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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.0001 par value
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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____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. / /
As of September 23, 1996, 14,823,200 shares of the registrant's Class A
Common Stock were issued and outstanding, and the aggregate market value of the
voting stock held by non-affiliates of the registrant as of September 23, 1996
was approximately $352,456,860.
DOCUMENTS INCORPORATED BY REFERENCE
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Selected portions of the Annual Report to Shareholders for Incorporated into Part II
the fiscal year ended June 30, 1996
Selected portions of the Definitive Proxy Statement for the Incorporated into Part III
Annual Meeting of Shareholders to be Held November 20, 1996
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PART I
ITEM 1. BUSINESS
GENERAL
United States Satellite Broadcasting Company, Inc. (the "Company") is a
provider of subscription television programming to households throughout the
continental United States via high-power direct broadcast satellite ("DBS").
The Company broadcasts a high quality digital television signal using the
Digital Satellite System ("DSS-Registered Trademark-") broadcasting system.
The Company's programming is available to virtually all of the approximately
96 million U.S. television households upon the purchase of a DSS unit, which
features an 18 inch satellite dish. The Company delivers up to 25 channels
of video programming, including "premium" networks such as Multichannel
HBO-Registered Trademark- (5 channels), Multichannel SHOWTIME-Registered
Trademark- (3 channels), Multichannel CINEMAX-Registered Trademark- (3
channels), Multichannel THE MOVIE CHANNEL-Registered Trademark-(2 channels),
FLIX-Registered Trademark- and the SUNDANCE CHANNEL-TM- and popular "basic"
channels such as MTV-Registered Trademark-, VH-1-Registered Trademark-,
NICKELODEON-Registered Trademark-/NICK AT NITE-Registered Trademark-, NICK AT
NITE'S TV LAND-TM-, COMEDY CENTRAL-Registered Trademark- and
LIFETIME-Registered Trademark-. The programming delivered by the Company
includes over 800 movies per month. The Company also broadcasts original news
programming on the ALL NEWS CHANNEL-Registered Trademark- and events and
specials on a pay-per-view basis.
The Company broadcasts from a single satellite, DBS-1, which is able to
reach the entire continental United States. DBS-1 broadcasts with minimal
signal interference because of its favorable orbital location at 101 DEG.
west longitude, greater orbital spacing than that provided for non-DBS
satellites and its high-power 120 watt transponders. DBS-1 was manufactured
by Hughes Electronics Corporation ("Hughes") and is owned and operated
jointly by the Company and DIRECTV, Inc., a subsidiary of Hughes. The
Company believes that the DSS system, which incorporates the technologically
advanced MPEG 2 digital compression standard, results in a higher picture
quality than any other existing domestic television broadcasting system. The
Company expects to replace DBS-1 at its current orbital location before the
end of its expected life in 2010. In addition to its FCC license to
broadcast from 101 DEG. west longitude, the Company also has an FCC permit
to construct and launch high-power DBS systems at two other orbital locations.
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control.
The DSS unit features an easy to use on-screen electronic program guide, a
ratings control function and the capability to switch easily between DSS
signals and local programming signals. DSS units are currently manufactured
and sold by leading consumer electronics manufacturers and sold at over
25,000 retail locations.
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. The Company and DIRECTV, Inc. share the use of
the technology underlying the DSS system, cooperate to promote and build
awareness of the DSS system and currently offer complementary programming
packages. The Company estimates that the majority of DSS households receive
both USSB-Registered Trademark- programming and DIRECTV-Registered Trademark-
programming. DIRECTV, Inc. offers approximately 175 channels of digital
video and audio programming, including news, sports, entertainment and
pay-per-view movies and events.
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STRATEGY
The Company seeks to offer the highest quality television programming at a
competitive price, expand consumer acceptance of the DSS system, increase the
market share of USSB programming and achieve profitability. The Company believes
that it can successfully achieve its objectives if it captures only a small
percentage of the approximately 96 million U.S. television households. Achieving
these objectives will require only modest penetration of markets that are
unserved or "underserved" (i.e., that have access to fewer than 54 channels) by
cable television and of existing cable subscribers in urban and suburban
markets. In addition, the Company will require no additional licenses,
franchises or infrastructure upgrades to increase its customer base.
The Company intends to accomplish these objectives by (i) leveraging its
early entry into the high-power DBS market to firmly establish its brand name
and to achieve market penetration in anticipation of increased competition; (ii)
maintaining its strategic relationship with Hughes and DIRECTV, Inc. to further
benefit from the technological advantages of high-power DBS and the DSS system
and to promote and build awareness of the DSS system; (iii) capitalizing on its
relationships with leading program suppliers, with whom it has multi-year
agreements; (iv) enhancing its strong relationships and joint marketing efforts
with leading consumer electronics manufacturers and retailers to further promote
the sale of DSS units and USSB programming; (v) expanding and continuing to
support the large and established retail distribution network for DSS units;
(vi) continuing to provide the highest broadcast quality; and (vii) emphasizing
customer service to maintain a high level of customer satisfaction.
THE MARKET
The Company believes that there is significant unsatisfied demand for high
quality, reasonably priced television programming. The Company believes,
therefore, that the potential market in the United States for high-power DBS
broadcasting consists of all of the approximately 96 million households with
television sets, as well as certain commercial markets, such as hotels and
motels, college dormitories and hospitals.
The primary target markets for the Company include (i) all of the U.S.
television households unserved by cable; (ii) the approximately 33 million U.S.
television households underserved by cable; and (iii) existing cable subscribers
who desire a greater variety of quality programming, improved video and audio
quality, better service and fewer transmission interruptions. Based upon FCC
and industry data, there are approximately 60 million U.S. cable subscribers.
These subscribers reportedly pay an average of approximately $33 per month for
television programming services. The Company also views as a target market the
approximately 32 million U.S. television households which have access to cable
television but are not cable subscribers, some of which are included in
households underserved by cable.
The Company believes that the demand for satellite television services in
the United States has grown and will continue to grow and that the DSS system
provides the most attractive alternative to cable. While the high-power DBS
share of the U.S. television market is currently
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small compared to cable, it has been steadily increasing. The Company has
conducted extensive research to better understand the television market in the
United States, the desires and preferences of consumers and the features and
benefits that will attract subscribers. This research indicates that a
substantial number of consumers are dissatisfied with cable television, that
former cable subscribers who subscribe to the DSS system are more satisfied with
it than cable and that 75% of DSS unit owners who were cable subscribers
purchased premium cable programming. This research also indicates that the most
likely USSB customers are homeowners with families who currently have or have
had cable, subscribed to the premium cable channels and consider television a
significant component of their entertainment activities. The Company believes,
based on this research, that demand for more choice in television programming,
dissatisfied cable subscribers, and consumers unserved or underserved by cable
will contribute to the market growth of the DSS system and the Company's
subscriber base.
MARKETING
The Company engages in extensive marketing, advertising and promotional
activities to increase consumer awareness of the DSS system and USSB
programming, to promote the sale of DSS units and to generate subscriptions to
USSB programming. The Company intends to continue these efforts and anticipates
that it will continue to make substantial expenditures for new and intensified
marketing, advertising and promotional activities.
ADVERTISING. The Company's advertising activities presently consist of
television commercials aired nationally, radio commercials, and print
advertisements promoting the DSS system and USSB programming service.
PROMOTIONS. The Company promotes subscriptions to its programming
service by offering all owners of DSS units, upon initial purchase of a DSS
unit, one free promotional month of its premier programming package, USSB
ENTERTAINMENT PLUS-Registered Trademark-. During the free promotional month
of programming, the Company engages in targeted telemarketing and mailings
designed to convert free subscribers to paying subscribers. The Company
believes that its free promotional month of USSB ENTERTAINMENT PLUS is an
effective marketing tool. In addition, the Company has available for its use
two minutes per hour on its "basic" channels which it currently uses to
promote the Company's programming.
To support its marketing, the Company also delivers a free channel that is
available to all owners of DSS units and, in conjunction with its programmers,
regularly provides USSB FREEVIEWs-SM-, or access to programming channels during
certain periods of the year without charge. The Company also engages in joint
advertising and promotions with its programmers.
RETAIL SUPPORT. The Company engages in an active retail support program,
which provides dealers with point-of-sale literature and displays, incentives
and training. DSS retailers promote the Company's programming and encourage
customers to activate their free promotional month and to subscribe to USSB
ENTERTAINMENT PLUS. The Company generally pays commissions to eligible
retailers when their customers become paying subscribers, regardless of which
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manufacturer's DSS unit was purchased. In addition, the Company makes USSB
programming available for demonstration to the customer at the point of sale.
The Company has entered into a long-term sales agency agreement with
Thomson Consumer Electronics ("Thomson"), pursuant to which Thomson acts as
the Company's sales agent for consumer electronics outlets that Thomson
services. Thomson is the top selling television manufacturer in the United
States, marketing the "RCA," "GE" and "ProScan-Registered Trademark-" brands.
Both the Company, with a dedicated staff of approximately 40 sales
personnel, and Thomson, with a sales and support staff of approximately 350,
service retail outlets.
The Company has also entered into a sales agency agreement with AT&T,
pursuant to which AT&T will market the DSS unit to its customers and provide its
customers with the opportunity to receive USSB programming, including the one
free month of USSB ENTERTAINMENT PLUS.
JOINT MARKETING. The Company engages in a number of joint marketing
efforts with DIRECTV, Inc. and DSS unit manufacturers. Market development funds
are used for advertising, public relations and retail promotions.
The Company believes it also benefits from the significant marketing
efforts of all DSS system participants. All current manufacturers of DSS units
include information regarding USSB programming in their retail packaging and all
new DSS unit manufacturers are expected to continue this practice.
PROGRAMMING
The Company selected its programming based on extensive market research,
which indicated that potential DSS customers would have a strong desire for
movies and general entertainment targeted at specific family members. As a
result, the Company sought multi-year agreements with content providers which
offered programming that could satisfy this target market. The Company offers
DSS households many of the most widely recognized and popular "premium" and
"basic" entertainment channels. The Company currently broadcasts over 800
movies per month and also offers an increasing menu of entertainment and sports
events on a pay-per-view basis. The Company expects to direct additional
resources to specialty sports events and entertainment specials and may devote
at least one of its channels to pay-per-view events. At this time, the Company
has no plans to develop or produce its own programming; however, the Company may
develop and produce a portion of its own programming in the future.
The Company delivers premium networks in multichannel format to increase
viewer choice and variety. The Company is not aware of any cable system with a
comparable level of multichannel premium programming. The Company's research
indicates that multichannel programming is a popular attraction with its
subscribers, as each programmer generally "counter programs" certain of its
multiple channels; I.E., the programmer will, for example, run an action movie,
a comedy movie and a family movie in the same general time slot. The Company's
delivery of premium channels in multichannel format allows a USSB subscriber to
receive multiple
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channels of a premium service at a price generally paid by cable subscribers for
one premium channel.
The Company offers its programming in a variety of subscription packages,
which currently range in price from $7.95 to $34.95 per month. From time to
time, the Company may revise its rates for promotional or competitive reasons.
In addition, the Company permits subscribers to purchase premium channel
packages without requiring them to purchase a basic package, as is generally
required with cable. USSB ENTERTAINMENT PLUS is currently purchased by more
than 50% of the Company's paying subscribers. Subscription packages are
generally purchased monthly, but may also be purchased on a quarterly or annual
basis. All subscriptions are billed in advance of their respective time
periods.
The Company also offers a complimentary channel to all DSS unit owners,
whether or not they are USSB programming subscribers. This channel is currently
utilized by the Company to broadcast marketing messages to maximize viewership
of upcoming USSB programming, as well as for public service broadcasting. The
Company also broadcasts in Spanish all of the programming which is provided to
it with a Spanish language soundtrack.
Since the DSS system poses no technical barriers to receiving both USSB
programming and DIRECTV programming, all purchasers of DSS units have access to
more than 200 channels of programming. DIRECTV programming currently includes
approximately 50 channels of pay-per-view movies, as well as subscription sports
packages, established cable networks and audio services. The Company provides
programming that complements DIRECTV's existing programming packages, thus
maximizing the consumer appeal of the DSS system. There is currently no overlap
between USSB programming and DIRECTV programming.
The DSS system is also fully compatible with local broadcast signals. DSS
households can receive local broadcast signals, either through a standard
television antenna or by subscribing to basic cable and can switch between DSS
signals and local programming signals with the DSS remote control. According to
the Company's research, approximately 56% of DSS households currently receive
local programming signals from standard television antennas.
DISTRIBUTION OF DSS UNITS
The introduction of the DSS unit is widely regarded as the most successful
introduction of a major consumer electronics product in United States history.
More than 1,000,000 DSS units were shipped to dealers within the first twelve
months of its introduction. Comparable dealer shipments of color television,
VCRs and compact disc players took eight years, four years and three years,
respectively.
DSS units are currently sold at over 25,000 retail locations, including
consumer electronics stores, major department stores, mass merchandisers and
discount chains such as Best Buy, Circuit City, Costco, Dayton's, Montgomery
Ward, Nobody Beats the Wiz, Radio Shack, Sam's Club, Sears and WalMart, as well
as satellite specialty stores. DSS units are also distributed by satellite
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specialty dealers and organizations such as the National Rural
Telecommunications Cooperative, which has approximately 300 affiliates that sell
satellite equipment predominately in rural areas.
In addition, the Company and DIRECTV, Inc. have each entered into marketing
arrangements with AT&T whereby AT&T is offering DSS units, as well as USSB and
DIRECTV programming, directly to its customer base.
DSS units are currently manufactured and sold by Thomson (under the "RCA",
"GE" and "ProScan" brand names), by Sony Corporation (under the "Sony" brand
name) and by Hughes Network Systems (marketed under the "Hughes Network Systems
Insight-TM-" brand name). Further, several additional manufacturers, including
Daewoo, Panasonic, Samsung, Sanyo, Toshiba, Uniden and Philips/Magnavox have
recently started, or have announced plans, to manufacture and sell DSS units.
THE DSS UNIT
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control. The
dish, which must be aimed in the direction of the 101 DEG. west longitude
orbital location, can be mounted on the exterior of the home. Company research
indicates that approximately 60% of purchasers of DSS units choose to install
their units themselves, while the balance have their units professionally
installed.
