<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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) 645-4500
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 7, 1997
----- --------------------------
Class A Common Stock, $.0001 par value: 15,350,151
Common Stock, $.0001 par value: 74,460,624
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
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 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended March 31 Ended March 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 99,231 $ 56,988 $ 270,579 $ 127,708
COST OF SALES 64,930 37,579 177,558 84,033
GROSS MARGIN 34,301 19,409 93,021 43,675
OPERATING EXPENSES:
Selling and marketing 23,430 24,257 86,103 65,185
Manufacturer Incentive 11,155 - 29,542 -
Depreciation and amortization 4,583 5,262 13,373 15,334
General and administrative 11,245 5,427 32,270 21,743
Engineering and operations 3,715 1,512 12,098 4,177
Commissions to dealers 3,797 3,343 10,649 7,540
------------ ------------ ------------ ------------
Net operating loss (23,624) (20,392) (91,014) (70,304)
OTHER (INCOME) EXPENSE:
Interest expense - 2,453 - 7,412
Interest (income) (1,169) (1,799) (3,912) (2,589)
Other (5) 412 (95) 1,008
------------ ------------ ------------ ------------
Loss before income taxes (22,450) (21,458) (87,007) (76,135)
INCOME TAX PROVISION - - - -
------------ ------------ ------------ ------------
Net loss $ (22,450) $ (21,458) $ (87,007) $ (76,135)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net loss per share $ (0.25) $ (0.24) $ (0.97) $ (0.85)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding 89,812 89,860 89,812 89,827
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
March 31, June 30,
1997 1996
------------ ------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 97,086 $ 114,166
Trade accounts receivable, net 38,619 26,271
Prepaid expenses and other current assets 4,694 2,865
----------- -----------
Total current assets 140,399 143,302
----------- -----------
PROPERTY AND EQUIPMENT:
Land 351 351
Buildings and improvements 4,900 4,785
Equipment 132,130 127,366
----------- -----------
137,381 132,502
Less - Accumulated depreciation (65,392) (52,019)
----------- -----------
Total property and equipment, net 71,989 80,483
----------- -----------
OTHER ASSETS:
Satellite deposits 5,452 1,380
Long-term investments, consisting of U.S. Treasury
securities 3,924 6,836
Other 188 142
----------- -----------
Total other assets 9,564 8,358
----------- -----------
$ 221,952 $ 232,143
----------- -----------
----------- -----------
The accompanying notes are an integral part of
these consolidated financial statements.
4
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 65,037 $ 38,147
Deferred revenue 55,946 29,894
------------ ------------
Total current liabilities 120,983 68,041
------------ ------------
LONG TERM LIABILITIES
Due to HBI 10,362 10,430
Manufacturer Incentive 23,557 -
------------ ------------
Total long term liabilities 33,919 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, 15,300,151 shares issued and
outstanding at March 31, 1997 and 12,601,250 at
June 30, 1996 2 1
Common Stock -
Participating, voting, $.0001 par value, 100 million
shares authorized, 74,510,624 shares issued and
outstanding at March 31, 1997 and 77,209,525 at
June 30, 1996 7 8
Additional paid-in capital 378,114 378,114
Accumulated deficit (307,921) (220,914)
Unrealized loss on investments (46) (105)
------------ ------------
70,156 157,104
Unused media credits (3,106) (3,432)
------------ ------------
Total shareholders' equity 67,050 153,672
------------ ------------
$ 221,952 $ 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 Nine
Months Ended
March 31
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (87,007) $ (76,135)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 13,373 15,334
Interest accretion, net - 843
Media credits utilized 326 569
Change in operating items:
Receivables and other current assets (14,177) (16,531)
Accounts payable and accrued expenses 26,890 17,510
Deferred revenue 26,052 15,443
Manufacturer Incentive 23,557 -
Other (75) (104)
------------ ------------
Net cash used in operating activities (11,061) (43,071)
------------ ------------
INVESTING ACTIVITIES:
Purchase of and deposits on equipment (8,951) (3,357)
Proceeds from sale of long-term available-for-sale investment 3,000 5,924
------------ ------------
Net cash provided by (used in) investing activities (5,951) 2,567
------------ ------------
FINANCING ACTIVITIES:
Advances from (repayments to) affiliated companies, net (68) 7,442
Proceeds from debt borrowings - 31,308
Proceeds from sale of common stock - 206,200
------------ ------------
Net cash provided by (used in) financing activities (68) 244,950
------------ ------------
Increase (decrease) in cash and cash equivalents (17,080) 204,446
CASH AND CASH EQUIVALENTS, beginning of period 114,166 12,498
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 97,086 $ 216,944
------------ ------------
------------ ------------
NONCASH TRANSACTIONS:
Conversion of notes and cancellation of warrants $ - $ 44,491
------------ ------------
------------ ------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ 7,318
Income taxes - -
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
United States Satellite Broadcasting Company, Inc. and Subsidiary ("USSB" or the
"Company") 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 March 31, 1997, and had approximately 61.2% of the combined
voting power with respect to all matters submitted for the vote of all
shareholders at March 31, 1997.
