<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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 0-27492
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1407863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3415 UNIVERSITY AVENUE, ST. PAUL, MN 55114
(Address of principal executive offices) (zip code)
(612) 642-4500
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1996
----- ---------------------------
Class A Common Stock, $.0001 par value: 12,479,075 Shares
Common Stock, $.0001 par value: 77,331,700 Shares
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<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31 MARCH 31
--------------------- ---------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PROGRAMMING REVENUES $ 56,988 $ 15,020 $ 127,708 $ 20,153
COST OF PROGRAMMING 37,579 9,880 84,033 13,242
--------- --------- --------- ---------
GROSS MARGIN 19,409 5,140 43,675 6,911
OPERATING EXPENSES:
Selling and marketing 24,257 10,777 65,185 26,327
Depreciation and amortization 5,262 5,528 15,334 17,588
General and administrative 5,427 3,801 15,076 10,062
Engineering and operations 1,512 929 4,177 2,613
Commissions to dealers 3,343 1,114 7,540 1,421
Management fees due to HBI -- -- 6,667 --
--------- --------- --------- ---------
Net operating loss (20,392) (17,009) (70,304) (51,100)
OTHER (INCOME) EXPENSE:
Interest expense 2,453 2,010 7,412 6,454
Interest (income) (1,799) (376) (2,589) (1,162)
Other 412 508 1,008 781
--------- --------- --------- ---------
Loss before income taxes (21,458) (19,151) (76,135) (57,173)
INCOME TAX PROVISION -- -- -- --
--------- --------- --------- ---------
Net loss $ (21,458) $ (19,151) $ (76,135) $ (57,173)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share $ (.24) $ (.21) $ (.85) $ (.64)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares
outstanding 89,860 89,811 89,827 89,811
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
---------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 216,944 $ 12,498
Trade accounts receivable, net 20,363 7,174
Notes and other current receivables 841 279
Prepaid expenses and other current assets 7,360 4,580
--------- ---------
Total current assets 245,508 24,531
--------- ---------
PROPERTY AND EQUIPMENT:
Land 351 351
Buildings and improvements 4,763 4,905
Equipment 126,322 122,823
--------- ---------
Less - Accumulated depreciation (46,413) (31,079)
--------- ---------
85,023 97,000
--------- ---------
OTHER ASSETS:
Satellite deposits 1,380 1,380
Long-term investments, consisting of U.S.
Treasury securities 6,908 12,832
Other 4,554 4,472
--------- ---------
Total other assets 12,842 18,684
--------- ---------
$ 343,373 $ 140,215
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1996 1995
----------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ -- $ --
Accounts payable and accrued expenses 37,898 20,388
Deferred revenue 28,853 13,410
---------- ----------
Total current liabilities 66,751 33,798
LONG-TERM DEBT, less current portion 91,922 96,912
DUE TO HBI 11,902 4,460
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 50 million
shares authorized; none issued or outstanding -- --
Class A Common Stock -
Participating, voting, $.0001 par value, 500
million shares authorized, 9,545,000 shares
issued and outstanding at March 31, 1996 and
16,875,900 at June 30, 1995 1 2
Common Stock -
Participating, voting, $.0001 par value, 100
million shares authorized, 80,265,775 shares
issued and outstanding at March 31, 1996 and
72,934,875 at June 30, 1995 8 7
Warrants -- 7,350
Additional paid-in capital 378,114 127,423
Accumulated deficit (201,970) (125,835)
Unrealized gain (loss) on investments (22) --
---------- ----------
176,131 8,947
Unused media credits (3,333) (3,902)
---------- ----------
Total shareholders' equity 172,798 5,045
---------- ----------
$ 343,373 $ 140,215
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
MARCH 31
---------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (76,135) $ (57,173)
Adjustments to reconcile net loss to net cash
used in operating activities -
Depreciation and amortization 15,334 17,588
Interest accretion, net 843 1,045
Changes in operating items:
Media credits utilized 569 901
Receivables and other current assets (16,531) (7,900)
Accounts payable and accrued expenses 17,510 8,957
Deferred revenue 15,443 11,644
Other (104) (5,081)
--------- ---------
Net cash used in operating activities (43,071) (30,019)
--------- ---------
INVESTING ACTIVITIES:
Purchases of and deposits on equipment (3,357) (1,911)
Proceeds from sales of short-term investments -- 25,053