The DSS unit has been designed to be as easy to use as a basic television
set. The consumer-friendly remote control allows subscribers to quickly and
easily access desired programming via a colorful on-screen program guide and
menu system. Subscribers can create lists of favorite channels, limit access to
certain types of programming and establish budget limits on pay-per-view
selections. The remote control has been designed to be compatible with a wide
variety of television sets, allowing subscribers to operate both the television
set and the DSS unit with the same remote control.
The DSS system's interactive programming guide provides program ratings for
most programs carried by the premium services and permits parents to set rating
limits and "lock out" programming which the subscriber does not wish to receive.
The DSS system is designed to be available (i.e., free from outages) 99.7%
of the time. Outages are generally the result of severe storms passing between
the satellite and the customer's dish or between the Company's transmission
facility and the satellite.
OPERATIONS
The Company's program suppliers deliver signals to the Company via
commercial satellites, fiber optics or microwave transmissions. These signals
are then uplinked, or transmitted, to the Company's transponders on the DBS-1
satellite, through antennas located at the Company's National Broadcast Center
in Oakdale, Minnesota. DBS-1 then broadcasts the signal to DSS
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households. The Company also maintains a separate Auxiliary Broadcast Center
which provides redundant uplinking capability.
All of the Company's video channels are encrypted to prevent unauthorized
reception of the signal. The conditional access system utilized in the DSS
system, which controls the encryption and decryption of the television signal,
was developed and is operated by The News Corporation Limited ("News DataCom").
The signal processing system, which is responsible for the transmission of
audio and video, was developed by Thomson. Both technologies were developed
under contract with Hughes and are available for use by the Company pursuant to
long-term agreements with Hughes.
The conditional access system is controlled by a Conditional Access
Management Center located in Castle Rock, Colorado, with a backup facility in
Los Angeles, California. The conditional access system has many flexible
features, allowing for subscription services and pay-per-view services on both
an impulse and order-ahead basis.
The Company's signal processing system and all DSS units, regardless of
manufacturer, fully comply with the main profile and the main level of the MPEG
2 digital compression standard. MPEG 2 is an international standard promulgated
by the Moving Picture Expert Group. Compliance with MPEG 2 allows DSS unit
manufacturers efficiencies in designing and manufacturing receivers. Even though
the DSS system is MPEG 2 compliant, it incorporates a number of proprietary
technologies and may not be used by other high-power DBS broadcasters unless
they obtain a license to such technology from Hughes.
The Company contracts out customer service and billing functions to BSI
Business Services, Inc. ("BSI") (formerly JCPenney Business Services, Inc.)
under a long-term agreement. BSI's functions include the handling of orders
from subscribers, establishing and maintaining customer accounts, inbound and
outbound telemarketing, billing and collections. All of BSI's interactions with
subscribers are conducted under the Company's name. The Company seeks to provide
the highest levels of customer service and believes that customer service is
important in developing customer loyalty and in distinguishing its service from
its competitors. To date, the Company's research indicates that 76% of its
subscribers were "very satisfied" with the Company's customer service.
SATELLITE
The Company owns five-sixteenths of DBS-1, including a five transponder
payload on the satellite. DBS-1 was manufactured by Hughes and was launched by
Arianespace in December 1993. The satellite was designed for a minimum 12-year
life from the date of launch; however, the launch was more accurate than
initially anticipated and the DBS-1 satellite is estimated to have a 15.5 to
17.2 year life from its launch date. The Company expects that it will make
arrangements for a replacement satellite to ensure continuity of its programming
service prior to the end of the useful life of DBS-1.
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OTHER COMPANY ORBITAL LOCATIONS
The FCC has issued a Construction Permit and Launch Authority which
authorizes the Company to construct high-power DBS systems at 110 DEG. west
longitude (three transponders) and 148 DEG. west longitude (eight
transponders). In connection with this permit, the Company has entered into a
satellite construction contract with Lockheed Martin for the construction of
two satellites. The 110 DEG. west longitude orbital location would enable
the Company to provide a second high-power DBS service to the continental
United States. The 148 DEG. west longitude orbital location would allow the
Company to transmit signals effectively to viewers in Alaska and Hawaii who
acquire an 18 inch dish and could provide programming between the United
States and the Pacific Rim. See "Regulatory Matters."
COMPETITION
The Company's existing and potential competitors comprise a broad range
of companies engaged in communications and entertainment, including cable
operators, other satellite program providers, wireless cable operators,
television networks and home video products companies, as well as companies
developing new technologies. Many of the Company's competitors have greater
financial and marketing resources than the Company, and the business of
providing subscription and pay television programming is highly competitive.
The Company expects that quality and variety of programming, quality of
picture and service and cost will be the key bases of competition.
The Company believes that the DSS system has several advantages,
including superior picture and sound quality compared to terrestial
broadcasters and most cable operators, its programming variety, its retail
distribution network, well-established brand name manufacturers, orbital
location and the limited capital expenditures required in the future. The DSS
system offers the broadest variety of programming available from any single
source and employs the MPEG 2 digital compression standard which, the Company
believes, results in a higher picture quality than any other existing
domestic television broadcasting system. With the 101 DEG. west longitude
orbital slot, the Company (and DIRECTV, Inc.) also have the most desirable
location for reaching the entire continental United States with the least
possibility of obstruction. The Company believes that the 18 inch dish used
in the DSS unit also gives the Company an advantage over many of its
competitors, who must generally rely on larger and, in the case of C-band
broadcasters, more expensive dishes.
CABLE OPERATORS
Cable television is currently available for purchase by as much as 96%
of the approximately 96 million U.S. television households. The cable
television industry is an established provider of television programming,
with approximately 63% of total television households subscribing. Cable
systems typically offer 30 to 80 channels at an average monthly subscription
price of approximately $33.
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Cable television providers benefit from their entrenched position in the
domestic consumer marketplace. Additionally, cable subscribers have
relatively minimal upfront costs as compared to DSS households, which must
purchase (or lease) and install the DSS unit. A DSS subscriber must still
utilize a standard television antenna or purchase some level of cable service
to acquire local broadcast programming and the total monthly cost of both
USSB programming and DIRECTV programming may be higher than a subscriber
would pay for cable service.
SATELLITE PROGRAM PROVIDERS
The FCC authorizes two types of satellite services for transmission of
television programming: (i) high-power DBS and (ii) low-power (C-band) and
medium-power (Ku-band) DBS. High-power DBS delivers high quality video and
audio signals, can be received by an easily installed, 18 inch dish with
virtually no signal interference and, depending on the satellite's orbital
location, can be broadcast throughout the continental United States from a
single satellite. Low- and medium-power DBS were intended by the FCC
primarily for commercial use.
The International Telecommunication Union, an agency of the United
Nations, allocated to the United States 32 transponders at each of eight
orbital locations for the provision of domestic high-power DBS service. The
FCC has issued licenses or construction permits for all orbital locations.
The Company expects that it will face competition from other high-power DBS
providers in the future, although the number of potential competitors in the
high-power DBS market is limited by the number of orbital slots authorized
for such service by the FCC and by regulatory authorities of adjoining
countries.
HIGH-POWER DBS
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. DIRECTV, Inc. broadcasts over 175 channels from
the 101 DEG. west longitude orbital location shared with the Company, as
compared with up to 25 channels offered by the Company. DIRECTV, Inc. offers
a broad range of sports programming and emphasizes pay-per-view movies and
events and offers over 50 channels of "basic" programming. While the Company
and DIRECTV, Inc. share the goal of promoting the DSS system, they do compete
for subscriber revenues once the DSS unit is purchased by the consumer.
EchoStar Communications Corporation ("EchoStar") launched a high-power
DBS satellite in December 1995 at the 119 DEG. west longitude orbital
location and commenced marketing activities and broadcasting of up to 75
channels in the spring of 1996. EchoStar offers programming which includes
many of the premium and basic channels available on DSS and is aggressively
marketing its programming services and satellite dish as an alternative to
DSS. EchoStar manufactures the 18 inch satellite dish needed to receive its
programming and thereby has greater control over the retail price of its
satellite dish than the Company. In addition to its satellite at the 119
DEG. west longitude orbital location, EchoStar has also acquired 24
transponder slots at 148 DEG. west longitude which were auctioned in January
1996 by the FCC, launched a second satellite at 119 DEG. west longitude in
September 1996, and has received FCC permission to acquire a majority
interest in Direct
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Broadcast Satellite Corporation, which has authority for 11 transponder slots
at 61.5 DEG. west longitude and 11 transponder slots at 175 DEG. west
longitude.
Tele-Communications, Inc. ("TCI") has undertaken various initiatives to
enter the high-power DBS marketplace. PrimeStar Partners ("PrimeStar"),
owned primarily by a consortium of cable companies, including TCI, had
entered into an agreement to purchase an FCC permit held by Advanced
Communications Corporation ("Advanced") for 27 transponder slots at the
110 DEG. west longitude orbital location. However, the FCC revoked the
Advanced permit and auctioned the Advanced transponder slots in January 1996.
The FCC action has been appealed. While the Court of Appeals for the District
of Columbia has affirmed the FCC's decision, it is possible that the parties
may seek review by the United States Supreme Court. PrimeStar could use these
slots for a high-power DBS service if the FCC is required as a result of legal
challenges to reinstate the permit originally issued to Advanced. TCI has
also sought to use Canadian-licensed high-power DBS satellites to deliver
television programming into the United States and Canada. While the FCC has
dismissed TCI's initial license application as premature, TCI has sought
reconsideration by the FCC.
MCI Communications Corp. ("MCI") has acquired the 27 transponder slots
which were auctioned by the FCC at 110 DEG. west longitude. MCI has entered
into a joint venture with News Corp. to build and launch a high-power DBS
broadcasting system at that orbital location and has announced that it intends
to be operational by the end of 1997. Any high-power DBS system owned by
others at the 110 DEG. west longitude location would be competitive with the
Company's existing system at 101 DEG. west longitude. However, the Company also
holds an FCC a permit for three transponders at the 110 DEG. west longitude
location and has begun to explore its options, including the possibility of
arrangements with MCI, for developing its DBS system at the 110 DEG. west
longitude orbital location.
LOW AND MEDIUM-POWER DBS
PrimeStar currently offers a 95-channel medium power broadcast system and
leases receivers and three foot satellite dishes to subscribers. Primestar's
lease program is widely credited for the success of its medium-power satellite
service which, according to trade publications, has approximately 1.3 million
subscribers. PrimeStar offers programming which includes many of the premium
and basic channels available on DSS. PrimeStar promotes its service as superior
to cable and markets to the same general television viewers as the Company.
AlphaStar, Inc., a subsidiary of Tee-Com Electronics, Inc., offers video
programming via AT&T's TelStar satellite, a medium-power DBS satellite.
AlphaStar uses MPEG 2 digital compression technology to receive signals via 30
inch satellite dishes.
Potential competitors may provide television programming at any time by
leasing transponders from an existing satellite operator. However, the number
of transponders available for lease on any one satellite is generally limited,
making it difficult to provide sufficient channels for a viable system.
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The Company also competes with low-power (C-band) systems. These
systems, which utilize a 4 to 8 foot dish, in the aggregate serve
approximately 2.3 million subscribers.
TELEPHONE COMPANIES
Certain regional telephone operating companies and long distance
telephone companies could become significant competitors of the Company in
the future. Certain telephone companies have also received authorization to
test market video and other services to certain geographic areas using fiber
optic cable and digital compression over existing telephone lines. While
significant legal and regulatory issues would need to be resolved before
telephone companies could begin to provide programming and other services to
their customers on a commercial basis, the Company will experience additional
competition if such companies enter the market. Among other things,
telephone companies have an existing relationship with virtually every
household in their service area, substantial financial resources, an existing
infrastructure and may be able to subsidize the delivery of programming
through their position as the sole source of telephone service to the home.
WIRELESS CABLE AND OTHER MICROWAVE SYSTEMS
There are approximately 175 wireless cable systems in the United States,
serving approximately 800,000 subscribers. These systems typically offer 20 to
40 channels of programming, which may include local programming; however, these
systems will require substantial capital expenditures to upgrade to digital
technology. Certain wireless cable companies may become more competitive as a
result of recently announced transactions with certain telephone companies.
TelQuest Ventures, L.L.C. has requested authority from the FCC to provide a DBS
service using a Canadian satellite. TelQuest intends to provide digitized
signals to wireless cable operators if the FCC grants TelQuest's applications.
VHF/UHF BROADCASTERS
Most areas of the United States are covered by traditional terrestrial
VHF/UHF broadcasters that typically offer three to ten channels. These stations
provide local, network and syndicated programming free of charge.
REGULATORY MATTERS
The Company is subject to the regulatory authority of the FCC. As a
distributor of television programming, the Company is also affected by numerous
laws and regulations. Unlike a common carrier, however, the Company is free to
set prices and serve customers according to its business judgment without rate
of return or certain other types of regulation.
The FCC has issued a license (the "License") to the Company which allows
the Company to broadcast from the 101 DEG. west longitude orbital slot.
DIRECTV, Inc. is the only other entity licensed for the 101 DEG. west longitude
orbital slot. No other entities can currently obtain transponders at 101 DEG.
west longitude.
12
<PAGE>
The License must be renewed at the end of its ten year term. FCC licenses
are generally renewed in the ordinary course, absent misconduct by the licensee.
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 other
satellites; and (iii) complying with rules the FCC has established specifically
for high-power DBS satellite licenses. USSB II, Inc. ("USSB II"), a wholly
owned subsidiary of the Company, holds the License and owns the five
transponders. The Company and USSB II have entered into a Transponder Use
Agreement, whereby the Company is granted the right to use the transponders. In
addition, uplink facilities are separately licensed by the Satellite Radio
Branch of the FCC. The Company's National Broadcast Center and its Auxiliary
Broadcast Center have each received a Satellite Radio Branch license.
