<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 Identification No.)
incorporation or organization)
3415 UNIVERSITY AVENUE, ST. PAUL, MN 55114
(Address of principal executive offices) (zip code)
(612) 642-4500
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 1996
----- -------------------------------
Class A Common Stock, $.0001 par value: 14,823,200 Shares
Common Stock, $.0001 par value: 74,987,575 Shares
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
For the three Months
Ended September 30
------------------------
1996 1995
---------- ----------
PROGRAMMING REVENUES $ 79,244 $ 30,720
COST OF PROGRAMMING 52,246 20,064
---------- ----------
GROSS MARGIN 26,998 10,656
OPERATING EXPENSES:
Selling and marketing 31,820 16,445
Depreciation and amortization 4,309 4,961
General and administrative 10,196 11,095
Engineering and operations 2,160 1,238
Commissions to dealers 3,484 1,808
---------- ----------
Net operating loss (24,971) (24,891)
OTHER (INCOME) EXPENSE:
Interest expense - 2,394
Interest (income) (1,429) (405)
Other (60) 279
---------- ----------
Loss before income taxes (23,482) (27,159)
INCOME TAX PROVISION - -
---------- ----------
Net loss $ (23,482) $ (27,159)
---------- ----------
---------- ----------
Net loss per share $ (0.26) $ (0.30)
---------- ----------
---------- ----------
Weighted average shares outstanding 89,841 89,811
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Sept. 30, June 30,
1996 1996
----------- ----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 101,743 $ 114,166
Trade accounts receivable, net 33,286 26,271
Prepaid expenses and other current assets 5,052 2,865
---------- ----------
Total current assets 140,081 143,302
---------- ----------
PROPERTY AND EQUIPMENT:
Land 351 351
Buildings and improvements 4,866 4,785
Equipment 128,469 127,366
---------- ----------
133,686 132,502
Less - Accumulated depreciation (56,328) (52,019)
---------- ----------
Total property and equipment, net 77,358 80,483
---------- ----------
OTHER ASSETS:
Satellite deposits 1,385 1,380
Long-term investments, consisting of
U.S. Treasury securities 6,903 6,836
Other 2,559 142
---------- ----------
Total other assets 10,847 8,358
---------- ----------
$ 228,286 $ 232,143
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Sept. 30, June 30,
1996 1996
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 52,137 $ 38,147
Deferred revenue 31,126 29,894
----------- -----------
Total current liabilities 83,263 68,041
----------- -----------
LONG TERM LIABILITIES
Due to HBI 10,495 10,430
Other 4,051 -
----------- -----------
Total long term liabilities 14,546 10,430
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, 50 million shares
authorized; none issued or outstanding - -
Class A Common Stock -
Participating, voting, $.0001 par value, 500 million
shares authorized, 14,823,200 shares issued and
outstanding at September 30, 1996 and 12,601,250 at
June 30, 1996 1 1
Common Stock -
Participating, voting, $.0001 par value, 100 million
shares authorized, 74,987,575 shares issued and
outstanding at September 30, 1996 and 77,209,525 at
June 30, 1996 8 8
Additional paid-in capital 378,114 378,114
Accumulated deficit (244,395) (220,914)
Unrealized loss on investments (49) (105)
----------- -----------
133,679 157,104
Unused media credits (3,202) (3,432)
----------- -----------
Total shareholders' equity 130,477 153,672
----------- -----------
$ 228,286 $ 232,143
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
For the Three
Months Ended
September 30
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (23,482) $ (27,159)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 4,309 4,961
Interest accretion, net - 359
Media credits utilized 230 159
Change in operating items:
Receivables and other current assets (9,202) (3,399)
Accounts payable and accrued expenses 13,990 7,171
Deferred revenue 1,232 2,801
Other 1,619 (316)
------------ ------------
Net cash used in operating activities (11,304) (15,423)
------------ ------------
INVESTING ACTIVITIES:
Purchase of and deposits on equipment (1,184) (384)
------------ ------------
Net cash used in investing activities (1,184) (384)
------------ ------------
FINANCING ACTIVITIES:
Advances from affiliated companies, net 65 6,952
Proceeds from debt borrowings - 20,394
------------ ------------
Net cash provided by financing activities 65 27,346
------------ ------------
Increase (decrease) in cash and cash equivalents (12,423) 11,539
CASH AND CASH EQUIVALENTS, beginning of period 114,166 12,498
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 101,743 $ 24,037
------------ ------------
------------ ------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ 1,441
Income taxes - -
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
United States Satellite Broadcasting Company, Inc. and Subsidiary ("USSB" or
the "Company") provide subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television
signal using the Digital Satellite System ("DSS-Registered Trademark-"). The
Company's programming is available to customers who have a DSS unit, which
consists of an 18-inch satellite dish, a receiver/decoder and a remote
control. All of the Company's gross revenues and identifiable assets relate
to the Company's activities in this industry.