Proceeds from sale of long-term
available-for-sale investment 5,924 6,971
Purchase of investments -- (12,911)
--------- ---------
Net cash provided by investing activities 2,567 17,202
--------- ---------
FINANCING ACTIVITIES:
Advances from affiliated companies 7,442 701
Proceeds from debt borrowings 31,308 60,000
Repayment of debt -- (42,475)
Proceeds from sale of common stock 206,200 720
--------- ---------
Net cash provided by financing activities 244,950 18,946
--------- ---------
Increase in cash and cash equivalents 204,446 6,129
CASH AND CASH EQUIVALENTS, beginning of period 12,498 1,744
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 216,944 $ 7,873
--------- ---------
--------- ---------
NONCASH TRANSACTIONS:
Transponder purchase price adjustment and
reduction of related debt balance $ -- $ 16,000
--------- ---------
--------- ---------
Conversion of notes and cancellation of warrants $ 44,491 $ --
--------- ---------
--------- ---------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 7,318 $ 5,555
Income taxes -- --
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
United States Satellite Broadcasting Company, Inc. and Subsidiary ("USSB" or
the "Company") provides subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television
signal using the Digital Satellite System ("DSS-Registered Trademark-"). The
Company's programming is available to customers who have a DSS unit, which
consists of an 18 inch satellite dish, a receiver/decoder and a remote
control. All of the Company's gross revenues and identifiable assets relate
to the Company's activities in this industry.
Hubbard Broadcasting, Inc. ("HBI" or the "parent") beneficially owned 69.3% and
51.8% of the Company, respectively, as of June 30, 1995 and March 31, 1996, and
had approximately 58.3% of the combined voting power with respect to all matters
submitted for the vote of all shareholders at March 31, 1996. On May 1, 1996,
approximately 2.9 million shares of the Company's Common Stock, with 10 votes
per share, automatically converted to Class A Common Stock, with one vote per
share, at a conversion ratio of 1:1. As a consequence of such conversion, the
voting power of HBI increased to 60.3% as of May 1, 1996.
NOTE 2. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Generally Accepted Accounting Principles for interim
financial statements and, therefore, do not include all information and
disclosures required by Generally Accepted Accounting Principles for complete
financial statements. In the opinion of management, such statements reflect all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for interim periods
presented are not necessarily indicative of the results which may be expected
for the entire fiscal year. These statements should be read in conjunction with
the June 30, 1995 consolidated financial statements, the notes thereto, and the
Company's Registration Statement on Form S-1 (Registration No. 33-99906).
NOTE 3. RECAPITALIZATION, INITIAL PUBLIC OFFERING AND STOCK PLANS:
In the first quarter of fiscal 1996, the Company decided to proceed with an
initial public offering of its Class A Common Stock. In connection with the
offering, the Company effected a recapitalization of the Company's capital
structure immediately prior to the effective date of the related Registration
Statement.
Terms of the recapitalization included (i) a change in the authorized capital of
the Company to consist of 100,000,000 shares of Common Stock, 500,000,000 shares
of Class A Common Stock
7
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and 50,000,000 shares of undesignated Preferred Stock; (ii) the conversion of
the Company's old common stock and class A common stock into shares of
Common Stock; (iii) the conversion of certain convertible subordinated
promissory notes into shares of Common Stock and the cancellation of the
warrants issued to the holders of those notes; (iv) a 75-for-one split of the
new capital stock; and (v) the contribution by HBI of 8,300,000 shares of
Common Stock in connection with the public offering and 7,411,950 shares of
Common Stock in connection with conversion of the convertible subordinated
promissory notes, pursuant to HBI's agreements with certain current
shareholders, in order to prevent those shareholders from experiencing
dilution in their ownership of the Company. The Company's consolidated
financial statements are presented as if the above changes in authorized
capital and the 75-for-one split of new capital stock had been effective for
all periods presented.