The FCC has also issued a Construction Permit and Launch Authority (the
"Permit") to the Company. The Permit allows the Company to construct and
launch high-power DBS systems with three transponders at 110 DEG. west
longitude and with eight transponders at 148 DEG. west longitude. The
110 DEG. west longitude orbital slot would enable the Company to provide a
second high-power DBS service to the continental United States. The 148 DEG.
west longitude slot would allow the Company to transmit signals effectively
to viewers in Alaska and Hawaii who acquire an 18 inch dish, and could
provide programming between the United States and the Pacific Rim, if the FCC
and international regulatory bodies agree to grant the necessary
authorizations. The Permit presently requires that these two additional
systems be operational by December 1997. In connection with the Permit, the
Company has entered into a satellite construction contract with Lockheed
Martin for the construction of two satellites. Under this contract, the
Company is presently required to make future fixed payments totaling
approximately $161 million after having made advance payments of $1.4 million.
In December 1995, the FCC issued a Report and Order adopting new rules
and amending certain existing rules (the "FCC Order"). The FCC Order
includes a rule change which releases the Company from its obligations at
148 DEG. west longitude as a condition of maintaining its License at 101 DEG.
west longitude and its Permit at 110 DEG. west longitude. Although the FCC
Order is subject to certain legal challenges, such challenges do not affect
those portions of the Order releasing the Company from its obligations at
148 DEG. west longitude. In addition, in January 1996 the FCC auctioned certain
other transponders at 110 DEG. and 148 DEG. west longitude which had been
assigned to Advanced Communications Corporation. Although the winning
bidders were MCI at 110 DEG. west longitude and EchoStar at 148 DEG. west
longitude, the auction is subject to a court challenge.
The Company does not expect to make a final decision with respect to its
transponders at 110 DEG. and 148 DEG. west longitude until it completes
certain technical and competitive studies with respect to satellite
broadcasting at such locations, until the regulatory and legal situation is
clarified, and until the Company has had an opportunity to enter into
discussions with MCI and EchoStar regarding the possibilities of sharing
satellite construction and launch costs and using the same technology.
13
<PAGE>
The Telecommunications Act of 1996 (the "Act") significantly deregulated
the telecommunications industry and may affect the Company. The Act allows
telephone companies to provide high-power DBS service. The Act further
clarifies that the FCC has exclusive jurisdiction over high-power DBS service,
that criminal penalties may be imposed for piracy of high-power DBS signals,
that local zoning and homeowner covenants which impair a viewer's ability to
receive DBS signals are preempted except where necessary for safety or historic
reasons and that local (but not state) taxes on DBS service are precluded.
RELATIONSHIP WITH HUGHES
The Company has an important business relationship and course of dealing
with Hughes, based on their co-ownership of DBS-1, their shared use of the DSS
system (including its underlying technology) and their mutual objective to build
and promote consumer acceptance and growth of the DSS system. The relationship
with Hughes dates back to 1991 and is based on contractual arrangements and a
history of cooperation. The Company and Hughes (or an affiliate of Hughes) are
parties to the following agreements:
SATELLITE PAYLOAD PURCHASE AGREEMENT. In May 1991, the Company entered
into a Satellite Payload Purchase Agreement (the "SPPA") with Hughes
Communications Galaxy, Inc. ("HCG"). The SPPA provided for the purchase by the
Company of a five-sixteenths interest in DBS-1, enabled the Company and
DIRECTV, Inc. to share the cost of satellite construction and launch and enabled
the Company and DIRECTV, Inc. to become the first high-power DBS satellite
broadcasters in the United States. In addition, the SPPA provided that the
Company would pay its fair share of the development and/or acquisition costs for
the system technology, which includes conditional access, signal processing and
other systems. Through this agreement, DIRECTV, Inc. and the Company utilized a
common system and avoided any technical barriers to consumers subscribing to
both USSB programming and DIRECTV programming.
TRANSPONDER SERVICE AGREEMENT. The Company also entered into a Transponder
Service Agreement with Hughes Communications Satellite Services, Inc. ("HCSS"),
whereby HCSS provides telemetry, tracking and control of DBS-1. Pursuant to
this Agreement, the Company and HCSS technical personnel are in regular contact,
sharing information regarding the satellite and cooperating in managing its
operations.
INTERIM TECHNOLOGY ACCESS AND COORDINATION AGREEMENT. The Company and HCG
have entered into an Interim Technology Access and Coordination Agreement, which
clarifies certain issues regarding the sharing of the technology underlying the
DSS system and sets forth the preliminary agreement on the sharing of
development costs. In addition, DIRECTV, Inc. has primary responsibility for
security of the DSS system and undertakes initiatives to detect signal piracy
and implement countermeasures.
Even though the Company and DIRECTV, Inc. compete for subscriber revenues
from DSS households, there is currently no overlap between USSB programming and
DIRECTV programming. Accordingly, both the Company and DIRECTV, Inc. have a
common interest in
14
<PAGE>
promoting awareness of the DSS system, maximizing DSS unit sales and cooperating
in joint marketing efforts to promote the DSS system.
EMPLOYEES
As of June 30, 1996, the Company employed 116 persons. None of the
Company's employees are represented by a union and the Company believes its
employee relations are satisfactory.
In addition, pursuant to an Administrative Services Agreement between the
Company and Hubbard Broadcasting, Inc. ("HBI"), the Company's largest
shareholder, the Company receives services from certain executives of HBI and
the legal, management information systems, tax, risk management, payroll and
accounts payable staff of HBI. The Company incurred an aggregate charge of
$960,000 for such services in fiscal 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Stanley S. Hubbard 63 Chairman of the Board
Stanley E. Hubbard 35 Chief Executive Officer and
President
Robert W. Hubbard 31 Executive Vice President
Gerald D. Deeney 72 Treasurer, Chief Financial
Officer and Secretary
Mary Pat Ryan 39 Senior Vice President, Marketing
Bernard J. Weiss 42 Vice President,
Finance and Administration
Raymond A. Conover 46 Vice President, Engineering
Carl S. Wegener 43 Vice President, Dealer Marketing
Robert D. Pacek 53 Vice President, Information Systems
Joseph G. Ducey 37 Vice President, Operations
Thomas W. French 36 Vice President, Consumer Marketing
15
<PAGE>
STANLEY S. HUBBARD is the founder of the Company and serves as its Chairman
of the Board. Mr. Hubbard served as Chief Executive Officer of the Company from
its inception to November 1995. Mr. Hubbard is also the Chairman of the Board,
President and Chief Executive Officer of HBI and divides his professional time
between the Company and HBI and its affiliates. Mr. Hubbard is an executive with
several other entities affiliated with HBI, including Conus Communications
Company Limited Partnership ("Conus"), a satellite news gathering firm. Mr.
Hubbard, a graduate of the University of Minnesota, joined HBI in 1951. He and
his father, the founder of HBI, were co-recipients of the Distinguished Service
Award from the National Association of Broadcasters in 1995. Stanley S. Hubbard
is the father of Stanley E. Hubbard and Robert W. Hubbard. Mr. Hubbard is also
a director of Fingerhut, Inc.
STANLEY E. HUBBARD was elected Chief Executive Officer of the Company in
November 1995. From February 1993 until November 1995, Mr. Hubbard served as
President and Chief Operating Officer of the Company. Prior thereto, he served
as Vice President of the Company. He has been a director of the Company since
1991. Mr. Hubbard has also been a Vice President of HBI for more than five
years and has a broad range of television experience. He holds positions in
other affiliated companies, including director of HBI. Mr. Hubbard is also a
director of First Team Sports, Inc.
ROBERT W. HUBBARD was elected Executive Vice President of the Company in
February 1993 and elected a director of the Company in September 1992. Mr.
Hubbard has a broad range of television experience with various HBI affiliates
and divides his professional time between the Company and HBI and its
affiliates. Mr. Hubbard is also a director of HBI and serves as President of
its television group.
GERALD D. DEENEY was elected Treasurer of the Company in June 1981, Chief
Financial Officer of the Company in September 1995 and Secretary in January
1996. Mr. Deeney has been with HBI for more than thirty four years and has been
Vice President and Treasurer of HBI for more than twenty five years. In 1992,
Mr. Deeney was elected a director of HBI.
MARY PAT RYAN joined the Company as Vice President, Marketing in February
1994 and now is Senior Vice President, Marketing. From 1983 to 1993, Ms. Ryan
was at Kobs & Draft, the fourth largest direct marketing agency in the world,
and served as Executive Vice President and Director of Client Services. At Kobs
& Draft, Ms. Ryan managed marketing programs for HBO's Cable and Satellite
Divisions, Time Warner Cable, The Sega Channel and American Express Travelers
Cheque Group, and oversaw all administrative, business development and training
functions for client services.
BERNARD J. WEISS joined the Company in January 1994 and has been Vice
President of Finance and Administration of the Company since January 1995. From
April 1990 until January 1994, Mr. Weiss served in various financial and
operating positions at Northwest Airlines. Inc., including Director of Budgets
and Analysis. From June 1986 to 1990, Mr. Weiss served as Vice President and
acting division head of the media and communications division of First Banks.
Mr. Weiss is a Certified Public Accountant.
16
<PAGE>
RAYMOND A. CONOVER has been Vice President of Engineering of the Company
since March 1994. Mr. Conover has held various positions with HBI and its
affiliates since 1972, most recently as Vice President and Director of
Engineering of Conus.
CARL S. WEGENER joined the Company in 1993 as Director of Consumer
Electronics Marketing and was promoted to Vice President, Dealer Marketing, in
December 1994. Mr. Wegener has 20 years of experience in the consumer
electronics industry, including positions with RCA and Philips N.V.
ROBERT D. PACEK joined the Company as Vice President, Information Services
in March 1996. From September 1992 to March 1996, Mr. Pacek was Vice President,
Operations, of Advance, Inc., a consulting firm retained by the Company in the
area of information services. For three years prior thereto, he was Director of
Information Services in the United States Navy.
JOSEPH G. DUCEY was appointed Vice President, Operations in July 1996. From
June 1991 to July 1996, he had been employed by HBI and affiliates in a number
of engineering/research positions, including Engineering Program Manager for
Conus and Director of Technical Operations.
THOMAS W. FRENCH joined the Company in May of 1994 as Director of Consumer
Marketing and served in that position until July 1996, when he was appointed
Vice President, Consumer Marketing. From June 1990 to May 1994, he was a Senior
Brand Manager for Hiram Walker.
17
<PAGE>
ITEM 2. PROPERTIES
The Company utilizes the following facilities:
<TABLE>
<CAPTION>
FACILITY LOCATION SQUARE FOOTAGE OWNED OR LEASED
-------- -------- -------------- ---------------
<S> <C> <C> <C>
Executive Offices St. Paul, Minnesota 9,400 Leased from HBI (a)
National Broadcast Center Oakdale, Minnesota 20,500 Owned
Auxiliary Broadcast Center St. Paul, Minnesota 1,300 Antennas and
equipment are
owned by the
Company; roof site
for antennas is
leased from HBI (a)
</TABLE>
- ----------
(a) The lease for the Company's executive offices expires on June 30, 1997.
The Company expect to renew this lease in the ordinary course. The
Auxiliary Broadcast Center lease expires on June 30, 1999 and includes
three five-year renewal options.
The Company believes that its executive offices are adequate for its office
and administrative purposes for the foreseeable future and that its National
Broadcast Center is sufficient for its signal reception, signal processing and
uplinking facilities for the foreseeable future. The Company's telemarketing,
customer service and billing functions are performed for it on a contract basis
by third parties and do not require the use of Company facilities.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 1996.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common stock trades on the Nasdaq National Market
under the symbol "USSB." The following table sets forth the high and low
closing sales prices for such stock as reported on the Nasdaq National Market
for each quarter since the initial public offering of the Company's Class A
Common stock:
HIGH LOW
---- ---
Year ended June 30, 1996:
-------------------------
Third Quarter ended March 31, 1996 $34.75 $27.75
Fourth Quarter ended June 30, 1996 $37.75 $31.25
On September 23, 1996, the last reported sale price of the Company's
Class A Common stock was $24.875 per share. At that date, the Company had 643
Class A Common shareholders of record.
The Company has not paid any cash dividends on its Class A Common stock and
does not intend to pay cash dividends for the foreseeable future. Earnings will
be retained for use in the operation and expansion of the Company's business.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Information required by this item is set forth in the Company's 1996 Annual
Report to Shareholders on page 16, under the heading "Selected Financial and
Operating Data," and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this item is set forth in the Company's 1996 Annual
Report to Shareholders on pages 17 to 22, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth in the Company's 1996 Annual
Report to Shareholders on pages 23 to 35, in the consolidated financial
statements and notes, and on page 36, under the heading "Report of Independent
Public Accountants," and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 20, 1996, under the heading "Election of Directors" and under
the heading "Compliance with Section 16(a) of the Exchange Act," and is
incorporated herein by reference. Information regarding executive officers of
the Company is contained in Part I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held November 20,
1996, under the heading "Compensation of Directors and Executive Officers,"
(except for the information set forth under the subcaptions "Compensation
Committee Report" and "Share Investment Performance," which subsections are not
incorporated herein) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information required by this item is set forth in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held November 20,
1996, under the heading "Principal Shareholders" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held November 20,
1996, under the heading "Certain Transactions," and is incorporated herein by
reference.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are included in the company's 1996
Annual Report to Shareholders and are incorporated in Part II, Item 8
of this Form 10-K by reference:
Report of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1995 and 1994
Consolidated Balance Sheets as of June 30, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule.
3. EXHIBITS
The following exhibits are filed as part of this Annual Report or,
where indicated, were previously filed and are hereby incorporated by
reference.
