINESS
Many existing computer systems and applications currently use two-digit
date fields to designate a particular 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 may cause computer systems and
applications to incorrectly process critical financial and operational
information. We have undertaken an effort to identify and correct any potential
year 2000 issues that may exist with our information systems, suppliers and
facilities. Our approach to addressing these issues can be separated into the
following phases:
Assessment Phase: The assessment phase, which defined possible sources of
year 2000 issues, was completed during 1998. A consultant, specializing in year
2000 projects, performed this assessment, which led to the analysis phase.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Analysis Phase: The analysis phase included a variety of procedures to
determine the nature and extent of any year 2000 issues and to develop plans to
address those issues. The procedures performed included the following:
o completing an inventory of our computer software and hardware;
o identifying budget requirements;
o assessing the year 2000 readiness of key vendors and business
partners;
o establishing priorities;
o developing specific action items;
o identifying our year 2000 steering committee members;
o identifying our year 2000 project team; and
o developing an internal and external year 2000 communications plan.
Conversion Phase: The conversion phase consisted of the implementation of
necessary system modifications, upgrades and replacements identified in the
analysis phase. These activities were completed during the second quarter of
1999.
Testing Phase: This phase entails verifying that the system changes
implemented in the conversion phase were successful in resolving identified year
2000 issues. During this phase, internal systems are being reviewed to ensure
that these systems will function properly, both on a separate and integrated
basis, with respect to date input, processing and output. Individual testing of
our internal systems has been completed successfully. Testing of our integrated
systems is expected to be completed in November 1999.
Implementation Phase. During this phase, all fully-tested internal systems
and components will be deployed. A substantial portion of these activities have
been completed, including all relevant systems at our corporate office and
national customer service center.
Based upon the steps we have completed to date, we believe that our
internal systems are year 2000 compliant. If our systems do not function
properly in the year 2000 or if our remediation efforts are not successful or
are not completed in a timely manner, the year 2000 issue could significantly
disrupt our ability to transact business and could have a material adverse
effect on our financial condition and results of operations.
We also 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 all of
the computer systems that provide these services are year 2000 compliant. 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. While we have communicated with these third
parties in an attempt to determine the extent to which we are vulnerable to
their failure to remedy year 2000 issues, there can be no assurance that these
third parties have in fact achieved year 2000 compliance. 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.
We are in the process of developing contingency plans to deal with
potential year 2000 issues. Our 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. There can
be no assurance the 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.
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<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
We have utilized both internal and external resources in implementing our
year 2000 project. We believe that our costs to successfully mitigate the year
2000 issue will approximate $250,000. To date, we have expended approximately
95% of this amount.
The foregoing constitutes a year 2000 statement and readiness disclosure
subject to the protections afforded it by the year 2000 Information and
Readiness Disclosure Act of 1998.
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.
As of September 30, 1999, Golden Sky Systems had $17.0 million of
borrowings outstanding under the $115.0 million revolving loan commitment of its
credit facility. Availability of revolving loan borrowings under the credit
facility reduces by specified amounts quarterly from March 31, 2001 through
maturity on September 30, 2005. Interest on revolving loan borrowings is
calculated on a base rate, which is either the lenders' prime rate or LIBOR,
plus an applicable margin.
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<PAGE> 22
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
We have the exclusive right to distribute certain DIRECTV programming to
homes in 56 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 offered premium
programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel
to subscribers throughout the United States, including those within the NRTC's
rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined
its DIRECTV business with USSB's assets to expand its programming lineup through
the addition of HBO, Showtime, Cinemax and The Movie Channel.
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging
breach of contract and seeking a court order requiring DIRECTV to provide NRTC
members and affiliates with HBO, Showtime, Cinemax and The Movie Channel
programming for exclusive distribution in the NRTC's rural DIRECTV markets and a
temporary restraining order and preliminary injunction preventing DIRECTV from
providing, marketing, selling or billing for this programming in the NRTC's
rural markets. On June 17, 1999, the court denied the NRTC's request for a
temporary restraining order and preliminary injunction. On July 12, 1999, the
NRTC amended its complaint to add a second claim for breach of contract and to
seek a declaratory judgment that, if the court determines that the NRTC does not
have the exclusive right to provide HBO, Showtime, Cinemax and The Movie Channel
programming in its rural markets, then the NRTC has the non-exclusive right to
distribute this programming in its rural markets. In July 1999, DIRECTV and
Hughes filed a motion to dismiss this portion of the NRTC's complaint on the
grounds that it fails to state a claim upon which relief may be granted because
DIRECTV is in the process of negotiation USSB programming distribution rights
with the NRTC and the DBS Distribution Agreement requires the parties to
arbitrate any claims regarding the terms and conditions of these rights. The
Court denied the motion to dismiss on September 8, 1999.
In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In
the counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only
relevant satellite for determining the term of the DBS Distribution
Agreement; and
2. That the DIRECTV-1R satellite, which was launched in October 1999, is
a successor satellite to DBS-1 within the scope and meaning of the DBS
Distribution Agreement; that DIRECTV appropriately and prudently
exercised its discretion, including its sole discretion to determine
when and under what conditions a successor satellite should be
launched, in determining to launch DIRECTV-1R in order to prevent a
disruption in service; that the NRTC's right of first refusal under
the DBS Distribution Agreement will be based on the satellite
expiration date of DBS-1; and that pursuant to its right of first
refusal, the NRTC has no right to specified programming services
currently required to be provided under the DBS Distribution Agreement
or more than 20 program channels of transponder capacity.
On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and
Hughes in the United States District Court for the Central District of
California. In this suit, the NRTC alleges that DIRECTV and Hughes have breached
their fiduciary duty to the NRTC as well as the NRTC's agreement with Hughes and
have engaged in unfair business practices in violation of California law by
withholding from the NRTC various revenues, cost savings, discounts and other
benefits belonging to the NRTC under its agreement with Hughes.
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<PAGE> 23
A trial date has not been set on the merits of any of the claims made by
the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the
outcome of these matters or how they will impact the business relationship
between the NRTC and DIRECTV. While we are not a party to the lawsuits between
the NRTC and Hughes/DIRECTV, the outcome of these suits, or any damage that they
cause to the relationship between the NRTC and Hughes/DIRECTV, could have a
material adverse effect on our rights to provide DIRECTV programming in our
rural markets and, therefore our business, financial condition and results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
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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: November 15, 1999
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<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY DBS, INC. AS OF SEPTEMBER 30,
1999 AND FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,880
<SECURITIES> 0
<RECEIVABLES> 12,947
<ALLOWANCES> (852)
<INVENTORY> 7,223
<CURRENT-ASSETS> 54,526
<PP&E> 10,118
<DEPRECIATION> (3,611)
<TOTAL-ASSETS> 318,061
<CURRENT-LIABILITIES> 91,424
<BONDS> 303,476
0
0
<COMMON> 0
<OTHER-SE> (83,992)
<TOTAL-LIABILITY-AND-EQUITY> 318,061
<SALES> 0
<TOTAL-REVENUES> 97,157
<CGS> 0
<TOTAL-COSTS> 61,205
<OTHER-EXPENSES> 101,782
<LOSS-PROVISION> 1,209
<INTEREST-EXPENSE> 33,241
<INCOME-PRETAX> (97,063)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97,063)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,935)
<CHANGES> 0
<NET-INCOME> (99,998)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