The offering consisted of the sale by the Company of 8,300,000 shares of Class A
Common Stock at $27.00 per share, generating proceeds of approximately $206.2
million net of underwriting commissions and other expenses incurred in
connection with the offering.
In December 1995, the Company's shareholders approved a stock option plan (the
"Option Plan") which provides for the granting of options to purchase up to an
aggregate of 2,000,000 shares of Class A Common Stock. The Option Plan provides
for certain key employees, officers and consultants of the Company to be granted
options to purchase Class A Common Stock of two types: (i) those that qualify
as incentive stock options ("Incentive Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, and (ii) those
that do not qualify as Incentive Options ("Nonstatutory Options"). The Company,
concurrent with the closing of the offering, granted 420,000 options to 37
individuals at the initial offering price. The Option Plan is administered by
the Board of Directors or the Compensation Committee of the Board of Directors,
which will determine the persons who are to receive options, the terms and the
number of shares subject to each option and whether the option is to be an
Incentive Option or a Nonstatutory Option. Subsequent to the closing of the
offering through March 31, 1996, the Company has granted options to purchase
31,800 shares of Class A Common Stock at $28.50 per share.
NOTE 4. COMMITMENTS AND CONTINGENCIES:
REGULATORY MATTERS
USSB II (a wholly owned subsidiary of the Company) holds a license from the
Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101 DEG. west longitude (the "License") and must continue to
maintain the License to operate. The License expires in June 1999 and is
renewable at ten-year intervals. Although the Company expects to obtain such
renewals in the ordinary course, there can be no assurance that such renewals
will be granted.
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the
FCC. Under the License, the Company is subject to FCC review primarily for
the following: (i) standards regarding individual satellites (e.g., meeting
minimum financial, legal and technical standards); (ii) avoiding interference
with
8
<PAGE>
other satellites; and (iii) complying with rules the FCC has established
specifically for high-power DBS satellite licenses. In addition, uplink
facilities are separately licensed by the FCC. The Company's National
Broadcast Center and the Auxiliary Broadcast Center have each received its
FCC license. FCC rules are subject to change in response to industry
developments, new technology and political considerations.
The FCC has also granted the Company a Construction Permit and Launch Authority
(the "Permit"), held by USSB II, for satellites with three transponders at
110 DEG. west longitude and eight transponders at 148 DEG. west longitude. The
Permit requires the Company to comply with specified construction and launch
schedules. The FCC has the authority to revoke the Permit if the Company fails
to comply with the FCC schedule for construction and launch. In connection
therewith, the Company has entered into a satellite construction contract with
Lockheed Martin Astro Space Corp. ("Lockheed Martin") for the construction of
the two satellites (see below).
While the Company has generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that the Company
will succeed in obtaining and maintaining all requisite regulatory approvals for
its operations.
LOCKHEED MARTIN ASTRO SPACE AGREEMENT
The Company has an agreement with Lockheed Martin to construct two direct
broadcast satellites under a contract, as amended, requiring future fixed
payments of approximately $161 million after advance payments of $1.4 million,
with additional incentive payments of approximately $20 million contingent on
satellite performance. While this agreement is cancellable in whole or in part
at the option of the Company, such cancellation would require forfeiture of any
cumulative advanced deposits and progress payments made, plus reimbursement of
125% of any costs incurred by Lockheed Martin in excess of such cumulative
payments forfeited. Under this agreement, the satellite construction and future
payments may be adjusted from the above amounts using an inflation factor. The
Company's obligation to proceed with satellite construction in order to comply
with the terms of its Permit may be modified by a certain FCC Order issued in
December 1995, which has not yet become final. If satellite construction
proceeds as scheduled under the agreement with Lockheed Martin, aggregate
amounts due are scheduled in the fiscal years as follows: none in 1996, $53.5
million in 1997, $64.0 million in 1998, $34.5 million in 1999 and $9.2 million
in 2000.