Exhibit No. Exhibit Description
- ----------- -------------------
1.1 Form of Underwriting Agreement (1)
1.2 Form of Subscription Agreement (1)
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
23
<PAGE>
3.3 Form of Second Restatement of the Articles of Incorporation (1)
3.4 Form of Amended and Restated Bylaws (1)
4.1 Form of Stock Certificate (1)
10.1 United States Satellite Broadcasting Company, Inc. 1995 Stock
Option Plan (1)*
10.2 Sales Agency Agreement, dated December 22, 1993, between Thomson
Consumer Electronics, Inc. and United States Satellite
Broadcasting Company, Inc. (1)**
10.3 Credit Agreement, dated December 22, 1994, among United States
Satellite Broadcasting Company, Inc., as Borrower, USSB II, Inc.,
as Guarantor, First Bank National Association, as Administrative
Agent, and Kleinwort Benson Limited and Internationale
Nederlanden Lease Ireland B.V., Dublin Branch, as Managing
Agents, and the Lenders signatory thereto (1)
10.4 Consulting Services Agreement, dated November 1, 1995 between
Conus Communications Company Limited Partnership and United
States Satellite Broadcasting Company, Inc. (2)
10.5 Guarantor Security Agreement, dated December 22, 1994, made by
USSB II, Inc. in favor of First Bank National Association (1)
10.6 Borrower Security Agreement, dated December 22, 1994, made by
United States Satellite Broadcasting Company, Inc. in favor of
First Bank National Association (1)
10.7 Stock Pledge Agreement, dated December 22, 1994, between United
States Satellite Broadcasting Company, Inc. and First Bank
National Association (1)
10.8 Stock Pledge Agreement, dated December 22, 1994, between Hubbard
Broadcasting, Inc. and First Bank National Association (1)
10.9 Pledge Agreement, dated December 22, 1994, made by United States
Satellite Broadcasting Company, Inc. in favor of First Bank
National Association (1)
10.10 Mortgage, Security Agreement, Financing Statement and Assignment
of Rents, dated December 22, 1994, by United States Satellite
Broadcasting Company, Inc. in favor of First Bank National
Association (1)
24
<PAGE>
10.11 Service Agreement, dated January 1, 1994 between Conus
Communications Company Limited Partnership and United States
Satellite Broadcasting Company, Inc. (1)
10.12 Indenture, dated May 1994, between Hubbard Broadcasting, Inc. and
United States Satellite Broadcasting Company, Inc. (1)
10.13 Satellite Payload Purchase Agreement, dated May 31, 1991, between
Hughes Communications Galaxy, Inc. and United States Satellite
Broadcasting Company, Inc., as amended (1)**
10.14 Interim Technology Access and Coordination Agreement, dated June
17, 1993, between Hughes Communications Galaxy, Inc. and United
States Satellite Broadcasting Company, Inc. (1)**
10.15 Transponder Service Agreement, dated May 31, 1991, between Hughes
Communications Satellite Services, Inc. and United States
Satellite Broadcasting Company, Inc. (1)**
10.16 Processing Agreement, dated March 5, 1993, between JCPenney
Business Services, Inc. and United States Satellite Broadcasting
Company, Inc. (1)**
10.17 Auxiliary Broadcast Center Lease (1)
10.18 Form of Subscription Agreement, Letter of Investment Intent and
Investor's Rights Agreement (1)
10.19 Administrative Services Agreement, effective July 1, 1994,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (1)
10.20 Tax Sharing Agreement between United States Satellite
Broadcasting Company, Inc. and Hubbard Broadcasting, Inc. (1)
10.21 6-Channel Direct Broadcast Satellite Contract, originally dated
June 15, 1984, between Lockheed Martin Corporation (formerly RCA
Corporation) and United States Satellite Broadcasting Company,
Inc., as amended (1)**
10.22 Amendment No. 10, dated December 18, 1995, to Direct Broadcast
Satellite Contract between Lockheed Martin Corporation and United
States Satellite Broadcasting Company, Inc. (1)**
10.23 Administrative Services Agreement, effective July 1, 1996,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (2)
25
<PAGE>
13.1 Selected Portions of the Company's 1996 Annual Report to
Shareholders (2)
21.1 Subsidiary of the Company (2)
23.1 Consent of Arthur Andersen LLP (2)
24.1 Powers of Attorney (2)
27.1 Financial Data Schedule (2)
- ---------------
* Denotes management contract or compensatory plan or arrangement in which
certain directors and named executive officers participate.
** Portions of these documents were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended, in connection with the filing of the Registration
Statement described in note (1) below.
(1) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Registration Statement on Form S-1, File No. 33-99906.
(2) Filed herewith.
(b) REPORTS ON FORM 8-K
None
26
<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.
Dated: September 26, 1996 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------------
Stanley E. Hubbard
Chief Executive Officer and President
(Principal Executive Officer)
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/ Stanley S. Hubbard Chairman of the Board September 26, 1996
- ------------------------------
Stanley S. Hubbard
/s/ Stanley E. Hubbard Chief Executive Officer, President, September 26, 1996
- ------------------------------ and Director
Stanley E. Hubbard (Principal Executive Officer)
/s/ Robert W. Hubbard Executive Vice President and September 26, 1996
- ------------------------------ Director
Robert W. Hubbard
/s/ Gerald D. Deeney Treasurer and Chief Financial Officer September 26, 1996
- ------------------------------ (Principal Financial and Accounting
Gerald D. Deeney Officer)
/s/ Herbert S. Schlosser* Director September 26, 1996
- ------------------------------
Herbert S. Schlosser
/s/ David S. Allen* Director September 26, 1996
- ------------------------------
David S. Allen
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Dennis J. Brownlee* Director September 26, 1996
- ------------------------------
Dennis J. Brownlee
/s/ Frank N. Magid* Director September 26, 1996
- ------------------------------
Frank N. Magid
/s/ Peter G. Skinner* Director September 26, 1996
- ------------------------------
Peter G. Skinner
/s/ William D. Savoy* Director September 26, 1996
- ------------------------------
William D. Savoy
/s/ John W. Marvin* Director September 26, 1996
- ------------------------------
John W. Marvin
/s/ Ward L. Quaal* Director September 26, 1996
- ------------------------------
Ward L. Quaal
/s/ Kenneth G. Langone* Director September 26, 1996
- ------------------------------
Kenneth G. Langone
/s/ Louis G. Zachary, Jr.* Director September 26, 1996
- ------------------------------
Louis G. Zachary, Jr.
/s/ Peter F. Frenzer* Director September 26, 1996
- ------------------------------
Peter F. Frenzer
*By /s/ Stanley E. Hubbard September 26, 1996
---------------------------
Stanley E. Hubbard,
Attorney-in-fact
</TABLE>
28
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
INDEX OF EXHIBITS TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
Exhibit No. Exhibit Description
- ----------- -------------------
1.1 Form of Underwriting Agreement (1)
1.2 Form of Subscription Agreement (1)
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
3.3 Form of Second Restatement of the Articles of Incorporation (1)
3.4 Form of Amended and Restated Bylaws (1)
4.1 Form of Stock Certificate (1)
10.1 United States Satellite Broadcasting Company, Inc. 1995 Stock
Option Plan (1)*
10.2 Sales Agency Agreement, dated December 22, 1993, between Thomson
Consumer Electronics, Inc. and United States Satellite
Broadcasting Company, Inc. (1)**
10.3 Credit Agreement, dated December 22, 1994, among United States
Satellite Broadcasting Company, Inc., as Borrower, USSB II, Inc.,
as Guarantor, First Bank National Association, as Administrative
Agent, and Kleinwort Benson Limited and Internationale
Nederlanden Lease Ireland B.V., Dublin Branch, as Managing
Agents, and the Lenders signatory thereto (1)
10.4 Consulting Services Agreement, dated November 1, 1995 between
Conus Communications Company Limited Partnership and United
States Satellite Broadcasting Company, Inc. (2) .................
10.5 Guarantor Security Agreement, dated December 22, 1994, made by
USSB II, Inc. in favor of First Bank National Association (1)
<PAGE>
10.6 Borrower Security Agreement, dated December 22, 1994, made by
United States Satellite Broadcasting Company, Inc. in favor of
First Bank National Association (1)
10.7 Stock Pledge Agreement, dated December 22, 1994, between United
States Satellite Broadcasting Company, Inc. and First Bank
National Association (1)
10.8 Stock Pledge Agreement, dated December 22, 1994, between Hubbard
Broadcasting, Inc. and First Bank National Association (1)
10.9 Pledge Agreement, dated December 22, 1994, made by United States
Satellite Broadcasting Company, Inc. in favor of First Bank
National Association (1)
10.10 Mortgage, Security Agreement, Financing Statement and Assignment
of Rents, dated December 22, 1994, by United States Satellite
Broadcasting Company, Inc. in favor of First Bank National
Association (1)
10.11 Service Agreement, dated January 1, 1994 between Conus
Communications Company Limited Partnership and United States
Satellite Broadcasting Company, Inc. (1)
10.12 Indenture, dated May 1994, between Hubbard Broadcasting, Inc. and
United States Satellite Broadcasting Company, Inc. (1)
10.13 Satellite Payload Purchase Agreement, dated May 31, 1991, between
Hughes Communications Galaxy, Inc. and United States Satellite
Broadcasting Company, Inc., as amended (1)**
10.14 Interim Technology Access and Coordination Agreement, dated June
17, 1993, between Hughes Communications Galaxy, Inc. and United
States Satellite Broadcasting Company, Inc. (1)**
10.15 Transponder Service Agreement, dated May 31, 1991, between Hughes
Communications Satellite Services, Inc. and United States
Satellite Broadcasting Company, Inc. (1)**
10.16 Processing Agreement, dated March 5, 1993, between JCPenney
Business Services, Inc. and United States Satellite Broadcasting
Company, Inc. (1)**
<PAGE>
10.17 Auxiliary Broadcast Center Lease (1)
10.18 Form of Subscription Agreement, Letter of Investment Intent and
Investor's Rights Agreement (1)
10.19 Administrative Services Agreement, effective July 1, 1994,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (1)
10.20 Tax Sharing Agreement between United States Satellite
Broadcasting Company, Inc. and Hubbard Broadcasting, Inc. (1)
10.21 6-Channel Direct Broadcast Satellite Contract, originally dated
June 15, 1984, between Lockheed Martin Corporation (formerly RCA
Corporation) and United States Satellite Broadcasting Company,
Inc., as amended (1)**
10.22 Amendment No. 10, dated December 18, 1995, to Direct Broadcast
Satellite Contract between Lockheed Martin Corporation and United
States Satellite Broadcasting Company, Inc. (1)**
10.23 Administrative Services Agreement, effective July 1, 1996,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (2)...................................
13.1 Selected portions of the Company's 1996 Annual Report to
Shareholders (2).................................................
21.1 Subsidiary of the Company (2)....................................
23.1 Consent of Arthur Andersen LLP (2)...............................
24.1 Powers of Attorney (2)...........................................
27.1 Financial Data Schedule (2)......................................
* Denotes management contract or compensatory plan or arrangement in which
certain directors and named executive officers participate.
** Portions of these documents were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended, in connection with the filing of the Registration
Statement described in note (1) below.
<PAGE>
(1) Pursuant to Rule 12b-32, this exhibit is incorporated by reference under
the same exhibit number to the exhibits filed with the Company's
Registration Statement on Form S-1, File No. 33-99906.
(2) Filed herewith.
<PAGE>
EXHIBIT 10.4
CONUS COMMUNICATIONS COMPANY LIMITED PARTNERSHIP
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
CONSULTING SERVICES AGREEMENT
Effective as of the 1st day of November, 1995, Conus Communications Company
Limited Partnership and United States Satellite Broadcasting Company, Inc. agree
as follows:
WHEREAS, Conus Communications Company Limited Partnership ("Conus") is a
Minnesota limited partnership with its principal place of business located at
3415 University Avenue, Saint Paul, Minnesota 55114; and
WHEREAS, the managing general partner of Conus is Hubbard Broadcasting,
Inc. ("Hubbard"), a Minnesota corporation, with its principal place of business
located at 3415 University Avenue, Saint Paul, Minnesota 55114; and
WHEREAS, United States Satellite Broadcasting Company, Inc. ("USSB") is a
Minnesota corporation, with its principal place of business located at 3415
University Avenue, Saint Paul, Minnesota 55114; and
WHEREAS, effective November 1, 1992, USSB and Conus entered into a
Consulting Service Agreement; and
WHEREAS, said Consulting Service Agreement expired by its own terms
effective May 31, 1994; and
WHEREAS, USSB and Conus wish to continue their professional relationship,
including Conus' provision of consulting and engineering services in connection
with USSB's operation of its diversity site, and the continued provision of
consulting and engineering services in connection with USSB's ongoing operations
on the terms and conditions set forth herein.
NOW, THEREFORE, USSB and Conus agree as follows:
<PAGE>
1. RETENTION OF CONUS AS CONSULTANT. Conus is hereby retained by USSB to
serve as an engineering consultant to USSB in connection with the operation and
maintenance of its diversity site and the continuing operation of its DBS
operations.
2. MANAGEMENT AND ADMINISTRATIVE CONSULTING SERVICES; MAINTENANCE AND
OPERATING PERSONEL; CONUS PROVISION OF SUPPORT SERVICES.
(a) MANAGEMENT AND ADMINISTRATIVE CONSULTING SERVICES. Conus
shall, at its expense, provide a minimum of two hundred sixty (260) hours and a
maximum of one thousand (1,000) hours of consulting services per calendar year
relating to the management and administration of the USSB Diversity Site, and
the operation, maintenance and future planning of USSB technical operations
overall, all of which shall be assigned, supervised and implemented by Ray
Conover.
(i) In and for consideration of management and administrative
consulting services provided hereunder, USSB shall pay Conus $8,804.17 per
month.
(b) MAINTENANCE AND OPERATING PERSONNEL. In addition, Conus shall,
at its expense, provide sufficient personnel to operate and maintain the USSB
Diversity Site on a twenty-four-hour-a-day, seven-day-a-week basis.
(i) In and for consideration of maintenance and operating
services provided hereunder, USSB shall pay Conus $2,262.50 per month.
3. CONUS PROVISION OF SUPPORT SERVICES.
(a) Conus shall, at its expense, provide the management,
administrative, maintenance and operating consultants/personnel with all
associated support hardware and support staff, including without limitation
computer and telephone services and equipment, which is necessary for them to
perform their duties.
(i) In and for consideration of personnel support items provided
hereunder, USSB shall pay Conus $290.00 per month.
-2-
<PAGE>
4. LABORATORY SUPPORT ITEMS AND SERVICES.
(a) Conus shall, at its expense, acquire and provide to the
management, administrative, maintenance and operating personnel laboratory
support services and equipment (including, without limitation, tools, testing
equipment, testing equipment maintenance and consumables) which are reasonable
and necessary for them to perform their duties.
(i) In and for consideration of laboratory support items
provided hereunder, USSB shall pay Conus $290.00 per month.
5. ADDITIONAL SOUNDPROOFING. USSB will reimburse Conus for all
reasonable, expenses incurred by Conus in enhancing or improving the
soundproofing to the Conus generator room as necessary, PROVIDED that USSB
reserves the right to verify the accuracy and propriety of such expenditures.
