UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from _______________ to ________________.
Commission file number 333-64367
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GOLDEN SKY SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 43-1749060
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
c/o Pegasus Communication Management Company
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
As of May 15, 2001, the Registrant had 1000 shares of common stock
outstanding.
GOLDEN SKY SYSTEMS, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended March 31, 2001
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000................................ 4
Consolidated Statements of Operations
Three months ended March 31, 2001 and 2000.......................... 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2001 and 2000.......................... 6
Notes to Consolidated Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
Signature.................................................................... 17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
Golden Sky Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,460 $ 31,481
Accounts receivable, net 13,735 12,349
Prepaid expenses 1,352 1,418
Deferred income taxes 284 380
----------- -----------
Total current assets 40,831 45,628
Property and equipment, net 3,229 3,783
Intangible assets, net 1,107,783 1,141,359
Other non-current assets 10,268 10,646
----------- -----------
Total assets $ 1,162,111 $ 1,201,416
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 231 $ 214
Other current liabilities 110,484 49,177
----------- -----------
Total current liabilities 110,715 49,391
Long-term debt 196,000 270,946
Net advances from affiliates 20,694 5,674
Deferred income taxes, net 271,524 289,086
----------- -----------
Total liabilities 598,933 615,097
----------- -----------
Commitments and contingent liabilities (see Note 5)
Minority interest 1,033 911
Common stockholder's equity:
Common stock - -
Other stockholder's equity 562,145 585,408
----------- -----------
Total stockholder's equity 562,145 585,408
----------- -----------
Total liabilities and stockholder's equity $ 1,162,111 $ 1,201,416
=========== ===========
See accompanying notes to consolidated financial statements
4
Golden Sky Systems, Inc.
Consolidated Statements of Operations
(In thousands)
Three Months Ended
March 31,
2001 2000
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(unaudited)
Net revenues:
DBS services $ 53,693 $ 43,491
Lease and other 3,502 57
--------- ----------
Total net revenues 57,195 43,548
Operating expenses:
Programming, technical, general and administrative 40,775 34,654
Marketing and selling 15,321 7,586
Depreciation and amortization 33,930 9,335
Other expenses 150 1,337
--------- ----------
Loss from operations (32,981) (9,364)
Interest expense (8,096) (8,306)
Interest income 341 205
Other non-operating income (expenses) 7 (523)
--------- ----------
Loss before income taxes (40,729) (17,988)
Benefit for income taxes (17,466) -
--------- ----------
Net loss $ (23,263) $ (17,988)
========= ==========
See accompanying notes to consolidated financial statements
5
Golden Sky Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31,
----------------------------
2001 2000
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(unaudited)
Net cash used by operating activities $ (19,071) $ (15,908)
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (1,486)
Other - 277
--------- ---------
Net cash used by investing activities - (1,209)
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (1,970) (3,086)
Net borrowings on bank credit facilities - 6,000
Advances from affiliates 15,020 -
Restricted cash - 11,910
Debt financing costs - (918)
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Net cash provided by financing activities 13,050 13,906
--------- ---------
Net decrease in cash and cash equivalents (6,021) (3,211)
Cash and cash equivalents, beginning of year 31,481 3,236
--------- ---------
Cash and cash equivalents, end of period $ 25,460 $ 25
========= =========
See accompanying notes to consolidated financial statements
6
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Golden Sky Systems, Inc. ("Golden Sky" or together with its
subsidiaries, the "Company") provides direct broadcast satellite television
("DBS") services to subscribers in rural areas of the United States. Golden Sky
is a direct subsidiary of Golden Sky DBS, Inc. ("GSDBS"). GSDBS is a direct
subsidiary of Golden Sky Holdings, Inc. ("GSH"), and GSH is a direct subsidiary
of Pegasus Satellite Communications, Inc. ("PSC", formerly known as Pegasus
Communications Corporation). PSC is a direct subsidiary of Pegasus
Communications Corporation.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements are
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited consolidated financial statements reflect
all adjustments consisting of normal recurring items that are, in the opinion of
management, necessary for a fair presentation, in all material respects, of the
financial position of the Company and the results of its operations and its cash
flows for the interim period. The amounts on the balance sheet as of December
31, 2000 were derived from the audited balance sheet as of that date. For
further information, refer to the consolidated financial statements and
footnotes thereto included in Golden Sky's Annual Report on Form 10-K for the
year ended December 31, 2000.
