UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the transition
period from _______to ______.
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
incorporation or organization) (I.R.S. Employer Identification No.)
4700 BELLEVIEW, SUITE 300
KANSAS CITY, MO 64112
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, (816) 753-5544
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of the chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ].
As of December 31, 1999, the Registrant's outstanding common stock consisted of
100 shares of Common Stock. The Registrant is a wholly owned subsidiary of
Golden Sky Holdings, Inc. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 31, 1999 was $0.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business............................................................ 1
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................13
Item 6. Selected Financial Data.............................................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........24
Item 8. Financial Statements and Supplementary Data.........................25
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure................................................25
PART III
Item 10. Directors and Executive Officers of the Registrant..................26
Item 11. Executive Compensation..............................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management......32
Item 13. Certain Relationships and Related Transactions......................36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.37
SOURCES OF MATERIAL INFORMATION
Information in this report concerning the National Rural Telecommunications
Cooperative, or the NRTC, and its arrangements with DIRECTV is based upon
information that has been made available to us by the NRTC or is otherwise
publicly available. Unless otherwise indicated, information in this report
regarding numbers of households in rural DIRECTV markets is based upon
information compiled by Claritas, Inc. Other industry-related information is
derived from SkyREPORT. We have not independently verified this data.
The following trademarks owned by third parties are used in this Report:
DIRECTV(R), USSB(R), Total Choice(R), NFL SUNDAY TICKET(TM), NHL(R) CENTER
ICE(R), MLB EXTRA INNINGS SM , ESPN FULL COURT TM, ESPN GamePlan TM and
DirecPC(R).
<PAGE>
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. The words "may," "expect," "believe," "could," "anticipate,"
"project," "estimate," their opposites and similar expressions are intended to
identify forward-looking statements. We caution readers that these statements
are not guarantees of future performance or events and are subject to a number
of risks, uncertainties and assumptions that may influence the accuracy of the
statements and the projections on which they are based. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
report might not occur. We undertake no obligation to publicly update or revise
any forward-looking statements, whether from new information, future events or
otherwise. These risks, uncertainties and other factors include, among other
things: a decrease in subscriber growth; an increase in subscriber acquisition
costs; an equipment shortage; impediments to the retransmission of distant
broadcast network signals; an increase in competition from cable television
system operators, other direct broadcast satellite system operators, and other
providers of subscription television services; the introduction of new
technologies and competitors into the subscription television business; general
business and economic conditions; and other risk factors described from time to
time in our reports filed with the Securities and Exchange Commission. All
statements herein other than statements of historical fact, including, without
limitation, the statements under "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and "Business" 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 be correct. Certain other important
factors, or cautionary statements, that could cause our actual results to differ
materially from our expectations 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.
GENERAL
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of December 31, 1999, approximately
345,200 subscribers in 57 rural markets located in 24 states received DIRECTV
service through us.
DIRECTV, a division of Hughes Electronics Corporation, is one of two
high-power direct broadcast satellite companies in the United States. Hughes
Electronics Corporation is a subsidiary of General Motors Corporation. Direct
broadcast satellite providers deliver digital television programming and related
services to subscribers via satellite. In order to receive this programming,
subscribers must install a satellite antenna, or dish, activate a digital
set-top receiver and pay a monthly fee.
We provide DIRECTV programming services in rural markets in the United
States as a non-voting affiliate of the National Rural Telecommunications
Cooperative, commonly known as the NRTC. Under a 1992 agreement with DIRECTV, as
amended in 1994, the NRTC acquired exclusive rights for participating 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. According to the
NRTC, these markets accounted for approximately 1.4 million, or approximately
21%, of DIRECTV's direct broadcast satellite subscribers as of December 31,
1999.
Under our agreements with the NRTC, we generally have the exclusive right to
provide DIRECTV programming to subscribers in our rural markets and to receive
related monthly service revenues from those subscribers, regardless of the
subscribers' original point of purchase. Our exclusive rural DIRECTV markets are
located in the following areas of the United States:
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF RURAL
GEOGRAPHICAL AREA DIRECTV MARKETS TOTAL HOUSEHOLDS STATES REPRESENTED
----------------- --------------- ---------------- ------------------
<S> <C> <C> <C>
Southeast................. 6 210,000 AL, FL, GA, NC, TN
Southwest................. 13 520,000 AR, OK, TX
Midwest................... 21 547,000 IA, KS, MI, MN, MO, ND, NE, WI
Rocky Mountain............ 10 227,000 CO, ID, MT, UT, WY
Pacific................... 7 357,000 CA, NV, OR
--------------------- -------------------
Total.................. 57 1,861,000
===================== ===================
------------------
Total households are based on estimates of primary residences by Claritas,
Inc.
</TABLE>
Our subscriber base has increased rapidly due to acquisitions, internal
growth and a low rate of subscriber disconnect, or churn. During 1999, we added
104,900 new subscribers, net of disconnects, in our rural markets through
internal growth. Our churn rate for the twelve-month period ended December 31,
1999 approximated 15.9%.
Merger with Pegasus Communications Corporation
On January 10, 2000, we entered into a definitive merger agreement
with Pegasus Communications Corporation. Pegasus is the largest independent
provider of DIRECTV subscription television services in the United States. The
combined operations of Pegasus and Golden Sky Holdings, Inc. ("Golden Sky
Holdings") will serve in excess of 1.1 million subscribers in 41 states and have
exclusive rights to serve approximately 7.2 million rural households. Under the
terms of the agreement, Pegasus will issue up to 6.5 million shares of its Class
A common stock to shareholders of Golden Sky Holdings. Golden Sky Holdings is
the parent company of Golden Sky DBS, Inc. ("Golden Sky DBS"), which is the
parent company of Golden Sky Systems, Inc. ("Golden Sky Systems" and, together
with Golden Sky Holdings and Golden Sky DBS, "Golden Sky"). Golden Sky Systems
is the primary operating subsidiary of Golden Sky. Upon completion of the
merger, Golden Sky Holdings will become a wholly owned subsidiary of Pegasus.
The transaction is expected to close during the first or second quarter of 2000.
Except as otherwise provided, all information in this report does not give
effect to the merger.
SALES AND DISTRIBUTION
We offer DIRECTV programming to consumer and business segments in our rural
DIRECTV markets through two separate but complementary sales and distribution
channels.
DIRECT SALES FORCE AND DEALER NETWORK. We have established direct sales
forces in our rural DIRECTV markets to market our DIRECTV programming services.
Since inception we have opened approximately 70 full service retail stores in
our rural DIRECTV markets and operated 68 of these stores as of December 31,
1999. During 2000, we plan to close approximately 30 of these stores. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Our direct sales force currently
consists of approximately 225 direct salespeople who are compensated on a
commission basis. We also have close relationships with approximately 450
independent dealers of direct broadcast satellite, commonly known as DBS,
equipment to whom we provide marketing, subscriber authorization, and
installation and customer service support. Wherever possible, our arrangements
with dealers are exclusive. In connection with the sale of a DBS unit and a
subscription to DIRECTV programming offered by us, a dealer retains the proceeds
from the sale of the equipment and earns a one-time commission paid by us. We
retain the ongoing monthly subscription revenue from the subscriber. For
equipment sold through the indirect dealer network, we generally provide a
subsidy, thus lowering the price of the equipment for the consumer.
<PAGE>
OTHER DISTRIBUTION CHANNELS. In addition to our direct sales force, we
utilize other distribution channels to offer DIRECTV programming to potential
subscribers in our rural DIRECTV markets, including:
o national retailers selected by DIRECTV;
o consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming; and
o satellite dealers and consumer electronics dealers authorized by five
regional sales management agents selected by DIRECTV.
In a similar fashion to our indirect dealer network, we pay a one-time
commission to these distribution channels for the sale of DIRECTV programming to
a subscriber located in our rural DIRECTV markets and we receive all associated
monthly programming revenue associated therewith, regardless of what outlet
originally sold DIRECTV programming to the subscriber.
MARKETING
We believe that DBS services compete favorably with medium and low-power
direct-to-home, cable and other subscription television services on the basis of
superior signal quality, channel capacity, programming choice and price. We
complement the existing marketing effort of DIRECTV and its other national
distribution partners through focused local marketing and sales, including local
print and radio advertising.
We also implement support-advertising programs for our indirect distribution
channels. We have implemented specific promotions, like offering new subscribers
an initial month's service at no charge, to motivate customers to purchase these
plans. We also have incentive-based sales compensation for both our direct and
dealer sales forces to promote and sell premium subscription plans.
A key element of our marketing strategy is to lower the up-front costs to
consumers of becoming Golden Sky subscribers by subsidizing the costs of DBS
equipment and installation. We offer various types of DBS equipment and
accessories through our direct sales force and retail locations. We are able to
take advantage of volume discounts in purchasing this equipment from the NRTC
and other vendors. In addition, dealers are motivated to lower the prices at
which they offer DBS equipment and installation by our volume-based commission
structure.
CUSTOMER SERVICE
We provide customer service from each of our local offices. Generally, our
offices are staffed from 9 a.m. to 7 p.m., six days a week. Local managers are
responsible for managing customer accounts receivable and churn. Overflow and
after hours assistance is provided 24 hours a day, seven days a week, by our
national call center located in Kansas City, Missouri and, beginning in February
2000, by a third-party provider of call center services. We also provide
professional installation services and technical assistance in each of our
offices.
OVERVIEW OF THE DIRECT-TO-HOME TELEVISION INDUSTRY
Direct-to-home television services encompass all types of television
transmission from satellites directly to the home. The FCC has authorized two
types of satellite services for transmission of television programming: direct
broadcast satellite services, commonly referred to as "DBS", and fixed satellite
service, commonly referred to as low-power and medium-power satellite services.
DBS services operate at high power or 120 to 240 watts per frequency channel, in
the Ku-band. Fixed satellite services include low-power services transmitting in
the C-band, as well as medium-power services transmitting in the Ku-band at 20
to 100 watts per frequency channel. Both DBS and medium-power direct-to-home
satellites are used for digital satellite television services. DBS provides high
quality video and audio signals and can be received by an 18-inch dish. Medium
and low-power direct-to-home signals require satellite dishes of 27 inches to
six feet in diameter, depending on the geographical location of the dish and
wattage per frequency channel. See "-- DIRECTV."
<PAGE>
DIRECTV and EchoStar Communications Corporation are currently the only
domestic providers of DBS services. All other direct-to-home domestic satellite
television providers currently provide medium or low-power direct-to-home
services. See "-- Competition."
A DBS system consists of an uplink center, one or more orbiting satellites
and the subscriber's reception equipment. The uplink center collects programming
from on-site video equipment and from the direct feeds of programmers. Through
antennae located at the uplink center, the operator transmits, or uplinks, the
programming to transponders located on its geostationary satellite. The
transponders receive and amplify the digital signal and transmit it to receiving
dishes within the service area covered by the satellite. The digital signal is
then transmitted via coaxial cable to the subscriber's receiver, where it is
converted into an analog signal, which allows it to be received by the
subscriber's televisions. System security is maintained through the use of
reprogrammable access cards that must be inserted into each subscriber's
integrated receiver decoder, sometimes referred to as a digital set-top box, to
unscramble programming signals.
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 200
channels of digital quality video and audio programming, and transmits via
high-power Ku-band satellites. As of December 31, 1999, DIRECTV had over 8.0
million subscribers (including those acquired as a result of Hughes' acquisition
of Primestar), which represented approximately 70.3% of the DBS and medium-power
direct-to-home market.
Major manufacturers under brand names including RCA, Sony, Hughes, and
others produce DBS equipment. DBS equipment is currently sold at retail outlets
throughout the U.S. for prices typically ranging from $79 to $199, depending
upon the generation of the equipment, the features offered and the retail
outlet.
Programming
DIRECTV programming includes:
o cable networks, broadcast networks and audio services available for
purchase in tiers for a monthly subscription fee;
o premium services available a-la-carte or in tiers for a monthly
subscription fee;
o sports programming, including major professional league sports packages
like the exclusive NFL SUNDAY TICKET, regional sports networks and
seasonal college sports packages, which is available for a yearly,
seasonal or monthly subscription fee; and
o movies from all major Hollywood studios and special events available for
purchase on a pay-per-view basis.
Satellite and premium services available a-la-carte or for a monthly
subscription are priced comparably to cable. Pay-per-view movies are available
for viewing on multiple channels at staggered starting times so that a viewer
does not have to wait more than 30 minutes to view a particular pay-per-view
movie.
DIRECTV periodically adjusts its programming packages in an attempt to
provide the best channel mix possible at various price points. The following is
a summary of some of the more popular DIRECTV programming packages we currently
offer:
o Total Choice: Package of 60 video channels, including two Disney channels
and an in-market regional sports network, 31 CD audio channels and access
to up to 55 channels of pay-per-view movies and events. Total Choice is
DIRECTV's most popular offering. Total Choice Platinum, Gold, Silver and
Plus Encore offer additional programming at higher retail prices;
<PAGE>
o Select Choice: Package of 40 video channels, 31 CD audio channels and
access to up to 55 channels of pay-per-view movies and events; and
o NFL SUNDAY TICKET: All out-of-market NFL Sunday games.
Other sports programming packages include:
o NHL CENTER ICE: Approximately 500 out-of-market NHL games;
o MLB EXTRA INNINGS: Approximately 800 out-of-market major league baseball
games;
o ESPN FULL COURT: Hundreds of college basketball games; and
o ESPN GamePlan: Up to ten college football games every Saturday.
DIRECTV recently began offering subscribers in selected markets programming
packages containing local broadcast stations affiliated with the NBC, CBS, ABC
and FOX national broadcast television networks. Subscribers in markets where
these local network packages are not offered may be able to receive their local
network affiliates by means of over-the-air reception using equipment that
allows for seamless switching between satellite-delivered programming and
broadcast television programming. Seamless switching between over-the-air
programming and satellite programming is possible with all DBS units. In
addition, DIRECTV offers distant NBC, CBS, ABC and FOX affiliates to subscribers
who are unable to receive the signal of a local affiliate using a conventional
rooftop antenna or who otherwise meet other specific eligibility requirements.
See "___ Regulation."
RELATIONSHIP WITH THE NRTC AND DIRECTV
The NRTC is a cooperative whose members are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The NRTC acquired the right to provide DIRECTV programming to
residential households and commercial establishments located in rural DIRECTV
markets under a 1992 agreement, as amended in 1994, with Hughes and DIRECTV as
successor to Hughes ("the Hughes Agreement"). The NRTC subdivided its rights to
provide these services into approximately 250 geographically-based rural DIRECTV
markets and then sold its rights to the individual rural DIRECTV markets to NRTC
members and affiliates under agreements between the NRTC and its individual
members and affiliates (the "NRTC Agreements"). We have acquired the exclusive
rights generally to provide DIRECTV programming in each of our rural DIRECTV
markets from various NRTC members through assignment of their NRTC Agreements.
Each NRTC Agreement was assigned to us with the consent of the NRTC and DIRECTV.
Because we do not qualify as a member of the NRTC, we act as a non-voting
affiliate.
Under the NRTC Agreements, we are obligated to promote, market and sell
DIRECTV programming and to take all reasonable steps to ensure that DIRECTV
programming is not received at any unauthorized locations or in any unauthorized
manner. We also purchase customer authorization, billing services and
centralized remittance-processing services from the NRTC under the NRTC
Agreements. The NRTC Agreements also contain customary provisions regarding
payment terms, compliance with laws and indemnification and provide that both
the NRTC and DIRECTV must consent prior to any assignment or transfer of our
rights or obligations under the NRTC Agreements, which consent shall not be
unreasonably withheld.
The NRTC Agreements also contain termination provisions that allow the NRTC
to terminate the agreements:
o as a result of a termination of the Hughes Agreement, with the NRTC
remaining responsible for paying to us its pro rata portion of any refunds
that the NRTC receives from DIRECTV under the Hughes Agreement;
o if we fail to make any payment due to the NRTC or otherwise breach a
material obligation in the NRTC Agreements and this failure or breach
continues for more than 30 days after written notice from the NRTC; or
<PAGE>
o if we fail to keep and maintain any letter of credit required to be
provided to the NRTC in full force and effect or to adjust the amount of
the letter of credit as required by the NRTC Agreements.
The NRTC Agreements also require us to comply with policies of the NRTC
promulgated from time to time. We, along with other NRTC-affiliated DIRECTV
providers, have disputed some of the policies proposed by the NRTC in the past
that we believed did not comply with the NRTC Agreements and applicable law. For
example, the NRTC has adopted a policy regarding its own interests in the
subscriber information of NRTC members and affiliates. The NRTC Agreements
provide that NRTC members and affiliates, including us, have "substantial
proprietary interests" in and rights to the information and data with respect to
their subscribers. The NRTC and its affiliates, including us, have differed over
the import of these rights and interests, which may have consequences in the
event that our rights to offer DIRECTV programming through the NRTC are
terminated or expire.
Under the NRTC Agreements, we have, among other things, the exclusive right
in our rural DIRECTV markets to market and sell all programming transmitted by
the DIRECTV satellites over 27 frequencies licensed to DIRECTV and the right to
retain all of the revenue from subscribers derived from these sales and
marketing activities. We pay the NRTC for the wholesale cost of this
programming. We also pay a fee to DIRECTV based upon 5% of the programming
revenue and certain shared satellite costs. The NRTC has the right to choose to
provide some non-select services, like NFL SUNDAY TICKET, as DIRECTV and the
content providers enter into new agreements. "Non-select services" are services
not generally included in the DIRECTV programming we provide because providers
of the programming require minimum subscriber guarantees, advance payments or
other similar commitments that the NRTC declines to give. We retain 5% of the
revenue from non-select services purchased by our subscribers and remit the
balance to DIRECTV.
The NRTC Agreements and the Hughes Agreement expire when the satellites that
broadcast the specified programming covered by the agreements reach the end of
their useful lives and are removed from their assigned orbital locations.
According to Hughes, the DIRECTV satellites have estimated orbital lives of at
least 12 to 15 years from their respective launches in December 1993, August
1994 and June 1995. The NRTC is currently in litigation with Hughes and DIRECTV
over some aspects of the NRTC's rights to distribute direct broadcast satellite
services under the Hughes Agreement.We and Pegasus also filed a lawsuit in
federal court in Los Angeles against DIRECTV, seeking various monetary and
declaratory relief based upon DIRECTV's failure to provide the NRTC with premium
programming and DIRECTV's position with respect to the NRTC's rights under the
Hughes Agreement, among other things. For more information about these lawsuits,
see "Legal Proceedings."
As part of their counterclaim in their lawsuit with the NRTC, DIRECTV and
Hughes are seeking a declaratory judgment that the term of the NRTC's agreement
with Hughes, and therefore the term of our rights under the NRTC Agreements, is
measured only by the orbital life of DBS-1 and not the orbital lives of any
other satellites subsequently launched by Hughes. According to Hughes, DBS-1
suffered a failure of its primary spacecraft control processor in July 1998 and,
since that time, has been operating normally using the spare control processor.
If DIRECTV and Hughes were to prevail on their counterclaim, the end of DBS-1's
life could have a material adverse effect on our DIRECTV programming rights.
There are numerous risks associated with satellite transmission technology
in general and DIRECTV's delivery of direct broadcast services in particular.
Satellite transmission of video, audio and other data is highly complex and
requires the manufacture and integration of diverse and advanced components that
may not function as expected. The useful life of a direct broadcast satellite
also may be adversely affected by acts of war, electrostatic storms or
collisions with space debris. We cannot assure you as to the longevity of the
satellites that are required to broadcast our DIRECTV programming or that we
will continue to have access to any or all of our DIRECTV programming upon the
expiration of the useful life of DBS-1 or any other DIRECTV satellite.
<PAGE>
The Hughes Agreement provides the NRTC with a right of first refusal to
obtain specified DBS distribution services from any successor satellite launched
by Hughes. Hughes launched a new satellite in October 1999, which it claims was
necessary in order to prevent a disruption of service in the event of any
failure of DBS-1. As part of its counterclaim in the pending lawsuit with the
NRTC, DIRECTV is asking the court to declare this satellite as the successor
satellite to which the right of first refusal relates under the Hughes
Agreement. DIRECTV is also seeking to limit the programming services and
transponder capacity that it is obligated to provide under the right of first
refusal as described more fully below. If DIRECTV and Hughes prevail on their
counterclaim, our cost of securing programming and other DBS services could
increase substantially. The NRTC Agreements do not expressly provide an
equivalent right of first refusal for NRTC members or affiliates to acquire DBS
services through the NRTC should the NRTC exercise its right of first refusal
under the Hughes Agreement. If we are unable for any reason to acquire DBS
distribution services on satisfactory terms upon the expiration of the Hughes
Agreement or the NRTC Agreements, we would be required to acquire these services
from others, or to attempt to sell our subscriber base to one or more other DBS
providers. If we are unable to do this for contractual or other reasons, we may
be forced to cease or fundamentally change our business operations. Any material
adverse change in our relationship with the NRTC or the NRTC's relationship with
DIRECTV could have a material adverse effect on our business, financial
condition and results of operations.
Prior to April 1999, DIRECTV, United States Satellite Broadcasting Company,
Primestar and EchoStar were the principal domestic satellite television
operators, serving over 80% of satellite television subscribers in the United
States. In April 1999, Hughes acquired Primestar's medium-power direct-to-home
business for approximately $1.8 billion. In May 1999, Hughes acquired USSB for
approximately $1.6 billion. Prior to its acquisition by Hughes, Primestar
offered a full range of satellite television programming to approximately 2.3
million subscribers nationwide, approximately 100,000 of which we believe were
located within our rural DIRECTV markets. As a result of our exclusive
distribution rights, former Primestar subscribers who are located in our rural
markets and choose to receive DIRECTV programming will become our subscribers.