Hubbard Broadcasting, Inc. ("HBI") beneficially owned 51.8% of the Company as of
June 30, 1996 and September 30, 1996, and had approximately 60.8% of the
combined voting power with respect to all matters submitted for the vote of all
shareholders at September 30, 1996.
NOTE 2. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Generally Accepted Accounting Principles for interim
financial statements and, therefore, do not include all information and
disclosures required by Generally Accepted Accounting Principles for complete
financial statements. In the opinion of management, such statements reflect all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for interim periods
presented are not necessarily indicative of the results which may be expected
for the entire fiscal year. These statements should be read in conjunction with
the June 30, 1996 consolidated financial statements, the notes thereto, and the
Company's Annual Report on Form 10-K.
NOTE 3. 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.
7
<PAGE>
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.
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.
NOTE 4. COMMITMENTS AND CONTINGENCIES:
REGULATORY MATTERS
USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license from
the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101DEG. west longitude (the "License"). The Company must
continue to maintain the License to operate its business. 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.
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
110DEG. west longitude and eight transponders at 148DEG. 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
8
<PAGE>
million after advance payments of $1.4 million, with additional incentive
payments of approximately $20 million contingent on satellite performance.
While this agreement is cancelable 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 148DEG. west longitude as
a condition of maintaining its License at 101DEG. west longitude and its Permit
at 110DEG. 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 148DEG. west longitude. If satellite construction proceeds as scheduled
under the agreement with Lockheed Martin, as amended effective September 30,
1996, aggregate amounts due are scheduled in the fiscal years as follows: $39.5
million in 1997, $69.5 million in 1998, $39.5 million in 1999, $12.2 million in
2000, and $0.5 million in 2001.
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 September 30, 1996, such commitments totaled $31.7 million due in
fiscal 1997, with the noncancelable portion of such commitments totaling $27.9
million.
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.
MANUFACTURER INCENTIVE PROGRAM
On August 26, 1996, the Company, together with DIRECTV, Inc. (the Company's DSS
partner) announced that it had entered into financial incentive arrangements
with certain manufacturers of DSS equipment to assist these manufacturers in
lowering the price of DSS units. Such arrangements, which run for up to four
years depending on manufacturer, commit the Company to pay the manufacturers
over a five-year period from the date new DSS households are authorized to
receive a free introductory month of USSB's Entertainment Plus-Registered
Trademark- programming package. The liability for such commitment is
established and recorded upon activation of the related DSS unit. A portion of
the liability is charged to expense with the remaining balance deferred and
amortized over a three year period. While the amounts to be incurred by the
Company under these arrangements cannot be precisely estimated at this time, for
fiscal 1997 the Company expects such expense to range from approximately $20 to
$30 million and related cash payments to range from approximately $5 to $10
million. As the levels of retail DSS unit sales increase, the expense and cash
flow related to these arrangements will increase accordingly.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking statements contained in this Report on Form 10-Q 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.
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 continues to grow steadily.
The introduction of DSS units is widely regarded as the most successful
introduction of a major consumer electronics product in United States history.
At September 30, 1996, approximately 1.94 million consumer households were
authorized to receive DSS service ("DSS households"), up from 1.70 million at
June 30, 1996.
SUMMARY OF SUBSCRIBER AND REVENUE DATA
Management currently measures the Company's performance by two key measures:
subscriber base and revenues.
The number of USSB paying subscribers grew to approximately 1,045,000 at
September 30, 1996 from approximately 918,000 at June 30, 1996. Approximately
134,000 additional households were receiving a free promotional month of USSB
programming as of September 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
10
<PAGE>
the total number of households with active DSS units that have received the free
promotional month of USSB's Entertainment Plus-Registered Trademark- programming
("convertible households"). As of September 30, 1996, the Company achieved a
penetration of convertible households of approximately 67 percent (i.e.,
approximately two-thirds of households that have received the free promotional
month of USSB programming are currently paying USSB subscribers).