The unaudited consolidated financial statements include the accounts of
Golden Sky and all of its subsidiaries on a consolidated basis. All intercompany
transactions and balances have been eliminated. The balance sheets and
statements of cash flows are presented on a condensed basis.
3. Costs Allocated by Affiliate
Pegasus Satellite Television, Inc. ("PST"), an indirect wholly owned
subsidiary of PSC, allocates to the Company expenses of operations common to
both PST and the Company. These common expenses are for customer care, the sales
function, labor and internal support costs. The allocation is based on a
proportion of the Company's number of subscribers. The total amount of these
expenses allocated to and included in the Company's statement of operations for
the three months ended March 31, 2001 was $8.5 million.
4. Long-Term Debt
At March 31, 2001 and December 31, 2000, the total amount outstanding
under Golden Sky's revolving credit facility was $37.0 million. Letters of
credit outstanding under the revolving credit facility, which reduce the
availability thereunder, were $28.7 million at March 31, 2001 and $35.9 million
at December 31, 2000. At March 31, 2001, the commitment for the revolving credit
facility was permanently reduced as scheduled under the terms of the governing
credit agreement by $1.2 million to $113.9 million. Availability under the
revolving facility at March 31, 2001 was $48.1 million. The weighted average
rates of interest including applicable margins on amounts outstanding at March
31, 2001 and December 31, 2000 were 8.33% and 9.90%, respectively, for the term
facility and 8.05% and 10.26%, respectively, for the revolving facility.
At March 31, 2001, Golden Sky was in violation of covenants under its
credit agreement with respect to certain operational thresholds. Golden Sky has
requested a waiver of these violations from the participating lenders to the
agreement. In exchange for the waiver, Golden Sky would amend the agreement to
permanently reduce the commitment under the revolving facility to $90.0 million.
The Company intends to repay amounts outstanding under the term loan facility
and revolving credit facility by the end of the third quarter 2001. The waiver
and amendment are pending approval by the participating lenders.
As a result of the covenant violations, the amounts outstanding under
the credit agreement at March 31, 2001 of $72.0 million became callable by the
participating lenders. Consequently, the Company has classified these amounts as
current liabilities from non-current liabilities at March 31, 2001.
On April 27, 2001, PSC offered to exchange its new issue of $195.0
million in principal amount of 12-3/8% senior notes due 2006 for Golden Sky's
outstanding $195.0 million in principal amount of Series A and B 12-3/8% senior
subordinated notes due 2006. In the exchange, the holders of the Golden Sky's
notes are being solicited for their consent to amend each indenture governing
Golden Sky's notes that would eliminate substantially all restrictive covenants
7
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Long-Term Debt (continued)
under the indenture. Tender of the notes constitutes consent to the applicable
indenture amendments. The exchange offer is scheduled to expire in the second
quarter of 2001.
5. Commitments and Contingent Liabilities
Legal Matters:
DIRECTV, Inc. Litigation
- ------------------------
The Company is an affiliate of the National Rural Telecommunications
Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and
affiliates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. The Company's
ability to distribute DIRECTV programming services is dependent upon agreements
between the NRTC and Hughes Electronics Corporation and between the Company and
the NRTC.
The NRTC:
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DIRECTV, Inc. seeking a court order to enforce the NRTC's contractual rights to
obtain from DIRECTV, Inc. 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, Inc. from marketing the premium
programming in such markets and requiring DIRECTV, Inc. 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, Inc. responded to the NRTC's continuing
lawsuit by rejecting the NRTC's claims to exclusive distribution rights and by
filing a counterclaim seeking judicial clarification of certain provisions of
DIRECTV Inc.'s contract with the NRTC. As part of the counterclaim, DIRECTV,
Inc. is seeking a declaratory judgment that the term of the NRTC's agreement
with DIRECTV, Inc. is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not by the orbital lives of the other DIRECTV
satellites at the 101(degree) W orbital location. According to DIRECTV, Inc.,
DBS-1 suffered a failure of its primary control processor in July 1998 and since
that time has been operating normally using a spare control processor. While the
NRTC has a right of first refusal to receive certain services from any successor
DIRECTV satellite, the scope and terms of this right of first refusal are also
being disputed in the litigation, as discussed below. This right is not
expressly provided for in our agreements with the NRTC.