COMPETITION
We face competition for acquisitions of rural DIRECTV markets from one other
company. We also face competition for subscribers within our exclusive rural
DIRECTV markets from a broad range of companies offering communications and
entertainment services, including cable operators, other satellite service
providers, wireless cable operators, telephone companies, television networks
and home video product companies. Many of our competitors have greater financial
and marketing resources than we do and the business of providing subscription
and pay television programming is highly competitive. We believe that quality
and variety of programming, signal quality, service and cost will be the key
bases of competition.
Competition for Acquisition of Rural DIRECTV Markets
Historically, both we and Pegasus have been pursuing the same goal of
consolidating rural DIRECTV markets. Pegasus is currently the largest
independent provider of DIRECTV services and has substantially greater financial
resources than we do. Pegasus had approximately 702,100 subscribers and 4.9
million households in 36 states as of December 31, 1999.As a result of our
announced merger with Pegasus, we have suspended evaluation of future
acquisition opportunities. To the extent we resume our acquisition activities,
our pace of any future acquisitions may be slower than our historical experience
due to, among other factors, a reduction in the number of attractive acquisition
opportunities and capital constraints. In addition, Pegasus' competing
acquisition strategy could have a material adverse effect on our ability to
execute our acquisition strategy.
Competing Subscription Television Providers
Cable Television Providers
Cable operators in the United States serve approximately 65 million
subscribers, representing over 65% penetration of television households passed
by cable systems. Cable operators typically offer 30 to 80 channels of
programming at an average monthly subscription price of approximately $36. While
cable companies currently serve a majority of the U.S. television market, we
<PAGE>
believe many may not be able to provide the quality and variety of programming
offered by DIRECTV until they significantly upgrade their coaxial systems. Many
cable television providers are in the process of upgrading their systems and
other cable operators have announced their intentions to make significant
upgrades. Many proposed upgrades, like conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. Although cable systems with adequate channel capacity may offer digital
service without major rebuilds, we believe that other cable systems that have
limited channel capacity, like those in most of our rural DIRECTV markets, will
have to be upgraded to add bandwidth in order to provide digital service. We
believe that these upgrades will require substantial investments of capital and
time to complete industry-wide. As a result, we believe that there will be a
substantial delay before cable systems in the rural DIRECTV markets can offer
programming services equivalent to DBS satellite providers and that some cable
systems in those markets may never be upgraded, subject to advances in digital
compression technology currently under development.
Other Direct-To-Home Television Providers
EchoStar, the only other remaining DBS provider in the United States, began
national broadcasting of programming in March 1996 and currently broadcasts
approximately 500 channels of digital television programming and CD quality
audio programming services to the entire continental United States. EchoStar has
21 licensed channel frequencies at the 119 degrees W.L. orbital position and 29
licensed channel frequencies at the 110 degrees W. L. orbital position. The 110
degrees and 119 degrees W.L. orbital positions are two of the three DBS orbital
locations that can serve the entire continental United States. These three
orbital locations are sometimes referred to as full "CONUS." EchoStar also has
69 frequencies in other partial CONUS orbital locations. EchoStar reported
approximately 3.4 million subscribers as of December 31, 1999. In June 1999,
EchoStar acquired its license for 29 DBS frequencies at 110 degrees W.L., two
satellites to be delivered in orbit and a direct broadcast operations facility
from The News Corporation Limited and MCI WorldCom Inc. EchoStar expects to
significantly expand its DBS and other programming offerings as a result of this
acquisition, which will potentially strengthen its competitive strength relative
to DIRECTV and us.
Low-power C-band direct-to-home operators reported approximately 1.6 million
subscribers as of December 31, 1999. C-band direct-to-home operators provide
subscription television services primarily to subscribers who live in markets
not served by cable television. C-band equipment, including the
six-to-eight-foot dish necessary to receive the low-power signal, currently
costs approximately $2,000 and is distributed by local TVRO satellite dealers.
During 1998 and 1999, the number of C-band customers decreased by approximately
465,000 subscribers.
Other Competitors
Regional telephone companies and other long distance companies could become
significant competitors in the future, as they have expressed an interest in
becoming subscription multichannel video programming distributors. Furthermore,
the Telecommunications Act of 1996 (the "1996 Act") removes barriers to entry
that previously inhibited local telephone companies from competing, or made it
more difficult for telephone companies to compete, in the provision of video
programming and information services. Several telephone companies have received
authorization to test market video and other services in specified geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of these multi-channel
video services vary, as several telephone companies have pushed back or
cancelled originally announced deployment schedules. In addition, mergers, joint
ventures and alliances among franchise, wireless or private cable television
operators and regional telephone companies may result in competitors capable of
offering bundled cable television and telecommunications services. For example,
the merger of AT&T and Tele-Communications, Inc. resulted in a large, integrated
communications provider with significantly greater technical, financial and
marketing resources than we have.
As more telephone companies begin to provide multichannel video programming and
other information and communications services to their customers, additional
significant competition for subscribers will develop. Among other things,
telephone companies have an existing relationship with substantially every
household in their service
<PAGE>
area, substantial financial resources and an existing infrastructure. Further,
telephone companies may be able to subsidize the delivery of programming through
their position as the sole source of local wireline telephone service to the
home.
Most areas of the United States are covered by traditional terrestrial
over-the-air VHF/UHF television broadcasters. Consumers can receive from three
to ten channels of over-the-air programming in most markets. These stations
provide local, network and syndicated programming free of charge, but each major
market is generally limited in the number of programming channels. On August 5,
1997, Congress approved the release of additional digital spectrum for use by
VHF/UHF broadcasters.
REGULATION
Unlike a cable operator, DBS operators like DIRECTV are free to set prices
and serve customers according to their business judgment, without rate of return
or other regulation or the obligation not to discriminate among customers.
However, there are laws and regulations that affect DIRECTV and, therefore, us.
As an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to:
o the licensing of individual satellites, including a requirement that
DIRECTV meet minimum financial, legal and technical standards;
o avoidance of interference with radio stations; and
o compliance with rules that the FCC has established specifically for DBS
licenses, including rules that the FCC is in the process of adopting to
govern the retransmission of broadcast television stations by DBS
operators.
As a distributor of television programming, DIRECTV also is affected by
numerous other laws and regulations. The 1996 Act clarifies that the FCC has
exclusive jurisdiction over direct-to-home satellite services and that criminal
penalties may be imposed for piracy of direct-to-home satellite services. The
1996 Act also offers direct-to-home operators relief from private and local
government-imposed restrictions on the placement of receiving antennae. In some
instances, direct-to-home operators have been unable to serve areas due to laws,
zoning ordinances, homeowner association rules, or restrictive property
covenants banning the installation of antennae on or near homes. In August 1996,
the FCC promulgated rules designed to implement Congress' intent by prohibiting
any restriction, including zoning, land use or building regulation, or any
private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user where the user
has a direct or indirect ownership interest in the property, to the extent that
the restriction impairs the installation, maintenance or use of a DBS receiving
antenna that is one meter or less in diameter or diagonal measurement, except
where the restriction is necessary to accomplish a clearly defined safety
objective or to preserve a recognized historic district. Local governments and
associations may apply to the FCC for a waiver of this rule based on local
concerns of a highly specialized or unusual nature. In November 1998, the FCC
amended its rules to extend these protections to rental property in those areas
under the exclusive use or control of the renter. The 1996 Act also preempted
local, but not state, governments from imposing taxes or fees on direct-to-home
services, including DBS. Finally, the 1996 Act required that multi-channel video
programming distributors, including direct-to-home operators, fully scramble or
block channels providing indecent or sexually explicit adult programming. If a
multi-channel video programming distributor cannot fully scramble or block this
programming, it must restrict transmission to those hours of the day when
children are unlikely to view the programming, as determined by the FCC. On
December 30, 1998, a three-judge federal court in Delaware held that this
provision was unconstitutional. The United States Supreme Court is currently
reviewing the judgment of the Delaware Court and a decision is expected this
year.
In addition to regulating pricing practices and competition within the cable
television industry, the Cable Television Consumer Protection and Competition
Act of 1992 (the "Cable Act") was intended to establish and support existing and
new multi-channel video services, including wireless cable and direct-to-home,
to provide subscription television services. We and DIRECTV have benefited from
the programming access provisions of the Cable Act and implementing rules in
that DIRECTV has been able to gain access to previously unavailable programming
services and, in some circumstances, has obtained programming services at
reduced cost. Any amendment to, or interpretation of, the Cable Act or the FCC's
rules that would permit cable companies or entities affiliated with cable
<PAGE>
companies to discriminate against competitors like DIRECTV in making programming
available or to discriminate in the terms and conditions of its programming
could adversely affect DIRECTV's ability to acquire programming on a
cost-effective basis, which would have an adverse impact on us. Some of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
or Congress extends these restrictions.
The Cable Act also required the FCC to conduct a rule-making proceeding to
impose public interest requirements for providing video programming on
direct-to-home licensees. In November 1998, the FCC adopted rules requiring
direct-to-home licensees to provide reasonable and non-discriminatory access by
qualified candidates for elective office. These rules also require
direct-to-home licensees to set aside four percent of the licensee's channel
capacity for non-commercial programming of an educational or informational
nature. Petitions for reconsideration seeking the imposition of additional
regulatory obligations on direct-to-home licensees are pending at the FCC.
The Satellite Home Viewer Improvement Act of 1999, or SHVIA, enacted by
Congress late last year, amends the Copyright Act and the Communications Act in
order to clarify the terms and conditions under which a direct-to-home operator
may retransmit local and distant broadcast television stations to subscribers.
The new law was intended to promote the ability of satellite services to compete
with cable television systems and to resolve disputes that had arisen between
broadcasters and satellite carriers regarding the delivery of broadcast
television station programming to satellite service subscribers.
The SHVIA permits direct-to-home operators like DIRECTV to retransmit the
signal of a broadcast television station to subscribers who reside in the
station's local market. Until May 29, 2000, a direct-to-home operator can
retransmit a local broadcast television station without the station's consent.
However, in order to retransmit a local broadcast television station to a
satellite service subscriber after May 29, 2000, the satellite provider must
have obtained the station's express consent; failure to comply with this
requirement could subject a satellite provider to substantial liability. The FCC
is currently considering the adoption of rules governing the retransmission
consent process, including rules prohibiting a broadcast television station from
entering into exclusive retransmission consent agreements or from failing to
engage in good faith negotiations for retransmission consent.
Beginning January 1, 2002, a satellite provider that retransmits a broadcast
television station to subscribers residing in the station's local television
market will be subject to a "must carry" obligation under which the carrier will
be required to retransmit any other broadcast television station that is located
in that market and that has elected to demand mandatory carriage rather than
negotiate a retransmission consent agreement with the satellite carrier. The FCC
is required to adopt rules implementing the provisions of the SHVIA regarding a
local broadcast television stations must carry rights and the station's election
between must carry and retransmission consent. The increased use of channel
capacity to fulfill this "must carry" obligation may have a limiting effect on
the number of markets in which DBS providers offer packages of local broadcast
television stations. Congress has indicated that it intends to consider
legislation that would promote the retransmission of local broadcast stations to
satellite service subscribers in all markets. It is not possible to predict how
such legislation, if enacted, will impact Golden Sky's ability to offer local
broadcast television signals to customers in the territories that it serves.
SHVIA also creates a new compulsory copyright license applicable to the
retransmission of local broadcast television stations to satellite service
subscribers. Although there is no royalty payment obligation associated with
this new compulsory copyright license, eligibility for the compulsory copyright
license is conditioned on the satellite carrier's compliance with the applicable
Communications Act provisions and FCC rules governing the delivery of local
broadcast television stations by a satellite carrier. Noncompliance with the
Communications Act and/or FCC requirements could subject a satellite carrier to
liability for copyright infringement.
A number of provisions contained in the SHVIA address the retransmission by
a satellite service provider of a broadcast television station to subscribers
who reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
four major national broadcast television networks (ABC, CBS, NBC and FOX) to
those subscribers that meet certain specified eligibility criteria, which the
FCC is directed to implement. The primary determinant of a subscriber's
eligibility to receive a distant affiliate of a particular network is whether
the subscriber is able to receive a "Grade B" strength signal from an affiliate
<PAGE>
of that network using a conventional rooftop broadcast television antenna. The
SHVIA also contains a waiver provision and a "grandfathering" provision, each of
which allows DBS providers to offer distant network stations to certain
subscribers that would otherwise be ineligible to receive such programming. The
number of distant affiliates of a particular network that a satellite carrier
can provide to eligible subscribers is capped at two per network. The SHVIA
contains additional provisions describing the terms and conditions under which a
DBS provider can retransmit distant broadcast television stations that are
affiliated with emerging national broadcast television networks (such as WB, UPN
and PAX) or that are unaffiliated with any network. In particular, the SHVIA
directs the FCC to adopt rules that would subject the retransmission of such
stations to certain "blackout" rules similar to rules currently applicable to
the retransmission of distant broadcast television stations by cable systems.
The SHVIA also makes a number of revisions to the compulsory copyright license
provisions that apply to the retransmission of distant broadcast television
stations to satellite service subscribers. These changes include reducing the
monthly per subscriber royalty rate payable under the distant signal compulsory
copyright license from 27 cents per distant signal for all types of stations to
14.85 cents per signal for those stations that are affiliated with a national
broadcast network and 18.9 cents per signal for "superstations" (stations that
are not affiliated with a national broadcast television network). The SHVIA also
creates a new compulsory copyright license applicable to the retransmission of a
national PBS programming feed (with a monthly per subscriber royalty rate of
14.85 cents). The compulsory copyright license applicable to the retransmission
of distant broadcast signals to satellite service subscribers will expire on
January 1, 2005 unless it is extended by Congress. If the license expires,
direct-to-home operators will be required to negotiate in the marketplace to
obtain the copyright clearances necessary for the retransmission of distant
broadcast signals to satellite service subscribers.
MANAGEMENT AND EMPLOYEES
As of January 31, 2000, we had approximately 580 full-time and 191 part-time
employees. We are not a party to any collective bargaining agreement and
consider our relations with our employees to be good.
ITEM 2. PROPERTIES
We are currently headquartered in approximately 35,000 square feet of leased
office space in Kansas City, Missouri. Annual rent under this lease approximates
$570,000 and the lease will terminate in August 2002. We also lease
approximately 70 local sales and customer service offices in our rural DIRECTV
markets. We expect these facilities to be adequate for our needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the NRTC's contractual rights to obtain from
DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. The NRTC also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the NRTC with the premium
programming for exclusive distribution in those areas. The court, in an order
dated June 17, 1999, denied the NRTC a preliminary injunction on such matters,
without deciding the underlying claims. On July 22, 1999, DIRECTV responded to
the NRTC's continuing lawsuit by denying the NRTC's claims to exclusive rights
and by filing a counterclaim seeking judicial clarification of certain
provisions of DIRECTV's contract with the NRTC. In particular, DIRECTV contends
in its counterclaim that the term of DIRECTV's contract with the NRTC is
measured solely by the orbital life of DBS-1, the first DIRECTV satellite
launched into orbit at the 101(0) WL orbital location, without regard to the
orbital lives of the other DIRECTV satellites at the 101(0) WL orbital location.
DIRECTV also alleges in its counterclaim that the NRTC's right of first refusal,
which is effective at the end of the term of DIRECTV's contract with the NRTC,
does not provide for certain programming and other rights comparable to those
provided under the contract. On September 8, 1999, the court denied a motion by
DIRECTV to dismiss certain of the NRTC's claims, leaving all of the causes of
action asserted by the NRTC at issue.
On September 9, 1999, the NRTC filed a response to DIRECTV's counterclaim
contesting DIRECTV's interpretations of the end of term and right of first
refusal provisions. On August 26, 1999, the NRTC filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
NRTC its share of launch fees and other benefits that DIRECTV and its affiliates
<PAGE>
have received relating to programming and other services. On November 15, 1999,
the court granted a motion by DIRECTV and dismissed the tort claim asserted by
the NRTC, but left in place the remaining claims asserted by the NRTC. The court
also consolidated that lawsuit with the other pending NRTC/DIRECTV lawsuit. The
court set various discovery and motion deadlines for the spring and summer of
2000 but did not set a trial date.
On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that the NRTC's right of first refusal, effective
at the termination of DIRECTV's contract with the NRTC, does not include
programming services and is limited to 20 program channels of transponder
capacity. The hearing date on DIRECTV's motion was vacated by the court pending
resolution of certain procedural issues raised by a new lawsuit we and Pegasus
filed against DIRECTV (discussed below). The court has not yet set a trial date
on the merits of the claims.
On January 10, 2000, we and Pegasus filed a class action lawsuit in federal
court in Los Angeles against DIRECTV as representatives of a proposed class that
would include all members and affiliates of the NRTC that are distributors of
DIRECTV. The complaint contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the class members. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
refusal. The complaint seeks monetary damages and a court order regarding the
rights of the NRTC and its members and affiliates.
On February 10, 2000, we and Pegasus filed an amended complaint which added
new tort claims against DIRECTV for interference with plaintiff's relationships
with manufacturers, distributors and dealers of direct broadcast satellite
equipment. We and Pegasus also withdrew the class action allegations to allow a
new class action to be filed on behalf of the members and affiliates of the
NRTC.
On February 22, 2000, DIRECTV refiled its motion for summary judgment first
filed on December 29, 1999. Again, the hearing date on DIRECTV's motion was
vacated by the court pending resolution of certain procedural issues raised by
the new class action complaint recently filed (discussed below). The court has
not yet set a trial date on the merits of the claims.
On February 29, 2000, certain NRTC Members filed a class action lawsuit in
federal court in Los Angeles against DIRECTV as representatives of a proposed
class that would include all members and affiliates of the NRTC that are
distributors of DIRECTV. The complaint contains causes of action for various
torts, common counts and declaratory relief based on DIRECTV's failure to
provide the NRTC with premium programming, thereby preventing the NRTC from
providing this programming to the class members. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
The outcome of the litigation described above 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. Thus,
if determined adversely, this matter could have a material adverse effect upon
our business, financial condition and results of operations.
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
quarter of 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1999, all 100 authorized, issued and outstanding shares
of our Common Stock ($.01 par value) were held by Golden Sky Holdings. There is
currently no established public trading market for our Common Stock. Further,
there is no established public trading market for the common stock ($.01 par
value) of Golden Sky Holdings.
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. Payment of any future dividends
will depend upon our earnings and capital requirements, our debt facilities, and
other factors the Board of Directors considers appropriate. We currently intend
to retain our earnings, if any, to support future growth and expansion. Our
ability to declare dividends is affected by covenants in our debt facilities
that prohibit us from declaring dividends and our subsidiaries from transferring
funds in the form of cash dividends, loans or advances to us or Golden Sky
Holdings.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our financial and operating information for the
periods indicated. The historical financial information presented below was
taken from our audited consolidated financial statements. Household and
subscriber data presented below reflect 100% of the households and subscribers
comprising our rural DIRECTV markets, including one rural DIRECTV market in
which we acquired less than 100% ownership. In that market, we acquired
approximately 76% ownership. We receive 100% of the revenue generated by all
subscribers in our rural DIRECTV markets. The following should be read in
conjunction with our consolidated financial statements and the notes to those
financial statements and other financial information, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
appearing elsewhere herein.
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services.......................... $ 219 $ 16,452 $ 74,910 $ 139,933
Lease and other....................... 36 944 1,014 640
--------------- --------------- --------------- ---------------
Total revenue............................ 255 17,396 75,924 140,573
Costs and Expenses:
Costs of DBS services................. 130 9,304 45,291 88,690
System operations..................... 26 3,796 11,021 19,733
Sales and marketing................... 73 7,316 32,201 64,933
General and administrative............ 1,035 2,331 7,431 15,708
Depreciation and amortization......... 97 7,300 23,166 35,963
--------------- --------------- --------------- ---------------
Total costs and expenses................. 1,361 30,047 119,110 225,027
--------------- --------------- --------------- ---------------
Operating loss........................... (1,106) (12,651) (43,186) (84,454)
Net interest expense..................... (61) (3,133) (18,964) (42,618)
Other non-operating expenses............. -- -- -- (868)
--------------- --------------- --------------- ---------------
Loss before extraordinary charge......... (1,167) (15,784) (62,150) (127,940)
Extraordinary charge on early
retirement of debt.................... -- -- (2,577) (2,935)
--------------- --------------- --------------- ---------------
Net loss................................. $ (1,167) $ (15,784) $ (64,727) $ (130,875)
=============== =============== =============== ===============
<PAGE>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
OTHER FINANCIAL DATA
EBITDA................................... $(1,009) $ (5,351) $(20,020) $ (48,337)
Net cash used in operating activities.... (790) (3,099) (36,588) (61,102)
Net cash used in investing activities.... (3,231) (120,729) (159,921) (12,232)
Net cash provided by financing
activities............................ 4,500 136,981 187,337 72,115
Capital expenditures..................... 105 998 3,317 3,452
Aggregate purchase price of
acquisitions.......................... 5,256 129,725 124,844 35,339
OPERATING DATA
Households at end of period.............. 22,000 1,135,000 1,727,000 1,861,000
Subscribers acquired in acquisitions..... 3,000 65,300 54,900 18,300
Subscribers added in existing rural
DIRECTV markets....................... 100 21,500 77,200 104,900
Subscribers at end of period............. 3,100 89,900 222,000 345,200
SAC per gross subscriber added........... $290 $280 $320 $380
Penetration at end of period............. 14.1% 7.9% 12.9% 18.5%
DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
BALANCE SHEET DATA
Cash and cash equivalents................ $ 479 $ 13,632 $ 4,460 $ 3,241
Restricted cash:
Current............................... -- -- 28,083 23,731
Long-term............................. -- -- 23,534 --
Working capital.......................... (1,948) 3,827 15,204 (2,234)
Total assets............................. 6,383 156,236 328,071 299,699
Total debt............................... 4,450 69,113 278,204 369,378
Stockholders' equity (deficit)........... (1,166) 70,449 15,922 (114,799)
- ----------------------
Restricted cash represents the amount placed in escrow to fund the first
four scheduled interest payments on Golden Sky Systems' 12 3/8% senior
subordinated notes due 2006. It also includes $5.3 million as of December 31,
1998 that was deposited with the administrative agent under Golden Sky Systems'
credit facility to fund a contingent reduction of availability under the term
loan facility. This contingent reduction did not occur as a result of an
amendment to Golden Sky Systems' credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
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 and is the
basis for many of our financial covenants. As a result, investors may use this
data to analyze and compare other communications companies with us in terms of
operating performance, leverage and liquidity. Further, we believe that EBITDA
provides useful information regarding an entity's ability to incur and/or
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.