Management believes that this comparison of the number of paying subscribers to
convertible households is a more meaningful measure of the Company's performance
than a comparison against the total estimated number of DSS households. 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 and DIRECTV, Inc. have
recently reached an understanding whereby they will exchange information on all
future DSS unit purchasers, which will allow each 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
PAYING PERCENT OF
SUBSCRIBERS USSB
FOR THE USSB USSB AND USSB CONVERTIBLE ESTIMATED
QUARTER PAYING PROMOTIONAL PROMOTIONAL CONVERTIBLE HOUSEHOLDS DSS
ENDED SUBSCRIBERS (a) ACTIVATIONS (b) ACTIVATIONS HOUSEHOLDS (c) SERVED (d) HOUSEHOLDS (e)
----- ----------- ----------- ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
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
Sept. 30,
1996 1,045 134 1,179 1,560 67% 1,942
</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 amounts
shown for September 30 and June 30, 1996 reflect the elimination of certain
DSS activations. See note (e).
11
<PAGE>
(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 September 30 and June 30,
1996.
(e) Total estimated number of households with active DSS units which are
authorized to receive either USSB or DIRECTV programming as of the end of
the period. Estimate based on cumulative DSS activations, less cumulative
DSS deactivations, 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 Company will make periodic reconciliations to estimate the
number of DSS households as accurately as possible.
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.
REVENUES:
(In thousands, except per subscriber data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30
1996 1996 1996 1995 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $25.43 $25.10 $24.94 $25.38 $25.82
Programming revenues $79,244 $64,288 $56,988 $40,001 $30,720
</TABLE>
- -----
(a) Excludes pay-per-view event and commercial revenues.
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $79.2 million for
the quarter ended September 30, 1996, compared to $30.7 million for the
comparable prior year period. The revenue increase was primarily attributable
to a larger subscriber base at September 30, 1996. Pay-per-view revenues, which
vary with the number and type of events provided on a pay-per-view basis in any
fiscal period, are included in the Company's total revenues.
SUBSCRIPTION REVENUES. The Company derives its revenues principally from
monthly fees from subscribers for television programming. Revenues are a
function of the number of subscribers, the mix of programming packages selected
by customers and the rates charged. The increase in revenues for the period was
primarily attributable to the increase in the number of paying subscribers to
approximately 1,045,000 at September 30, 1996, from approximately 422,000 at
September 30, 1995.
Compared to the quarter ended June 30, 1996, revenue per subscriber increased
primarily due to certain promotional efforts by the Company to upgrade existing
subscribers to expanded programming packages. A third-party retail financing
program previously available through certain DSS retail outlets also contributed
to the increase, since customers purchasing their DSS units under this financing
program subscribed disproportionately to the Company's top programming package.
Because certain of the Company's promotional programs are offered only for
limited periods based on market and seasonal factors, and because subscribers
can easily change their USSB programming packages, management continues to
believe that annual average revenue per paying subscriber will be in the range
of $24 to $25 for fiscal 1997.
12
<PAGE>
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 $52.2 million for the quarter ended
September 30, 1996, compared to $20.1 million for the comparable prior year
period. The increase in cost of programming was primarily the result of an
increased number of subscribers from the comparable prior year period and
increases in the cost of pay-per-view programming. The cost of programming as a
percent of programming revenues will vary based on the mix of programming
packages taken by subscribers, the number of pay-per-view events per quarter,
and the extent to which volume-based discounts from the Company's programming
providers are realized.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $52.0 million
for the quarter ended September 30, 1996, compared to $35.5 million for the
comparable prior year period. The increase was primarily attributable to the
cost of providing the Company's services to a growing subscriber base, including
increased marketing, customer service, security and encryption fees.
SELLING AND MARKETING. Selling and marketing costs include promotional and
advertising costs, the costs of direct marketing and customer service and
amounts expended pursuant to joint marketing efforts with other DSS broadcasting
system participants. Selling and marketing expenses increased to $31.8 million
for the quarter ended September 30, 1996, compared to $16.4 million for the
comparable prior year period. The increase for the period was primarily
attributable to continuing increases in selling and marketing expenditures to
increase consumer awareness of both the DSS system and USSB programming, as well
as customer service associated with the growth of the Company's subscriber base.
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 also increased as the number of such DSS activations has
increased.
In addition, the manufacturer incentive program announced by the Company and
DIRECTV, Inc. on August 26, 1996 increased the Company's selling and marketing
expense by $1.4 million for the first quarter of fiscal 1997. While the amounts
to be incurred by the Company under this program cannot be precisely estimated
at this time, for fiscal 1997 the Company expects the expense to range from
approximately $20 to $30 million and the related cash payments to range from
approximately $5 to $10 million. As the levels of retail DSS unit sales
increase, the expense and cash flow related to this program will increase
accordingly.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses relate
mainly to the Company's transponders on DBS-1 and transmission equipment located
both at the Company's National Broadcast Center and its Auxiliary Broadcast
Center. Depreciation and amortization decreased to $4.3 million for the quarter
ended September 30, 1996, compared to $5.0 million for the comparable prior year
period. The decrease was primarily attributable to the utilization of an
accelerated method of depreciation for the Company's transponders, which results
in decreasing periodic depreciation expense over their useful life.