On September 9, 1999, the NRTC filed a response to DIRECTV, Inc.'s
counterclaim contesting DIRECTV, Inc.'s interpretations of the end of term and
right of first refusal provisions. On December 29, 1999, DIRECTV, Inc. filed a
motion for partial summary judgment. The motion sought a court order that the
NRTC's right of first refusal, effective at the termination of DIRECTV, Inc.'s
contract with the NRTC, does not include programming services and is limited to
20 program channels of transponder capacity. On January 31, 2001, the court
issued an order denying DIRECTV, Inc.'s motion in its entirety for partial
summary judgment relating to the right of first refusal.
If DIRECTV, Inc. were to prevail on its counterclaim, any failure of
DBS-1 could have a material adverse effect on the Company's DIRECTV rights. The
Company and Pegasus Satellite have been informed that DIRECTV may amend its
counterclaim to file additional claims against the NRTC.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV, Inc. claiming that DIRECTV, Inc. had failed to provide to the
NRTC its share of launch fees and other benefits that DIRECTV, Inc. and its
affiliates have received relating to programming and other services. On November
15, 1999, the court granted a motion by DIRECTV, Inc. and dismissed the portion
of this lawsuit asserting tort claims, but left in place the remaining claims
asserted by the NRTC.
8
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Commitments and Contingent Liabilities (continued)
Both of the NRTC's lawsuits against DIRECTV, Inc. have been
consolidated. A trial date of August 13, 2002 has been set for these lawsuits
and two additional lawsuits against DIRECTV, Inc. discussed below.
PST and GSS:
On January 10, 2000, the Company and PST filed a class action lawsuit
in federal court in Los Angeles against DIRECTV, Inc. as representatives of a
proposed class that would include all members and affiliates of the NRTC that
are distributors of DIRECTV. The complaint contained causes of action for
various torts, common law counts and declaratory relief based on DIRECTV, Inc.'s
failure to provide the NRTC with certain premium programming, and on DIRECTV,
Inc.'s position with respect to launch fees and other benefits, term and right
of first refusal. The complaint sought monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
On February 10, 2000, the Company and PST filed an amended complaint
which added new tort claims against DIRECTV, Inc. for interference with their
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The class action allegations the Company and PST previously
filed were later withdrawn to allow a new class action to be filed on behalf of
the members and affiliates of the NRTC. The new class action was filed on
February 27, 2000.
On December 10, 2000, the court rejected in its entirety DIRECTV,
Inc.'s motion to dismiss certain of the claims asserted by the Company, PST and
the putative class. On January 31, 2001, the court denied in its entirety a
motion for summary judgment filed by DIRECTV, Inc. relating to the right of
first refusal. The court also certified the plaintiff's class on December 28,
2000.
On March 9, 2001, DIRECTV, Inc. filed a counterclaim against the
Company and PST, as well as the class members. In the counterclaim, DIRECTV,
Inc. seeks two claims for relief: a declaratory judgement that the Company has
no right of first refusal in its agreements with the NRTC to have DIRECTV, Inc.
provide any services after the expiration of the term of these agreements; and
an order that DBS-1 is the satellite (and the only satellite) that measures the
term of the agreements with the NRTC. The Company and PST have been informed by
DIRECTV, Inc. that it intends to file a motion for summary judgment on both of
those claims. The Company's and PST' motion to dismiss the counterclaim was
denied on May 8, 2001 and a response by the Company and PST to the counterclaim
is due May 21, 2001.
All four lawsuits discussed above, including both lawsuits brought by
the NRTC, the class action and the Company's and PST's lawsuit are pending
before the same judge. The court has set a trial date of August 13, 2002 for all
four of these actions.
The outcome of this litigation could have a material adverse effect on
the Company's direct broadcast satellite business. The Company's revenue and
financial performance would be adversely affected if the Company was unable to
continue offering DIRECTV products.
6. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, became effective for the Company on January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. The adoption of this standard did not have any impact on the
Company as the Company does not have any derivative instruments.
SFAS No. 140 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" revises standards for accounting for
securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Certain
provisions of this standard became effective for the Company on January 1, 2001
and other provisions became effective after March 31, 2001. The adoption of this
standard did not have any impact on the Company.
9
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Reorganization of Pegasus Communications Corporation
On February 22, 2001, Pegasus Communications Corporation adopted a new
holding company structure. In the reorganization, all common and preferred stock
of PSC (formerly known as Pegasus Communications Corporation) was exchanged for
identical common and preferred stock of its new holding company, which assumed
the name Pegasus Communications Corporation, and PSC became a direct subsidiary
of the new holding company.