SAC per gross subscriber added represents subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our historical consolidated results of
operations, liquidity and capital resources without giving effect to the pending
merger with Pegasus. See "Business - General - Merger with Pegasus
Communications Corporation." This discussion should be read in conjunction with
our consolidated financial statements and the related notes appearing elsewhere
in this report.
OVERVIEW
Company History
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of December 31, 1999, we were the
exclusive provider of DIRECTV programming services to approximately 345,200
subscribers in our rural markets.
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, commonly known as the NRTC. 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, as amended in 1994, 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 57 rural markets in 24 states serving approximately 1.9
million households and 141,500 subscribers. The aggregate purchase price for
these acquisitions totaled approximately $298.5 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. Since inception, we have opened approximately 70 full
service retail stores in our rural DIRECTV markets and operated 68 of these
stores as of December 31, 1999. In addition, we have established dealer
relationships with approximately 450 local retailers of direct broadcast
satellite equipment.
During 1999, we acquired ten rural DIRECTV markets. These markets included
approximately 134,000 households and served approximately 18,300 subscribers as
of the dates of acquisition. The aggregate purchase price for these
acquisitions, including direct acquisition costs, approximated $35.3 million.
Also during 1999, we acquired certain minority ownership interests in our rural
DIRECTV markets for aggregate consideration of $3.4 million. As a result of our
announced merger with Pegasus, we have suspended evaluation of future
acquisition opportunities. To the extent we resume our acquisition activities,
our pace of any future acquisitions may be slower than our historical experience
due to, among other factors, a reduction in the number of attractive acquisition
opportunities and capital constraints.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
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 us 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
<PAGE>
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 year ended December 31, 1999, we:
o used net cash of $61.1 million in operating activities;
o used net cash of $12.2 million in investing activities; and
o provided net cash of $72.1 million from financing activities.
During the year ended December 31, 1998 we:
o used net cash of $36.6 million in operating activities;
o used net cash of $159.9 million in investing activities; and
o provided net cash of $187.4 million from financing activities.
During the year ended December 31, 1997 we:
o used net cash of $3.1 million in operating activities;
o used net cash of $120.7 million in investing activities; and
o provided net cash of $137.0 million from financing activities.
Churn
Our rate of subscriber disconnect, or churn, has increased in recent periods
on both an average monthly and last twelve months basis. During 1999, our
average monthly churn approximated 1.8%, compared to 0.8% during 1998. For the
twelve-month periods ended December 31, 1999 and 1998, our churn rate
approximated 15.9% and 7.5%, respectively. 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.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
<PAGE>
RESULTS OF OPERATIONS
The following table presents some of the items from our consolidated
statements of operations as a percentage of total revenue for the periods noted.
<TABLE>
<CAPTION>
INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------
1996 1997 1998 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
DBS services........................ 85.9 % 94.6 % 98.7 % 99.5%
Lease and other..................... 14.1 5.4 1.3 0.5
---------------- --------------- ---------------- ----------------
Total revenue.......................... 100.0 100.0 100.0 100.0
Costs and Expenses:
Costs of DBS services............... 51.0 53.5 59.7 63.1
System operations................... 10.2 21.8 14.5 14.0
Sales and marketing................. 28.6 42.0 42.4 46.2
General and administrative.......... 405.9 13.4 9.8 11.2
Depreciation and amortization....... 38.0 42.0 30.5 25.6
---------------- --------------- ---------------- ----------------
Total costs and expenses............... 533.7 172.7 156.9 160.1
---------------- --------------- ---------------- ----------------
Operating loss......................... (433.7) (72.7) (56.9) (60.1)
Net interest expense and other......... (23.9) (18.0) (25.0) (30.9)
---------------- --------------- ---------------- ----------------
Loss before extraordinary charge....... (457.6)% (90.7)% (81.9)% (91.0)%
================ =============== ================ ================
</TABLE>
Revenue. We earn revenue by providing DIRECTV programming services to
subscribers within our rural DIRECTV markets. DBS services revenue includes any
combination of various monthly program service plans, additional monthly premium
channel program upgrades, seasonal sports programming packages, one-time event
programming on a pay-per-view basis and miscellaneous fee revenue related to
providing programming to subscribers. Lease and other revenue principally is
comprised of revenue from the rental of DBS equipment to subscribers.
Costs of DBS Services. Our largest cost of providing service to our
subscribers is the wholesale cost of DIRECTV programming and related services.
The principal components of programming costs include miscellaneous service fees
and programming costs paid to the NRTC and a 5% royalty based on programming
revenue paid to DIRECTV.
System Operations. System operations expenses include costs of our national
call center operations, field office operations and other subscriber service
expenses. We expect that these expenses will increase to the extent we continue
to make acquisitions and open additional, or expand existing, field offices.
However, many of these costs are fixed in nature and we do not expect that these
expenses will increase in direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses include advertising,
promotional expenses, marketing personnel expenses, commissions paid to our
employees and outside sales agents, net equipment and installation costs and
other marketing overhead costs. We subsidize the cost to the consumer of DBS
equipment and the cost of installation of DBS equipment. Equipment and
installation revenues and related expenses are recognized upon the delivery and
installation of DBS equipment. Net transaction costs associated with the sale
and installation of DBS equipment are reported as a component of sales and
marketing expenses in our statement of operations. We invest significantly to
develop our sales and distribution systems and to acquire new subscribers. A
large part of our sales and marketing expense is comprised of costs related to
the addition of new subscribers. Although we anticipate continuing to incur
these costs as we build our subscriber base, these costs are not expected to
increase in direct proportion to revenue.
General and Administrative. General and administrative expenses include
corporate general office and administration expenses incurred primarily at our
Kansas City corporate office. We expect that these expenses will increase as we
<PAGE>
grow and continue to expand our infrastructure. However, since many of these
expenses are fixed in nature, general and administrative expenses are not
expected to increase in direct proportion to increases in subscribers and
revenue.
Depreciation and Amortization. Depreciation and amortization includes
amortization of intangible assets associated with acquisitions and depreciation
of property and equipment.
Income Taxes. We are subject to income taxation under Subchapter C of the
Internal Revenue Code. To date, we have not recognized any income tax benefit
for financial reporting purposes because we have incurred operating losses in
all periods, and realization of future tax benefits is uncertain. As of December
31, 1999, we had net operating loss carryforwards for federal income tax
purposes of approximately $179.0 million. These net operating loss carryforwards
expire beginning in 2011.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenue. DBS services revenue for the year ended December 31, 1999 totaled
$139.9 million, which represented an 87% increase as compared to 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 1999 increased
to approximately 285,400, compared to approximately 151,100 during 1998. Average
monthly revenue per subscriber approximated $41.00 and $41.75 during those same
periods. The decrease in revenue per subscriber resulted primarily from lower
revenues from distant broadcast network services and lower sports programming
revenues. Distant broadcast network services revenue decreased as a result of an
agreement between DIRECTV and the National Association of Broadcasters. Pursuant
to that agreement, 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 adversely impacted our
revenues and contributed to our increased churn. We do not anticipate any
further termination of these services to our existing subscribers as a result of
federal legislation that was enacted in November 1999.
Costs of DBS Services. Costs of DBS services increased $43.4 million, or
96%, during 1999 to $88.7 million. This increase resulted from the 89% 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 total revenue, the costs of DBS services increased to 63.1% during 1999,
compared to 59.7% during 1998. This increase resulted from the higher fees
charged by DIRECTV previously described.
System Operations. System operations expenses totaled $19.7 million during
the year ended December 31, 1999, an $8.7 million increase, or 79%, over 1998.
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 decreased to 14.0% during 1999, from 14.5% during 1998. This
decrease in system operations expenses as a percentage of total revenues
resulted primarily from scale economies realized from our larger subscriber
base.
Sales and Marketing. Sales and marketing expenses totaled $64.9 million
during the year ended December 31, 1999, an increase of $32.7 million, or 102%,
compared to the year ended December 31, 1998. Sales and marketing costs per new
subscriber activation approximated $380 and $320 during the years ended December
31, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
o an 82% increase in the number of new subscriber activations during 1999;
o higher subscriber acquisition costs associated with our conversions of
Primestar subscribers to our DIRECTV service;
o increased equipment and installation subsidies provided 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
<PAGE>
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 30% of our gross subscriber additions
during 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 in future periods. Consequently, while there can be no assurance,
we anticipate that our subscriber acquisition costs per new subscriber
activation will decrease in future periods.
General and Administrative. During the year ended December 31, 1999, general
and administrative expenses totaled $15.7 million, compared to $7.4 million
during 1998. As a percentage of total revenue, general and administrative
expenses increased to 11.2% during 1999, from 9.8% during 1998. These increases
in general and administrative expenses resulted from the addition of
administrative resources necessary to support our growth and increased bad debts
expenses. Our bad debts expenses increased from $1.5 million, or 2.0% of total
revenue, during 1998, to $4.1 million, or 2.9% of total revenue, during 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 year ended December 31, 1999 totaled negative $48.3
million, compared to EBITDA of negative $20.0 million during the year ended
December 31, 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 $12.8 million to $36.0 million during the year ended December 31,
1999, compared to $23.2 million during the year ended December 31, 1998. This
increase reflects the amortization of higher intangible asset balances resulting
from our acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $45.0 million during the year
ended December 31, 1999 and $20.5 million during 1998. This increase of $24.5
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% senior subordinated notes due
2006 in July 1998 and the issuance of our 13 1/2% discount notes due 2007 in
February 1999.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. DBS services revenue for the year ended December 31, 1998 totaled
$74.9 million, which represented a 355% increase as compared to the prior year.
This increase was principally attributable to the increase in the number of
subscribers. The average number of subscribers during 1998 increased to
approximately 151,100, compared to approximately 33,200 during 1997. Average
monthly revenue per subscriber approximated $41.75 and $43.75 during these same
periods. The decrease in average monthly revenue per subscriber principally
resulted from lower lease and other revenues during 1998.
Costs of DBS Services. Costs of DBS services increased $36.0 million, or
387%, during 1998, to $45.3 million. This increase is consistent with the
increase in the average number of subscribers. As a percentage of total revenue,
the costs of DBS services increased to 59.7% during 1998, compared to 53.5% in
1997. This increase resulted largely from increased programming costs.
System Operations. System operations costs totaled $11.0 million for the
year ended December 31, 1998, a $7.2 million increase, or 190%, over 1997. These
costs rose as a result of the increased number of field offices and related
activity resulting from our continued acquisition of rural DIRECTV markets, as
well as from subscriber growth. As a percentage of total revenue, system
operations expenses declined to 14.5% for the year ended December 31, 1998, from
<PAGE>
21.8% during the year ended December 31, 1997. The decrease in system operations
expenses as a percentage of total revenues resulted from the increases in
subscribers and revenues previously described.
Sales and Marketing. Sales and marketing expenses totaled $32.2 million
during the year ended December 31, 1998, an increase of $24.9 million compared
to the previous year. This increase principally resulted from the 265% increase
in new subscriber activations during 1998, as compared to 1997. Sales and
marketing costs per new subscriber activation approximated $320 during the year
ended December 31, 1998 and $280 during the year ended December 31, 1997.
General and Administrative. During the year ended December 31, 1998, general
and administrative expenses totaled $7.4 million, compared to $2.3 million
during 1997. The increase in general and administrative expenses resulted from
the addition of administrative resources necessary to support our growth. As a
percentage of total revenue, general and administrative expenses decreased to
9.8% during the year ended December 31, 1998, from 13.4% during 1997. This
decrease reflects the continued leveraging of these costs, which are partially
fixed in nature, over increased subscribers and revenues.
EBITDA. EBITDA for the year ended December 31, 1998 totaled negative $20.0
million, compared to EBITDA of negative $5.4 million during the same period in
1997. 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 $15.9 million to $23.2 million during the year ended December 31,
1998, compared to $7.3 million during the year ended December 31, 1997. This
increase resulted from higher intangible assets balances, which resulted from
our acquisition of additional rural DIRECTV markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998, as compared to $3.2 million during 1997. This increase
of $17.3 million primarily resulted from higher outstanding debt balances and,
to a lesser degree, from an increase in weighted-average interest costs.
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. 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 with minimal additional sales and marketing expense. Provided 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.
Improvement in our results of operations is principally dependent upon our
ability to cost effectively expand our subscriber base, control subscriber churn
and effectively manage our operating and overhead costs. We plan to reduce our
future operating and overhead costs by transitioning from a principally direct
sales distribution model to a largely indirect, retail sales distribution model.
Accordingly, during the year ending December 31, 2000 we plan, among other
things, to:
o close approximately 30 of our local sales offices;
o reduce our corporate overhead expenses through headcount and other expense
reductions; and
o increase the number of third-party retailers of our direct broadcast
satellite television service in our rural DIRECTV markets.
<PAGE>
We estimate that we will incur aggregate, non-recurring costs of approximately
$1.5 million in connection with these actions. These costs are expected to
primarily consist of employee severance and lease termination costs.
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 and related minority interests, totaled $40.2 million during
1999, $107.8 million during 1998 and $121.0 million during 1997. Net cash used
in operations totaled $61.1 million in 1999, $36.6 million in 1998 and $3.1
million in 1997.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under Golden Sky Systems' bank credit facility,
proceeds from the offering of Golden Sky Systems' 12 3/8% Notes, proceeds from
the offering of our 13 1/2% Notes, proceeds from the issuance of Golden Sky
Holding's capital stock, and to a lesser extent, the issuance of promissory
notes to sellers of rural DIRECTV markets.
During the year ended December 31, 1999, our net cash flows from financing
activities totaled $72.1 million. This was comprised of:
o net proceeds of $100.0 million from the offering of our 13 1/2% discount
notes;
o net repayments of $15.0 million under Golden Sky Systems' bank credit
facility;
o repayments of other debt totaling $8.8 million;
o increased deferred financing costs of $5.5 million resulting from the
issuance of our 13 1/2% discount notes and the amendment of Golden Sky
Systems' bank credit facility; and
o capital contributions of $1.4 million received from certain minority
interest holders.
In 1998, our net cash flows from financing activities of $187.3 million were
comprised of:
o net proceeds of $189.2 million from the offering of Golden Sky Systems' 12
3/8% Notes;
o net borrowings of $7.0 million under Golden Sky Systems' bank credit
facility;
o deferred financing costs of $5.2 million resulting from the amendment of
Golden Sky Systems' bank credit facility and the offering of Golden Sky
Systems' 12 3/8% Notes; and
o $3.7 million of repayments on other debt.
In 1997, our net cash flows from financing activities of $137.0 million were
comprised of:
o $81.1 million from the issuance of preferred stock;
o deferred financing costs of $3.3 million resulting from the execution of
Golden Sky Systems' bank credit facility; and
o $59.2 million of net borrowings under Golden Sky Systems' bank credit
facility and other indebtedness.
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 December 31,
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 $19.6 million of the letter of credit
<PAGE>
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 (approximately 10.0% as of December 31, 1999)
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.
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by its credit facility. During
January 2000, Golden Sky Systems completed an amendment to the credit facility.
The amendment, which was effective as of December 31, 1999, waived Golden Sky
Systems' third quarter 1999 covenant violations and amended certain fourth
quarter 1999 and year 2000 covenant requirements. Pursuant to the amendment,
Golden Sky Systems may borrow up to an additional $20.0 million under the credit
facility prior to March 31, 2000. Any such incremental borrowings, which are
secured by letters of credit provided by certain of Golden Sky Holdings'
shareholders, must be repaid by March 31, 2000 from the proceeds of either a
private or public equity offering. The required repayment date relative to these
year 2000 incremental borrowings may be deferred until May 31, 2000 under
certain conditions. Upon repayment of the incremental borrowings in March (or
prior to May 31 if the repayment date is extended), Golden Sky Systems will have
potential incremental borrowing capacity during the year ending December 31,
2000 equal to the lesser of the proceeds received from either a public or
private equity offering or $20.0 million. Coincident with the amendment of the
credit facility, Golden Sky Holdings entered into stock subscription agreements
with certain of its shareholders for an aggregate of $20.0 million of its
preferred stock. Also in January 2000, the credit facility was further amended
to approve the change in ownership of Golden Sky that would result from the
merger with Pegasus. As of December 31, 1999, Golden Sky Systems was in
compliance with the credit facility's amended covenants.
12 3/8% Notes
On July 31, 1998, Golden Sky Systems completed the sale of $195.0 million
aggregate principal amount at maturity of its 12 3/8% Notes. Interest on the 12
3/8% Notes is payable in cash semi-annually on February 1 and August 1 of each
year. The 12 3/8% Notes mature on August 1, 2006. The offering of these notes
resulted in net proceeds of approximately $189.2 million after payment of
underwriting discounts and other issuance costs. In the event the merger with
Pegasus is consummated, Golden Sky Systems will be required to make an offer to
the holders of the 12 3/8% Notes to purchase those notes for 101% of their
principal amount plus accrued interest. If Golden Sky Systems' offer for the 12
3/8% Notes is accepted by any of its note holders, and it is unable to purchase
those notes, Golden Sky Systems may be in default of the terms of the 12 3/8%
Notes Indenture. Pegasus has entered into a commitment letter with an investment
bank under which that investment bank has agreed to purchase any and all 12 3/8%
Notes tendered in response to Golden Sky Systems' offer to purchase. This
commitment is subject to the execution of definitive documentation and customary
closing conditions. There can be no assurance that Pegasus will be able to agree
on definitive documentation with the investment bank or make alternative
arrangements if necessary.
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. In the event the merger with Pegasus is consummated, we will be
required to make an offer to the holders of our 13 1/2% Notes to purchase those
notes for 101% of their accreted value plus accrued interest. If our offer for
the 13 1/2% Notes is accepted by any of our note holders, and we are unable to
purchase those notes, we may be in default of the terms of the 13 1/2% Notes
Indenture. Pegasus has entered into a commitment letter with an investment bank
under which that investment bank has agreed to purchase any and all 13 1/2%
Notes tendered in response to our offer to purchase. This commitment is subject
to the execution of definitive documentation and customary closing conditions.
There can be no assurance that Pegasus will be able to agree on definitive
<PAGE>
documentation with the investment bank or make alternative arrangements if
necessary.
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 our working capital needs
necessary to accommodate such growth. 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, 2000.
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. On
January 10, 2000, we and Pegasus filed a lawsuit against DIRECTV and Hughes in
the United States District Court, Central District of California. The action
asserts various claims, including intentional interference with contractual
relations and interference with prospective economic advantage, and seeks
declaratory relief. The claims are based on DIRECTV's failure to provide the
NRTC with certain premium programming, thereby preventing the NRTC from
providing this premium programming to the class action members. The claims are
also based on DIRECTV's position with respect to launch fees and other benefits
it has received, contract term and rights of refusal. See "Business - Legal
Proceedings." The outcome of this matter 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. Thus, if
determined adversely, this matter could have a material adverse effect upon our
business, financial condition and results of operations.
During 1999, we acquired ten rural DIRECTV markets. These markets included
approximately 134,000 households and served approximately 18,300 subscribers as
of the dates of acquisition. The aggregate purchase price for these
acquisitions, including direct acquisition costs, approximated $35.3 million. As
noted above under "- Overview - Company History," we have suspended evaluation
of future acquisition opportunities as a result of the pending merger with
Pegasus. To the extent we resume our acquisition activities and 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 December 31, 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.
Our ability to pay dividends and make other distributions and advances is
subject to, among other things, the terms of our 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 Golden Sky
Systems will be in compliance with these covenants at the time of a required
interest payment on our 13 1/2% Notes. 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.
Golden Sky Systems' 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
<PAGE>
likely preclude us from being able to access Golden Sky Systems' cash flow for
these initial interest payments.
As of December 31, 1999, we had unrestricted cash on hand of approximately
$3.2 million. While there can be no assurance, we believe we have sufficient
cash and availability under Golden Sky Systems' amended bank credit facility to
finance our expected internal growth through at least December 31, 2000. There
are a number of factors, some of which may be beyond our control or ability to
predict, that could require us to raise additional capital. 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.
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. During 1999,
we undertook an effort to identify and correct any potential year 2000 issues
that may have existed with our information systems, suppliers and facilities. As
of the date of this report, our business has not been affected by the year 2000
issue. We will continue to monitor the impact of the year 2000 issue on our
business throughout the year ending December 31, 2000. There can be no assurance
that the year 2000 issue will not adversely affect our business, financial
condition or results of operations in future periods.
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.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS 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, we have no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on our business, financial position or results of operations.
ITEM 7A. 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 December 31, 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
<PAGE>
base rate, which is either the lenders' prime rate or LIBOR, plus an applicable
margin.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Golden Sky DBS, Inc. required by
this item are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive
officers and directors as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------- --- ----------------------------------------
<S> <C> <C>
Rodney A. Weary........................................ 49 Chairman of the Board, Chief Executive
Officer and Director
John R. Hager.......................................... 38 Chief Financial Officer
William J. Gerski...................................... 47 Senior Vice President, Sales
and Marketing
Scott R. Brown......................................... 34 Vice President, Operations
Gordon Smith........................................... 57 Vice President, Human Resources
Jo Ellen Linn.......................................... 38 Secretary and General Counsel
Robert F. Benbow(1).................................... 63 Director
William O. Charman..................................... 36 Director
William P. Collatos(1)................................. 45 Director
William A. Johnston(1)(2).............................. 47 Director
Robert B. Liepold(2)................................... 73 Director
34 Director
Erik M. Torgerson(2)...................................