HUGHES AGREEMENTS
The Company has a transponder service agreement with Hughes Communications
Satellite Services, Inc. which provides tracking, telemetry and control of the
transponders purchased from Hughes Communications Galaxy ("HCG"). Under the
terms of the agreement, the Company is required to pay a minimum of $780,000 and
a maximum of $1.5 million per year for ten years, beginning with satellite
delivery in March 1994.
The Company and HCG also have an agreement to share the costs of the development
of the signal processing system and conditional access system. Development of
the systems has been coordinated by HCG, and the systems are utilized by the
Company and HCG. The agreement calls
9
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for payments by the Company to HCG, which have been incurred and accrued at
March 31, 1996, of approximately $1.9 million for the Company's share of the
development costs, hardware for the Company's uplinking system and interest.
INSURANCE
The Company maintains business interruption and in-orbit insurance coverages at
levels management considers necessary to address the normal risks of operating
via communications satellite, including damage, destruction or failure of the
satellite or its transponders. Additionally, the Company maintains general
liability and directors' and officers' insurance coverages.
LITIGATION
The Company is exposed to litigation encountered in the normal course of
business. In the opinion of management, the resolution of the litigation
matters of which the Company is aware will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.
In April 1995, Feature Film Services, Inc. ("FFS") commenced litigation in the
Federal District Court in the Northern District of Illinois against the Company,
DIRECTV, Inc., Thomson Consumer Electronics, Inc., and all program suppliers
carried on the DSS system, claiming that the DSS system infringes on a patent
owned by FFS, which expires in 1997. The Company has entered into a conditional
settlement agreement which, if it becomes final, will result in a dismissal of
the claims asserted by FFS against the Company without payment of monetary
damages or other adverse consequences to the Company. If the conditional
settlement agreement does not become final, FFS will be entitled to proceed with
the litigation. The Company does not believe that the DSS system infringes on
any patent or that FFS is entitled to damages or remedies from the Company.
NOTE 5. SUBSEQUENT EVENT:
Subsequent to March 31, 1996, the Company elected to repay the entire
outstanding balance of the term loan under its credit agreement of $90.0 million
and to terminate the credit agreement. In connection with the termination, the
Company paid previously deferred interest of $1.9 million and a prepayment fee
of approximately $4.0 million. The Company also charged to expense deferred
loan origination fees of approximately $5.4 million which were previously being
amortized over the life of the credit agreement.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the accompanying
consolidated financial statements, the notes thereto, and the Company's
Registration Statement on Form S-1 (Registration No. 33-99906).
The Company provides subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television
signal using the Digital Satellite System ("DSS-Registered Trademark-"). The
Company's programming is available to customers who have a DSS unit, which
consists of an 18 inch satellite dish, a receiver/decoder and a remote
control. All of the Company's gross revenues and identifiable assets relate
to the Company's activities in this industry.
The Company commenced commercial operations in June 1994. The Company has not
generated net earnings to date. Management expects that the Company will
experience net losses in fiscal 1996 and that net losses will continue for the
foreseeable future as the Company continues to build its subscriber base.
The potential market for the Company's programming is growing rapidly. The
introduction of DSS units is widely regarded as the most successful introduction
of a major consumer electronics product in United States history. At March 31,
1996, approximately 1.62 million DSS units had been placed in service, or
"activated," in the United States, up from 1.36 million at December 31, 1995.
Of this total number of DSS activations, approximately 1.44 million are
estimated to be consumer households ("DSS households") as of March 31, 1996.
The Company faces a number of risks as it develops its commercial operations.
These include, but are not limited to, the uncertain level of ultimate demand
for high-power DBS; competition from cable companies, other high and medium
power DBS operators and others; dependence on unaffiliated third party
programmers and upon Hughes Electronics Corporation; dependence on a single DBS
satellite and broadcast facility; and potentially adverse governmental
regulation and actions. Congress has recently enacted the Telecommunications
Act of 1996, which significantly deregulated the telecommunications industry.
The effect of such deregulation on the Company's business, results of operations
and financial condition cannot be predicted.