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
7
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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.
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
8
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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 satellite construction contracts 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 entered into contracts with Lockheed Martin for the construction
of direct broadcast satellites at the 110DEG. orbital location (the "110DEG.
Contract") and at the 148DEG. orbital location (the "148DEG. Contract").
Under the 110DEG. Contract, as amended effective April 30, 1997, the Company is
required to pay $68.0 million for satellite construction, of which $4.0 million
has been paid to date. The contract also provides for payments for ongoing
operations services and in-orbit performance incentive payments during the life
of the satellite. In addition, substantial costs would be incurred to launch
and insure the satellite. No material payments are anticipated under the
148DEG. Contract until December 31, 1997.
While these agreements are cancelable in whole or in part at the option of the
Company, such cancellation would require forfeiture of any deposits and progress
payments made, plus additional penalties. 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. The
FCC Order has been affirmed by the United States Court of Appeals for the
District of Columbia.
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 March 31, 1997, such commitments totaled $2.1 million due in
fiscal 1997, all of which are noncancelable.
9
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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
In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated a
legal proceeding before the United States International Trade Commission
("ITC"), and a separate proceeding in the United States District Court for the
Northern District of California, against Digital Satellite System developers,
manufacturers and programmers, including, among others, Hughes Network Systems,
Thomson Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the
Company, alleging that these defendants have infringed, or contributed to the
infringement of, patents owned by PMC. The Company has denied all material
allegations in both complaints. Because these proceedings are in the discovery
stage, it is not possible to estimate the probable outcome of these matters at
this time. The Company does not believe that PMC is entitled to damages or any
remedies from the Company, and management intends to vigorously defend both
actions.
The Company is also exposed to other litigation encountered in the normal course
of business. In the opinion of management, the resolution of these other
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 expense and liability for such future
commitments is established and recorded upon activation of the related DSS unit.
In the quarter and nine months ended March 31, 1997, the Company charged to
expense $11.2 million and $29.5 million, respectively, representing the full
amount of those future obligations for the Manufacturer Incentive program
incurred during the respective periods for the sale of DSS units to new
households.
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the Company expects the total
expense for fiscal 1997 to range from
10
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approximately $40 to $50 million, and the total cash payments for fiscal 1997 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.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENT:
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", (SFAS 128), which
changes the way companies calculate their earnings per share (EPS). SFAS 128
replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS 128, is also to be
disclosed. The Company is required to adopt SFAS 128 in the second quarter of
fiscal 1998, at which time all prior year EPS amounts are to be restated in
accordance with SFAS 128.
11
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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; competitive issues, including changes by
competitors to their product offerings and pricing strategies; 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, other DBS satellites which have been or will be
launched at other orbital locations may alter the competitive environment in
which the Company operates. The impact of such new activities on the Company
and the industry cannot be predicted. 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. The
introduction of DSS units is widely regarded as the most successful introduction
of a major consumer electronics product in United States history. At March 31,
1997, approximately 2.5 million consumer households were authorized to receive
DSS service ("DSS households"), up from 2.3 million at
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December 31, 1996. Management believes that the Company's growth has been
driven primarily by the strength of the premium movie channels offered by the
Company. Management periodically evaluates its programming offerings and
packages and may modify its programming to maximize subscriber satisfaction.