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS
Rodney A. Weary. Mr. Weary founded Golden Sky Systems in June 1996 and has
been its Chief Executive Officer since inception. Until 1995, he was President
of Cable Video Enterprises Inc., which he formed in 1986 by acquiring
traditional cable systems located in three states. From 1988 to December 1994,
Mr. Weary was a co-founder, officer and director of Premiere Page, a paging
company.
John R. Hager. Mr. Hager has been our Chief Financial Officer since October
1998. Mr. Hager joined us in August 1998 as Vice President, Finance and
Controller. From February 1997 until August 1998, Mr. Hager was Vice President--
Controller of EchoStar. He was the Controller of American Telecasting, Inc. from
August 1993 until February 1997. Prior to joining American Telecasting in 1993,
Mr. Hager was with Ernst & Young, where he was an Audit Senior Manager.
William J. Gerski. Mr. Gerski has been our Senior Vice President, Sales and
Marketing since July1999. Mr. Gerski joined us in May 1997 as our Vice
President, Sales and Marketing. From May 1996 to April 1997, Mr. Gerski was
Regional Director of Marketing and Sales at American Telecasting, Inc. From
December 1995 to May 1996, Mr. Gerski was Vice President of Marketing and Sales
of Bell Atlantic Video Services. From April 1990 through November 1995, Mr.
Gerski was Corporate Director of Sales at Adelphia Cable Communications.
Scott R. Brown. Mr. Brown has been our Vice President of Operations since
February 1999. Mr. Brown held the position of Vice President of Fulfillment
Operations with Primestar, Inc. from April 1998 to February 1999 and was the
Vice President of Operations with TCI Satellite Entertainment, Inc. from
November 1995 to March 1998. From May 1989 to November 1995 Mr. Brown held
several positions with Tele-Communications, Inc, including General Manager of
<PAGE>
TCI Cable of Westchester, General Manager of TCI Cablevision of Pinellas County,
Business Manager of TCI Cablevision of Dade/Broward County, and Internal Auditor
of TCI North Central Division.
Gordon G. Smith. Mr. Smith has been our Vice President of Human Resources
since May 1999. From 1998 to 1999, Mr. Smith was a Principal of Somerset
Partners, a human resources consulting firm. From 1990 to 1998 Mr. Smith was
Vice President of Human Resources, Health Care Services at Olsten Corporation.
Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since
inception. From 1993 to 1996, Ms. Linn was General Counsel to Cable Video
Management, Inc., a communications management company and the former Cable Video
Enterprises, Inc., which owned and operated domestic cable television systems.
Ms. Linn is licensed to practice law in Kansas and Texas.
BACKGROUND OF DIRECTORS
Robert F. Benbow. Mr. Benbow has been a director since February 1997. He is
a Vice President of Burr, Egan, Deleage & Co. , a private venture capital firm,
and a managing general partner of Alta Communications Inc. Prior to joining
Burr, Egan Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New
England N.A., where he was Senior Vice President responsible for special
industries lending in the areas of media, project finance and energy.
Additionally, he serves as a director of Diginet Americas, Inc., a fixed
wireless local loop service provider throughout South America; Advanced Telcom
Group, Inc., a competitive local exchange carrier; and Preferred Networks, Inc.,
a public paging company.
William O. Charman. Mr. Charman has been a director since March 1997. He has
served as a Vice President of BancBoston Capital since 1995. From 1993 to 1995,
Mr. Charman was a Director and team leader for Bank of Boston's Media &
Communications Group in London.
William P. Collatos. Mr. Collatos has been a director since March 1997. He
is a managing general partner of Spectrum Equity Investors, a private equity
investment firm focused on the communication services, networking
infrastructure, electronic commerce and media industries, which he founded in
1993. He serves as a director of Galaxy Telecom, L.P., which owns, operates and
develops cable television systems; ITXC Corp., a global provider of
Internet-based voice, fax and voice-enabled services; and JazzTel, a competitive
local exchange provider based in Madrid, Spain.
William A. Johnston. Mr. Johnston has been a director since November 1997.
He is a Managing Director of HarbourVest Partners, LLC and has served in a
variety of capacities for HarbourVest Partners, LLC and its predecessor, Hancock
Venture Partners, Inc., since 1983.
Robert B. Liepold. Mr. Liepold has been a director since inception. Mr.
Liepold has been President and Chief Executive Officer of KCWE-TV, an
independent commercial television station operating in Kansas City, Missouri,
since 1994. Since 1983, Mr. Liepold also has been a consultant to the
telecommunications industry.
Erik M. Torgerson. Mr. Torgerson has been a director since November 1997. He
is a partner at Norwest Equity Partners. Prior to joining Norwest Equity
Partners in 1993, Mr. Torgerson was with Arthur Anderson & Co.'s financial
consulting and audit practice.
Each of our Directors has been elected pursuant to the terms of the
Stockholders' Agreement. See "Certain Relationships and Related Transactions --
Stockholders' Agreement."
All directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, we reimburse non-management directors for expenses incurred in
attending meetings of the Board of Directors.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal years ended December 31, 1997, 1998 and 1999 as to the Chief Executive
Officer and our four other highest paid executive officers whose total annual
salary and bonus exceeded $100,000 (the "Named Executive Officers"):
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION ($)
- ---------------------------------------- ------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary 1999 $249,996 $ 87,500 21,884 $5,600 (1)
Chief Executive Officer, Chairman 1998 227,462 90,000 21,884 7,945 (1)
of the Board of Directors 1997 198,818 50,000 21,884 --
John R. Hager 1999 166,851 65,800 10,000 --
Chief Financial Officer 1998 43,892 50,000 10,000 47,675 (2)
William J. Gerski 1999 188,463 70,000 15,000 14,697 (3)
Senior Vice President, Sales 1998 153,270 80,000 15,000 --
and Marketing 1997 60,259 50,000 12,182 --
Jo Ellen Linn 1999 109,993 26,950 3,226 --
Secretary and General Counsel 1998 93,061 32,500 2,501 --
1997 80,926 25,000 2,501 --
Scott R. Brown 1999 116,597 55,020 4,000 65,429 (2)
Vice President, Operations
(1) Represents compensation attributable to Mr. Weary's use of a company- owned
vehicle.
(2) Represents compensation related to a relocation allowance provided to the
named executive officer.
(3) Represents compensation attributable to a vehicle allowance provided to Mr.
Gerski.
</TABLE>
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 1999:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION FOR OPTION
UNDERLYING SARS GRANTED EXERCISE OF TERM
OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---------------------------------- ------------ -------------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary........................ -- -- -- -- -- --
John R. Hager.......................... -- -- -- -- -- --
William J. Gerski...................... -- -- -- -- -- --
Jo Ellen Linn.......................... 725 6.25% $ 1.00 8/16/2009 $ 1,181 $ 1,881
Scott R. Brown.........................4,000 34.48% 1.00 2/1/2009 6,516 10,376
</TABLE>
<PAGE>
<TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR-END (#) FISCAL YEAR-END ($) (1)
EXERCISE REALIZED -------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ------------- ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary........................ -- -- 7,294 4,864 $4,077,346 $2,718,976
John R. Hager.......................... -- -- 4,444 5,556 2,484,196 3,105,804
William J. Gerski...................... -- -- 6,252 3,334 3,494,868 1,863,706
Jo Ellen Linn.......................... -- -- 894 1,221 499,746 682,539
Scott R. Brown......................... -- -- 1,222 2,778 683,098 1,552,902
(1) Based on a value of $559.00 per share, which was the approximate fair
value of the Golden Sky Holdings common stock on January 10, 2000, the
date the merger agreement with Pegasus was executed, based upon the
value on that date of the merger consideration to be received.
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1997, we entered into non-competition agreements with Mr. Weary
and Ms. Linn, the terms of which preclude each of them from competing with us
during their respective periods of employment and for two years thereafter in
any market in North America in which we operate or intend to operate.
In February 1997, we entered into an employment agreement with Mr. Weary
pursuant to which he agreed to serve as our President and Chief Executive
Officer through February 2000. Such agreement may be extended according to its
terms. Under the agreement, Mr. Weary is paid compensation in the amount of
$200,000 per year, subject to adjustments, and is eligible to participate in our
stock option plan. In the event that Mr. Weary's employment is terminated by the
Company for any reason other than for "Cause" or by Mr. Weary for "Good Reason"
following a "Change of Control," Mr. Weary shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of his
termination, said payments to be made for the remainder of his Employment Period
(as defined in the agreement) on the same periodic dates as would have been
required had Mr. Weary not been terminated, (ii) continuation of Mr. Weary's
group health plan benefits, and (iii) a lump sum payment equal to such portion
of Mr. Weary's cash "Incentive Compensation" for the then-current fiscal year as
shall be prorated for a partial year based on the period worked for the Company
during such year and the satisfaction of any applicable objectives prior to the
date of his termination.
Also during 1997, we entered into substantially similar employment
agreements with Ms. Linn and Mr. Gerski, pursuant to which each of them agreed
to serve us in their present capacity through February 2000 for Ms. Linn and
November 2000 for Mr. Gerski. These agreements may be extended according to
their terms. Under the agreements, Ms. Linn is paid compensation in an amount
not less than $82,500 per year, and Mr. Gerski is paid compensation in an amount
not less than $100,000 per year. Each is also eligible to participate in our
stock option plan. In the event that either agreement is terminated by the
Company for any reason other than for "Cause" or by the employee for "Good
Reason" following a "Change of Control," the employee shall be entitled to
receive (i) continued payment of the employee's annual salary as in effect as of
the date of termination, said payments to be made for a period of six months
following the date of termination (or, in the event of a termination by the
employee for "Good Reason," for a period of 12 months following the date of
termination) on the same periodic dates as would have been required had the
employee not been terminated, (ii) continuation of the employee's group health
plan benefits, and (iii) a lump sum payment equal to such portion of the
employee's cash "Incentive Compensation" for the then-current fiscal year as
shall be prorated for a partial year based on the period worked for the Company
during such year and the satisfaction of any applicable objectives prior to the
date of termination. We also entered into a non-competition agreement with Mr.
Gerski in November 1997. The terms of the non-competition agreement preclude Mr.
Gerski from competing with us during the term of his employment and for a period
of two years thereafter in any market in the United States in which we operate
and require Mr. Gerski to maintain the confidentiality of our proprietary
information during the period of his employment and thereafter.
<PAGE>
In August 1998, we entered into an employment agreement with Mr. Hager
pursuant to which Mr. Hager agreed to serve us in his current capacity through
August 2001. The employment agreement may be extended in accordance with its
terms. Mr. Hager is paid compensation under the employment agreement in an
amount not less than $120,000 per year and is eligible to participate in our
stock option plan. In the event that the agreement is terminated by the Company
for any reason other than for "Cause" or by Mr. Hager for "Good Reason"
following a "Change of Control," Mr. Hager shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of
termination, said payments to be made for a period of six months following the
date of termination (or, in the event of a termination by Mr. Hager for "Good
Reason," for a period of 12 months following the date of termination) on the
same periodic dates as would have been required had he not been terminated, (ii)
continuation of his group health plan benefits, and (iii) a lump sum payment
equal to such portion of his cash "Incentive Compensation" for the then-current
fiscal year as shall be prorated for a partial year based on the period worked
for the Company during such year and the satisfaction of any applicable
objectives prior to the date of his termination. We also entered into a
non-competition agreement and a confidentiality and proprietary rights agreement
with Mr. Hager in August 1998. The terms of the non-competition agreement
preclude Mr. Hager from competing with us during the term of his employment and
for two years thereafter in any market in the United States in which we operate
or intend to operate. The confidentiality and proprietary rights agreement
requires Mr. Hager to maintain the confidentiality of our proprietary
information during the period of his employment and thereafter.
In February 1999, we entered into an employment agreement with Mr. Brown
pursuant to which Mr. Brown agreed to serve us in his current capacity through
February 2002. The employment agreement may be extended in accordance with its
terms. Mr. Brown is paid compensation under the employment agreement in an
amount not less than $129,000 per year and is eligible to participate in our
stock option plan. In the event that the agreement is terminated by the Company
for any reason other than for "Cause" or by Mr. Brown for "Good Reason"
following a "Change of Control," Mr. Brown shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of
termination, said payments to be made for a period of six months following the
date of termination on the same periodic dates as would have been required had
he not been terminated, (ii) continuation of his group health plan benefits,
(iii) a lump sum payment equal to such portion of his cash "Incentive
Compensation" for the then-current fiscal year as shall be prorated for a
partial year based on the period worked for the Company during such year and the
satisfaction of any applicable objectives prior to the date of his termination,
and (iv) a release from certain obligations contained in Mr. Brown's
non-competition agreement with the Company. We also entered into a
non-competition agreement with Mr. Brown in February 1999. The terms of the
non-competition agreement preclude Mr. Brown from competing with us during the
term of his employment and for six months thereafter in any market in the United
States in which we operate and require Mr. Brown to maintain the confidentiality
of our proprietary information during the period of his employment and
thereafter.
STOCK OPTION PLAN
In July 1997, our board of directors adopted our Stock Option and Restricted
Stock Purchase Plan to provide our employees, officers and directors with an
opportunity to invest in our common stock and to advance the interests of Golden
Sky Systems and its stockholders. Effective September 9, 1997, the plan was
assumed by Golden Sky Holdings.
The plan permits our board of directors to grant incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, non-qualified stock options within the meaning of Treasury Regulations
Section 1.83-7 and restricted stock awards to our officers, directors and
employees. The maximum number of shares of our common stock that may be subject
to options or awards granted under the plan may not exceed, in the aggregate,
85,218 shares. Shares of our common stock that are attributable to grants or
awards that have expired or been terminated, cancelled or forfeited are
available for issuance in connection with future grants or awards. The
Compensation Committee of our Board of Directors administers the plan, makes
grants and awards under the plan and establishes the terms and conditions of the
grants and awards.
<PAGE>
401(K) PLAN
We maintain a 401(k) savings plan for our full-time employees, which permits
employee contributions up to 15% of annual compensation to the plan on a pre-tax
basis. In addition, we may make contributions on a discretionary basis as a
percentage of each participating employee's annual compensation. We may also
make additional discretionary contributions to this plan in any plan year up to
the annual 401(k) plan contribution limits as defined in the Internal Revenue
Code. This plan is administered by the Compensation Committee of our Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Benbow, Mr. Collatos and Mr. Johnston were the members of the
Compensation Committee of the Board of Directors as of December 31, 1999. No
member of the Compensation Committee was an officer or employee of Golden Sky or
its subsidiaries during 1999, or an officer of Golden Sky or its subsidiaries at
any time prior to 1999. During 1999, none of the Named Executive Officers served
as a director or member of the compensation committee of another entity, one of
whose executive officers served as a director or member of our Compensation
Committee.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our issued and outstanding capital stock is owned by Golden Sky
Holdings. The following table sets forth certain information as of December 31,
1999, regarding the ownership of Golden Sky Holdings' common stock; Series A
Convertible Participating Preferred Stock, $.01 par value; Series B Convertible
Participating Preferred Stock, $.01 par value; and Series C Senior Convertible
Preferred Stock, $.01 par value, by (i) certain stockholders or groups of
related stockholders who, individually or as a group, are the beneficial owners
of 5% or more of any class of Golden Sky Holdings' capital stock and (ii) our
executive officers and directors. Beneficial ownership percentages of Golden Sky
Holdings' common stock presented below are significantly affected by the
securities convertible into or exercisable for Golden Sky Holdings common stock
held by each stockholder. Except as required by law or Golden Sky Holdings'
Certificates of Designation, holders of Golden Sky Holdings' common stock are
notentitled to vote as a separate class on matters presented for stockholder
approval.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
------------------------------------------------------------------------------------ DILUTED
% OF % OF % OF % OF VOTING
NAME (1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES (2) CLASS (3) POWER
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS
Alta Subordinated Debt
Partners III, L.P. (4)... 55,532.00 13.3% 11,125.24 4.9% -- --% 2,116.00 7.7% 8.9%
Alta Communications VI,
L.P. (4).................. 92,365.00 22.1 18,504.38 8.1 -- -- 3,522.00 12.2 14.8
Alta-Comm S By S, LLC (4). 2,103.00 * * -- -- 81.00 * *
421.84
Spectrum Equity Investors 50,000.00 12.0 -- -- -- -- 12.00 * 6.5
L.P. (5)..................
Spectrum Equity Investors II
L.P. (5).................. 100,000.00 23.9 -- -- -- -- 25.00 * 13.0
BancBoston Ventures Inc. (6) 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4
Norwest Equity Partners VI,
L.P. (7).................. -- -- 50,083.75 21.9 -- -- -- -- 6.5
Norwest Venture Partners
VI, L.Pl (7)............. -- -- 25,041.87 11.0 -- -- -- -- 3.3
HarbourVest Partners
V-Direct Fund L.P. (8)... -- -- 75,125.62 32.9 -- -- -- -- 9.8
Lion Investments Limited (9) -- -- 5,010.76 2.2 -- -- -- -- *
Westpool Investment Trust
plc (9)................... -- -- 15,031.27 6.6 -- -- -- -- 2.0
General Electric Capital
Corporation (10)......... -- -- 15,000.00 6.6 -- -- -- -- 2.0
Harold Poulson (11)....... 100.00 - -- -- 21,350.76 37.0 21,450.76 45.7 2.8
Jack S. Ramirez and Carol
H. Ramirez (12).......... -- -- -- -- 7,873.10 13.6 7,873.10 26.2 1.0
Joyce Travis, Trustee of
the Travis Living Trust
Dated the 5th day of -- -- -- -- 5,337.68 9.3 5,337.68 17.4 *
March, 1998 (13).........
James and Constance R.
Hertz (14)............... -- -- -- -- 3,754.93 6.5 3,754.93 14.0 *
Maxon R. and Kristina Davis
(15)..................... -- -- -- -- 3,385.89 5.9 3,385.89 11.8 *
Louise A. Davis (16)...... -- -- -- -- 3,308.68 5.7 3,308.68 11.5 *
Jay and Marla Downen (17). -- -- -- -- 3,088.10 5.4 3,088.10 10.8 *
Chris J. Downen (19)...... -- -- -- -- 4,628.01 8.0 4,628.01 15.4 *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
------------------------------------------------------------------------------------ DILUTED
% OF % OF % OF % OF VOTING
NAME (1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES (2) CLASS (3) POWER
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Rodney A. Weary (20) (21). 16,030.00 3.8 -- -- -- -- 18,240.00 53.8 4.5
John R. Hager (21) (22)... -- -- -- -- -- -- 5,000.00 16.4 *
William J. Gerski (21) (29) -- -- -- -- -- -- 12,500.00 38.5 1.6
Scott R. Brown (21) (31).. -- -- -- -- -- -- 1,444.00 5.4 *
Gordon G. Smith (21) (32). -- -- -- -- -- -- 666.00 2.6 *
Jo Ellen Linn (21) (24)... 430.00 * -- -- -- -- 2,184.00 8.3 *
Robert F. Benbow (25)..... 150,000.00 35.9 30,051.45 13.2 -- -- 5,719.00 20.2 24.2
William O. Charman (26)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4
William P. Collatos (27).. 150,000.00 35.9 -- -- -- -- 37.00 * 19.5
William A. Johnston (28).. -- -- 75,125.62 32.9 -- -- -- -- 9.8
Robert B. Liepold (21) (23) 1,000.00 * -- -- -- -- 3,009.00 11.2 *
Erik M. Torgerson (30).... -- -- 75,125.62 32.9 -- -- -- -- 9.8
All executive officers and
directors as a group
(twelve persons)......... 392,460.00 93.9 192,824.13 84.4 -- -- 48,818.00 100.00 82.5
* Less than 1%
(1) Except as otherwise noted below, the persons named in the table have
sole voting power and investment power with respect to all shares set
forth in the table.
(2) Includes shares issuable upon exercise of warrants and options
exercisable within 60 days of the date hereof, as well as shares of
Golden Sky Holdings common stock issuable upon conversion of
beneficially-owned shares of Series C Preferred Stock.
(3) The percent of class beneficially owned by each listed holder of Golden
Sky Holdings common stock appears unusually large, because there is a
small number of shares of Golden Sky Holdings common stock outstanding
relative to the number of shares of Golden Sky Holdings common stock
owned and subject to options, warrants or conversion privileges held by
such person.
(4) The address is c/o Alta Communications, Inc., One Embarcadero Center,
Suite 4050, San Francisco, California 94111, Attn: Robert Benbow. Alta
Subordinated Debt Partners III, L.P. ("Alta Sub Debt III") is managed by
Burr, Egan, Deleage & Co. Alta Communications VI, L.P. ("Alta VI") and
Alta Comm S by S, LLC ("S by S") are managed by Alta Communications,
Inc. The general partner of Alta Sub Debt III and the general partner of
Alta VI exercise sole voting and investment powers with respect to the
securities held by their respective funds. The general partners of Alta
Subordinated Debt Management III, L.P., which is the general partner of
Alta Sub Debt III, include Messrs. Craig Burr, William P. Egan, Brian
McNeill, Robert Benbow, Timothy Dibble, Jean Deleage and Jonathan Flint
and Ms. Eileen McCarthy. These general partners may be deemed to share
voting and investment powers for the shares held by Alta Sub Debt III.
The general partners of Alta Communications VI Management Partners,
L.P., which is the general partner of Alta VI, include Messrs. William
P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble and David Retik
and Ms. Eileen McCarthy. These general partners may be deemed to share
voting and investment powers for the shares held by Alta VI. These
general partners disclaim beneficial ownership of all such securities
held by the funds except to the extent of their proportionate pecuniary
interests in the shares. Some of the principals of Burr, Egan, Deleage &
Co. and Alta Communications, Inc. (including some of the individuals
identified above) are members of S by S, which invests alongside Alta
VI. As members of S by S, they may be deemed to share voting and
investment power for the shares held by S by S. These principals
disclaim beneficial ownership of all such shares except to the extent of
their proportionate pecuniary interest in the shares.