11
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SUMMARY OF SUBSCRIBER AND REVENUE DATA
Management measures the Company's performance by two key measures: subscriber
base and revenues.
The number of USSB paying subscribers grew to approximately 791,000 at March 31,
1996 from approximately 629,000 at December 31, 1995. Approximately 70,000
additional households were receiving a free promotional month of USSB
programming as of March 31, 1996.
In addition to tracking the absolute number of subscribers, management assesses
its penetration of the potential DSS market by comparing the number of USSB
paying subscribers to the total number of households that have received the free
promotional month of USSB's Entertainment Plus-Registered Trademark- programming
("convertible households"). As of March 31, 1996, the Company achieved a
penetration of convertible households of approximately 66 percent (i.e., almost
two-thirds of households that have received the free promotional month of USSB
programming are currently paying USSB subscribers).
Management believes that this comparison of the number of paying subscribers to
convertible households is a more meaningful measure of the Company's performance
than a comparison against the total estimated number of DSS households. The
Company is unable to calculate with certainty the actual number of DSS
households, since the number of dealer, commercial and second household units
included in the total number of DSS activations can only be estimated at
present. In addition, some purchasers of DSS units in rural areas of the United
States are not currently provided with information on USSB's free month of
programming at the point of purchase.
The summary immediately below shows, as of the end of each period, USSB paying
subscribers, USSB promotional activations, USSB convertible households and the
percentage of convertible households served by the Company. The estimated
number of DSS households is also shown.
Subscriber Base:
(In thousands)
<TABLE>
<CAPTION>
TOTAL USSB
PAYING PERCENT OF
SUBSCRIBERS USSB
FOR THE USSB USSB AND USSB CONVERTIBLE ESTIMATED
QUARTER PAYING PROMOTIONAL PROMOTIONAL CONVERTIBLE HOUSEHOLDS DSS
ENDED SUBSCRIBERS (a) ACTIVATIONS (b) ACTIVATIONS HOUSEHOLDS (c) SERVED (d) HOUSEHOLDS (e)
- - -------------- --------------- --------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1995 242 47 289 373 65% 490
June 30, 1995 321 44 365 511 63% 642
Sept. 30, 1995 422 81 503 681 62% 882
Dec. 31, 1995 629 113 742 946 66% 1,215
March 31, 1996 791 70 861 1,201 66% 1,440
</TABLE>
12
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_______
(a) USSB paying subscribers as of the end of such period.
(b) USSB household activations that were receiving a free promotional month of
USSB Entertainment Plus as of the end of such period.
(c) Total number of USSB household activations since July 1994 that have
completed a free promotional month of USSB Entertainment Plus.
(d) Total USSB Paying Subscribers as of the end of the period as a percent of
USSB Convertible Households.
(e) Estimate based on total DSS activations as reported by News DataCom, Inc.,
less known activations by dealers, manufacturing facilities, technical
facilities and commercial locations, and less additional receivers in a
single household, as of the end of such period.
The Company's per subscriber and total revenues are shown below for the periods
indicated. From time to time, the Company engages in certain promotional
activities which include special rates for limited periods, which could result
in lower average per subscriber revenues for such periods.
Revenues:
(In thousands, except per subscriber data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
MARCH 31 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
1996 1995 1995 1995 1995
-------- ----------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $24.94 $25.38 $25.82 $26.05 $26.59
Programming revenues $56,988 $40,001 $30,718 $22,184 $15,020
</TABLE>
________
(a) Excludes pay-per-view event revenues.
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $57.0 million and
$127.7 million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $15.0 million and $20.2 million for the comparable
prior year periods. The revenue increase was primarily attributable to a larger
subscriber base at March 31, 1996. Pay-per-view revenues, which vary with the
number and type of events provided on a pay-per-view basis in any fiscal period,
are included in the Company's total revenues.