8. Income Taxes
The Company's effective federal income tax rate for continuing
operations for the three months ended March 31, 2001 was (42.88)%, compared to
the statutory federal income tax rate of (35.00)%. The effective federal income
tax rate for continuing operations for the year ended December 31, 2000 was
(38.00)% for the portion of the year after the merger of GSH and PSC that
occurred in May 2000. The Company's effective federal income tax rate varies
with the changes in the Company's net deferral income tax position. The current
year's rate reflects more of the effects of deferred income tax assets
associated with increased cumulative net operating loss carryforwards available
for income tax purposes than were able to be used in 2000.
9. Subsidiary Guarantees
Golden Sky's 12-3/8% senior notes are guaranteed by two of its three
subsidiaries. In lieu of separate financial statements for the subsidiary
guarantors, the Company provides the following condensed consolidating financial
statements, as permitted by Regulation S-X of the SEC. It is not practicable for
the Company to provide comparative condensed consolidating statement of
operations and statement of cash flows for the three months ended March 31,
2000.
10
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Subsidiary Guarantees (continued)
Condensed Consolidating Balance Sheets
(In thousands)
Guarantor Non-guarantor
As of March 31, 2001 Subsidiaries Subsidiaries Golden Sky Eliminations Consolidated
------------ ------------- ---------- ------------ ------------
Assets:
Cash and cash equivalents $ 3,232 $ 22,228 $ 25,460
Accounts receivable, net 649 13,086 13,735
Intercompany receivables 3,095 $ 1,756 - $ (4,851) -
Other current assets 1,636 1,636
------------ ------------- ---------- ------------ ------------
Total current assets 6,976 1,756 36,950 (4,851) 40,831
Property and equipment, net - 3,229 3,229
Intangible assets, net 5,412 1,102,371 1,107,783
Other assets 10,268 10,268
------------ ------------- ---------- ------------ ------------
Total assets $ 12,388 $ 1,756 $1,152,818 $ (4,851) $ 1,162,111
============ ============= ========== ============ ============
Liabilities and total equity:
Accounts payable $ 231 $ 231
Other current liabilities $ 3,535 106,949 110,484
------------ ------------- ---------- ------------ ------------
Total current liabilities 3,535 - 107,180 - 110,715
Long-term debt - 196,000 196,000
Other liabilities - 292,218 292,218
------------ ------------- ---------- ------------ ------------
Total liabilities 3,535 - 595,398 - 598,933
Minority interest - - $ 1,033 1,033
Total equity (deficit) 8,853 $ 1,756 557,420 (5,884) 562,145
------------ ------------- ---------- ------------ ------------
Total liabilities and equity $ 12,388 $ 1,756 $1,152,818 $ (4,851) $ 1,162,111
============ ============= ========== ============ ============
As of December 31, 2000
Assets:
Cash and cash equivalents $ 3,775 $ 27,706 $ 31,481
Accounts receivable, net 997 11,352 12,349
Intercompany receivables 2,621 $ 1,240 $ (3,861) -
Other current assets 1,798 1,798
------------ ------------- ---------- ------------ ------------
Total current assets 7,393 1,240 40,856 (3,861) 45,628
Property and equipment, net 3,783 3,783
Intangible assets, net 5,589 1,135,770 1,141,359
Other assets 10,646 10,646
Investments in subsidiaries and affiliates - - -
------------ ------------- ---------- ------------ ------------
Total assets $ 12,982 $ 1,240 $1,191,055 $ (3,861) $ 1,201,416
============ ============= ========== ============ ============
Liabilities and total equity:
Current portion of long-term debt $ 1,970 $ 1,970
Accounts payable 214 214
Other current liabilities $ 4,207 43,000 47,207
------------ ------------- ---------- ------------ ------------
Total current liabilities 4,207 - 45,184 - 49,391
Long-term debt 270,946 270,946
Other liabilities 294,760 294,760
------------ ------------- ---------- ------------ ------------
Total liabilities 4,207 - 610,890 - 615,097
Minority interest $ 911 911
Total equity 8,775 $ 1,240 580,165 (4,772) 585,408
------------ ------------- ---------- ------------ ------------
Total liabilities and equity $ 12,982 $ 1,240 $1,191,055 $ (3,861) $ 1,201,416
============ ============= ========== ============ ============
11
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Operations
For the Three Months Ended March 31, 2001
(In thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Golden Sky Eliminations Consolidated
------------ ------------- ---------- ------------ ------------
Total revenue $ 7,301 $ 3,644 $ 46,250 $ 57,195
Total operating expenses 7,223 3,128 79,825 90,176
------------ ------------- ---------- ------------ ------------
Loss from operations 78 516 (33,575) - (32,981)
Interest expense - 8,096 8,096
Other expense - (348) (348)