Common stock ownership includes warrants to purchase 2,103, 3,499 and 80
shares of Common Stock owned by Alta Sub Debt III, Alta VI and S by S,
respectively.
<PAGE>
(5) The address is One International Place, 29th Floor, Boston,
Massachusetts 02110, Attn: William P. Collatos. The sole general partner
of Spectrum Equity Investors, L.P. is Spectrum Equity Associates, L.P.,
a limited partnership whose general partners are Messrs. Brion B.
Applegate and William P. Collatos. The sole general partner of Spectrum
Equity Investors II, L.P. is Spectrum Equity Associates II, L.P., a
limited partnership whose general partners are Messrs. Brion B.
Applegate, William P. Collatos and Kevin J. Maroni. Messrs. Applegate
and Collatos may be deemed to share beneficial ownership of the shares
owned by Spectrum Equity Investors, L.P., and Messrs. Applegate,
Collatos and Maroni may be deemed to share beneficial ownership of the
shares owned by Spectrum Equity Investors II, L.P. These individuals
disclaim beneficial ownership of all of these shares except to the
extent of their respective pecuniary interests in the shares.
(6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts
02110, Attn: William O. Charman. The shares of Series A Preferred Stock
and Series B Preferred Stock beneficially owned by BancBoston Ventures
Inc. are controlled by its President, Frederick M. Fritz, and by its
Managing Director, Sanford Anstey, and by William O. Charman, who is a
director of our company.
(7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402,
Attn: Erik M. Torgerson. The shares of Series B Preferred Stock
beneficially owned by Norwest Equity Partners VI, LP are controlled by
its general partner, Itasca LBO Partners VI, LLP, which is controlled by
John E. Lindahl, Managing Partner, and by John P. Whaley, Managing
Administrative Partner. The shares of Series B Preferred Stock
beneficially owned by Norwest Venture Partners VI, LP are controlled by
its general partner, Itasca VC Partners, LLP, which is controlled by its
Managing Partner, George J. Still, Jr., and by John P. Whaley, Managing
Administrative Partner.
(8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole
general partner of HarbourVest Partners V -- Direct Fund L.P.
("HarbourVest V") is a limited liability company whose managing member
is HarbourVest Partners, LLC. The managing directors of HarbourVest
Partners, LLC are Messrs. George Anson, John M. Begg, Philip M. Bilden,
Theodore A. Clark, Kevin S. Delbridge, William A. Johnston, Edward W.
Kane, Frederick C. Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D.
Brooks Zug, and Ms. Martha D. Vorlicek. These individuals may be deemed
to share beneficial ownership of the shares held by HarbourVest V, and
disclaim beneficial ownership of all of these shares except to the
extent of their respective pecuniary interest in the shares.
(9) The address is c/o London Merchant Securities, Carlton House, 33 Robert
Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion
Investments Limited and Westpool Investment Trust plc is a wholly owned
subsidiary of London Merchant Supplies plc, a publicly traded company in
the U.K.
(10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut
06927, Attn: Peter Foley. General Electric Capital Corporation is a
wholly owned subsidiary of General Electric Corporation.
(11) The address is P.O. Box 1376, Great Falls, Montana 59403.
(12) The address is 2061 Norwich Ct., Glenview, Illinois 60025.
(13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086.
(14) The address is 7444 Molt Road, Billings, Montana 59106.
(15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404.
(16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128.
(17) The address is 511 Fortress Circle, Leesburg, Virginia 21075.
<PAGE>
(18) The address is 2105 Noble Avenue, Springfield, Illinois 62704.
(19) The address is 1617 Outer Park, Springfield, Illinois 62704.
(20) 16,030 shares of Series A Preferred Stock and 4 shares of Golden Sky
Holdings common stock are held by the Rodney A. Weary Revocable Trust
Dated 10/25/95 and may be deemed to be beneficially owned by Mr. Weary.
In addition, Mr. Weary owns 9,726 shares of Golden Sky Holdings common
stock, and through our stock option plan, Mr. Weary has the right to
acquire 8,510 shares of Golden Sky Holdings common stock pursuant to
options exercisable within 60 days.
(21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue,
Suite 300, Kansas City, Missouri 64112.
(22) Through our stock option plan, Mr. Hager has the right to acquire 5,000
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(23) Mr. Gerski beneficially owns 5,414 shares of common stock. In addition,
through our stock option plan, Mr. Gerski has the right to acquire 7,086
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(24) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and
1,111 shares of Golden Sky Holdings common stock. In addition, through
our stock option plan, Ms. Linn has the right to acquire 973 shares of
Golden Sky Holdings common stock pursuant to options exercisable within
60 days.
(25) The address is c/o Alta Communications, Inc., One Embarcadero Center,
Suite 4050, San Francisco, California 94111. The shares are held of
record by Alta Subordinated Debt Partners III, L.P., Alta Communications
VI, L.P. and Alta-Comm S By S, LLC. Mr. Benbow is a general partner of
the respective general partners of Alta Subordinated Debt Partners III,
L.P. and Alta Communications VI, L.P. As a general partner, he may be
deemed to share voting and investment power with respect to the shares
held by the funds. Mr. Benbow disclaims beneficial ownership of the
shares held by these funds except to the extent of his proportionate
pecuniary interest therein. Mr. Benbow also disclaims beneficial
ownership of all shares held by Alta Comm S by S, LLC, of which he is
not a member.
(26) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th
Floor, Boston, Massachusetts 02110. The shares are held of record by
BancBoston Ventures Inc., which may be deemed to be beneficially owned
by Mr. Charman.
(27) The address is c/o Spectrum Equity Investors, One International Place,
29th Floor, Boston, Massachusetts 02110. The shares are held of record
by Spectrum Equity Investors L.P. and Spectrum Equity Investors II L.P.,
which may be deemed to be beneficially owned by Mr. Collatos.
(28) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111. The shares are held of record by
HarbourVest Partners V-Direct Fund L.P., which may be deemed to be
beneficially owned by Mr. Johnston.
(29) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock
and 1,425 shares of Golden Sky Holdings common stock. In addition,
through our stock option plan, Mr. Liepold has the right to acquire 609
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(30) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402-3388. The shares
are held of record by Norwest Equity Partners VI, LP, which may be
deemed to be beneficially owned by Mr. Torgerson.
(31) Through our stock option plan, Mr. Brown has the right to acquire 1,222
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
</TABLE>
<PAGE>
(32) Through the stock option plan, Mr. Smith has the right to acquire 666
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSFER OF GOLDEN SKY SYSTEMS' CAPITAL STOCK
On February 19, 1999, Golden Sky Holdings transferred all of Golden Sky
Systems' outstanding capital stock (together with $100 in cash) to us in
exchange for 100 shares of our common stock, $.01 par value.
CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD
Golden Sky Systems has an oral consulting agreement with Robert B. Liepold,
a director of Golden Sky Systems, to provide expertise on an "as needed" basis.
Golden Sky Systems paid to Mr. Liepold an aggregate of $84,000 in 1999 in
connection with these services.
PAYMENTS TO AFFILIATES OF RODNEY A. WEARY
Golden Sky Systems utilizes the air transportation services of a company
owned by Rodney A. Weary, Golden Sky Systems' Chief Executive Officer. Golden
Sky Systems paid approximately $300,000 to this entity in 1999 in connection
with these services.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
PAGE
----
Independent Auditors' Report .................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................F-4
Consolidated Statements of Stockholder's Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999............F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................F-6
Notes to Consolidated Financial Statements....................F-7
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits
The following documents are filed as Exhibits to this
report on Form 10-K or incorporated by reference herein.
Each document incorporated by reference is identified by a
parenthetical referencing the prior filing in which it was
included.
2.1 Stock Purchase Agreement, dated as of July 11,
1997, among Golden Sky Systems, Inc., Argos Support
Services Company and the several shareholders named
therein. (Exhibit 2.1 to Registration Statement on
Form S-4 No. 333-64367)
2.2 Asset Purchase Agreement, dated as of July 19,
1998, by and between Golden Sky Systems, Inc. and
Volcano Vision, Inc. (Exhibit 2.2 to Registration
Statement on Form S-4 No. 333-64367)
2.3 Agreement and Plan of Merger, dated as of September
1, 1998, among Golden Sky Holdings, Inc., Golden
Sky Systems, Inc., Western Montana DBS, Inc. d/b/a
Rocky Mountain DBS and the stockholders of Western
Montana DBS, Inc. named therein. (Exhibit 2.3 to
Registration Statement on Form S-4 No. 333-64367)
3.1 Second Amended and Restated Certificate of
Incorporation of Golden Sky Systems, Inc. (Exhibit
3.1 to Registration Statement on Form S-4 No.
333-64367)
3.2 By-Laws of Golden Sky Systems, Inc., adopted as of
October 1, 1997. (Exhibit 3.2 to Registration
Statement on Form S-4 No. 333-64367)
4.1 Indenture, dated as of July 31, 1998, by and among
Golden Sky Systems, Inc., as issuer, Argos Support
Services Company, as guarantor, PrimeWatch, Inc.,
as guarantor, and State Street Bank and Trust
Company of Missouri, N.A., as trustee, relating to
the 12 3/8% Senior Subordinated Notes due 2006,
Series A and 12 3/8% Senior Subordinated Notes due
<PAGE>
2006, Series B of Golden Sky Systems, Inc. (Exhibit
4.1 to Registration Statement on Form S-4 No.
333-64367)
4.2 Form of 12 3/8% Senior Subordinated Note due 2006,
Series B of Golden Sky Systems, Inc. (Included in
Exhibit 4.1 to Registration Statement on Form S-4
No. 333-64367)
4.3 Registration Rights Agreement, dated as of July 31,
1998, by and among Golden Sky Systems, Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated
and NationsBanc Montgomery Securities LLC, as
initial purchasers. (Exhibit 4.3 to Registration
Statement on Form S-4 No. 333-64367)
4.4 Escrow Agreement, dated as of July 31, 1998, by and
among State Street Bank and Trust Company of
Missouri, N.A., as escrow agent and as trustee
under the Indenture, and Golden Sky Systems, Inc.
(Exhibit 4.4 to Registration Statement on Form S-4
No. 333-64367)
4.5 Account Control Agreement, dated as of July 31,
1998, by and among Golden Sky Systems, Inc., State
Street Bank and Trust Company of Missouri, N.A., as
escrow agent and as custodian and securities
intermediary. (Exhibit 4.5 to Registration
Statement on Form S-4 No. 333-64367)
10.1 Purchase Agreement, dated July 24, 1998, among
Golden Sky Systems, Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, relating to the issuance
and sale of $195,000,000 aggregate principal amount
of 12 3/8% Senior Subordinated Notes due 2006,
Series A of Golden Sky Systems, Inc. (Exhibit 10.1
to Registration Statement on Form S-4 No.
333-64367)
10.2 Amended and Restated Credit Agreement, dated as of
May 8, 1998, 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. (Exhibit 10.2 to Registration
Statement on Form S-4 No. 333-64367)
10.3 First Amendment to Amended and Restated Credit
Agreement, dated as of February 10, 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. (Exhibit 10.17 to Registration Statement on
Form S-4 No. 333-64367)
10.4 Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended. (Exhibit
10.3 to Registration Statement on Form S-4 No.
333-64367)
10.6 Employment Agreement, dated February 12, 1997,
between Golden Sky Systems, Inc. and Rodney A.
Weary. (Exhibit 10.6 to Registration Statement on
Form S-4 No. 333-64367)*
10.7 Non-Competition Agreement between Golden Sky
Systems, Inc., and Rodney A. Weary. (Exhibit 10.11
to Registration Statement on Form S-4 No.
333-64367)*
10.8 Employment Agreement, dated February 12, 1997,
between Golden Sky Systems, Inc. and Jo Ellen Linn.
(Exhibit 10.7 to Registration Statement on Form S-4
No. 333-64367)*
<PAGE>
10.9 Non-Competition Agreement between Golden Sky
Systems, Inc. and Jo Ellen Linn. (Exhibit 10.12 to
Registration Statement on Form S-4 No. 333-64367)*
10.10 Employment Agreement, dated as of November 3, 1997,
between Golden Sky Systems, Inc. and William J.
Gerski. (Exhibit 10.8 to Registration Statement on
Form S-4 No. 333-64367)*
10.11 Employment Agreement, dated August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.10 to Registration Statement on Form
S-4 No. 333-64367)*
10.12 Non-Competition Agreement, dated August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.13 to Registration Statement on Form
S-4 No. 333-64367)*
10.13 Confidentiality and Proprietary Rights Agreements,
dated August 24, 1998, between Golden Sky Systems,
Inc. and John R. Hager. (Exhibit 10.15 to
Registration Statement on Form S-4 No. 333-64367)*
10.14 Form of Director Indemnification Agreement, dated
February 12, 1997, between Golden Sky Systems, Inc.
and each of the members of its Board of Directors.
(Exhibit 10.14 to Registration Statement on Form
S-4 No. 333-64367)
10.15 Exchange Agency Agreement, dated as of November 24,
1998, between Golden Sky Systems, Inc. and State
Street Bank and Trust Company of Missouri, N.A., as
exchange agent. (Exhibit 10.16 to Registration
Statement on Form S-4 No. 333-64367)
10.16 Office Building Lease, dated January 27, 1999,
between Belletower Partners, L.L.C. and Golden Sky
Systems, Inc. (Exhibit 10.18 to Registration
Statement on Form S-4 No. 333-64367)
10.17 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. (Exhibit 10.24 to Registration
Statement on Form S-4 No. 333-76413)
10.18 Employment Agreement, dated as of February 1, 1999,
between Golden Sky Systems, Inc. and Scott R. Brown
(Exhibit 10.18 to Annual Report on Form 10-K for
the period ended December 31, 1999 No. 333-64367).*
10.19 Noncompetition Agreement, dated as of February 1,
1999, between Golden Sky Systems, Inc. and Scott R.
Brown (Exhibit 10.19 to Annual Report on Form 10-K
for the period ended December 31, 1999 No.
333-64367).*
10.20 Noncompetition Agreement, dated as of November 3,
1997, between Golden Sky Systems, Inc. and William
J. Gerski (Exhibit 10.20 to Annual Report on Form
10-K for the period ended December 31, 1999 No.
333-64367).*
10.21 Stock and Warrant Purchase Agreement, dated as of
January 4, 2000, by and among Golden Sky Holdings,
Inc. and the investors identified therein (Exhibit
10.21 to Annual Report on Form 10-K for the period
ended December 31, 1999 No. 333-64367).
10.22 Agreement and Plan of Merger, dated as of January
10, 2000, among Pegasus Communications Corporation
and certain of its shareholders, Pegasus GSS Merger
<PAGE>
Sub, Inc., Golden Sky Holdings, Inc. and certain of
its shareholders. (Exhibit 2.1 to Registration
Statement on Form S-4 No. 333-31080)
10.23 Second Amendment, Consent and Waiver, dated as of
January 4, 2000, among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., the Banks party thereto
from time to time, Paribas (formerly known as
Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation
Agent (Exhibit 10.23 to Annual Report on Form 10-K
for the period ended December 31, 1999 No.
333-64367).
10.24 Third Amendment, Consent and Waiver, dated as of
January 20, 2000, among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., the Banks party thereto
from time to time, Paribas (formerly known as
Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation
Agent (Exhibit 10.24 to Annual Report on Form 10-K
for the period ended December 31, 1999 No.
333-64367).
21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit
21.1 to Registration Statement on Form S-4 No.
333-64367)
24.1 Powers of Attorney of the members of the Board of
Directors of Golden Sky Systems, Inc. (Included in
the signature pages of this report)**
27.1 Financial Data Schedule. **
99.1 Stock Purchase Agreement, dated as of February 12,
1997, among Golden Sky Systems, Inc., Rodney A.
Weary and the investors named therein. (Exhibit
99.3 to Registration Statement on Form S-4 No.
333-64367)
99.2 Stock Purchase Agreement, dated as of November 24,
1997, by and among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., Rodney A. Weary, and the
investors named therein. (Exhibit 99.4 to
Registration Statement on Form S-4 No. 333-64367)
99.3 Stockholders Agreement, dated as of November 24,
1997, by and among Golden Sky Holdings, Inc. and
the investors and other stockholders named therein.
(Exhibit 99.5 to Registration Statement on Form S-4
No. 333-64367)
-------------
* Management contract or compensatory plan or
arrangement.
** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999. On January 18, 2000, we filed a Form 8-K
reporting, under Item 5, that Golden Sky Holdings, Inc. had
entered into a definitive merger agreement with Pegasus
Communications Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 20, 2000
The undersigned directors and officers of Golden Sky DBS, Inc. hereby
appoint Rodney A. Weary and John R. Hager, or either of them individually, as
attorney-in-fact for the undersigned, with full power of substitution for, and
in the name, place and stead of the undersigned, to sign and file with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, any and all amendments to this Report on Form 10-K, and Exhibits to
this Report on Form 10-K, with full power and authority to do and perform any
and all acts and things whatsoever requisite and necessary or desirable, hereby
ratifying and confirming all that said attorney-in-fact, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ RODNEY A. WEARY Chairman of the Board, March 20, 2000
- ------------------------------------- Chief Executive Officer
Rodney A. Weary and Director (Principal
Executive Officer)
/s/ JOHN R. HAGER Chief Financial Officer March 20, 2000
- ------------------------------------------ (Principal Financial and
John R. Hager Accounting Officer)
/s/ ROBERT F. BENBOW Director March 20, 2000
- ------------------------------------
Robert F. Benbow
/s/ WILLIAM O. CHARMAN Director March 20, 2000
- ----------------------------------
William O. Charman
/s/ WILLIAM P. COLLATOS Director March 20, 2000
- -----------------------------------
William P. Collatos
/s/ WILLIAM A. JOHNSTON Director March 20, 2000
- ----------------------------------
William A. Johnston
/s/ ROBERT B. LIEPOLD Director March 20, 2000
- --------------------------------------
Robert B. Liepold
/s/ ERIK M. TORGERSON Director March 20, 2000
- ------------------------------------
Erik M. Torgerson
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last
fiscal year or proxy statement, form of proxy or other proxy soliciting material
has been sent to any security holders.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report..............................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..............F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999........................................F-4
Consolidated Statements of Stockholder's Equity (Deficit) for the
years ended December 31, 1997, 1998 and 1999...........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999........................................F-6
Notes to Consolidated Financial Statements................................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky DBS, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
DBS, Inc. and subsidiaries as of December 31, 1998 and 1999 and the related
consolidated statements of operations, stockholder's equity (deficit) and
cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden
Sky DBS, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
February 14, 2000
Kansas City, Missouri
<PAGE>
<TABLE>
GOLDEN SKY DBS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 4,460 $ 3,241
Restricted cash, current portion............................... 28,083 23,731
Subscriber receivables (net of allowance for uncollectible
accounts of $293 and $973, respectively)..................... 8,632 12,333
Other receivables.............................................. 2,465 1,133
Inventory...................................................... 10,146 3,108
Prepaid expenses and other..................................... 1,859 1,652
--------------------- ---------------------
Total current assets.............................................. 55,645 45,198
Restricted cash, net of current portion........................... 23,534 --
Property and equipment (net of accumulated depreciation of
$3,214 and $5,918, respectively)............................... 4,994 5,853
Intangible assets, net............................................ 233,139 236,926
Deferred financing costs ......................................... 10,541 11,462
Other assets...................................................... 218 260
--------------------- ---------------------
Total assets................................................. $ 328,071 $ 299,699
===================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 13,539 $ 22,893
Interest payable............................................... 11,009 11,679
Current maturities of long-term obligations.................... 8,916 3,248
Unearned revenue............................................... 5,574 8,669
Accrued payroll and other...................................... 1,403 943
--------------------- ---------------------
Total current liabilities......................................... 40,441 47,432
Long-term obligations, net of current maturities:
12 3/8% Notes................................................. 195,000 195,000
13 1/2% Notes.................................................. -- 112,095
Bank debt...................................................... 67,000 52,000
Seller notes payable........................................... 6,912 6,932
Other notes payable and obligations under capital leases....... 376 103
Minority interest.............................................. 2,420 936
--------------------- ---------------------
Total long-term obligations, net of current maturities............ 271,708 367,066
--------------------- ---------------------
Total liabilities................................................. 312,149 414,498
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 December 31, 1999....... -- --
Additional paid-in capital..................................... 97,600 97,754
Accumulated deficit............................................ (81,678) (212,553)
--------------------- ---------------------
Total stockholder's equity (deficit).............................. 15,922 (114,799)
--------------------- ---------------------
Total liabilities and stockholder's equity (deficit)......... $ 328,071 $ 299,699
===================== =====================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C>
Revenue:
DBS services...................................... $ 16,452 $ 74,910 $ 139,933
Lease and other................................... 944 1,014 640
----------------------------------------------------
Total revenue........................................ 17,396 75,924 140,573
Costs and expenses:
Costs of DBS services............................. 9,304 45,291 88,690
System operations................................. 3,796 11,021 19,733
Sales and marketing............................... 7,316 32,201 64,933
General and administrative........................ 2,331 7,431 15,708
Depreciation and amortization..................... 7,300 23,166 35,963
----------------------------------------------------
Total costs and expenses............................. 30,047 119,110 225,027
----------------- ---------------- -----------------
Operating loss....................................... (12,651) (43,186) (84,454)
Non-operating items:
Interest and investment income.................... 40 1,573 2,394
Interest expense.................................. (3,173) (20,537) (45,012)
Initial public offering and other non-operating
expenses ......................................... -- -- (868)
----------------------------------------------------
Total non-operating items............................ (3,133) (18,964) (43,486)
----------------------------------------------------
Loss before income taxes............................. (15,784) (62,150) (127,940)
Income taxes......................................... -- -- --
----------------------------------------------------
Loss before extraordinary charge..................... (15,784) (62,150) (127,940)
Extraordinary charge on early retirement of debt..... -- (2,577) (2,935)
----------------------------------------------------
Net loss............................................. $ (15,784) $ (64,727) $ (130,875)
====================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------ --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................................. $ -- $ 1 $ (1,167) $ (1,166)
Cancellation of originally issued Golden Sky Systems,
Inc. common stock.......................................... -- (1) -- (1)
Issuance of 1,000 shares of new Golden Sky Systems, Inc.