SUBSCRIPTION REVENUES. The Company derives its revenues principally from
monthly fees from subscribers for television programming. Revenues are a
function of the number of subscribers, the mix of programming packages selected
by customers and the rates charged. The increase in revenues for both periods
was primarily attributable to the increase in the number of paying subscribers
to approximately 791,000 at March 31, 1996, from approximately 242,000 at
March 31,
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1995. For a substantial portion of the nine month period ended March 31,
1995, the Company was in the start-up phase of its commercial operations,
national distribution of DSS units had not yet been achieved, and a
significant portion of subscribers to the Company's programming were
receiving a free promotional month of programming. The decrease in average
monthly revenue per paying subscriber from December 31, 1995 to March 31,
1996 is consistent with management's fiscal year target to maintain monthly
revenues between $24 and $25 per subscriber. This decrease resulted
primarily from promotions designed to increase the Company's penetration of
convertible USSB households.
COST OF PROGRAMMING. Programming costs consist of payments to programmers,
which are based on the number of paying subscribers. Programming costs also
include the purchase of rights to broadcast event programming on a pay-per-view
basis. The cost of programming increased to $37.6 million for the quarter and
$84.0 million for the nine month period ended March 31, 1996, respectively,
compared to $9.9 million and $13.2 million for the comparable prior year
periods. The increase in cost of programming for both periods was primarily the
result of an increased number of subscribers from the comparable prior year
periods and increases in the cost of pay-per-view programming. The cost of
programming represented 65.9 percent of programming revenues for the three
months and 65.8 percent for the nine months ended March 31, 1996.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $39.8 million
and $114.0 million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $22.1 million and $58.0 million for the comparable
prior year periods. The increase was primarily attributable to the cost of
providing the Company's services to a growing subscriber base, including
increased marketing, customer service, security and encryption fees.
SELLING AND MARKETING. Selling and marketing costs include promotional and
advertising costs, the costs of direct marketing and customer service and
amounts expended pursuant to joint marketing efforts with other DSS broadcasting
system participants. Selling and marketing expenses increased to $24.3 million
and $65.2 million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $10.8 million and $26.3 million for the comparable
prior year periods. The increase for both periods was primarily attributable to
increased selling and marketing expenditures to increase consumer awareness of
both the DSS system and USSB programming, as well as customer service associated
with the growth of the Company's subscriber base. In addition, expenses
associated with the Company's telemarketing and direct mail marketing programs,
which are directed at purchasers of DSS units who activate with the Company,
have increased as the number of such DSS activations has increased.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses relate
mainly to the Company's transponders on DBS-1 and transmission equipment located
both at the Company's National Broadcast Center and its Auxiliary Broadcast
Center. Depreciation and amortization decreased to $5.3 million and $15.3
million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $5.5 million and $17.6 million for the comparable
prior year periods. The decrease was primarily attributable to the utilization
of an accelerated method of depreciation for the Company's transponders, which
results in decreasing periodic depreciation expense over their useful life.
14
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative costs include in-orbit
and general insurance costs, billing and remittance processing, staff functions
such as finance and information services, and administrative services provided
by HBI. General and administrative expenses increased to $5.4 million and
$15.1 million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $3.8 million and $10.1 million for the comparable
prior year periods. The increases were primarily attributable to increased
billing and remittance processing costs and increased bad debt expense, both
resulting from the growth of the Company's subscriber base.
ENGINEERING AND OPERATIONS. Engineering and operations expenses include the
operation of the National Broadcast Center and the Auxiliary Broadcast Center,
fees charged in connection with the operation of the conditional access system
(determined by subscriber levels) and satellite telemetry, tracking and control
expenses. Engineering and operations expenses increased to $1.5 million and
$4.2 million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $0.9 million and $2.6 million for the comparable prior
year periods. The increases were primarily attributable to higher security and
encryption fees, which are paid on a per subscriber basis.
COMMISSIONS TO DEALERS. Commissions to dealers consist of amounts paid by the
Company to eligible DSS dealers whose customers become paying subscribers, to
encourage dealers to promote the sale of DSS units and subscriptions to USSB
programming. Commissions to dealers increased to $3.3 million and to $7.5
million for the quarter and nine month period ended March 31, 1996,
respectively, compared to $1.1 million and $1.4 million for the comparable prior
year periods. The increases in both periods reflect increased USSB programming
subscriptions.
MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued in
September 1995, representing the remainder of fees for management services
rendered to the Company by HBI during fiscal 1993 and fiscal 1994.
NET OPERATING LOSS. The Company recorded a net operating loss for the quarter
and nine month period ended March 31, 1996 of $20.4 million and $70.3 million,
respectively, compared to $17.0 million and $51.1 million for the comparable
prior year periods.
INTEREST EXPENSE. Interest expense for quarter and nine month period ended
March 31, 1996 was $2.5 million and $7.4 million, respectively, compared to $2.0
million and $6.5 million for the comparable prior year periods. Increased
interest expense reflects the Company's borrowings under the credit agreement.
INTEREST INCOME. Interest income for the quarter and nine month period ended
March 31, 1996 was $1.8 million and $2.6 million, respectively, compared to $0.4
million and $1.2 million for the comparable prior year periods. Interest income
increased as a result of the investment of the proceeds of the public offering
of the Company's Class A Common Stock which were received February 6, 1996.
Interest rates decreased from the comparable prior year periods.
15
<PAGE>
NET LOSS. The Company recorded a net loss for the third quarter and nine month
period ended March 31, 1996 of $21.5 million and $76.1 million, respectively,
compared to $19.2 million and $57.2 million for the comparable prior year
periods.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Prior to February 1996, the Company's operations were financed by equity
contributions from shareholders, approximately $31.2 million of advances from
HBI, and approximately $42.0 million in privately-issued notes and associated
warrants. The advances from HBI were subsequently converted into equity and,
upon consummation of the recapitalization of the Company in February 1996, the
notes were converted into equity and the warrants were cancelled. In addition,
the Company's operations were financed by $90.0 million of borrowings between
January and December 1995 under a credit agreement with a syndicate of financial
institutions. Upon completion of the public offering of the Company's Class A
Common Stock in February 1996, the Company received proceeds of approximately
$206.2 million, net of underwriting commissions of approximately $14.0 million,
other offering expenses of $1.9 million and approximately $2.0 million paid to a
financial advisor upon consummation of the offering.
COMPONENTS OF CASH FLOWS. The significant components of the changes in cash and
cash equivalents were as follows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31
--------------------------
1996 1995
------ ------
<S> <C> <C>
Net loss $(76.1) $(57.2)
Depreciation and amortization 15.3 17.6
Changes in working capital 17.8 9.6
Net capital expenditures (3.4) (1.9)
Net investment activities 5.9 19.1
Debt repayment -- (42.5)
Net cash proceeds from offering 206.2 --
Proceeds from debt borrowings 31.3 60.0
Other 7.4 1.4
------ ------
Net increase in cash and cash
equivalents $204.4 $ 6.1
------ ------
------ ------
</TABLE>
CASH AND CASH EQUIVALENTS. As of March 31, 1996, cash, cash equivalents and
marketable securities totaled $216.9 million, compared to $12.5 million at
June 30, 1995. Substantially all of the increase consisted of the net proceeds
of the initial public offering of the Company's Class A Common Stock, and
interest earnings thereon.
WORKING CAPITAL. Working capital at March 31, 1996 was $178.8 million, compared
to a working capital deficit of $9.3 million at June 30, 1995. Substantially all
of the increase in working capital consists of the net proceeds of the initial
public offering of the Company's Class A Common Stock, and interest earnings
thereon. In addition, net trade accounts receivable increased by $13.2 million
16
<PAGE>
due to growth in paying subscriber levels, and a $1.6 million decrease in
accrued cost sharing was caused by cash payments made during the period. These
increases to working capital were offset by an increase in accounts payable and
accrued expenses of $17.5 million, due primarily to increased advertising,
promotion and program provider license fee expenses. Additionally, deferred
revenue increased $15.4 million resulting from greater levels of pre-paid
subscriptions.