------------ ------------- ---------- ------------ ------------
Loss before income taxes 78 516 (41,323) - (40,729)
Benefit for income taxes - (17,466) (17,466)
------------ ------------- ---------- ------------ ------------
Net loss $ 78 $ 516 $ (23,857) $ - $ (23,263)
============ ============= ========== ============ ============
12
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Subsidiary Guarantees (continued)
Condensed Consolidating Statements of Cash Flows
For the Three Months Ended March 31, 2001
(In thousands)
Guarantor Non-guarantor
Subsidiaries Subsidiaries Golden Sky Eliminations Consolidated
------------ ------------- ---------- ------------ ------------
Net cash used by operating activities $ (543) $ - $ (18,528) $ (19,071)
------------ ------------- ---------- ------------ -----------
Cash flows from financing activities:
Net proceeds from debt (1,970) (1,970)
Other 15,020 15,020
------------ ------------- ---------- ------------ -----------
Net cash provided by financing activities - - 13,050 - 13,050
Net decrease in cash and cash equivalents (543) (5,478) (6,021)
Cash and cash equivalents, beginning of year 3,775 27,706 31,481
------------ ------------- ---------- ------------ -----------
Cash and cash equivalents, end of period $ 3,232 $ - $ 22,228 $ - $ 25,460
============ ============= ========== ============ ===========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our results of operations should be read in
conjunction with the consolidated financial statements and related notes herein.
Results of Operations
Comparison of Three Months Ended March 31, 2001 and 2000
In this section, amounts and changes specified are for the three months
ended March 31, 2001 compared to the three months ended March 31, 2000, unless
indicated otherwise.
Revenues increased $13.6 million to $57.2 million. This increase
consisted of $10.2 million in DBS services and $3.4 million in lease and other
revenues. The increase in DBS services was primarily due to the growth in the
number of our subscribers since the end of the first quarter of 2000. During the
12 months ended March 31, 2001 we added 54,500 subscribers through internal
growth. At March 31, 2001, we had exclusive DIRECTV distribution rights to 1.9
million households and 399,500 subscribers. Lease and other revenues increased
$3.4 million to $3.5 million. The increase is mainly attributable to our
assuming the rental arrangements in place with subscribers of a former provider
that were converted to our subscribers since March 31, 2000.
Programming, technical, general and administrative expenses increased
$6.1 million to $40.8 million. This increase was principally due to the
incremental costs incurred in providing service to an increased subscriber base.
Marketing and selling expenses increased $7.7 million to $15.3 million.
A portion of this increase was due to increased marketing and selling efforts
that contributed to the increase in subscribers. A portion of the increase is
also due to a concerted effort to minimize these expenses in the first quarter
of 2000 in anticipation of the merger of our parent company Golden Sky Holdings
with Pegasus Satellite Communications (formerly Pegasus Communications
Corporation) that occurred in May 2000.
Depreciation and amortization increased $24.6 million to $33.9 million,
principally due to the amortization on the $1.0 billion increase in our DBS
rights assets that we recorded in May 2000 as a result of the merger between
Golden Sky Holdings and Pegasus Satellite Communications. The annual and
quarterly amortization expense on the increased DBS assets approximates $100.0
and $25.0 million, respectively.
For the three months ended March 31, 2001, we had an income tax benefit
of $17.5 million compared to no income taxes for the prior year period. In the
current year period, we were able to apply our deferred income tax assets
against an increased amount of deferred income tax liabilities that resulted
from the merger of our indirect parent company Golden Sky Holdings and Pegasus
Satellite Communications in May 2000, thereby permitting us to recognize the
associated deferred income tax benefits in our current year earnings. In the
prior year period, we were in a net deferred income tax asset position against
which were applied full valuation allowances that negated our recognition of the
related deferred income tax benefits.
14
Liquidity and Capital Resources
Net cash used by operating activities was $19.1 million for the three
months ended March 31, 2001 compared to $15.9 million for the three months ended
March 31, 2000. A portion of the increase is due to greater working capital
requirements in the current year period associated with a larger subscriber base
and increased subscriber acquisition costs than in the prior year period.