6. TERM; TERMINATION.
(a) INITIAL TERM. Unless earlier terminated in accordance with the
following two subdivisions, the Term of this Agreement shall commence effective
January 1, 1996, and shall terminate December 31, 1997.
(b) BY USSB. In the event Ray Conover leaves the employ of Conus,
USSB may, at its option, terminate this Agreement upon thirty (30) days advance
written notice with no further liability or obligation by either party.
Otherwise, USSB may terminate this Agreement upon sixty (60) days advance
written notice.
(c) BY CONUS. Conus may terminate this Agreement upon one hundred
twenty (120) days advance written notice.
7. CONUS SERVICES.
(a) Conus shall, at USSB's discretion, consult with USSB concerning
all engineering related matters pertinent to the operation and maintenance of
its diversity site and the continuing operation of its DBS operations. Such
consultation shall include, but not be limited to: final waveguide and fine
tuning of microwave system; diversity station routine maintenance (including
labor and small parts such resistors, capacitors and hardware that are not
unique);
-3-
<PAGE>
assignment of personnel; and development and implementation of all diversity
station operational procedures.
(b) Parts and services unique to the diversity station requiring
attention will be brought to the attention of Ray Conover, who will also
personally approve any work or services to be performed.
(c) Additional engineering time for extraordinary circumstances will
be available at Conus' standard hourly billing rate.
8. PAYMENTS BY USSB TO CONUS.
(a) All payments due Conus hereunder are due and payable within
thirty (30) days of invoicing by Conus.
(b) All associated travel and entertainment expenses incurred by
Conus pursuant to this Agreement shall be expensed directly to USSB without
markup, provided that USSB reserves the right to verify the accuracy and
propriety of such expenditures.
9. MISCELLANEOUS.
(a) No waiver by either party of any breach or default hereunder
shall be deemed to be a waiver of any preceding or subsequent breach or default.
(b) No action or course of conduct or dealing by any party to this
Agreement shall be deemed a waiver, interpretation, alteration, amendment or
modification of this Agreement. This Agreement may not be modified, altered or
amended, nor may any provision hereof be waived, except by a writing signed by
an authorized representative of the party to be charged therewith.
(c) This Agreement, its interpretation, performance or any breach
thereof, shall be construed and enforced in accordance with, and all questions
with respect thereto shall be determined by, the laws of the State of Minnesota
(without giving regard to the conflict of laws rules thereof), applicable to
contracts made and entirely performed therein.
-4-
<PAGE>
(d) Nothing contained herein shall be deemed to create a joint
venture, partnership, principal/agent relationship or other fiduciary
relationship between the parties hereto.
(e) This Agreement contains the entire understanding of the parties
relating to the subject matter hereof and supersedes all prior agreements or
understandings (whether oral or written) relating thereto.
(f) This Agreement may not be assigned by either party without the
written authorization of the non-assigning party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CONUS COMMUNICATIONS COMPANY
LIMITED PARTNERSHIP
By: /s/ Charles H. Dutcher, III
--------------------------------
Charles H. Dutcher, III
Its: President/General Manager
--------------------------------
UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Robert W. Hubbard
--------------------------------
Robert W. Hubbard
Its: Executive Vice President
--------------------------------
-5-
<PAGE>
EXHIBIT 10.23
ADMINISTRATIVE SERVICES AGREEMENT
THIS AGREEMENT is effective as of the 1st day of July, 1996, by and between
United States Satellite Broadcasting Company, Inc., a Minnesota corporation
("USSB"), and Hubbard Broadcasting, Inc., a Minnesota corporation ("HBI").
WITNESSETH:
WHEREAS, USSB, pursuant to licenses issued by the Federal Communications
Commission, operates a high-power direct broadcast satellite business; and
WHEREAS, USSB's business continues to develop rapidly and the company
desires to obtain additional management assistance in order to manage
effectively its growth and take advantage of its marketplace opportunities; and
WHEREAS, HBI has the experience, facilities and personnel to provide
management services on a contract fee basis to USSB; and
WHEREAS, USSB desires to engage HBI to provide management services to it,
and HBI desires to provide such services;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants contained herein, the parties hereto agree as follows:
1. MANAGEMENT SERVICES. HBI shall, during the term of this Agreement,
provide to USSB the following services, and all other services incident thereof:
A. Assist USSB's management in performing general management
activities (including, but not limited to, finance, legal, human services,
information services and risk management services) and carrying out the day-to-
day management of USSB's operations;
B. Assist in performing strategic and budgetary planning;
C. Assist in preparing necessary federal and state tax returns;
D. Assist in obtaining financing for the company and in managing
relations with lenders and shareholders;
E. Assist in obtaining and maintaining all necessary licenses and
representing the company before appropriate regulatory and legislative bodies;
F. Provide personnel, as needed, to carry out the foregoing.
<PAGE>
All of the foregoing services shall be performed under and subject to
the direction of USSB's Board of Directors.
2. TERM.
A. Subject to Section 2.B hereof, the term of this Agreement shall
be for one (1) year and shall terminate at 11:59 p.m. on the 30th day of June,
1997; provided that USSB, at its sole option, shall have the right to renew the
Agreement on reasonable terms and conditions to be negotiated, but subject to
the provisions of Section 3 hereof.
B. Notwithstanding the provisions of Section 2.A hereof, this
Agreement may be terminated at any time by the affirmative vote of shareholders
of USSB holding shares representing at least 75% of the voting power of the
outstanding shares of USSB's capital stock.
3. COMPENSATION. For all services provided hereunder, HBI shall receive
an annual administrative service fee (the "Administrative Services Fee"). The
Annual Administrative Services Fee shall be accrued in equal monthly
installments. For Fiscal Year 1997 the budgeted Annual Administrative Services
Fee shall be $994,977.00. Any upward increase in the Annual Administrative
Services Fee for Fiscal Year 1997 must be approved by the USSB Board of
Directors after recommendation by a committee of the Board comprised of
directors who are not affiliated with HBI or employed by USSB other than as
directors (the "Audit Committee"). The Audit Committee may request the
assistance of USSB's independent auditors in determining the reasonableness of
any proposed changes. If USSB renews this Agreement, for Fiscal Year 1998, the
Annual Administrative Services Fee shall be approved by the USSB Board of
Directors after recommendation by the Audit Committee, which may seek the
assistance of USSB's independent auditors concerning the reasonableness of the
proposed Annual Administrative Services Fee.
4. REASONABLE EFFORTS. HBI will use its reasonable efforts to promote
and develop the business of USSB. The parties acknowledge that HBI is engaged
in other businesses and agree that HBI shall devote such time and attention to
its other businesses as it, in its sole discretion, deems necessary.
5. BOOKS AND RECORDS. HBI shall assist USSB to continue to maintain a
complete and accurate set of books and records for USSB and cause the
preparation of annual financial statements in accordance with general accepted
accounting principles, applied on a basis consistent with prior years.
6. LIMITATION OF LIABILITY. HBI shall not be liable to USSB for any
claim, damage, injury, loss, expense or liability, arising out of or in
connection with the operation and management of the business of USSB, or any
omission to act in connection therewith, unless such act or omission is the
result of HBI's willful misconduct. In no event shall HBI be liable for any
indirect, special, general, incidental or consequential damages, including,
without limitation, loss of profits or revenues, suffered or incurred by USSB or
any other person, whether in contract, in tort or otherwise, upon any claim
arising out of or related to the services furnished by HBI under this Agreement,
even if HBI has been advised of the possibility of such loss or
-2-
<PAGE>
damage. Further, the liability of HBI for any claim arising out of this
Agreement, or the services provided by HBI, under this Agreement, shall be
absolutely limited to the aggregate amount paid by USSB to HBI under this
Agreement.
7. INDEMNIFICATION. USSB hereby indemnifies and holds HBI harmless from
any and all claims, damages, injuries, losses, expenses, liabilities, actions or
causes of actions, including, without limitation, reasonable attorney's fees
incident to any of the foregoing, resulting from or arising out of the conduct
and operation of USSB's DBS broadcast business, unless such claim, damage,
injury, loss, expense, liability, action or cause of action arises out of or is
due to HBI's willful misconduct.
8. ASSIGNMENT. This Agreement may not be assigned by either party
without the prior consent of the other.
9. GENERAL PROVISIONS.
A. This Agreement supersedes any and all prior agreements,
understandings and writings between the parties concerning the subject matter
hereof. It may be amended only by a writing executed by both parties.
B. This Agreement shall be governed and construed in accordance with
the laws of the State of Minnesota.
C. The titles of sections are for convenience only and shall not be
construed as a part of this Agreement.
D. All notices, requests and demands, other than routine operational
communications under this Agreement, shall be in writing and shall be deemed to
have been given when deposited in the United States mail, registered or
certified, postage prepaid and addressed to the other party at its principal
place of business or by personal delivery. Notice of changes of address, if
any, shall be given in like manner.
E. The parties agree that, for purposes of this Agreement, HBI is an
independent contractor and is not a partner, joint venturer or employee of USSB.
F. The failure of any party at any time or times to require
performance of any provision hereof shall in no manner affect the right at a
later time to enforce the same. No waiver by any party of any term, covenant
or condition or of any breach of any term, covenant or condition under this
Agreement, whether by conduct or otherwise, shall be deemed to be or construed
as a further or continuing waiver of any such condition or breach or a waiver of
any other condition or of any breach of any other term, covenant or condition of
this Agreement.
G. This Agreement shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns, but may not be assigned,
as noted above, without the prior written consent of the other party.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective the day and year first above written.
UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-----------------------------------
Stanley E. Hubbard
Its: President
-----------------------------------
HUBBARD BROADCASTING, INC.
By: /s/ Gerald D. Deeney
-----------------------------------
Gerald D. Deeney
Its: Vice President/Treasurer
-4-
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
For the Years Ended June 30
--------------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Programming revenues $191,997 $ 42,337 $ - $ - $ -
Cost of programming 127,183 27,868 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Gross margin 64,814 14,469 - - -
Operating expenses:
Selling and marketing 80,971 37,542 2,495 119 47
Depreciation and amortization 20,940 23,340 7,723 6 4
General and administrative 20,645 13,623 6,158 2,176 1,762
Commissions to dealers 11,254 2,923 - - -
Engineering and operations 5,925 3,584 1,497 159 -
Management fees (a) 6,667 - - - 3,333
- ------------------------------------------------------------------------------------------------------------------------------------
Net operating loss (81,588) (66,543) (17,873) (2,460) (5,146)
Other (income) expense:
Interest expense 7,284 8,567 4,585 1,574 1,777
Interest (income) (4,291) (1,552) (566) - (19)
Cost to terminate Credit Agreement 9,504 - - - -
Other 994 1,165 309 27 10
- ------------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (95,079) (74,723) (22,201) (4,061) (6,914)
Income tax provision - - 2 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $(95,079) $(74,723) $(22,203) $ (4,061) $ (6,914)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss per share $ (1.06) $ (0.83) $ (0.26) $ (0.05) $ (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,862 89,811 84,383 78,965 77,138
<CAPTION>
At June 30
--------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $114,166 $ 12,498 $ 7,744 $ 19 $ 6,688
Working capital (deficit) 75,261 (9,267) 4,708 (7,844) (7,242)
Long-term investments, consisting
of U.S. Treasury securities 6,836 12,832 19,802 - -
Total assets 232,143 140,215 181,797 51,718 48,133
Long-term debt - 96,912 93,373 11,933 20,000
Shareholders' equity 153,672 5,045 78,014 16,660 12,421
</TABLE>
(a) In connection with management services performed by Hubbard Broadcasting,
Inc. ("HBI") for the Company during fiscal 1992, fiscal 1993 and fiscal
1994, the Company agreed to pay HBI an aggregate of $10.0 million, of
which $3.3 million was accrued in fiscal 1992 and the remainder accrued
in the first quarter of fiscal 1996, when it became likely certain
preconditions to payment would be satisfied.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
United States Satellite Broadcasting Company, Inc. ("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.
The Company commenced commercial operations in June 1994, and has not
generated net earnings to date. Management expects that the Company will
experience net losses in fiscal 1997 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 June 30,
1996, approximately 1.90 million DSS units had been placed in service, or
"activated," in the United States, up from 1.62 million at March 31, 1996. Of
this total number of DSS activations, approximately 1.70 million were estimated
to be consumer households ("DSS households") as of June 30, 1996.
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. There are
certain important factors that could cause results to differ materially from
those anticipated by the statements made herein. Investors are cautioned that
all forward-looking statements involve risks and uncertainty and that the
Company faces a number of risks as it develops its commercial operations. Among
the factors that could cause actual results to differ materially are the
following: the uncertain level of ultimate demand for DSS and USSB's
programming; product offerings and pricing strategies of competitors; dependence
on third-party programmers and upon Hughes Electronics Corporation; dependence
on a single DBS satellite and broadcast facility; dependence on continued
effectiveness of the security and signal encryption features of the DSS system;
potentially adverse governmental regulation and actions; and overall economic
conditions. In addition, the Telecommunications Act of 1996 significantly
deregulated the telecommunications industry. The effect of such deregulation on
the Company's business, results of operations and financial condition cannot be
predicted.
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 918,000 at
June 30, 1996 from approximately 791,000 at March 31, 1996. Approximately
102,000 additional households were receiving a free promotional month of USSB
programming as of June 30, 1996.
In addition to tracking the absolute number of subscribers, management
assesses the Company's penetration of its 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
programming ("convertible households"). As of June 30, 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).
17
<PAGE>
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. One of the Company's marketing vehicles is to offer a free
promotional month of USSB's Entertainment Plus to all customers who purchase
and activate a DSS unit for residential use. Since the first month is free,
the consumer's decision to purchase USSB programming is generally made by the
consumer only after the free promotional month has been received. As a
result, the category of DSS households includes households receiving the free
promotional month that have not yet made their subscription decision.
In addition, some DSS households historically have not been offered USSB's free
month of programming at the point of purchase and, therefore, the Company has
not been able to market USSB programming directly to these customers. The
Company has recently reached an understanding with DIRECTV whereby the Company
will receive information on all future DSS unit purchasers, which will allow
the Company to market its programming to all DSS customers in the future.