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 1,378,000 at March
31, 1997 from approximately 1,220,000 at December 31, 1996. Approximately
70,000 additional households were receiving a free promotional month of USSB
programming as of March 31, 1997.
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 with active DSS units
that have received the free promotional month of USSB's Entertainment
Plus-Registered Trademark- programming ("convertible households"). As of March
31, 1997, the Company achieved a penetration of convertible households of
approximately 65 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.
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.
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SUBSCRIBER BASE:
(In thousands)
<TABLE>
<CAPTION>
TOTAL USSB
PAYING PERCENT OF
SUBSCRIBERS USSB
USSB USSB AND USSB CONVERTIBLE ESTIMATED
PAYING PROMOTIONAL PROMOTIONAL CONVERTIBLE HOUSEHOLDS DSS
AS OF SUBSCRIBERS (a) ACTIVATIONS (b) ACTIVATIONS HOUSEHOLDS (c) SERVED (d) HOUSEHOLDS (e)
----- ----------- ----------- ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
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
Dec. 31, ||
1996 1,220 181 1,401 1,862 65% || 2,300
March 31, ||
1997 1,378 70 1,448 2,133 65% || 2,499
||
</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 on and after June 30, 1996 reflect 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 the estimate of DSS households described in note (e) has a favorable
impact on the percentage shown in this column on and after 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 programming 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
---------------------
MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
1997 1996 1996 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $24.86 $24.93 $25.43 $25.10 $24.94
Programming revenues $99,001 $92,104 $79,244 $64,288 $56,988
</TABLE>
_____
(a) Excludes pay-per-view event and commercial revenues.
14
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RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $99.2 million and
$270.6 million for the quarter and nine month period ended March 31, 1997,
respectively, compared to $57.0 million and $127.7 million for the comparable
prior year periods. The revenue increases were primarily attributable to a
larger subscriber base at March 31, 1997. 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 revenue.
REVENUES. The Company derives its revenues principally from monthly fees from
subscribers for television programming. Revenues are primarily a function of
the number of subscribers, the mix of programming packages selected by customers
and the rates charged. The increase in revenues for both periods was primarily
attributable to the increase in the number of paying subscribers to
approximately 1,378,000 at March 31, 1997, from approximately 791,000 at
March 31, 1996.
Compared to the quarter ended December 31, 1996, revenue per subscriber
decreased slightly from $24.93 to $24.86. 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.
COST OF SALES. Cost of sales consist of payments to programmers, which are
based on the number of paying subscribers. Cost of sales also include the
purchase of rights to broadcast event programming on a pay-per-view basis. The
cost of sales increased to $64.9 million for the quarter and $177.6 million for
the nine month period ended March 31, 1997, respectively, compared to $37.6
million and $84.0 million for the comparable prior year periods. The increases
in cost of programming were primarily the result of an increased number of
subscribers from the comparable prior year periods and increases in the cost of
pay-per-view programming. The cost of programming 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 $57.9 million
and $184.0 million for the quarter and nine month periods ended March 31, 1997,
respectively, compared to $39.8 million and $114.0 million for the comparable
prior year periods. The increase in each period 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
15
<PAGE>
expenses were $23.4 million and $86.1 million for the quarter and nine month
periods ended March 31, 1997, compared to $24.3 million and $65.2 million for
the comparable prior year periods. Selling and marketing expenditures are a
function of the size of the customer base, which drives customer service
activities, specific promotions and advertising campaigns undertaken during the
periods, and the overall level of the Company's efforts to promote and increase
consumer awareness of both the DSS system and USSB programming. 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.
MANUFACTURER INCENTIVE. 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 expense and liability for
such future commitments is established and recorded upon activation of the
related DSS unit. Manufacturer Incentive program expenses totaled $11.2 million
and $29.5 million, respectively, for the quarter and nine month periods ended
March 31, 1997. No amounts were incurred in the comparable prior year periods.
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the Company expects the total
expense for fiscal 1997 to range from approximately $40 to $50 million and the
total cash payments for fiscal 1997 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.