common stock............................................... -- -- -- --
Contribution from Golden Sky Holdings, Inc................... -- 87,400 -- 87,400
Net loss..................................................... -- -- (15,784) (15,784)
------------ --------------- ---------------- --------------
Balance at December 31, 1997................................. -- 87,400 (16,951) 70,449
Contribution from Golden Sky Holdings, Inc................... -- 10,200 -- 10,200
Net loss..................................................... -- -- (64,727) (64,727)
------------ --------------- ---------------- --------------
Balance at December 31, 1998.................................. -- 97,600 (81,678) 15,922
Issuance of 100 shares of Golden Sky DBS, Inc. --
Common Stock............................................. -- -- --
Deferred compensation pursuant to issuance of Golden Sky --
Holdings, Inc. common stock options ....................... 154 -- 154
Net loss..................................................... -- -- (130,875) (130,875)
------------ --------------- ---------------- --------------
Balance at December 31, 1999.................................. $ -- $97,754 $(212,553) $(114,799)
============ =============== ================ ==============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
--------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (15,784) $ (64,727) $ (130,875)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 7,300 23,166 35,963
Amortization of debt discount, deferred financing
costs and other........................................ 215 977 13,676
Deferred compensation pursuant to issuance of Common
Stock options.......................................... -- -- 154
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........ (2,501) (1,757) (541)
Other receivables...................................... (161) (2,130) 795
Inventory.............................................. (1,604) (8,049) 7,038
Prepaid expenses and other............................. (203) (1,228) 207
Trade accounts payable................................. 7,515 5,068 9,354
Interest payable....................................... 733 10,223 670
Accrued payroll and other.............................. 1,391 (708) (478)
--------------- ---------------- -----------------
Net cash used in operating activities....................... (3,099) (36,588) (61,102)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets....................... (120,051) (104,487) (35,339)
Purchases of minority interests............................. -- -- (1,439)
Proceeds from interest escrow account ...................... -- (51,617) 24,224
Release of amounts reserved for contingent reduction of -- -- 5,449
bank debt
Investment earnings placed in escrow ....................... -- -- (1,787)
Purchases of property and equipment......................... (998) (3,317) (3,452)
Other....................................................... 320 (500) 112
--------------- ---------------- -----------------
Net cash used in investing activities....................... (120,729) (159,921) (12,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred stock ......... 34,289 -- --
Net proceeds from issuance of 12 3/8% Notes................. -- 189,150 --
Net proceeds from issuance of 13 1/2% Notes ................ -- -- 100,049
Borrowings on bank debt..................................... 75,000 90,000 38,000
Principal payments on bank debt............................. (15,000) (83,000) (53,000)
Proceeds from issuance of notes payable..................... 2,115 -- --
Principal payments on notes payable and obligations under
capital leases........................................... (2,902) (3,675) (8,846)
Contribution from Golden Sky Holdings, Inc.................. 46,800 -- --
Increase in deferred financing costs........................ (3,321) (5,138) (5,516)
Capital contribution from minority partner ................. -- -- 1,428
--------------- ---------------- -----------------
Net cash provided by financing activities................... 136,981 187,337 72,115
--------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents..... 13,153 (9,172) (1,219)
Cash and cash equivalents, beginning of period........... 479 13,632 4,460
--------------- ---------------- -----------------
Cash and cash equivalents, end of period................. $ 13,632 $ 4,460 $ 3,241
=============== ================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 2,225 $ 9,337 $ 30,014
Property and equipment acquired under capitalized lease 554 609 78
obligations.................................................
Retirement of Credit Agreement from borrowings under the
Credit Facility........................................... -- 88,000 --
Issuance of seller notes payable in acquisitions............ 8,600 10,157 --
Conversion of notes payable and subscriptions to Series A
preferred stock ......................................... 6,311 -- --
Issuance of note payable in purchase of minority interest... -- -- 2,925
Contribution from Golden Sky Holdings, Inc. resulting
from issuance of its preferred stock in acquisition...... -- 10,200 --
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Organization and Legal Structure
Golden Sky DBS, Inc. ("Golden Sky DBS" and together with is subsidiaries,
"Golden Sky") was formed in February 1999 for the purpose of completing a
private offering (the "13 1/2% Notes Offering") of 13 1/2% Senior Discount Notes
due 2007 (the "13 1/2% Notes"). Upon formation, Golden Sky DBS issued 100 shares
of its common stock to Golden Sky Holdings, Inc. ("Holdings") in exchange for
$100 and the subsequent transfer of all of the capital stock of Golden Sky
Systems, Inc. ("Systems") to Golden Sky DBS. Until February 1999, Systems was a
wholly owned subsidiary of Holdings. Accordingly, Systems has been treated as
the predecessor to Golden Sky DBS and the historical financial statements of
Golden Sky DBS are those of Systems.
Principal Business
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. Systems, a Delaware corporation
formed on June 25, 1996 ("Inception"), 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 of the
United States ("Rural DIRECTV Markets"). As of December 31, 1999, Systems had
acquired 57 Rural DIRECTV Markets in 24 states with approximately 1.9 million
households. As of that same date, Systems served approximately 345,200
subscribers.
Pegasus Merger
Holdings entered into a definitive merger agreement with Pegasus
Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the
largest independent provider of DIRECTV subscription television services in the
United States. The combined operations of Pegasus and Golden Sky will serve in
excess of 1.1 million subscribers in 41 states and have the exclusive right to
serve approximately 7.2 million rural households. Under the terms of the
agreement, Pegasus will issue up to 6.5 million shares of its Class A common
stock to Holdings shareholders. The value of the Pegasus shares to be issued to
Holdings shareholders approximated $632 million as of the date of execution of
the definitive merger agreement. Upon completion of the merger, Holdings will
become a wholly owned subsidiary of Pegasus. Consummation of the merger, which
is subject to certain conditions and approvals, is expected in the first or
second quarter of 2000.
Significant Risks and Uncertainties
Substantial Leverage. Golden Sky is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December 31,
1999, Golden Sky had outstanding long-term debt (including current portion)
totaling approximately $369.4 million. Substantially all of Golden Sky's assets
are pledged as collateral on its long-term debt. Further, the terms associated
with Golden Sky's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for Golden Sky and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement Golden Sky's business strategy.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained
significant losses since Inception. Golden Sky's operating losses were $12.7
million, $43.2 million, and $84.5 million for the years ended December 31, 1997,
1998 and 1999 respectively. Golden Sky's net losses during those same periods
aggregated $15.8 million, $64.7 million, and $130.9 million respectively.
Improvement in Golden Sky's results of operations is principally dependent upon
its ability to cost effectively expand its subscriber base, control subscriber
churn (i.e., the rate at which subscribers terminate service), and effectively
manage its operating and overhead costs. Golden Sky plans to reduce its future
operating and overhead costs by transitioning its direct sales distribution
model to an indirect (i.e., retail) distribution model. Accordingly, during the
year ending December 31, 2000 Golden Sky plans, among other things, to: (i)
close approximately 30 of its 68 local sales offices; (ii) reduce its corporate
overhead expenses through headcount and other expense reductions; and (iii)
increase the number of third-party retailers in its Rural DIRECTV Markets.
Golden Sky estimates that it will incur aggregate, non-recurring costs of
approximately $1.5 million in connection with these actions. These costs are
expected to primarily consist of employee severance and lease termination
expenses. There can be no assurance that Golden Sky will be effective with
regard to these plans. Golden Sky incurs significant costs to acquire DIRECTV
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber churn. Golden Sky anticipates that it will continue to
experience operating losses through at least 2000. There can be no assurance
that such operating losses will not continue beyond 2000 or that Golden Sky's
operations will generate sufficient cash flows to pay its obligations, including
its obligations on its long-term debt.
Restrictions on Dividends and Other Distributions. The ability of Systems
and its subsidiaries to pay dividends and make other distributions and advances
is subject to, among other things, the terms of its long-term debt obligations
and applicable law. As a result, Systems may be limited in its ability to make
dividend payments and other distributions to Golden Sky DBS or Holdings at the
time such distributions are needed by Golden Sky DBS or Holdings to meet their
obligations.
Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result,
Golden Sky would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, Golden Sky relies upon DIRECTV to continue to
provide programming services on a basis consistent with its past practice. Any
change in such practice due to, for example, a failure to replace a satellite
upon the expiration of its useful orbital life or a delay in launching a
successor satellite may prevent Golden Sky from continuing to provide DBS
services and could have a material adverse effect on Golden Sky's financial
condition and results of operations. Additionally, Golden Sky's ability to offer
DIRECTV programming services depends upon agreements between the NRTC and Hughes
and between Golden Sky and the NRTC. The NRTC's interests may differ from Golden
Sky's interests. Golden Sky would be materially and adversely affected by the
termination of the NRTC's agreement with Hughes and/or the termination of Golden
Sky's agreements with the NRTC. Golden Sky's agreements with the NRTC require
that it use the NRTC for certain support services including subscriber
information and data reporting capability, retail billing services and central
office subscriber services. Such services are critical to the operation and
management of Golden Sky's business.
On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal court
in Los Angeles against DIRECTV (see Note 10). The outcome of this litigation and
similar litigation filed by the NRTC against DIRECTV could have a material
adverse effect on the scope and duration of Golden Sky's right to provide
DIRECTV programming in its Rural DIRECTV Markets, its capital requirements and
its costs of operations.
Competition. The subscription television industry is highly competitive.
Golden Sky faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than Golden Sky. Golden
Sky's ability to effectively compete in the subscription television industry
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Golden Sky DBS and its majority-owned, direct and indirect subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Minority interest represents the cumulative earnings and losses, after capital
contributions, attributable to minority partners and stockholders.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number of
estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Golden Sky considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. As of December 31, 1998 and
1999, cash and cash equivalents consisted of cash on hand, demand deposits and
money market accounts.
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with Systems' 12
3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash,
which is held in escrow, is invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the indenture. As of December 31, 1998 and 1999, restricted cash
was composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and
consists of receivers, satellite dishes and accessories ("DBS Equipment").
Golden Sky subsidizes the cost to the consumer of such equipment, which is
required to receive DIRECTV programming services. Additionally, Golden Sky
subsidizes the cost to the consumer of installation of DBS Equipment. Equipment
and installation revenues and related expenses are recognized upon delivery and
installation of DBS Equipment. Net transaction costs associated with the sale
and installation of DBS Equipment are reported as a component of sales and
marketing expenses in the accompanying consolidated statements of operations.
During the periods ended December 31, 1997, 1998 and 1999, aggregate proceeds
from the sale and installation of DBS Equipment totaled $3.8 million, $11.0
million, and $9.3 million respectively; related cost of sales totaled $4.6
million, $25.8 million, and $44.3 million during those same periods.
Long-lived Assets
Golden Sky reviews its long-lived assets (e.g., property and equipment) and
certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For assets that are held and used in
operations, the asset would be impaired if the book value of the asset exceeded
the undiscounted future cash flows related to the asset. For those assets that
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. Golden Sky considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited. The expected
period to be benefited corresponds to the remaining estimated orbital lives of
the satellites used by Hughes for distribution of DIRECTV programming services.
Deferred Financing Costs
Deferred financing costs represent fees and other costs incurred in
conjunction with the issuance of long-term debt. These costs are amortized over
the term of the related debt using the effective interest method. Amortization
of these costs totaled $215,000, $977,000, and $2,164,000 during 1997, 1998 and
1999, respectively.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying value approximates fair value
as a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of Golden Sky's publicly
traded debt securities is based on quoted market prices. The carrying
value of Golden Sky's bank debt and other notes payable approximates
fair value, as interest rates are variable or approximate market rates.
As of December 31, 1999, the carrying and fair values of Golden Sky's
publicly traded debt securities were as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
---------------- ----------------
<S> <C> <C>
12 3/8% Notes...................................... $195,000 $211,575
13 1/2% Notes...................................... 112,095 121,653
</TABLE>
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months;
related revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative costs
related to Golden Sky's local offices and national call center.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $1.4
million, $5.1 million, and $5.9 million during the years ended December 31,
1997, 1998 and 1999, respectively.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for up to three months of service, to new subscribers. The cost of such free
programming is expensed as sales and marketing expense in the period the
services are provided. During 1999, sales and marketing expenses attributable to
such promotions totaled $2.5 million.
Income Taxes
Golden Sky uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
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, Golden Sky has no derivative instruments or
hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to
have a material effect on Golden Sky's financial position or results of
operations.
Comprehensive Income
Golden Sky has no components of comprehensive income other than net loss.
3. ACQUISITIONS
Golden Sky accounts for its acquisitions using the purchase method. Golden
Sky's consolidated statements of operations for the periods ended December 31,
1997, 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) for the
acquisitions completed during 1997, 1998 and 1999 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
-----------------------------------------------
<S> <C> <C> <C>
DIRECTV distribution rights................... $ 116,394 $114,747 $31,809
Customer lists................................ 9,450 7,114 --
Non-compete agreements........................ 4,879 2,587 4,869
Property and equipment........................ 1,953 204 --
Minority interest............................. (2,931) -- --
Working capital, net.......................... (20) 192 100
-----------------------------------------------
$ 129,725 $124,844 $36,778
===============================================
</TABLE>
1
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following summarizes Golden Sky's acquisitions of Rural DIRECTV Markets
consummated during 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deep East Texas Telecommunications, Inc....... February 7, 1997 Texas $ 1,919
Images DBS Kansas, L.C., Images DBS Oklahoma,
L.C. and Total Communications, Inc......... February 12, 1997 Kansas/Oklahoma 12,702
Direct Satellite TV, LTD...................... February 28, 1997 Texas 3,746
Thunderbolt Systems, Inc...................... March 11, 1997 Missouri 6,127
Western Montana DBS, Inc. dba Rocky Mountain
DBS........................................ May 1, 1997 Colorado 4,774
TEG DBS Services, Inc......................... June 12, 1997 Nevada 5,237
GVEC Rural TV, Inc............................ July 8, 1997 Texas 5,176
Satellite Entertainment, Inc.................. July 14, 1997 Minnesota/Michigan 9,640
Direct Vision................................. July 15, 1997 Minnesota 7,452
Argos Support Services Company................ August 8, 1997 Florida/Texas/Utah 18,217
JECTV, a segment of Jackson Electric August 26, 1997 Texas 9,453
Cooperative................................
Lakes Area TV................................. September 2, 1997 Minnesota 1,355
DCE Satellite Entertainment, LLC.............. October 13, 1997 Wisconsin 313
Direct Broadcast Satellite, a segment of CTS
Communication Corporation.................. November 7, 1997 Michigan 4,293
DBS, L.C...................................... November 17, 1997 Iowa 1,911
Panora Telecommunications, Inc................ November 20, 1997 Iowa 1,131
Souris River Television, Inc.................. November 21, 1997 North Dakota 7,276
Cal-Ore Digital TV, Inc....................... December 8, 1997 California/Oregon 5,095
NRTC System No. 0093, a segment of Cable and
Communications Corporation................. December 17, 1997 Montana 3,876
Western Montana Entertainment Television, Inc. December 22, 1997 Montana 7,067
South Plains DBS.............................. December 23, 1997 Texas 9,143
Lakeland DBS.................................. December 24, 1997 Oklahoma 3,822
-----------------
TOTAL 1997 ACQUISITIONS.................... $129,725
=================
Direct Broadcast Satellite, a segment of
Nemont Communications Inc.................. January 14, 1998 Montana/Wyoming $ 8,284
Triangle Communications System, Inc........... January 20, 1998 Montana 9,765
Wyoming Mutual Telephone...................... January 21, 1998 Iowa 527
North Willamette Telephone.................... March 10, 1998 Oregon 6,015
Northwest Communications...................... March 10, 1998 North Dakota 1,363
Beulahland Communications, Inc................ March 19, 1998 Colorado 835
Direct Broadcast Satellite, a segment of SCS
Communications & Security, Inc............. April 20, 1998 Oregon 5,386
PrimeWatch, Inc............................... May 8, 1998 North Carolina 7,988
Mega TV....................................... May 11, 1998 Georgia 2,103
Direct Broadcast Satellite, a division of
Baldwin County Electric Membership June 29, 1998 Alabama 11,769
Corporation................................
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------
Frontier Corporation.......................... July 8, 1998 Wisconsin $ 734
North Texas Communications.................... August 6, 1998 Texas 3,118
SEMO Communications Corporation............... August 26, 1998 Missouri 2,918
DBS Segment of Cumby Cellular, Inc............ August 31, 1998 Texas 7,553
Minburn Telephone............................. September 18, 1998 Iowa 447
Western Montana DBS, Inc. dba Rocky Mountain
DBS........................................ October 2, 1998 Idaho/Montana 20,740
Direct Broadcast Satellite, a segment of
Volcano Vision, Inc........................ October 9, 1998 California 31,425
North Central Missouri Electric Coop.......... November 2, 1998 Missouri 1,745
Star Search Rural Television, Inc............. November 5, 1998 Oklahoma 2,129
-----------------
TOTAL 1998 ACQUISITIONS.................... $124,844
=================
Breda Telephone Corporation................... January 11, 1999 Iowa/Nebraska $ 8,605
Thunderbolt Systems Inc....................... January 15, 1999 Missouri 2,731
Siskiyou Ruralvision, Inc..................... February 28, 1999 California 4,735
Baraga Telephone Co........................... March 31, 1999 Michigan 4,546
E. Ritter Communications...................... April 2, 1999 Arkansas 2,689
Yelcot Telephone Co........................... April 2, 1999 Arkansas 6,246
Van Buren DBS................................. April 14, 1999 Iowa 2,914
Kertel Communications, Inc.................... June 24, 1999 California 2,033
Mutual Telephone Company...................... August 5, 1999 Iowa 620
Dubois Telephone.............................. December 8, 1999 Montana 220
-----------------
TOTAL 1999 ACQUISITIONS.................... $ 35,339
=================
</TABLE>
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not material
and, accordingly, the pro forma impact of those acquisitions has not been
presented. Unaudited pro forma total revenue and unaudited pro forma loss before
extraordinary charge for the year ended December 31, 1998 approximated $87.9
million and $79.8 million, respectively. This unaudited pro forma information
reflects Golden Sky's significant acquisitions of Rural DIRECTV Markets
consummated during 1998 as if each such acquisition had occurred as of the
beginning of 1998. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated as of that date.
During 1997, Golden Sky acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). In June 1999, Golden Sky 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 the $2.9 million. Also
during 1999, Golden Sky acquired certain other minority interests for $496,000.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. INTANGIBLE ASSETS
Intangible assets, which are amortized using the straight-line method over
the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
----------------------------------
1998 1999 USEFUL LIFE
---------------------------------------------------
<S> <C> <C> <C>
DIRECTV distribution rights.............. $236,531 $266,874 9 -12 years
Customer lists........................... 17,018 18,603 5 years
Non-compete agreements................... 7,501 12,370 3 years
----------------------------------
261,050 297,847
Less accumulated amortization............ (27,911) (60,921)
----------------------------------
Intangible assets, net............... $233,139 $236,926
==================================
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
----------------------------------
<S> <C> <C>
12 3/8% Notes................................................. $ 195,000 $ 195,000
13 1/2% Notes ................................................ -- 112,095
Bank debt..................................................... 67,000 52,000
Seller notes payable.......................................... 15,407 9,823
Other notes payable and obligations under capital leases...... 797 460
Minority interest............................................. 2,420 936
----------------------------------
Total long-term obligations................................... 280,624 370,314
Less current maturities....................................... (8,916) (3,248)
----------------------------------
Long-term obligations, net of current maturities......... $ 271,708 $ 367,066
================= ================
</TABLE>
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, commencing February 1, 1999. The 12 3/8%
Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net
proceeds to Golden Sky of approximately $189.2 million (after payment of
underwriting discounts and other issuance costs aggregating approximately $5.8
million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes
Offering were placed in escrow to fund the first four semi-annual interest
payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3
million was reserved to fund a portion of a then contingent reduction of Golden
Sky's availability under its Credit Facility.
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of payment to all existing and future subordinated indebtedness,
if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional,
joint and several basis by Argos Support Services Company ("Argos") and
PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly owned
subsidiaries of Golden Sky.
The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option on
or after August 1, 2003, at redemption prices decreasing from 112% during the
year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, on or prior
to August 1, 2001, Systems may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the 12 3/8% Notes, at a
3
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
redemption price equal to 112.375% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of redemption solely with the
net proceeds of a public equity offering of Systems or DBS yielding gross
proceeds of at least $40.0 million and any subsequent public equity offerings
(provided that, in the case of any such offering or offerings by DBS, all the
net proceeds thereof are contributed to Systems); provided, further that
immediately after any such redemption the aggregate principal amount of Notes
outstanding must equal at least 65% of the originally issued aggregate principal
amount of the 12 3/8% Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
Systems' ability to incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur indebtedness that is subordinate in right of
payment to any senior indebtedness and senior in right of payment to the 12 3/8%
Notes, incur liens, permit restrictions on the ability of subsidiaries to pay
dividends or make certain payments to Systems, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of Systems' assets.
In the event of a change of control, as defined in the 12 3/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. Golden Sky's merger with Pegasus will constitute a
change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon
closing of the merger with Pegasus, Golden Sky will be required to make an offer
to the holders of the 12 3/8% Notes to purchase those notes consistent with the
terms described above. If Golden Sky's offer for the 12 3/8% Notes is accepted
by any of its note holders, and it is unable to purchase those notes, Golden Sky
may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has
entered into a commitment letter with an investment bank under which that
investment bank has agreed to purchase any and all 12 3/8% Notes tendered in
response to Golden Sky's offer to purchase. This commitment is subject to the
execution of definitive documentation and customary closing conditions. There
can be no assurance that Pegasus will be able to agree on definitive
documentation with the investment bank or make alternative arrangements if
necessary.