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 Percent
Paying of USSB
USSB USSB Subscribers and USSB Convertible Estimated
Paying Promotional Promotional Convertible Households DSS
For the Quarter Ended Subscribers (a) Activations (b) Activations Households (c) Served (d) Households (e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
JUNE 30, 1996 918 102 1,020 1,396 66% 1,701
</TABLE>
(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-Registered Trademark- as of the end of such
period. These activations are not counted as USSB Convertible Households
until they have completed the free promotional month.
(c) Total number of USSB household activations since July 1994 that have
completed a free promotional month of USSB Entertainment Plus. The June
30, 1996 amount reflects the elimination of certain DSS activations. See
note (e).
(d) Total USSB Paying Subscribers as of the end of the period as a percent of
USSB Convertible Households. The elimination of certain DSS activations
from its estimate of DSS households described in note (e) has a favorable
impact on the percentage shown in this column for June 30, 1996.
(e) Estimate based on cumulative DSS activations, less cumulative DSS
deactivations, as reported by News DataCom, Inc., less activations by
dealers, manufacturing facilities, technical facilities and commercial
locations known to the Company, and less additional receivers in a single
household, as of the end of such period. The June 30, 1996 amount updates
the Company's database by eliminating from its estimate of DSS households
approximately 50,000 DSS activations which have no authorization to
receive USSB or DIRECTV programming. Management believes that this
adjustment increases the accuracy of its estimate of DSS households by
eliminating, for example, units which have been returned to retailers,
broken, lost and stolen units, and homes subscribing on a seasonal basis.
The Company will periodically make such adjustments to more accurately
estimate the number of DSS households.
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. In
addition, the Company's programming revenues associated with increased DSS
unit sales are largely reflected in subsequent quarters due to the lag
between the purchase of a DSS unit and its installation and activation,
combined with the free promotional month of programming offered by the
Company.
18
<PAGE>
REVENUES
<TABLE>
<CAPTION>
For the Quarter Ended June 30 March 31 December 31 September 30 June 30
1996 1996 1995 1995 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber(a) $ 25.10(b) $ 24.94 $ 25.38 $ 25.82 $ 26.05(b)
Programming revenues (in thousands) $64,288 $56,988 $40,001 $30,720 $22,184
</TABLE>
(a) Excludes pay-per-view event revenues.
(b) Reflects only quarter ended June 30, not entire fiscal year.
The Company's churn rate was approximately 21% for the twelve months ended
June 30, 1996. Churn rate represents the number of the Company's paying
customers who terminated their subscriptions or whose subsubscriptions were
terminated by the Company during such twelve month period, and who did not
resubscribe during that period, expressed as a percentage of the total number
of paying subscribers at the end of such period. Certain of the Company's
promotional efforts may attract a higher percentage of short-term
subscribers, thus increasing the Company's churn rate from time to time. The
Company's churn rate is based on limited operating history and the Company
does not believe that it has sufficient experience to predict future churn
rates.
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $192.0 million for
the year ended June 30, 1996, compared to $42.3 million for fiscal 1995. The
Company had no subscription revenues during fiscal 1994. The revenue increases
between fiscal 1996 and fiscal 1995 were attributable to a larger subscriber
base. 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 the two fiscal years was
primarily attributable to the increase in the number of paying subscribers to
approximately 918,000 at June 30, 1996, up from approximately 321,000 at
June 30, 1995. The Company had no subscribers at June 30, 1994. For a
substantial portion of the 1994 and 1995 fiscal years, 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 those
authorized for the Company's programming were receiving a free promotional
month of programming. Average monthly revenue per subscriber for the fiscal
year ended June 30, 1996 was $25.22, compared to $26.29 in fiscal 1995. This
decrease resulted primarily from promotions designed to increase the
Company's penetration of convertible USSB households and was consistent with
management's 1996 fiscal year target of maintaining monthly revenues in the
range of $24 to $25 per subscriber.
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 $127.2 million for the year ended June 30,
1996, compared to $27.9 million for fiscal 1995. No programming cost was
incurred in fiscal 1994. The increase in cost of programming for these fiscal
periods was primarily the result of an increased number of subscribers each
period and
19
<PAGE>
increases in the number of pay-per-view events. The cost of programming
represented 66.2 percent of programming revenues for fiscal 1996 and 65.8
percent for fiscal 1995.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $146.4 million
for fiscal 1996, compared to $81.0 million for fiscal 1995 and $17.9 million for
fiscal 1994. The increase was primarily attributable to the cost of providing
the Company's services to a growing subscriber base, including increased
marketing, customer service and 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 $81.0 million
for the year ended June 30, 1996, compared to $37.5 million for fiscal 1995 and
$2.5 million for fiscal 1994. The increase for both periods was primarily
attributable to 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 expense relates
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 was $20.9 million for the year ended June
30, 1996, compared to $23.3 million for fiscal 1995 and $7.7 million for fiscal
1994. The decrease in fiscal 1996 as compared to fiscal 1995 was primarily
attributable to the effects of an accelerated method of depreciation for the
Company's transponders, which results in decreasing periodic depreciation
expense over their useful life. Fiscal 1995 was the first full year in which
depreciation was incurred on transponders and facilities. Most of the
depreciation charge resulted from the Company's five-sixteenths ownership of
DBS-1, which was launched in December 1993 and became operational in March 1994.
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 $20.6 million for the year
ended June 30, 1996, compared to $13.6 million for fiscal 1995 and $6.2 million
for fiscal 1994. 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. The increase from fiscal 1994
to fiscal 1995 primarily reflects higher personnel costs, premium payments for
in-orbit and business interruption insurance and billing and remittance expenses
associated with operations commencing in fiscal 1995.
COMMISSIONS TO DEALERS. Commissions to dealers consist of amounts paid by the
Company to eligible DSS dealers whose customers become paying subscribers, and
are intended to encourage dealers to promote the sale of DSS units and
subscriptions to USSB programming. Commissions to dealers increased to $11.3
million for the year ended June 30, 1996, compared to $2.9 million for fiscal
1995. No commissions were paid to dealers in fiscal 1994. The increases in all
fiscal periods reflect increased USSB programming subscriptions.
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 condi-
20
<PAGE>
tional access system (determined by subscriber levels) and satellite telemetry,
tracking and control expenses. Engineering and operations expenses increased to
$5.9 million for the year ended June 30, 1996, compared to $3.6 million for
fiscal 1995 and $1.5 million for fiscal 1994. The increases were primarily
attributable to higher security and encryption fees, which are paid on a per
subscriber basis. The increase from fiscal 1994 to fiscal 1995 reflects the
greater level of engineering and operations activity once the Company commenced
commercial operations.
MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued in
September 1995, representing the remainder of fees for contracted 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 year ended
June 30, 1996 of $81.6 million, compared to net operating losses of $66.5
million for fiscal 1995 and $17.9 million for fiscal 1994.
INTEREST EXPENSE. Interest expense for the year ended June 30, 1996 was $7.3
million, compared to $8.6 million for fiscal 1995 and $4.6 million for fiscal
1994. Changes in interest expense reflect changes in the amount and duration of
the Company's borrowings in fiscal 1994 and fiscal 1995 under its credit
agreement.
INTEREST INCOME. Interest income for the year ended June 30, 1996 was $4.3
million, compared to $1.6 million for fiscal 1995 and $0.6 million for fiscal
1994. Interest income in fiscal 1996 increased as a result of the investment of
the proceeds of the public offering of the Company's Class A Common Stock, which
closed on February 6, 1996.
NET LOSS. The Company recorded a net loss for the fiscal year ended June 30,
1996 of $95.1 million, compared to $74.7 million for fiscal 1995 and $22.2
million for fiscal 1994.
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 cash advances
from HBI and approximately $42.0 million in privately-issued notes and
associated warrants. Such advances from HBI were converted into equity in fiscal
1990 and fiscal 1994 and, upon consummation of the recapitalization of the
Company in February 1996, the notes were converted into equity and the warrants
were canceled. In addition, the Company's operations were financed by $90.0
million of borrowings made 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.
COMPONENTS OF CASH FLOWS. The significant components of the changes in cash and
cash equivalents for the fiscal years ended June 30, 1996, 1995 and 1994 were as
follows (in millions):
Fiscal Year Ended June 30
-----------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net loss $(95.1) $(74.7) $(22.2)
Depreciation and
amortization 20.9 23.3 7.7
Changes in working capital 22.7 16.6 3.6
Net capital expenditures (4.4) (6.3) (87.7)
Net investment activities 6.0 26.0 (38.8)
Debt repayment (91.9) (42.4) -
Net cash proceeds from
sales of stock 206.2 0.7 62.3
Proceeds from
debt borrowings 31.3 60.6 81.0
Other, including
intercompany charges 6.0 1.0 1.8
- --------------------------------------------------------------------------------
Net increase in cash and
cash equivalents $101.7 $4.8 $7.7
- --------------------------------------------------------------------------------
21
<PAGE>
CASH AND CASH EQUIVALENTS. As of June 30, 1996, cash and cash equivalents
totaled $114.2 million, compared to $12.5 million at June 30, 1995.
Substantially all of the increase in fiscal 1996 was attributable to the
net proceeds received from the initial public offering of the Company's
Class A Common Stock.
WORKING CAPITAL. Working capital at June 30, 1996 was $75.3 million, compared to
a working capital deficit of $9.3 million at June 30, 1995. Substantially all of
the increase in working capital was attributable to the initial public offering
of the Company's Class A Common Stock. In addition, net trade accounts
receivable increased by $19.1 million, due to growth in paying subscriber
levels. These increases to working capital were offset by an increase in
accounts payable and accrued expenses of $17.8 million, due primarily to
increased advertising, promotion and program provider license fee expenses.
Additionally, deferred revenue increased $16.5 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-backed securities. In April
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.
Management believes that the Company's current cash position is adequate to
meet the operating expenses of the business during fiscal 1997. However, the
Company may require external financing for future major capital expenditures
such as the construction of DBS-4 at the 101DEG. west longitude orbital
location, or the cost of satellites at the 110DEG. and 148DEG. locations.
Further, the Company may seek additional debt financing and/or lines of credit
to support the expansion of any business opportunities that may develop at the
110DEG. or 148DEG. locations. The Company believes that such financing is
available from a number of sources and at year-end management was continuing to
explore a credit facility which would provide additional flexibility in
satisfying the Company's future financing needs.
CAPITAL EXPENDITURES. Capital expenditures for the year ended June 30, 1996
totaled $4.4 million, including $2.2 million for continuing expansion and
improvement of the broadcast system, and $1.6 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 Astro Space Corp. ("Lockheed Martin") for high-power DBS
satellites at 110DEG. and 148DEG. west longitude commencing in October 1996.
Progress payments may be affected by negotiations with the entities which have
obtained the available transponder slots at 110DEG. and 148DEG. west longitude
and with Lockheed Martin. If a new satellite, DBS-4, is built and put into
operation at 101DEG. west longitude, the Company will incur additional capital
expenditures.
NET OPERATING LOSS CARRY FORWARD. At June 30, 1996, the Company's net
operating loss carry forward was $227.3 million for federal tax purposes and
$220.9 million for financial reporting purposes. The difference in loss carry
forward amounts primarily represents differing amounts of depreciation
reported by the Company for tax and for financial reporting purposes.
SEASONALITY
Sales of DSS units, which directly impact the growth of programming revenues,
may be subject to seasonal sales patterns experienced by the consumer
electronics industry, in which approximately 35 to 45 percent of sales occur in
the October to December period. Although sales of DSS units have trended upward
throughout fiscal 1996, the Company continues to believe that seasonality may be
a significant factor in the Company's long-term sales patterns.