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 decreased to $10.2 million for the
quarter ended September 30, 1996, compared to $11.1 million for the comparable
prior year period. The Company had recorded the balance of a management fee due
to Hubbard Broadcasting, Inc. of $6.7 million in the comparable prior year
period, with no similar amount accrued in the current period. This reduction
between the periods was offset in part by increased bad debt expense of
approximately $3.5 million in the first
13
<PAGE>
quarter of fiscal 1997, based on customer defaults associated in large part with
purchases of DSS units under the previously-available third-party retail
financing program described above. Management believes that this provision for
bad debts covers the majority of the Company's exposure for the defaults
resulting from this financing program. Also impacting general and
administrative expense for the quarter was an increase in billing and remittance
processing costs resulting from the growth of the Company's subscriber base.
ENGINEERING AND OPERATIONS. Engineering and operations expenses include the
operation of the National Broadcast Center and the Auxiliary Broadcast Center,
fees charged in connection with the operation of the conditional access system
(determined by subscriber levels) and satellite telemetry, tracking and control
expenses. Engineering and operations expenses increased to $2.2 million for the
quarter ended September 30, 1996, compared to $1.2 million for the comparable
prior year period. The increases were primarily attributable to higher total
security and encryption costs, which are paid on a per subscriber basis.
COMMISSIONS TO DEALERS. Commissions to dealers consist of amounts paid by the
Company to eligible DSS dealers whose customers become paying subscribers, to
encourage dealers to promote the sale of DSS units and subscriptions to USSB
programming. Commissions to dealers increased to $3.5 million for the quarter
ended September 30, 1996, compared to $1.8 million for the comparable prior year
period. The increase primarily reflects increased USSB programming
subscriptions and a greater number of subscribers purchasing more expensive
programming packages.
NET OPERATING LOSS. The Company recorded a net operating loss for the quarter
ended September 30, 1996 of $25.0 million, compared to a net operating loss of
$24.9 million for the comparable prior year period.
INTEREST EXPENSE. No interest expense was incurred for quarter ended September
30, 1996, compared to $2.4 million for the comparable prior year period. The
elimination of interest expense in the current quarter was due to the repayment
in April 1996 of the entire outstanding balance of $90.0 million under the
company's term loan.
INTEREST INCOME. Interest income for the quarter ended September 30, 1996 was
$1.4 million, compared to $0.4 million for the comparable prior year period.
Interest income increased as a result of the investment of the net 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 first quarter ended September
30, 1996 of $23.5 million, compared to $27.2 million for the comparable prior
year period.
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.
14
<PAGE>
COMPONENTS OF CASH FLOWS. The significant components of the changes in cash and
cash equivalents were as follows (in millions):
THREE MONTHS ENDED SEPT. 30
---------------------------
1996 1995
---- ----
Net loss $(23.5) $(27.2)
Depreciation and amortization 4.3 5.0
Changes in operating items 7.8 6.7
Net capital expenditures (1.2) (0.4)
Proceeds from debt borrowings -- 20.4
Other - 0.2 7.0
------ ------
Net increase (decrease) in cash
and cash equivalents $(12.4) $11.5
------ ------
------ ------
CASH AND CASH EQUIVALENTS. As of September 30, 1996, cash, cash equivalents and
marketable securities totaled $101.7 million, compared to $114.2 million at June
30, 1996. The decrease reflects the net use of cash resulting from the
Company's operations during the fiscal quarter ended September 30, 1996.
WORKING CAPITAL. Working capital at September 30, 1996 was $56.8 million,
compared to working capital of $75.3 million at June 30, 1996. Net trade
accounts receivable increased by $7.0 million due to growth in paying subscriber
levels. This increase to working capital was offset by an increase in accounts
payable and accrued expenses of $14.0 million, due primarily to increased
advertising, promotion and program provider license fee expenses and
manufacturer incentive program expense. Additionally, deferred revenue
increased $1.2 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
$90.0 million under its term loan and to terminate 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 a new satellite, 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 management continues to explore a credit
facility which would provide additional flexibility in satisfying the Company's
future financing needs.
CAPITAL EXPENDITURES. Capital expenditures for the three month period ended
September 30, 1996 totaled $1.2 million, primarily for improvements to the
Company's information systems. The Company is required to make progress
payments to Lockheed Martin for high-power DBS satellites at 110DEG. and
148DEG. west longitude commencing in December 1996. If DBS-4 is built and put
into operation at 101DEG. west longitude, the Company will also incur
additional capital expenditures.