The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act"). During 1998,
Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective), Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
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.
4
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. Golden Sky's merger with Pegasus will
constitute a change of control as defined in the 13 1/2% Notes Indenture.
Accordingly, upon closing of the merger with Pegasus, Golden Sky will be
required to make an offer to the holders of the 13 1/2% Notes to purchase those
notes consistent with the terms described above. If Golden Sky's offer for the
13 1/2% Notes is accepted by any of its note holders, and it is unable to
purchase those notes, Golden Sky may be in default of the terms of the 13 1/2%
Notes Indenture. Pegasus has entered into a commitment letter with an investment
bank under which that investment bank has agreed to purchase any and all 13 1/2%
Notes tendered in response to Golden Sky's offer to purchase. This commitment is
subject to the execution of definitive documentation and customary closing
conditions. There can be no assurance that Pegasus will be able to agree on
definitive documentation with the investment bank or make alternative
arrangements if necessary.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin).
During May 1998, Systems entered into a seven-year, $150.0 million amended
credit facility (the "Credit Facility") with a syndicate of lenders. Upon
execution of the Credit Facility, Systems recognized an extraordinary charge of
approximately $2.6 million to write-off unamortized deferred financing costs
associated with the Credit Agreement. In February 1999, Systems' Credit Facility
was amended to permit, among other things, the 13 1/2% Notes Offering. Upon
execution of the February 1999 amendment to the Credit Facility, Systems
recognized an extraordinary charge of approximately $2.9 million to write off
unamortized deferred financing costs associated with the Credit Facility.
The Credit Facility provides for a term loan commitment of $35.0 million and
a revolving loan commitment of $115.0 million. The 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 Credit Facility reduces 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
(approximately 10% as of December 31, 1999) calculated on a base rate, such as
the prime rate or LIBOR, plus an applicable margin. Commitment fees are payable
on unused amounts available under the Credit Facility. Such commitment fees,
which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per
5
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
annum based on Systems' utilization of such commitments. As of December 31,
1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0
million, including $35.0 million borrowed pursuant to the Credit Facility's term
loan commitment.
The Credit Facility contains a number of restrictive covenants that, among
other things, limit Systems' ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or transact
with affiliates. As of each of December 31, 1997, 1998 and 1999, no amounts were
available for distribution to DBS.
The Credit Facility also contains a number of financial covenants that
require Systems to meet certain financial ratios and financial condition tests.
These financial covenants, in certain instances, become effective at different
points in time and vary over time. The covenants include limitations on
indebtedness per subscriber, limitations on subscriber acquisition costs,
maintenance of a minimum fixed charge coverage ratio, maintenance of minimum
interest coverage ratios, and limitations on indebtedness to pro forma EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
Revolving credit availability under the Credit Facility depends upon
satisfaction of the various covenants as well as minimum subscriber base
requirements.
As of September 30, 1999, Systems was not in compliance with certain of the
restrictive covenants prescribed by the Credit Facility. During January 2000,
the Credit Facility was amended to modify certain fourth quarter 1999 and year
2000 covenant requirements. Further, in conjunction with the amendment, Golden
Sky's third quarter 1999 covenant violations were waived. Pursuant to the
amendment, which was effective as of December 31, 1999, Golden Sky may borrow up
to an additional $20.0 million under the Credit Facility prior to March 31,
2000. Any such incremental borrowings, which are secured by letters of credit
provided by certain of Golden Sky Holdings' shareholders, must be repaid by
March 31, 2000 from the proceeds of either a private or public equity offering.
The required repayment date relative to these year 2000 incremental borrowings
may be deferred until May 31, 2000 under certain conditions. Upon repayment,
systems will have potential incremental borrowing capacity during the year
ending December 31, 2000 equal to the lesser of the proceeds received from
either a public or private equity offering or $20.0 million. Coincident with the
amendment of the Credit Facility, Holdings entered into stock subscription
agreements with certain of its shareholders for an aggregate of $20.0 million of
its preferred stock (see note 6). Also in January 2000, the Credit Facility was
further amended to approve the change in ownership of Holdings that would result
from the merger with Pegasus. As of December 31, 1999, Systems was in compliance
with the Credit Facility's amended covenants.
Seller Notes Payable
Seller notes payable bear interest at rates ranging from 7% to 10% and are
collateralized by bank letters of credit.
Other Notes Payable
In November 1996, Golden Sky issued $2.0 million in promissory notes to a
group of lenders under a bridge financing agreement. The notes bore interest at
the rate of 10% per annum. In February 1997, these notes, along with $1.8
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems' issued warrants exercisable for 5,682 shares
of its Common Stock at an exercise price of $.01 per share. These warrants were
immediately exercisable and expire on February 12, 2007. At the date of
issuance, the fair value of the warrants was not material. These warrants were
assumed by Holdings after its formation and remain outstanding as of December
31, 1999.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Future maturities of amounts outstanding under Golden Sky's long-term
obligations as of December 31, 1999 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SELLER
12 3/8% 13 1/2% BANK NOTES
NOTES NOTES DEBT PAYABLE OTHER TOTAL
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ending December 31,
2000......................... $ -- $ -- $ -- $ 2,891 $357 $ 3,248
2001......................... -- -- -- 2,970 76 3,046
2002......................... -- -- 263 2,962 23 3,248
2003......................... -- -- 350 1,000 4 1,354
2004......................... -- -- 350 -- -- 350
Thereafter................... 195,000 112,095 51,037 -- -- 358,132
------------------------------------------------------------------------
Total debt.................. $195,000 $112,095 $52,000 $9,823 $460 $369,378
========================================================================
</TABLE>
6. STOCKHOLDER'S EQUITY (DEFICIT)
During 1996, Systems issued 1,000 shares of Common Stock, par value $.01,
for aggregate consideration of $1,000 cash. In February 1997, Systems (i)
amended its certificate of incorporation to cancel its outstanding shares of
Common Stock; (ii) created new classes of common and preferred stock and (iii)
exchanged all of the canceled shares of Systems' Common Stock for an aggregate
of ten shares of Systems' Series A Convertible Participating Preferred Stock
(the "Series A Preferred Stock").
In February 1997, Systems issued 24,990 shares of Series A Preferred Stock
in fulfillment of an investor's subscription to purchase Series A Preferred
Stock that was outstanding at December 31, 1996 (aggregate consideration of
$2,499,000). During that same month, Systems issued 100 shares of its Common
Stock (par value $.01) for aggregate consideration of $100 cash and a total of
38,107 shares of Series A Preferred Stock upon the conversion of convertible
promissory notes (plus accrued interest of approximately $62,000) issued in
November 1996 ($2.0 million) and January 1997 ($1.8 million). In February and
March 1997, Systems issued 342,893 additional shares of Series A Preferred Stock
for cash totaling $34.3 million. Upon the formation of Holdings in September
1997, all shareholders of Systems' Common Stock and Series A Preferred Stock
were issued equivalent shares of Holdings stock. Concurrent therewith, Systems
issued 1,000 shares of its Common Stock (par value $0.01) to Holdings for cash
proceeds of $10 and all previously outstanding shares of Systems' Common Stock
and Series A Preferred Stock were canceled.
7. STOCK INCENTIVE PLAN
In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option and
Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide incentive
to attract and retain certain officers, directors and key employees. Options
issued pursuant to the Stock Incentive Plan are exercisable during a period of
up to ten years after grant and vest over a three-year period. Effective
September 9, 1997, Holdings assumed the Stock Incentive Plan. Participants in
the Holdings' Stock Incentive Plan received options with terms identical to
those under Systems' Stock Incentive Plan and all previously outstanding options
were canceled.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following summarizes incentive stock option activity during the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
OPTIONS OPTIONS OPTIONS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year... -- $-- 62,525 $ 1.00 48,745 $1.00
Granted.................................. 62,525 1.00 18,693 1.00 11,600 1.00
Exercised................................ -- -- (24,831) 1.00 (468) 1.00
Forfeited................................ -- -- (7,642) 1.00 (1,025) 1.00
---------------------------------------------------------------------------
Options outstanding, end of year......... 62,525 $1.00 48,745 $1.00 58,852 $1.00
===========================================================================
Options exercisable, end of year......... 8,684 $1.00 5,595 $1.00 30,165 $1.00
===========================================================================
</TABLE>
Accounting for Stock-Based Compensation
Golden Sky has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25, if the
exercise price of employee stock options granted pursuant to the Stock Incentive
Plan is equal to or greater than the fair value of the underlying stock on the
date of grant, no compensation expense is recognized. In October 1995, the FASB
issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"),
which established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. Golden Sky elected to not
adopt FAS No. 123 for expense recognition purposes.
For options granted during 1999, the estimated aggregate fair value of
Holdings' common stock on the respective grant dates exceeded the related
aggregate exercise price by approximately $462,000. This amount will be
recognized as compensation expense over the vesting period of the related stock
options. Accordingly, compensation cost of $154,000 was recorded during the year
ended December 31, 1999. For options granted in 1998 and 1997, the exercise
prices of the related stock options was not less than the fair value of
Holdings' common stock as of the respective grant dates and, accordingly, no
compensation expense was recognized relative to those options. The fair value of
Holdings' common stock was estimated by management using trading prices for
other similar publicly traded companies, as adjusted for specific factors and
differences deemed relevant to the valuation of Holdings' common stock.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if Golden Sky had accounted for its stock-based
compensation using the fair value method prescribed by that statement. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the corresponding vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed to the
extent applicable to forfeitures of unvested options. The fair value of each
option grant was estimated at the date of the grant using a Black-Scholes option
valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate........................................ 6.0% 6.0% 6.0%
Dividend yield................................................. 0.0% 0.0% 0.0%
Volatility factor.............................................. 0.0% 0.0% 0.0%
Expected term of options....................................... 10 years 10 years 10 years
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Using the preceding assumptions, there was no pro forma effect on Golden
Sky's net loss from applying the fair value method under FAS No. 123.
8. 401(K) RETIREMENT PLAN
Golden Sky sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. During the years
ended December 31, 1997, 1998 and 1999, Golden Sky made no discretionary
employer matching contributions to the 401(k) Plan. Administrative expenses
associated with the 401(k) Plan during those same periods were not material.
9. INCOME TAXES
The components of Golden Sky's (provision for) benefit from income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
-----------------------------------------------
<S> <C> <C> <C>
Current (provision) benefit:
Federal......................................... $ 3,777 $ 16,325 $ 36,437
State........................................... 717 3,097 6,913
Increase in valuation allowance................. (4,494) (19,422) (43,350)
-----------------------------------------------
Total current (provision) benefit................. -- -- --
Deferred benefit:
Federal......................................... 1,148 3,103 3,122
State........................................... 218 615 592
Increase in valuation allowance................. (1,366) (3,718) (3,714)
-----------------------------------------------
Total deferred benefit............................ -- -- --
-----------------------------------------------
Total benefit (provision).................... $ -- $ -- $ --
===============================================
</TABLE>
As of December 31, 1999, Golden Sky DBS had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $179.0 million. The
NOLs expire beginning in the year 2011. Use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. FAS No. 109,
"Accounting for Income Taxes" ("FAS No. 109"), requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1999, Golden Sky increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management frequently
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changes in circumstances indicate that
it is more likely than not the additional benefits will be realized. Any future
adjustments to the valuation allowance will be recognized as a separate
component of DBS' provision for income taxes.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
-----------------------------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts................................. $ 115 $ 383
Accrued expenses................................................ 104 337
-----------------------------------
Gross current deferred tax assets.................................. 219 720
Valuation allowance................................................ (219) (720)
-----------------------------------
Net current deferred tax assets.................................... -- --
Non-current deferred tax assets:
Depreciation.................................................... 92 139
Amortization of intangible assets............................... 5,931 8,255
Partnerships.................................................... -- 841
Net operating loss carryforwards................................ 28,407 71,738
Other......................................................... -- 20
-----------------------------------
Total non-current deferred tax assets.............................. 34,430 80,993
Valuation allowance................................................ (34,430) (80,993)
-----------------------------------
Net non-current deferred tax assets................................ -- --
-----------------------------------
Net deferred tax assets............................................ $ -- $ --
===================================
</TABLE>
The actual income tax benefit (provision) for 1997, 1998 and 1999 reconciles
to the amounts computed by applying the statutory federal tax rate to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999
--------------------------------------------------------------
TAX Rate TAX RATE TAX RATE
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate....................................... $ 5,367 34.0% $21,131 34.0 % $43,633 34.0 %
State income taxes, net of federal benefit........... 617 3.9 2,450 3.9 4,953 3.9
Non-deductible amortization of intangible assets..... (291) (1.8) (0.7) (1,507) (1.2)
(415)
Other................................................ (12) (0.1) -- (15) --
(26)
Increase in valuation allowance...................... (5,681) (36.0) (23,140) (37.2) (47,064) (36.7)
--------------------------------------------------------------
Income taxes......................................... $ -- -- % $ -- -- % $ -- -- %
==============================================================
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
DIRECTV 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
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
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. On October 15,
1999 DIRECTV moved to have the NRTC's breach of fiduciary duty (and related
breach of confidential relationship claims) dismissed. The court granted
DIRECTV's motion on November 15, 1999.
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.
On January 10, 2000, Golden Sky Holdings and Pegasus filed a lawsuit against
DIRECTV and Hughes. The lawsuit was filed in the United States District Court,
Central District of California. Golden Sky Holdings and Pegasus filed on behalf
of themselves and as representatives of a class of those similarly situated
within the NRTC affiliate and member universe. The action asserts various
claims, including intentional interference with contractual relations and
interference with prospective economic advantage, programming, thereby
preventing NRTC from providing said premium programming to the class action
members. The claims are also based on DIRECTV's position with respect to launch
fees and other benefits it has received, contract term and rights of refusal. We
are unable to predict the outcome of this matter or how it will impact our
business, financial condition or results of operations.
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Other Litigation
Golden Sky is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect Golden Sky's financial position or results of operations.
Operating Leases
Golden Sky has non-cancelable operating leases for office, warehouse and
storage space and equipment that expire at various dates. Future minimum lease
payments as of December 31, 1999 are summarized as follows (dollars in
thousands):
2000......................................................... $2,116
2001......................................................... 1,611
2002......................................................... 1,050
2003......................................................... 255
2004 and thereafter.......................................... 79
-----------------
Total.............................................. $5,111
=================
11. RELATED PARTY TRANSACTIONS
In 1997, Systems paid $66,000 to a company affiliated with Systems'
president for consulting services received by Systems. Additionally, during
1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in
connection with a 1998 acquisition) and $84,000, respectively, to one of its
directors for consulting services.
During 1996, Golden Sky's president provided Systems with a short-term loan
in the amount of $381,000. In 1997, Golden Sky received an additional $150,000
short-term loan from its president and a $215,000 short-term loan from a
shareholder. Each of these loans bore interest at an annual rate of 10% and was
repaid during 1997.
Through December 31, 1999, Golden Sky contracted with an entity owned by its
president for air transportation services, including the lease of an aircraft.
This lease, which was canceled effective December 31, 1999, required monthly
payments equal to the greater of $20,000 or an aggregate fixed hourly operating
charge. The fixed hourly operating charge was based on prevailing market prices.
The total cost of such services approximated $109,000, $506,000 and $300,000
during 1997, 1998 and 1999, respectively.