Approximately $15.0 million of this cash usage was funded by advances from our
affiliate Pegasus Satellite Television, which is a subsidiary of Pegasus
Satellite Communications like us, and the rest was funded from our cash on hand.
We have a revolving credit facility with availability of $48.1 million
at March 31, 2001. At March 31, 2001, the commitment for the revolving credit
facility was permanently reduced as scheduled under the terms of the governing
credit agreement by approximately $1.2 million to approximately $113.9 million.
At March 31, 2001, we were in violation of covenants under the credit
agreement with respect to certain operational thresholds. We have requested a
waiver of these violations from the participating lenders to the agreement. In
exchange for the waiver, we would amend the agreement to permanently reduce the
commitment under the revolving facility to $90.0 million. We intend to repay
amounts outstanding under the term loan facility and revolving credit facility
of the credit agreement by the end of the third quarter 2001. The waiver and
amendment are pending approval by the participating lenders.
As a result of the covenant violations, the amounts outstanding under
the credit agreement at March 31, 2001 of $72.0 million became callable by the
participating lenders. Consequently, the Company has classified these amounts as
current liabilities from non-current liabilities at March 31, 2001.
On April 27, 2001, Pegasus Satellite offered to exchange its new issue
of $195.0 million in principal amount of 12-3/8% senior notes due 2006 for our
outstanding $195.0 million in principal amount of Series A and B 12-3/8% senior
subordinated notes due 2006. The exchange offer is scheduled to expire in the
second quarter of 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk continues to be changes in interest rates
associated with our variable rate debt. Because of a general decline in market
interest rates, the variable weighted average interest rates, including
applicable margins, on our revolving credit facility and term loan facility
decreased to 8.33% and 8.05%, respectively, at March 31, 2001 from 9.90% and
10.26%, respectively, at December 31, 2000.
15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation:
National Rural Telecommunications Cooperative:
We hereby incorporate by reference the disclosure relating to "DIRECTV
Litigation - National Rural Telecommunications Cooperative" set forth under
"Item 3: Legal Proceedings" on pages 7 and 8 of the Registrant's Annual Report
on Form 10-K filed with the SEC on April 2, 2001, except that we hereby amend
the last paragraph of this section by changing the trial date of February 25,
2002 to August 13, 2002.
The Company and Pegasus Satellite Television:
We hereby incorporate by reference the disclosure relating to "DIRECTV
Litigation - Pegasus Satellite Television, Inc. and Golden Sky Systems" set
forth under "Item 3: Legal Proceedings" on page 8 of the Registrant's Annual
Report on Form 10-K filed with the SEC on April 2, 2001, except as follows:
We amend the fourth paragraph of this section, which begins "On March
9, 2001...," by adding the following sentence to the end of this paragraph: "Our
motion and Pegasus Satellite Television's motion to dismiss the counterclaim was
denied on May 8, 2001 and a response from us and Pegasus Satellite Television to
the counterclaim is due May 21, 2001."
The second to last paragraph of this section is amended by changing the
trial date of February 25, 2002 to August 13, 2002.
Other Matters
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In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Second Amended and Restated Certificate of Incorporation of
Golden Sky Systems, Inc. (incorporated herein by reference to Exhibit 3.1 to
Registration Statement of Golden Sky Systems, Inc. on Form S-4 (File No.
333-64367)).
3.2 By-Laws of Golden Sky Systems, Inc., adopted as of October 1,
1997. (incorporated herein by reference to Exhibit 3.2 to Registration Statement
of Golden Sky Systems, Inc. on Form S-4 (File No. 333-64367)).
(b) Reports on Form 8-K
In a report filed on Form 8-K, filed January 3, 2001, under Item 4
we announced that, on December 26, 2000, our board of directors
adopted resolutions dismissing our independent auditors, KPMG LLP,
and approving the engagement of PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending December 31, 2000.
Our decision to change accountants was based upon our desire to
adopt the accounting firm of our parent corporation, Pegasus
Communications Corporation, and not as a result of any disagreement
between our company and KPMG LLP.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Golden Sky Systems, Inc. has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
GOLDEN SKY SYSTEMS, INC.
May 16, 2001 By: /s/ Kasin Smith
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Date Kasin Smith
Chief Financial Officer, Treasurer and Executive Vice
President of Finance and Information Technology
(Principal Financial and Accounting Officer)
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