NET OPERATING LOSS CARRY FORWARD. At September 30, 1996, the Company's net
operating loss carry forward was $251.7 million for federal tax purposes and
$244.4 million for financial
15
<PAGE>
reporting purposes. The difference in loss carry forward amounts primarily
represents differing amounts of depreciation recorded 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. The Company continues to believe that
seasonality may be a significant factor in the Company's long-term sales
patterns.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.24 Amendment No 11, effective September 30, 1996, to Direct
Broadcast Satellite Contract between Lockheed Martin
Corporation and United States Satellite Broadcasting
Company, Inc.
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 12, 1996 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------------
Stanley E. Hubbard
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Gerald D. Deeney
-------------------------------------
Gerald D. Deeney
Treasurer and Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
Index of Exhibits to Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1996
Exhibit No. Exhibit Description
- ----------- -------------------
10.24 Amendment No. 11, effective September 30, 1996, to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.24
-------------
AMENDMENT NO. 11
TO THE
DIRECT BROADCASTING SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. (USSB)
AND
LOCKHEED MARTIN CORPORATION
THROUGH
LOCKHEED MARTIN ASTRO SPACE COMMERCIAL (ASTRO)
This Amendment is effective 30 September 1996.
WHEREAS, USSB has requested ASTRO to conduct additional studies requiring an
extension to the System Definition Phase and a resultant rescheduling of the
Construction Phase Commencement (CPC), and
WHEREAS, ASTRO is willing to perform the additional studies and to grant an
extension and resultant rescheduling of the CPC in accordance with the changes
made herein, and
WHEREAS, the Parties recognize and agree that, prior to the CPC, further changes
to this Contract will be required, including the change to a model of ASTRO's
Series A2100 satellite and changes to terms, conditions, delivery schedules,
prices, payments and the Exhibits.
NOW THEREFORE, in consideration of the promises and mutual convenants
hereinafter contained, the parties agree to the following:
I. In paragraph II TERMS, of Amendment No. 10, change the date satellite
construction shall commence to 1 December 1996 unless USSB notifies ASTRO
of its intent not to proceed no later than 1 December 1996.
II. All other dates specified in the Contract's ARTICLE 3. DELIVERABLE ITEMS
AND DELIVERY SCHEDULE and ARTICLE 4. PAYMENT, beginning with the CPC
payment number 13, specified in Amendment No. 10, will be deferred for two
months due to the time required: (1) for ASTRO to perform the studies of
the alternatives outlined in USSB's letter dated September 16, 1996, (2)
for USSB to analyze the information provided by ASTRO and to determine the
manner it decides to proceed, and (3) for the Parties to further modify
this Contract to incorporate the changes required to accommodate USSB's
decision, including changes to a model of ASTRO's A2100 satellite, the
prices, payment schedule, delivery schedule, terms, conditions, and the
Contract's Exhibits prior to CPC.
III. In consideration of the extension to this Contract and for ASTRO's
performance of the studies of the alternatives specified in paragraph
II, above, USSB agrees to pay ASTRO the sum of US$50,000.00 on
18 October 1996.
IV. Except as modified herein, all terms and conditions of this Contract shall
be valid and in effect as specified through Amendment No. 10.
<PAGE>
IN WITNESS THEREOF, the Parties have caused this Amendment No. 11 to be signed
by their duly authorized officer or representative.
LOCKHEED MARTIN CORPORATION UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ H.T. Riley By: /s/Robert W. Hubbard
-------------------------- --------------------------------
H.T. Riley, Manager Robert W. Hubbard
Contracts, East Windsor Operations Executive Vice President
Lockheed Martin Astro Space
Commercial
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS FOR THE
FISCAL YEAR TO DATE FOUND ON PAGES 3-6 INCLUSIVE OF THE COMPANY'S FORM 10-Q FOR
THE FISCAL QUARTER ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 101,743
<SECURITIES> 6,903
<RECEIVABLES> 35,847
<ALLOWANCES> 2,561
<INVENTORY> 0
<CURRENT-ASSETS> 140,081
<PP&E> 133,686
<DEPRECIATION> 56,328
<TOTAL-ASSETS> 228,286
<CURRENT-LIABILITIES> 83,263
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 130,468
<TOTAL-LIABILITY-AND-EQUITY> 228,286
<SALES> 79,244
<TOTAL-REVENUES> 79,244
<CGS> 52,246
<TOTAL-COSTS> 52,246
<OTHER-EXPENSES> 51,969
<LOSS-PROVISION> 4,740
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (23,482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,482)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