LIQUIDITY AND CAPITAL RESOURCES. After completion of the initial public
offering of the Company's Class A Common Stock, the Company invested the net
proceeds of the offering in short-term United States Treasury Repurchase
Agreements. Subsequent to March 31, 1996, the Company elected to repay the
entire outstanding balance of the term loan under its credit agreement of $90
million and to terminate the credit agreement. In connection with the
termination, the Company paid previously deferred interest of $1.9 million and a
prepayment fee of approximately $4 million. The Company also charged to expense
deferred loan origination fees of approximately $5.4 million which were
previously being amortized over the life of the credit agreement. Management
believes that the Company's current cash position is adequate to meet the
operating requirements of the business for the foreseeable future. However, the
Company may require external financing for future capital expenditures such as
the construction of DBS-4 at the 101 DEG. west longitude orbital location, or
the cost of satellites at the 110 DEG. and 148 DEG. locations. Management has
initiated the process of exploring a revolving credit facility which would meet
the Company's anticipated future financing needs more satisfactorily than the
term loan under the prior credit agreement. The Company has entered into
preliminary discussions concerning such a loan facility with potential lenders,
including members of the Company's prior bank syndicate.
CAPITAL EXPENDITURES. Capital expenditures for the nine month period ended
March 31, 1996 totaled $3.4 million, including $1.5 million for continuing
expansion and improvement of the broadcast system, and $1.5 million for
expansion of and improvements to the Company's customer data base and customer
service information systems. The Company is required to make progress payments
to Lockheed Martin for high-power DBS satellites at 110 DEG. and 148 DEG. west
longitude commencing in October 1996. Progress payments may be affected by
negotiations with the entities which have obtained the available transponder
slots at 110 DEG. and 148 DEG. west longitude. If a new satellite, DBS-4, is
built and put into operation at 101 DEG. west longitude, the Company will also
incur additional capital expenditures.
NET OPERATING LOSS CARRY FORWARD. At March 31, 1996, the Company's net
operating loss carry forward was $206.3 million for federal tax purposes and
$202.0 million for financial reporting purposes, the difference representing
primarily acceleration of depreciation reflected for tax purposes that was not
accrued for financial reporting purposes.
17
<PAGE>
SEASONALITY
Sales of DSS units, which directly impact the growth of programming revenues,
may be subject to seasonal patterns experienced by major consumer electronics
products. The Company anticipates that approximately 35 to 45 percent of annual
DSS unit sales will take place during the fourth calendar quarter, while the
increased programming revenues associated with such sales will largely be
reflected in subsequent quarters. Programming revenues are also influenced by a
one-month lag, due to the free promotional month of programming offered by the
Company. The Company expects DSS unit sales, as is customary in the consumer
electronics industry, to be lowest during January through June (the third and
fourth fiscal quarters of the Company). DSS unit sales are then expected to
increase throughout the summer and fall months prior to peaking during the
end-of-the-year holiday season.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 13, 1996 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------------
Stanley E. Hubbard
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Gerald D. Deeney
-------------------------------------
Gerald D. Deeney
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
INDEX OF EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
Exhibit No. Exhibit Description
- - ----------- -------------------
27.1 Financial Data Schedule
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS FOUND ON
PAGES 3-5, INCLUSIVE OF THE COMPANY'S FORM 10-Q FOR THE FISCAL QUARTER ENDED
MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 216,944
<SECURITIES> 6,908
<RECEIVABLES> 22,772
<ALLOWANCES> 2,409
<INVENTORY> 0
<CURRENT-ASSETS> 245,508
<PP&E> 131,436
<DEPRECIATION> 46,413
<TOTAL-ASSETS> 343,373
<CURRENT-LIABILITIES> 66,751
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 172,789
<TOTAL-LIABILITY-AND-EQUITY> 343,373
<SALES> 127,708
<TOTAL-REVENUES> 127,708
<CGS> 84,033
<TOTAL-COSTS> 84,033
<OTHER-EXPENSES> 113,979
<LOSS-PROVISION> 1,849
<INTEREST-EXPENSE> 7,412
<INCOME-PRETAX> (76,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> (76,135)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,135)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