22
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended June 30
------------------------------------------------------------------
(In thousands, except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PROGRAMMING REVENUES $191,997 $ 42,337 $ -
COST OF PROGRAMMING 127,183 27,868 -
- -------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN 64,814 14,469 -
OPERATING EXPENSES
Selling and marketing 80,971 37,542 2,495
Depreciation and amortization 20,940 23,340 7,723
General and administrative 20,645 13,623 6,158
Commissions to dealers 11,254 2,923 -
Engineering and operations 5,925 3,584 1,497
Management fees due to HBI 6,667 - -
- -------------------------------------------------------------------------------------------------------------------------------
Net operating loss (81,588) (66,543) (17,873)
- -------------------------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE
Interest expense 7,284 8,567 4,585
Interest (income) (4,291) (1,552) (566)
Cost to terminate Credit Agreement 9,504 - -
Other 994 1,165 309
- -------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (95,079) (74,723) (22,201)
INCOME TAX PROVISION - - 2
- -------------------------------------------------------------------------------------------------------------------------------
Net loss $(95,079) $(74,723) $(22,203)
- -------------------------------------------------------------------------------------------------------------------------------
Net loss per share $(1.06) $(0.83) $(0.26)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,862 89,811 84,383
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
<TABLE>
<CAPTION>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30
--------------------------------------
(In thousands, except share and per share data) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $114,166 $ 12,498
Trade accounts receivable, less allowance of $634 and $560
at June 30, 1996 and 1995, respectively 26,271 7,174
Prepaid expenses and other 2,865 4,859
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 143,302 24,531
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 351 351
Buildings and improvements 4,785 4,905
Equipment 127,366 122,823
- ------------------------------------------------------------------------------------------------------------------------------------
132,502 128,079
Less - Accumulated depreciation (52,019) (31,079)
- ------------------------------------------------------------------------------------------------------------------------------------
Total property and equipment, net 80,483 97,000
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Satellite deposits 1,380 1,380
Long-term investments, consisting of U.S. Treasury securities 6,836 12,832
Other 142 4,472
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 8,358 18,684
- ------------------------------------------------------------------------------------------------------------------------------------
$232,143 $140,215
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $28,554 $12,730
Deferred revenue 29,894 13,410
Accrued expenses -
Cost sharing 1,884 3,509
Interest - 1,362
Other 7,709 2,787
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 68,041 33,798
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT - 96,912
DUE TO HBI 10,430 4,460
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6)
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, 12,601,250
shares issued and outstanding at June 30, 1996 and 16,875,900 at June 30, 1995 1 2
Common Stock -
Participating, voting, $.0001 par value, 100 million shares authorized, 77,209,525
shares issued and outstanding at June 30, 1996 and 72,934,875 at June 30, 1995 8 7
Warrants - 7,350
Additional paid-in capital 378,114 127,423
Accumulated deficit (220,914) (125,835)
Unrealized loss on investments (105) -
- ------------------------------------------------------------------------------------------------------------------------------------
157,104 8,947
Unused media credits (3,432) (3,902)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 153,672 5,045
- ------------------------------------------------------------------------------------------------------------------------------------
$232,143 $140,215
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
24
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock Shares Subscribed
----------------- ----------------- -----------------
(In thousands, except per share data) Shares Amount Shares Amount Shares Amount Warrants
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT JUNE 30, 1993 - $ - 80,848 $ 8 1,840 $ - $ -
Collection of subscriptions 1,232 - 608 - (1,840) - -
Conversion of common stock to
Class A common stock 6,118 1 (6,118) (1) - - -
Issuance of common stock for services,
no value assigned - - 27 - - - -
Sale of Class A common stock for
$5.66 per share 4,964 1 - - - - -
Sale of Class A common stock for
$5.66 per share, net 4,412 - - - - - -
Contribution of capital from HBI - - - - - - -
Issuance of warrants - - - - - - 7,350
Antidilution adjustment for share
price of $5.66 per share 23 - - - - - -
Transfer of common stock from HBI - - (2,303) - - - -
Media credits utilized - - - - - - -
Net loss - - - - - - -
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1994 16,749 2 73,062 7 - - 7,350
Common stock contributed to
the Company - - (127) - - - -
Sale of Class A common stock for
$5.66 per share, net 127 - - - - - -
Media credits utilized - - - - - - -
Net loss - - - - - - -
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995 16,876 2 72,935 7 - - 7,350
Conversion of shares pursuant
to Recapitalization (16,876) (2) 16,876 2 - - -
Conversion of notes and cancellation
of warrants - - 7,412 1 - - (7,350)
Conversion of shares available for
overallotment 1,245 - (1,245) - - - -
Transfer of common stock from HBI - - (15,712) (2) - - -
Sale of Class A common stock for
$27 per share, net 8,300 1 - - - - -
Conversion of shares pursuant to
certain shareholder rights 3056 - (3,056) - - - -
Media credits utilized - - - - - - -
Unrealized gain (loss) on investments - - - - - -
Net loss - - - - - - -
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996 12,601 $ 1 77,210 $ 8 - $ - $ -
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Additional Unrealized Gain Unused
Paid-In Accumulated Subscriptions (Loss) on Media
(In thousands, except per share data) Capital Deficit Outstanding Investments Credits Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholders' Equity at June 30, 1993 $53,494 $(28,909) $(7,933) $ - $ - $ 16,660
Collection of subscriptions - - 7,933 - - 7,933
Conversion of common stock to
Class A common stock - - - - - -
Issuance of common stock for services,
no value assigned - - - - - -
Sale of Class A common stock for
$5.66 per share 27,718 - - - - 27,719
Sale of Class A common stock for
$5.66 per share, net 24,292 - - - (5,000) 19,292
Contribution of capital from HBI 21,187 - - - - 21,187
Issuance of warrants - - - - - 7,350
Antidilution adjustment for share
price of $5.66 per share - - - - - -
Transfer of common stock from HBI - - - - - -
Media credits utilized - - - - 76 76
Net loss - (22,203) - - - (22,203)
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1994 126,691 (51,112) - - (4,924) 78,014
Common stock contributed to
the Company - - - - - -
Sale of Class A common stock for
$5.66 per share, net 732 - - - - 732
Media credits utilized - - - - 1,022 1,022
Net loss - (74,723) - - - (74,723)
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995 127,423 (125,835) - - (3,902) 5,045
Conversion of shares pursuant
to Recapitalization - - - - - -
Conversion of notes and cancellation
of warrants 44,491 - - - - 37,142
Conversion of shares available for
overallotment - - - - - -
Transfer of common stock from HBI - - - - - (2)
Sale of Class A common stock for
$27 per share, net 206,200 - - - - 206,201
Conversion of shares pursuant to
certain shareholder rights - - - - - -
Media credits utilized - - - - 470 470
Unrealized gain (loss) on investments - - - (105) - (105)
Net loss - (95,079) - - - (95,079)
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996 $ 378,114 $ (220,914) $ - $(105) $(3,432) $153,672
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended June 30
-----------------------------------------------------------
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (95,079) $(74,723) $ (22,203)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 20,940 23,340 7,723
Interest accretion, net 844 1,400 333
Deferred loan origination fees charged to expense in
connection with termination of Credit Agreement 5,465 - -
Unrealized loss on investments (105) - -
Media credits utilized 470 1,022 76
Change in operating items:
Trade accounts receivable (19,097) (7,174) -
Prepaid expenses and other current assets 1,994 (1,335) (3,497)
Accounts payable 15,824 8,981 3,461
Accrued expenses 1,935 4,475 3,183
Deferred revenue 16,484 13,410 -
Other (1,135) (4,250) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (51,460) (34,854) (10,939)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of and deposits on equipment (4,423) (6,270) (87,709)
Proceeds from sales of short-term investments - 19,424 -
Proceeds from sale of long-term available-for-sale investments 5,996 6,600 -
Purchase of investments - - (38,791)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,573 19,754 (126,500)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from affiliated companies 5,970 984 1,828
Proceeds from debt borrowings 31,306 60,613 81,042
Repayment of debt (91,922) (42,475) -
Proceeds from sale of common stock 206,201 732 54,944
Proceeds from sale of warrants - - 7,350
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 151,555 19,854 145,164
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 101,668 4,754 7,725
CASH AND CASH EQUIVALENTS, beginning of period 12,498 7,744 19
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 114,166 $ 12,498 $ 7,744
- ------------------------------------------------------------------------------------------------------------------------------------
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 6,755 7,336 3,444
Income taxes - - -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
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"). 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") beneficially owned 51.8% and 68.8% of
the Company, respectively, as of June 30, 1996 and 1995, and had approximately
59.3% of the combined voting power with respect to all matters submitted for the
vote of all shareholders at June 30, 1996.
Until July 1, 1994, the Company was a development stage company. The
Company has incurred losses since its inception and had an accumulated deficit
of approximately $221 million as of June 30, 1996. Management anticipates that
net losses will continue for the foreseeable future because the Company plans to
continue to incur substantial selling and marketing expenses to build its
subscriber base. In addition, existing contractual obligations (see Note 5) may
require capital resources in excess of anticipated operating cash flows during
fiscal 1997 and beyond. The Company may seek additional debt financing and/or
lines of credit to augment those resources. The Company believes that such
financing is available from a number of sources. However, if such financing is
not available on terms satisfactory to the Company, management has the ability
to reduce its planned consumer and trade marketing expenditures. Such reductions
could have the effect of slowing the rate of subscriber growth in fiscal 1997
and beyond.
In addition to the capital needs described above, the success of future
operations will be dependent on further development of the Company's subscriber
base from which to generate revenues and continued growth of the market for
Digital Satellite Systems.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, USSB II, Inc. ("USSB II"). USSB II owns the
Company's satellite transponders and holds the Company's FCC licenses and
permits (see Note 5). All significant intercompany accounts and transactions
have been eliminated in consolidation.
FISCAL YEAR
All references to years in the consolidated financial statements and
accompanying notes refer to the Company's respective fiscal years ended June 30.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist primarily of short-term United States
Treasury-backed securities with original maturities of less than 90 days, are
stated at cost, which approximates fair value.
INVESTMENTS
Long-term investments consist of U.S. Treasury securities with varying
maturities through 1999. At June 30, 1996, the securities had an aggregate
actual amortized cost basis of $6,941,000 and an aggregate market value of
$6,836,000. At June 30, 1995, the securities had
27
<PAGE>
an aggregate actual amortized cost basis and an aggregate market value of
approximately $12,832,000. The securities bear interest at rates ranging from
4.75% to 5.70%. In fiscal 1995, in response to certain liquidity decisions the
Company changed the classification of its investments from held-to-maturity to
available-for-sale. The effects of this change and of the related sale had no
material effect on the fiscal 1995 financial statements. Unrealized gains and
losses are reported as a separate component of shareholders' equity.
DEALER COMMISSIONS
The Company generally pays commissions to eligible retailers for their customers
who are paying subscribers. Commissions paid are charged to expense over the
related subscription period. Deferred dealer commissions totaled $1,401,000 at
June 30, 1996 and $802,000 at June 30, 1995 and are included with prepaid
expenses and other current assets in the accompanying consolidated balance
sheets. Accrued dealer commissions totaled $5,835,000 at June 30, 1996 and
$1,846,000 at June 30, 1995.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
accelerated methods based on estimated useful lives as follows:
Satellite Transponders 10 years
Other Equipment 5-10 years
Buildings & Improvements 31 years
FINANCIAL INSTRUMENTS
Unless otherwise indicated, the recorded value of the Company's financial
instruments approximates their fair value.
REVENUE RECOGNITION
Programming revenues are recorded as income when the respective services are
rendered. Subscriptions received in advance of the delivery of the related
programming are recorded as deferred revenue.
ADVERTISING AND PROMOTIONS
Costs for advertising and promotional materials and activities (including the
cost, if any, of programming provided to current or prospective customers free
of charge) are charged to expense as incurred.
RESEARCH AND DEVELOPMENT
Costs related to the Company's research and development efforts are charged to
expense as incurred.
INCOME TAXES
During the period from fiscal 1986 through fiscal 1991, the Company was included
in the consolidated federal income tax return of its parent. Federal income tax
benefits were credited to the Company through the intercompany account as
allocated by HBI at a rate related to HBI's overall effective rate. The Company
began filing its own federal income tax return in fiscal 1992.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts in
the future based on enacted tax laws and applicable to the periods in which the
differences are expected to affect taxable income.
NET LOSS PER SHARE
Net loss per share is computed based on weighted average shares outstanding,
which have been retroactively restated for the 75-for-one stock split effected
in fiscal 1996 as a component of the Company's recapitalization (see Note 2).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). The
Company will be required to adopt SFAS No. 121 in fiscal 1997 and expects that
its adoption will not have a significant impact on its financial position or
results of operations.
28
<PAGE>
Statement of Financial Accounting Standards No.123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), effective for fiscal 1997, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. While the Company is still
evaluating SFAS No. 123, it currently expects to elect to measure compensation
cost under APB No. 25 and to comply with the pro forma disclosure requirements.
If the Company makes this election, this statement will have no impact on the
Company's results of operations or financial position because the Company's
option plan is a fixed stock option plan (see Note 3), under which options
granted have no intrinsic value at the grant date under APB No. 25.
RECLASSIFICATION
Certain reclassifications have been made in the 1995 financial statements to
conform to the 1996 presentation. Such reclassifications had no effect on net
loss or shareholders' equity as previously reported.
2 RECAPITALIZATION AND INITIAL PUBLIC OFFERING
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, on January 31, 1996, the Company effected a recapitalization of the
Company's capital structure.
Prior to the recapitalization, the Company's capitalization consisted of
two classes of common stock (referred to herein as "old common stock" and "old
class A common stock"). 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 and 50,000,000 shares of
undesignated Preferred Stock; (ii) the conversion of the Company's old common
stock and old 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 (which closed on February 6, 1996) 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.
Pursuant to the overallotment provisions in the underwriting agreement,
certain shareholders who had purchased shares of the Company's capital stock in
previous private placements sold 1,245,000 shares of newly converted Class A
Common Stock in connection with the offering. The Company did not receive any of
the proceeds of such sales.
3 SHAREHOLDERS' EQUITY
In accordance with certain shareholder agreements, prior to the Company's
initial public offering, the ownership percentages of certain shareholders,
other than HBI, were protected from dilution, based on total outstanding shares
of 89,810,775, until the ownership of HBI was reduced to 51%. In fiscal 1994,
under such
29
<PAGE>
antidilution provisions, 2,303,100 shares of old common stock were contributed
by HBI to the Company for no consideration. In connection with the Company's
initial public offering, 15,711,950 shares of old common stock were so
contributed in fiscal 1996 by HBI. In addition, certain shareholders holding
22,645,350 shares of Common Stock have certain "piggy-back" rights to
participate in certain public offerings of the Company's stock and certain "co-
sale" rights to include all or a portion of their shares in certain sales by HBI
of its stock of the Company.
During fiscal 1994, the Company issued and sold 9,376,200 shares of old
class A common stock. The per share price was $5.66 and net proceeds of the
sales were $52.0 million, including a media credit aggregating $5.0 million.
During fiscal 1994, holders of 7,350,000 shares of the Company's old common
stock who purchased their shares in prior offerings converted their shares of
old common stock to old class A common shares on a one-for-one basis. In
addition, in accordance with the terms of their original stock purchase
agreements, two investors in old common stock converted their shares to old
class A common shares at an equivalent per share price of $5.66. In August 1994,
HBI contributed back to the Company (for no compensation) 127,200 shares of old
common stock, pursuant to the antidilution provision discussed above, which were
immediately converted to old class A common shares and sold for net proceeds of
$732,000.
On May 1, 1996, approximately 3.1 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. On July 30, 1996, the
remainder of the Company's Common Stock, with 10 votes per share, became
eligible, at the option of the holders thereof, to convert into Class A Common
Stock, with one vote per share, at a conversion ratio of 1:1.
WARRANTS
In fiscal 1994, in connection with the sale of the convertible subordinated
promissory notes described in Note 4, the Company issued and sold warrants
valued at $7.5 million. Proceeds from the sale, net of issuance costs, totaled
$7.4 million. The warrants were canceled as part of the recapitalization
described in Note 2.
UNUSED MEDIA CREDITS
In connection with a sale of old class A common stock in fiscal 1994, the
Company received a $5.0 million media credit. The media credit, as amended, can
be utilized towards a portion of the cost of advertising purchased from
subsidiaries of this shareholder through January 1998. The unused media credit
balance ($3.4 million at June 30, 1996 and $3.9 million at June 30, 1995) has
been recorded as a reduction of shareholders' equity.
STOCK PLANS
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 Option Plan is
administered by 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. At June 30, 1996, options to purchase 449,300
shares of Class A Common Stock at prices ranging from $27.00 to $36.00 per share
were outstanding. None of these options was exercisable at June 30, 1996.