12. VALUATION AND QUALIFYING ACCOUNTS
Golden Sky's valuation and qualifying accounts as of December 31, 1997, 1998
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period.... $ 4 $ 138 $ 293
Charged to costs and expenses........................... 417 1,537 3,909
Deductions.............................................. (283) (1,382) (3,229)
----------------------------------------------
Allowance for doubtful accounts, end of period.......... $ 138 $ 293 $ 973
=============== =============== ==============
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS
Consolidating financial information for Golden Sky, Golden Sky's guarantor
subsidiaries, and Golden Sky's non-guarantor subsidiaries is as follows (dollars
in thousands):
Consolidating Statement of Operations - Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ 13,356 $ 2,787 $ 309 $ -- $ 16,452
Lease and other................... 931 -- 13 -- 944
---------------------------------------------------------------------------
Total revenue....................... 2,787 322 -- 17,396
14,287
Costs and expenses:
Costs of DBS services............. 7,514 1,601 189 -- 9,304
System operations................. 2,830 876 100 (10) 3,796
Sales and marketing............... 6,597 693 26 -- 7,316
General and administrative........ 2,260 59 12 -- 2,331
Depreciation and amortization..... 6,312 109 79 800 7,300
---------------------------------------------------------------------------
Total costs and expenses............ 25,513 3,338 406 790 30,047
---------------------------------------------------------------------------
Operating loss...................... (11,226) (551) (84) (790) (12,651)
Non-operating items:
Interest and investment income.... 30 10 -- -- 40
Interest expense.................. (3,170) (3) -- -- (3,173)
---------------------------------------------------------------------------
Total non-operating items........... (3,140) 7 -- -- (3,133)
---------------------------------------------------------------------------
Loss before income taxes............ (14,366) (544) (84) (790) (15,784)
Income taxes........................ -- -- -- -- --
---------------------------------------------------------------------------
Net loss............................ $(14,366) $ (544) $ (84) $(790) $(15,784)
===========================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13.CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................ $ (14,366) $ (544) $ (84) $(790) $(15,784)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization........ 6,312 109 79 800 7,300
Amortization of debt discount,
deferred financing costs and other. 215 -- -- -- 215
Change in operating assets and liabilities,
net of acquisitions:
Subscriber receivables, net of
unearned revenue................ (1,827) (615) (59) -- (2,501)
Other receivables.................. (185) 24 -- -- (161)
Inventory.......................... (1,499) (34) (71) -- (1,604)
Prepaid expenses and other......... (201) 8 (10) -- (203)
Trade accounts payable............. 7,683 (320) 152 -- 7,515
Interest payable................... 733 -- -- -- 733
Accrued payroll and other.......... (1,461) 2,460 402 (10) 1,391
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities.................. (4,596) 1,088 409 -- (3,099)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets... (120,051) -- -- -- (120,051)
Purchases of property and equipment..... (992) (6) -- -- (998)
Other................................... 320 -- -- -- 320
---------------------------------------------------------------------------
Net cash used in investing activities... (120,723) (6) -- -- (120,729)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A
Preferred Stock...................... 34,289 -- -- -- 34,289
Borrowings under the Credit Agreement... 75,000 -- -- -- 75,000
Principal payments on the Credit
Agreement............................ (14,995) (5) -- -- (15,000)
Proceeds from issuance of notes
payable.............................. 2,115 __ -- -- 2,115
Principal payments on notes payable
and obligations under capital
leases............................... (2,902) -- -- -- (2,902)
Contribution from Golden Sky
Holdings, Inc........................ 46,800 -- -- -- 46,800
Increase in deferred financing costs.... (3,321) -- -- -- (3,321)
---------------------------------------------------------------------------
Net cash provided by (used in)
financing activities.................. 136,986 (5) -- -- 136,981
Net increase in cash and cash
equivalents........................... 11,667 1,077 409 -- 13,153
Cash and cash equivalents, beginning
of period............................. 479 -- -- -- 479
---------------------------------------------------------------------------
Cash and cash equivalents, end of $ 12,146 $ 1,077 $ 409 $ -- $ 13,632
period
===========================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 827 $ 1,189 $2,444 $ -- $ 4,460
Restricted cash, current portion..... 28,083 -- -- -- 28,083
Subscriber receivables, net.......... 6,815 1,043 774 -- 8,632
Other receivables.................... 2,360 87 18 -- 2,465
Intercompany receivables............. 11,521 -- -- (11,521) --
Inventory............................ 9,255 583 308 -- 10,146
Prepaid expenses and other........... 1,819 37 3 -- 1,859
---------------------------------------------------------------------------
Total current assets.................... 60,680 2,939 3,547 (11,521) 55,645
Restricted cash, net of current portion. 23,534 -- -- -- 23,534
Property and equipment, net............. 4,418 381 195 -- 4,994
Investment in subsidiaries.............. 22,518 -- -- (22,518) --
Intangible assets, net.................. 199,867 25,051 3,525 4,696 233,139
Deferred financing costs................ 10,541 -- -- -- 10,541
Other assets............................ 133 85 -- -- 218
---------------------------------------------------------------------------
Total assets....................... $ 321,691 $28,456 $7,267 $(29,343) $ 328,071
===========================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable............... $ 13,482 $......49 $ 8 $ -- $ 13,539
Interest payable..................... 11,009 -- -- -- 11,009
Current maturities of long-term
obligations........................ 8,916 -- -- -- 8,916
Unearned revenue..................... 4,380 789 405 -- 5,574
Accrued payroll and other............ 1,028 6,263 5,633 (11,521) 1,403
---------------------------------------------------------------------------
Total current liabilities............... 38,815 7,101 6,046 (11,521) 40,441
Long-term obligations, net of current maturities:
12 3/8% Notes........................ 195,000 -- -- -- 195,000
Bank debt............................ 67,000 -- -- -- 67,000
Seller notes payable................. 6,912 -- -- -- 6,912
Other notes payable and
obligations under capital leases... 318 58 -- -- 376
Minority interest.................... -- -- -- 2,420 2,420
---------------------------------------------------------------------------
Total long-term obligations, net of
current maturities.................... 269,230 58 -- 2,420 271,708
---------------------------------------------------------------------------
Total liabilities....................... 308,045 7,159 6,046 (9,101) 312,149
Stockholder's Equity (Deficit):
Common Stock......................... -- 896 -- (896) --
Additional paid-in capital........... 97,600 1,967 -- (1,967) 97,600
Retained earnings (accumulated
deficit)............................. (83,954) 18,434 1,221 (17,379) (81,678)
---------------------------------------------------------------------------
Total stockholder's equity (deficit).... 13,646 21,297 1,221 (22,518) 15,922
---------------------------------------------------------------------------
Total liabilities and
stockholder's equity (deficit)... $ 321,691 $28,456 $7,267 $(29,343) $ 328,071
===========================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Operations - Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ 57,437 $ 11,172 $ 6,301 $ -- $ 74,910
Lease and other................... 982 22 10 -- 1,014
------------ -- ----------- -- ----------- --- ------------ -- ------------
Total revenue....................... 58,419 11,194 6,311 -- 75,924
Costs and expenses:
Costs of DBS services............. 34,640 6,813 3,838 -- 45,291
System operations................. 7,683 2,533 1,318 (513) 11,021
Sales and marketing............... 23,753 5,045 3,403 -- 32,201
General and administrative........ 7,000 267 164 -- 7,431
Depreciation and amortization..... 19,336 996 340 2,494 23,166
------------ -- ----------- -- ----------- --- ------------ -- ------------
Total costs and expenses............ 92,412 15,654 9,063 1,981 119,110
------------ -- ----------- -- ----------- --- ------------ -- ------------
Operating loss...................... (33,993) (4,460) (2,752) (1,981) (43,186)
Non-operating items:
Interest and investment income.... 1,571 2 -- -- 1,573
Interest expense.................. (20,497) (28) (12) -- (20,537)
------------ -- ----------- -- ----------- --- ------------ -- ------------
Total non-operating items........... (18,926) (26) (12) -- (18,964)
------------ -- ----------- -- ----------- --- ------------ -- ------------
Loss before income taxes............ (52,919) (4,486) (2,764) (1,981) (62,150)
Income taxes........................ -- -- -- -- --
------------ -- ----------- -- ----------- --- ------------ -- ------------
Loss before extraordinary charge.... (52,919) (4,486) (2,764) (1,981) (62,150)
Extraordinary charge on early
retirement of debt............... (2,577) -- -- -- (2,577)
------------ -- ----------- -- ----------- --- ------------ -- ------------
Net loss............................ $(55,496) $(4,486) $(2,764) $(1,981) $(64,727)
============ == =========== == =========== === ============ == ============
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................. $(55,496) $(4,486) $(2,764) $(1,981) $(64,727)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 19,336 996 340 2,494 23,166
Amortization of debt discount,
deferred financing and other........ 977 -- -- -- 977
Extraordinary charge on early
retirement of debt.................. 2,577 -- -- -- 2,577
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue.................. (1,283) (222) (252) -- (1,757)
Other receivables................... (2,144) 32 (18) -- (2,130)
Inventory........................... (7,335) (477) (237) -- (8,049)
Prepaid expenses and other.......... (1,189) (36) (3) -- (1,228)
Trade accounts payable.............. 5,357 (145) (144) -- 5,068
Interest payable.................... 10,223 -- -- -- 10,223
Accrued payroll and other........... (10,253) 4,827 5,231 (513) (708)
---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities..................... (39,230) 489 2,153 -- (36,588)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets.... (104,487) -- -- -- (104,487)
Offering proceeds and investment
earnings placed in escrow............. (51,617) -- -- -- (51,617)
Purchases of property and equipment...... (2,858) (341) (118) -- (3,317)
Other.................................... (500) -- -- -- (500)
---------------------------------------------------------------------------
Net cash used in investing activities.... (159,462) (341) (118) -- (159,921)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of 12 3/8%
Notes ................................ 189,150 -- -- -- 189,150
Borrowings under bank debt............... 90,000 -- -- -- 90,000
Principal payments on bank debt.......... (83,000) -- -- -- (83,000)
Principal payments on notes payable
and obligations under capital
leases................................ (3,639) (36) -- -- (3,675)
Increase in deferred financing costs..... (5,138) -- -- -- (5,138)
---------------------------------------------------------------------------
Net cash provided by (used in)
financing activities.................. 187,373 (36) -- -- 187,337
---------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents....................... (11,319) 112 2,035 -- (9,172)
Cash and cash equivalents, beginning
of period.............................. 12,146 1,077 409 -- 13,632
---------------------------------------------------------------------------
Cash and cash equivalents, end of $ 827 $ 1,189 $ 2,444 $ -- $ 4,460
period
==========================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Balance Sheet -- December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
DBS SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 5 $ 2,850 $ 132 $ 254 $ -- $ 3,241
Restricted cash, current portion.. -- 23,731 -- -- -- 23,731
Subscriber receivables, net....... -- 10,118 1,445 770 -- 12,333
Other receivables................. -- 1,133 -- -- -- 1,133
Intercompany receivables.......... -- 6,021 -- -- (6,021) --
Inventory......................... -- 2,525 331 252 -- 3,108
Prepaid expenses and other........ -- 1,642 8 2 -- 1,652
-----------------------------------------------------------------------
Total current assets................. 5 48,020 1,916 1,278 (6,021) 45,198
Property and equipment, net.......... -- 5,459 256 138 -- 5,853
Investment in subsidiaries........... -- 17,144 -- -- (17,144) --
Intangible assets, net............... -- 213,229 22,930 767 -- 236,926
Deferred financing costs............. 4,144 7,318 -- -- -- 11,462
Other assets......................... -- 173 87 -- -- 260
-----------------------------------------------------------------------
Total assets.................... $ 4,149 $ 291,343 $25,189 $2,183 $ (23,165) $ 299,699
=======================================================================
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable........... $ -- $ 22,858 $ 18 $ 17 $ -- $ 22,893
Interest payable................. 20 11,659 -- -- -- 11,679
Current maturities of long-term
obligations.................... -- 3,248 -- -- -- 3,248
Unearned revenue................. -- 7,146 1,065 458 -- 8,669
Accrued payroll and other........ 466 734 7,032 1,638 (8,927) 943
---------------------------------------------------------------------
Total current liabilities........... 486 45,645 8,115 2,113 (8,927) 47,432
Long-term obligations, net of current maturities:
12 3/8% Notes.................... -- 195,000 -- -- -- 195,000
13 1/2% Notes.................... 112,095 -- -- -- -- 112,095
Bank debt........................ -- 52,000 -- -- -- 52,000
Seller notes payable............. -- 6,932 -- -- -- 6,932
Other notes payable and
obligations under capital
leases......................... -- 103 -- -- -- 103
Minority interest................ -- -- -- -- 936 936
---------------------------------------------------------------------
Total long-term obligations, net of
current maturities................ 112,095 254,035 -- -- 936 367,066
Losses of subsidiaries in excess of
original basis...................... 15,491 -- -- -- (15,491) --
---------------------------------------------------------------------
Total liabilities................... 128,072 299,680 8,115 2,113 (23,482) 414,498
Stockholder's Equity (Deficit):
Common Stock..................... -- -- 896 -- (896) --
Additional paid-in capital....... -- 193,145 1,967 -- (97,358) 97,754
Retained earnings (accumulated
deficit)......................... (123,923) (201,482) 14,211 70 98,571 (212,553)
---------------------------------------------------------------------
Total stockholder's equity (deficit) (123,923) (8,337) 17,074 70 317 (114,799)
---------------------------------------------------------------------
Total liabilities and
stockholder's equity..
(deficit).................... $ 4,149 $ 291,343 $25,189 $2,183 $(23,165) $ 299,699
=====================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Operations - Year Ended December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
CBS SYSTEMS BSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ -- $112,714 $ 18,130 $ 9,089 $ -- $ 139,933
Lease and other................... -- 636 3 1 -- 640
------------------------------------------------------------------------
Total revenue....................... -- 113,350 18,133 9,090 -- 140,573
Costs and expenses:
Costs of DBS services............. -- 71,510 11,516 5,664 -- 88,690
System operations................. -- 14,349 3,495 2,155 (266) 19,733
Sales and marketing............... -- 58,452 4,142 2,339 -- 64,933
General and administrative........ 5 15,703 -- -- -- 15,708
Depreciation and amortization..... -- 32,562 3,054 347 -- 35,963
------------------------------------------------------------------------
Total costs and expenses............ 5 192,576 22,207 10,505 (266) 225,027
------------------------------------------------------------------------
Operating loss...................... (5) (79,226) (4,074) (1,415) 266 (84,454)
Non-operating items:
Interest and investment income.... -- 2,394 -- -- -- 2,394
Interest expense.................. (12,570) (32,435) (5) (2) -- (45,012)
Other non-operating expenses...... (466) (258) (144) -- -- (868)
------------------------------------------------------------------------
Total non-operating items........... (13,036) (30,299) (149) (2) -- (43,486)
------------------------------------------------------------------------
Income (loss) before income taxes... (13,041) (109,525) (4,223) (1,417) 266 (127,940)
Income taxes........................ -- -- -- -- -- --
------------------------------------------------------------------------
Income (loss) before extraordinary (13,041) (109,525) (4,223) (1,417) 266 (127,940)
charge..............................
Extraordinary charge on early -- (2,935) -- -- -- (2,935)
retirement of debt..................
------------------------------------------------------------------------
Net income (loss)................... $ (13,041 $(112,460) $(4,223) $(1,417) $ 266 $(130,875)
========================================================================
</TABLE>
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
CBS SYSTEMS BSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................$ (13,041) $(112,460) $(4,223) $(1,417) $266 $(130,875)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ -- 32,562 3,054 347 -- 35,963
Amortization of debt discount,
deferred financing costs and
other.............................. 12,550 1,126 -- 266 (266) 13,676
Earned stock compensation............ -- 154 -- -- -- 154
Extraordinary charge on early
retirement of debt................. -- 2,935 -- -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue. .............. -- (472) (126) 57 -- (541)
Other receivables................. -- 236 87 18 454 795
Inventory......................... -- 6,730 252 56 -- 7,038
Prepaid expenses and other........ -- 177 29 1 -- 207
Trade accounts payable............ -- 9,376 (31) 9 -- 9,354
Interest payable.................. 20 650 -- -- -- 670
Accrued payroll and other......... 466 1,105 (97) (1,498) (454) (478)
------------------------------------------------------------------------
Net cash used in operating activities.. (5) (57,881) (1,055) (2,161) -- (61,102)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets.. -- (35,339) -- -- -- (35,339)
Purchases of minority interests........ -- (1,439) -- -- -- (1,439)
Proceeds from interest escrow account . -- 24,224 -- -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt
reduction of bank debt ............. 5,449 -- -- -- 5,449
Investment earnings placed in escrow .. -- (1,787) -- -- -- (1,787)
Purchases of property and equipment.... -- (3,423) -- (29) -- (3,452)
Other.................................. -- 114 (2) -- -- 112
------------------------------------------------------------------------
Net cash used in investing activities.. -- (12,201) (2) (29) -- (12,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowing......................... -- 38,000 -- -- -- 38,000
Principal payments on bank debt........ -- (53,000) -- -- -- (53,000)
Principal payments on notes payable
and obligations under capital
leases.............................. -- (8,846) -- -- -- (8,846)
Increase in deferred financing costs... (4,648) (868) -- (5,516)
Capital contribution from minority
partner ............................ -- 1,428 -- -- -- 1,428
Capital Contribution to Systems........ (95,391) 95,391 -- -- -- --
Net proceeds from issuance of 131/2%
Notes ............................. 100,049 -- -- -- -- 100,049
------------------------------------------------------------------------
Net cash provided by financing
activities ................... 10 72,105 -- -- -- 72,115
------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents................... 5 2,023 (1,057) (2,190) -- (1,219)
Cash and cash equivalents, beginning -- 827 1,189 2,444 -- 4,460
of period...........................
------------------------------------------------------------------------
Cash and cash equivalents, end of
period............................ $ 5 $ 2,850 $ 132 $ 254 $ -- $ 3,241
========================================================================
</TABLE>
11
<PAGE>
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Golden Sky's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Period Ended December 31, 1998:
Total revenue.................................. $ 14,129 $ 16,849 $ 19,912 $ 25,034
Operating loss................................. (6,034) (8,806) (11,462) (16,884)
Loss before extraordinary charge.............. (8,287) (11,761) (17,354) (24,748)
Net loss....................................... (8,287) (14,338) (17,354) (24,748)
Period Ended December 31, 1999:
Total revenue.................................. $ 29,036 $ 31,389 $ 36,732 $ 43,416
Operating loss................................. (16,734) (19,166) (29,930) (18,624)
Loss before extraordinary charge.............. (25,872) (30,104) (41,087) (30,877)
Net loss....................................... (28,807) (30,104) (41,087) (30,877)
</TABLE>
<PAGE>
EXHIBIT INDEX
2.1 Stock Purchase Agreement, dated as of July 11, 1997, among
Golden Sky Systems, Inc., Argos Support Services Company and the
several shareholders named therein. (Exhibit 2.1 to Registration
Statement on Form S-4 No. 333-64367)
2.2 Asset Purchase Agreement, dated as of July 19, 1998, by and
between Golden Sky Systems, Inc. and Volcano Vision, Inc.
(Exhibit 2.2 to Registration Statement on Form S-4 No.
333-64367)
2.3 Agreement and Plan of Merger, dated as of September 1, 1998,
among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
Western Montana DBS, Inc. d/b/a Rocky Mountain DBS and the
stockholders of Western Montana DBS, Inc. named therein.
(Exhibit 2.3 to Registration Statement on Form S-4 No.
333-64367)
3.1 Second Amended and Restated Certificate of Incorporation of
Golden Sky Systems, Inc. (Exhibit 3.1 to Registration Statement
on Form S-4 No. 333-64367)
3.2 By-Laws of Golden Sky Systems, Inc., adopted as of October 1,
1997. (Exhibit 3.2 to Registration Statement on Form S-4 No.
333-64367)
4.1 Indenture, dated as of July 31, 1998, by and among Golden Sky
Systems, Inc., as issuer, Argos Support Services Company, as
guarantor, PrimeWatch, Inc., as guarantor, and State Street Bank
and Trust Company of Missouri, N.A., as trustee, relating to the
12 3/8% Senior Subordinated Notes due 2006, Series A and 12 3/8%
Senior Subordinated Notes due 2006, Series B of Golden Sky
Systems, Inc. (Exhibit 4.1 to Registration Statement on Form S-4
No. 333-64367)
4.2 Form of 12 3/8% Senior Subordinated Note due 2006, Series B of
Golden Sky Systems, Inc. (Included in Exhibit 4.1 to
Registration Statement on Form S-4 No. 333-64367)
4.3 Registration Rights Agreement, dated as of July 31, 1998, by and
among Golden Sky Systems, Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and NationsBanc Montgomery Securities LLC, as
initial purchasers. (Exhibit 4.3 to Registration Statement on
Form S-4 No. 333-64367)
4.4 Escrow Agreement, dated as of July 31, 1998, by and among State
Street Bank and Trust Company of Missouri, N.A., as escrow agent
and as trustee under the Indenture, and Golden Sky Systems, Inc.
(Exhibit 4.4 to Registration Statement on Form S-4 No.
333-64367)
4.5 Account Control Agreement, dated as of July 31, 1998, by and
among Golden Sky Systems, Inc., State Street Bank and Trust
Company of Missouri, N.A., as escrow agent and as custodian and
securities intermediary. (Exhibit 4.5 to Registration Statement
on Form S-4 No. 333-64367)
10.1 Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC, relating
to the issuance and sale of $195,000,000 aggregate principal
amount of 12 3/8% Senior Subordinated Notes due 2006, Series A
of Golden Sky Systems, Inc. (Exhibit 10.1 to Registration
Statement on Form S-4 No. 333-64367)
10.2 Amended and Restated Credit Agreement, dated as of May 8, 1998,
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. (Exhibit 10.2 to Registration Statement on Form S-4 No.
333-64367)
10.3 First Amendment to Amended and Restated Credit Agreement, dated
as of February 10, 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,
<PAGE>
as documentation agent. (Exhibit 10.17 to Registration Statement
on Form S-4 No. 333-64367)
10.4 Form of NRTC/Member Agreement for Marketing and Distribution of
DBS Services, as amended. (Exhibit 10.3 to Registration
Statement on Form S-4 No. 333-64367)
10.6 Employment Agreement, dated February 12, 1997, between Golden
Sky Systems, Inc. and Rodney A. Weary. (Exhibit 10.6 to
Registration Statement on Form S-4 No. 333-64367)*
10.7 Non-Competition Agreement between Golden Sky Systems, Inc., and
Rodney A. Weary. (Exhibit 10.11 to Registration Statement on
Form S-4 No. 333-64367)*
10.8 Employment Agreement, dated February 12, 1997, between Golden
Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.7 to
Registration Statement on Form S-4 No. 333-64367)*
10.9 Non-Competition Agreement between Golden Sky Systems, Inc. and
Jo Ellen Linn. (Exhibit 10.12 to Registration Statement on Form
S-4 No. 333-64367)*
10.10 Employment Agreement, dated as of November 3, 1997, between
Golden Sky Systems, Inc. and William J. Gerski. (Exhibit 10.8 to
Registration Statement on Form S-4 No. 333-64367)*
10.11 Employment Agreement, dated August 24, 1998, between Golden Sky
Systems, Inc. and John R. Hager. (Exhibit 10.10 to Registration
Statement on Form S-4 No. 333-64367)*
10.12 Non-Competition Agreement, dated August 24, 1998, between Golden
Sky Systems, Inc. and John R. Hager. (Exhibit 10.13 to
Registration Statement on Form S-4 No. 333-64367)*
10.13 Confidentiality and Proprietary Rights Agreements, dated August
24, 1998, between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.15 to Registration Statement on Form S-4 No.
333-64367)*
10.14 Form of Director Indemnification Agreement, dated February 12,
1997, between Golden Sky Systems, Inc. and each of the members
of its Board of Directors. (Exhibit 10.14 to Registration
Statement on Form S-4 No. 333-64367)
10.15 Exchange Agency Agreement, dated as of November 24, 1998,
between Golden Sky Systems, Inc. and State Street Bank and Trust
Company of Missouri, N.A., as exchange agent. (Exhibit 10.16 to
Registration Statement on Form S-4 No. 333-64367)
10.16 Office Building Lease, dated January 27, 1999, between
Belletower Partners, L.L.C. and Golden Sky Systems, Inc.
(Exhibit 10.18 to Registration Statement on Form S-4 No.
333-64367)
10.17 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 (Exhibit
10.24 to Registration Statement on Form S-4 No. 333-76413)
10.18 Employment Agreement, dated as of February 1, 1999, between
Golden Sky Systems, Inc. and Scott R. Brown (Exhibit 10.18 to
Annual Report on Form 10-K for the period ended December 31,
1999 No. 333-64367).*
10.19 Noncompetition Agreement, dated as of February 1, 1999, between
Golden Sky Systems, Inc. and Scott R. Brown (Exhibit 10.19 to
Annual Report on Form 10-K for the period ended December 31,
1999 No. 333-64367).*
<PAGE>
10.20 Noncompetition Agreement, dated as of November 3, 1997, between
Golden Sky Systems, Inc. and William J. Gerski (Exhibit 10.20 to
Annual Report on Form 10-K for the period ended December 31,
1999 No. 333-64367).*
10.21 Stock and Warrant Purchase Agreement, dated as of January 4,
2000, by and among Golden Sky Holdings, Inc. and the investors
identified therein (Exhibit 10.21 to Annual Report on Form 10-K
for the period ended December 31, 1999 No. 333-64367).
10.22 Agreement and Plan of Merger, dated as of January 10, 2000,
among Pegasus Communications Corporation and certain of its
shareholders, Pegasus GSS Merger Sub, Inc., Golden Sky Holdings,
Inc. and certain of its shareholders. (Exhibit 2.1 to
Registration Statement on Form S-4 No. 333-31080)
10.23 Second Amendment, Consent and Waiver, dated as of January 4,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
the Banks party thereto from time to time, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet National
Bank, as Administrative Agent and General Electric Capital
Corporation, as Documentation Agent (Exhibit 10.23 to Annual
Report on Form 10-K for the period ended December 31, 1999 No.
333-64367).
10.24 Third Amendment, Consent and Waiver, dated as of January 20,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
the Banks party thereto from time to time, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet National
Bank, as Administrative Agent and General Electric Capital
Corporation, as Documentation Agent (Exhibit 10.24 to Annual
Report on Form 10-K for the period ended December 31, 1999 No.
333-64367).
21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit 21.1 to
Registration Statement on Form S-4 No. 333-64367)
24.2 Powers of Attorney of the members of the Board of Directors of
Golden Sky Systems, Inc. (Included in the signature pages of
this report)**
27.1 Financial Data Schedule. **
99.1 Stock Purchase Agreement, dated as of February 12, 1997, among
Golden Sky Systems, Inc., Rodney A. Weary and the investors
named therein. (Exhibit 99.3 to Registration Statement on Form
S-4 No. 333-64367)
99.2 Stock Purchase Agreement, dated as of November 24, 1997, by and
among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
Rodney A. Weary, and the investors named therein. (Exhibit 99.4
to Registration Statement on Form S-4 No. 333-64367)
99.3 Stockholders Agreement, dated as of November 24, 1997, by and
among Golden Sky Holdings, Inc. and the investors and other
stockholders named therein. (Exhibit 99.5 to Registration
Statement on Form S-4 No. 333-64367)
-------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
<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 DECEMBER 31,
1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,241
<SECURITIES> 0
<RECEIVABLES> 13,306
<ALLOWANCES> (973)
<INVENTORY> 3,108
<CURRENT-ASSETS> 45,193
<PP&E> 11,771
<DEPRECIATION> (5,918)
<TOTAL-ASSETS> 299,699
<CURRENT-LIABILITIES> 47,432
<BONDS> 307,095
0
0
<COMMON> 0
<OTHER-SE> (114,799)
<TOTAL-LIABILITY-AND-EQUITY> (299,699)
<SALES> 0
<TOTAL-REVENUES> 140,573
<CGS> 0
<TOTAL-COSTS> 88,690
<OTHER-EXPENSES> 132,428
<LOSS-PROVISION> 3,909
<INTEREST-EXPENSE> 45,012
<INCOME-PRETAX> (127,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (127,940)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,935)
<CHANGES> 0
<NET-INCOME> (130,875)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