30
<PAGE>
4 LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
June 30 1996 1995
- --------------------------------------------------------------------------------
Credit Agreement $- $60,613
Convertible subordinated promissory notes - 36,299
- --------------------------------------------------------------------------------
$- $96,912
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
In December 1994, the Company entered into a credit agreement with a syndicate
of financial institutions (the "Credit Agreement"), which provided for
borrowings up to $90.0 million, $60.0 million of which was borrowed at closing
in January 1995. During August 1995, the Company borrowed another $20.0 million
under the Credit Agreement and, in December 1995, borrowed an additional $10.0
million. Borrowings under the Credit Agreement bore interest at LIBOR plus 4.5%
per annum.
In April 1996, the Company elected to repay the entire outstanding balance
of the term loan under the 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.
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
During 1994, the Company issued and sold unsecured convertible subordinated
promissory notes (the "Notes") for $34.5 million. The Notes were scheduled to
mature in March 1999 at a face value of $42 million and interest accreted at an
imputed rate of 3.94%. The Notes were subject to mandatory conversion into
shares of old class A common stock equal to the face amount of the Notes divided
by $5.66 if the gross proceeds of an initial public offering of the Company were
to exceed $50 million at an offering price of at least $7.00 per share. Such
conversion occurred as part of the recapitalization described in Note 2 at which
time the Notes (including cumulative accretion) had a recorded balance of $37.1
million. The conversion did not result in the issuance of additional shares of
the Company, as HBI simultaneously contributed to USSB an equivalent number of
shares. Issued with the convertible subordinated promissory notes were warrants
valued at $7.5 million (see Note 3), which were canceled as a part of the
recapitalization.
5 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 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.
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<PAGE>
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 at 148 DEG. west
longitude as a condition of maintaining its License at 101 DEG. west longitude
and its Permit at 110 DEG. west longitude has been eliminated by an FCC Order
issued in December 1995. Although the FCC Order has been appealed, the appeal
does not challenge those portions of the Order releasing the Company from its
obligations at 148 DEG. west longitude. If satellite construction proceeds as
scheduled under the agreement with Lockheed Martin, aggregate amounts due are
scheduled in the fiscal years as follows: $53.5 million in 1997, $64.0 million
in 1998, $34.5 million in 1999 and $9.2 million in 2000.
ADVERTISING AND PROMOTIONS
The Company has entered into commitments to purchase or participate in joint
purchases of broadcast, print and other media for advertising and promotional
purposes. At June 30, 1996, such commitments totaled $35.7 million due in fiscal
1997, with the noncancellable portion of such commitments totaling
$33.1 million.
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, Inc. ("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 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 for payments by the Company
to HCG for the Company's share of the development costs, hardware for the
Company's uplinking system and interest, of which $1.9 million was unpaid at
June 30, 1996.
32
<PAGE>
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.
6 RELATED-PARTY TRANSACTIONS
Certain officers and directors of the Company are also employed by, and spend a
significant portion of their time on, the businesses of HBI and its affiliates
other than the Company. Each of such persons who is a director has indicated to
the Company that, should a conflict of interest arise, he will promptly disclose
such conflict to the Company's Board of Directors and refrain from voting on
such matter as a director.
DUE TO HBI
Debt due to HBI consists principally of amounts accrued for management services
valued at $10.0 million provided to the Company from HBI during fiscal years
1992 through 1994 under an agreement which expired June 30, 1994. The balance
does not bear interest. The Company was contingently obligated to pay these
amounts and they will not become due until, in Company management's opinion,
adequate working capital exists. As a result of certain significant financial
performance thresholds, USSB management discontinued accruing the $3.3 million
annual charge after 1992 and did not intend to accrue any additional charges
until and unless it was determined payment could be considered probable. When
the Company decided to proceed with its initial public stock offering,
management determined that it became likely that certain preconditions would
ultimately be satisfied, and therefore made this obligation probable, although
the timing of the cash payment of the $10.0 million has not been determined.
Accordingly, during first quarter of fiscal 1996, the Company accrued as an
operating expense the remaining $6.7 million of its management fee obligation.
The Company intends to defer payment of these charges for the foreseeable
future.
Concurrent with the growth of the Company's revenue in 1995, HBI began to
provide certain general and administrative services to the Company under a two-
year agreement which ended June 30, 1996. Under this agreement, the Company
incurred a charge of $960,000 in fiscal 1996 and $844,000 in fiscal 1995. Under
a similar agreement which runs through June 1997, the Company expects to incur a
charge totaling $996,000 in fiscal 1997, to be paid on a monthly basis.
The Company's general and administrative expenses also include consulting
fees paid to entities related to directors and officers of the Company totaling
$1.5 million in fiscal 1996, $1.0 million in fiscal 1995, and $677,000 in fiscal
1994.
In connection with the Company's initial public offering, the Company paid
aggregate commissions of $13.9 million to the underwriters of its offering.
Certain directors of the Company are employed by or affiliated with certain of
these underwriters.
In January 1994, advances from HBI totaling $21.2 million were converted to
additional paid-in capital, in accordance with terms of certain private
placements of old class A common stock. This capital contribution did not result
in the granting of additional shares to HBI.
33
<PAGE>
The Company purchases programming, engineering services and other services
from other entities affiliated under common control of HBI. Certain engineering
and other services are purchased from a partnership in which HBI is a general
partner, under an agreement which runs through December 1997. Certain
programming is purchased from a joint venture in which such partnership is a
partner, under an agreement which runs through 1999. Amounts included in the
accompanying consolidated statements of operations which were purchased from
these affiliated entities are as follows (in thousands):
For the Years Ended June 30
-------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Cost of programming $2,348 $607 $ -
Engineering and operations 205 853 466
Selling and marketing - 35 -
- --------------------------------------------------------------------------------
$2,553 $1,495 $466
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company believes that the services provided between the Company and HBI
and its subsidiaries and affiliates, and by entities with which certain
directors are affiliated, are on terms comparable to those available from third
parties and that such terms are reasonable.
OTHER
The Company's employees participate in a 401(k) plan sponsored by HBI. Under the
terms of the plan, the Company may make annual base contributions and can match
participant contributions for each year. An employee becomes a participant at
the next open quarter after 12 months of service during which they have worked
1,000 hours. HBI made contributions (which were reimbursed by the Company) to
the plan of $88,000 on behalf of the Company's employees during fiscal 1996 and
$15,000 during fiscal 1995, with no contributions made during fiscal 1994.
7 INCOME TAXES
The Company's deferred tax assets and liabilities, all of which are long-term,
are summarized as follows (in thousands):
Deferred Tax Asset (Liability)
- --------------------------------------------------------------------------------
As of June 30 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Preoperating capitalized costs $ 5,031 $ 6,918
Capitalized interest 725 1,087
Management services 4,338 1,671
Other 1,571 256
Net operating loss carryforward 90,729 52,516
Total deferred tax assets 102,394 62,448
Deferred tax liabilities:
Depreciation (14,719) (12,720)
Total deferred tax liability (14,719) (12,720)
- --------------------------------------------------------------------------------
Valuation allowance (87,675) (49,728)
- --------------------------------------------------------------------------------
Net deferred tax balance $ - $ -
- --------------------------------------------------------------------------------
The Company has net operating losses for federal tax reporting purposes
totaling $227.3 million available for carryover to subsequent years as of June
30, 1996 (and $131.3 million as of June 30, 1995), expiring in years 2000
through 2012. The valuation allowance applied against the Company's net deferred
tax assets increased by $37.8 million in fiscal 1996, by $29.7 million in fiscal
1995, and by $12.7 million in fiscal 1994.
The Company and HBI file separate federal tax returns and a combined state
tax return in Minnesota and New Mexico. HBI has benefited from this unitary
relationship as it has utilized USSB losses to reduce its combined income
subject to apportionment in Minnesota. The benefit that HBI realized was
approximately $1.2 million in fiscal 1996, $1.5 million in fiscal 1995, and $1.3
million in fiscal 1994. This unitary relationship has reduced the Company's
Minnesota net operating loss carryforward. Benefits realized by HBI in fiscal
years preceding 1994 were not significant. Under a tax sharing agreement, HBI
will reimburse the Company for such benefits in the year they would otherwise
have been realized by the Company.
34
<PAGE>
8 EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED)
On August 26, 1996, the Company, together with DIRECTV, Inc. (the Company's
strategic partner in selling DSS programming) announced that it had entered into
financial incentive agreements with certain manufacturers of DSS equipment to
assist these manufacturers in lowering the price of DSS units. Such agreements
commit the Company to pay the manufacturers over a five-year period with respect
to new DSS household activations. While the amounts to be paid by the Company
under these agreements cannot be precisely estimated at this time, the Company
expects such payments to the manufacturers to approximate $10 million in fiscal
1997. At the levels of retail DSS unit sales currently estimated by management,
this amount would increase significantly in subsequent years.
9 QUARTERLY CONDENSED FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly data for fiscal 1996 and 1995 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Full Year
- ------------------------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
Programming Revenues $30,720 $ 40,001 $ 56,988 $ 64,288 $191,997
Cost of Programming 20,064 26,391 37,579 43,149 127,183
Gross Margin 10,656 13,610 19,409 21,139 64,814
Operating Expenses 35,547 38,631 39,801 32,423 146,402
Net Operating Loss (24,891) (25,021) (20,392) (11,284) (81,588)
Other (income) expense, net 2,268 2,497 1,066 7,660 13,491
Net Loss (27,159) (27,518) (21,458) (18,944) (95,079)
Weighted Average Shares Outstanding 89,811 89,811 89,860 89,937 89,862
Loss per share $ (0.30) $ (0.31) $ (0.24) $ (0.21) $(1.06)
1995
Programming Revenues $ 421 $ 4,711 $ 15,021 $ 22,184 $42,337
Cost of Programming 276 3,086 9,880 14,626 27,868
Gross Margin 145 1,625 5,141 7,558 14,469
Operating Expenses 15,378 20,483 22,150 23,001 81,012
Net Operating Loss (15,233) (18,858) (17,009) (15,443) (66,543)
Other (income) expense, net 2,079 1,852 2,142 2,107 8,180
Net Loss (17,312) (20,710) (19,151) (17,550) (74,723)
Weighted Average Shares Outstanding 89,811 89,811 89,811 89,811 89,811
Loss per share $ (0.19) $ (0.23) $ (0.21) $ (0.20) $(0.83)
</TABLE>
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
We have audited the consolidated balance sheets of United States Satellite
Broadcasting Company, Inc. (a Minnesota corporation) and Subsidiary as of June
30, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 financial statements referred to above present fairly,
in all material respects, the financial position of United States Satellite
Broadcasting Company, Inc. and Subsidiary as of June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 30, 1996
36
<PAGE>
EXHIBIT 21.1
SUBSIDIARY OF THE COMPANY
The following corporation is a subsidiary of United States Satellite
Broadcasting Company, Inc.:
USSB II, Inc., a Minnesota corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated July 30, 1996 in United States
Satellite Broadcasting Company, Inc.'s annual report to shareholders.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 25, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
I, David S. Allen, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 11, 1996
/s/ David S. Allen
-----------------------------------
David S. Allen
<PAGE>
POWER OF ATTORNEY
I, Dennis J. Brownlee, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 17, 1996
/s/ Dennis J. Brownlee
-----------------------------------
Dennis J. Brownlee
<PAGE>
POWER OF ATTORNEY
I, Peter F. Frenzer, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 11, 1996
/s/ Peter F. Frenzer
-----------------------------------
Peter F. Frenzer
<PAGE>
POWER OF ATTORNEY
I, Kenneth G. Langone, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 12, 1996
/s/ Kenneth G. Langone
-----------------------------------
Kenneth G. Langone
<PAGE>
POWER OF ATTORNEY
I, Frank N. Magid, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 13, 1996
/s/ Frank N. Magid
-----------------------------------
Frank N. Magid
<PAGE>
POWER OF ATTORNEY
I, John W. Marvin, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 12, 1996
/s/ John W. Marvin
-----------------------------------
John W. Marvin
<PAGE>
POWER OF ATTORNEY
I, Ward L. Quaal, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 12, 1996
/s/ Ward L. Quaal
-----------------------------------
Ward L. Quaal
<PAGE>
POWER OF ATTORNEY
I, Herbert S. Schlosser, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 12, 1996
/s/ Herbert S. Schlosser
-----------------------------------
Herbert S. Schlosser
<PAGE>
POWER OF ATTORNEY
I, Peter G. Skinner, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 12, 1996
/s/ Peter G. Skinner
-----------------------------------
Peter G. Skinner
<PAGE>
POWER OF ATTORNEY
I, William D. Savoy, do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 16, 1996
/s/ William D. Savoy
-----------------------------------
William D. Savoy
<PAGE>
POWER OF ATTORNEY
I, Louis G. Zachary, Jr., do hereby constitute and appoint Stanley E. Hubbard my
Attorney-in-Fact for the purpose of signing, in my name and on my behalf as a
Director of United States Satellite Broadcasting Company, Inc., the Annual
Report of United States Satellite Broadcasting Company, Inc. on Form 10-K for
its fiscal year ended June 30, 1996, and any and all amendments to said Annual
Report and any and all amendments thereto, as each thereof is so signed, for
filing with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934, as amended.
September 16, 1996
/s/ Louis G. Zachary, Jr.
-----------------------------------
Louis G. Zachary, Jr.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of operations and consolidated balance sheets
incorporated by reference in Item 8 on page 21 of the Company's Report on Form
10-K for the fiscal year ended June 30, 1996, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 114,166
<SECURITIES> 6,836
<RECEIVABLES> 26,905
<ALLOWANCES> 634
<INVENTORY> 0
<CURRENT-ASSETS> 143,302
<PP&E> 132,502
<DEPRECIATION> 52,019
<TOTAL-ASSETS> 232,143
<CURRENT-LIABILITIES> 68,041
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 153,663
<TOTAL-LIABILITY-AND-EQUITY> 232,143
<SALES> 191,997
<TOTAL-REVENUES> 191,997
<CGS> 127,183
<TOTAL-COSTS> 127,183
<OTHER-EXPENSES> 150,086
<LOSS-PROVISION> 2,523
<INTEREST-EXPENSE> 7,284
<INCOME-PRETAX> (95,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (95,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (95,079)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