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 $4.6 million and $13.4
million for the quarter and nine month periods ended March 31, 1997, compared to
$5.3 million and $15.3 million for the comparable prior year periods. The
decreases were 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 increased to $11.2 million and
$32.3 million for the quarter and nine month periods ended March 31, 1997,
compared to $5.4 million and $21.7 million for the comparable prior year
periods. The Company had recorded the balance of a management fee due to
Hubbard Broadcasting, Inc. of $6.7 million in the comparable prior nine month
period, with no similar amount accrued in the current fiscal year. The
Company's bad debt expense for the third quarter
16
<PAGE>
totaled $4.2 million and includes higher bad debt reserves associated with the
growth of the Company's customer base. 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 $3.7 million and
$12.1 million for the quarter and nine month periods ended March 31, 1997,
compared to $1.5 million and $4.2 million for the comparable prior year periods.
The increases were primarily attributable to higher total security and
encryption costs, which are paid on a per subscriber basis.
COMMISSIONS TO RETAILERS. Commissions consist of amounts paid by the Company to
eligible DSS retailers whose customers become paying subscribers, to encourage
retailers to promote the sale of DSS units and subscriptions to USSB
programming. Commissions to dealers increased to $3.8 million and $10.6 million
for the quarter and nine month periods ended March 31, 1997, compared to $3.3
million and $7.5 million for the comparable prior year periods. The increase
primarily reflect increased USSB programming subscriptions.
NET OPERATING LOSS. The Company recorded a net operating loss for the quarter
and nine month period ended March 31, 1997 of $23.6 million and $91.0 million,
respectively, compared to $20.4 million and $70.3 million for the comparable
prior year periods.
INTEREST EXPENSE. No interest expense was incurred for the quarter and nine
month periods ended March 31, 1997, compared to $2.5 million and $7.4 million,
respectively, for the comparable prior year periods. The elimination of
interest expense in the current periods 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 and nine month periods ended
March 31, 1997 was $1.2 million and $3.9 million, respectively, compared to $1.8
million and $2.6 million for the comparable prior year periods. Interest income
reflects the amount of cash and cash equivalent balances invested during the
respective periods.
NET LOSS. The Company recorded a net loss for the third quarter and nine month
period ended March 31, 1997 of $22.5 million and $87.0 million, respectively,
compared to $21.5 million and $76.1 million for the comparable prior year
periods.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Prior to February 1996, the Company's operations were financed by equity
contributions from shareholders, approximately $31.2 million of cash advances
from HBI and approximately $42.0
17
<PAGE>
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 net proceeds of
approximately $206.2 million.
COMPONENTS OF CASH FLOWS. The significant components of the changes in cash and
cash equivalents were as follows (in millions):
NINE MONTHS ENDED MARCH 31
--------------------------
1997 1996
---- ----
Net loss $(87.0) $(76.1)
Depreciation and amortization 13.4 15.3
Changes in operating items 62.2 16.3
Net capital expenditures (6.0) 2.6
Proceeds from debt borrowings -- 31.3
Proceeds from initial public
offering (net) -- 206.2
Other - 0.3 8.8
--- ---
Net increase (decrease) in cash
and cash equivalents
$(17.1) $204.4
------- ------
------- ------
CASH AND CASH EQUIVALENTS. As of March 31, 1997, cash, cash equivalents and
marketable securities totaled $97.1 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 quarter and nine month periods ended March 31,
1997. This decrease was offset in part by increased cash received due to a
higher level of prepaid annual subscriptions.
WORKING CAPITAL. Working capital at March 31, 1997 was $19.4 million, compared
to working capital of $75.3 million at June 30, 1996, primarily due to the net
use of cash resulting from the Company's operations. In addition, net trade
accounts receivable increased by $12.3 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 $26.9 million, due primarily to
increased advertising, promotion and program provider license fee expenses and
Manufacturer Incentive program expense. Additionally, deferred revenue
increased $26.1 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.
18
<PAGE>
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.
Personalized Media Communications, L.L.C. ("PMC") has commenced two legal
proceedings against Hughes Network Systems, Thomson Consumer Electronics and
other DSS manufacturers, DIRECTV, Inc., and the Company. Because these
proceedings are in the discovery stage, the ultimate outcome of these matters
and the resulting effect on the liquidity and financial position of the Company
cannot be determined with certainty. Part II, Item 1 of this Report on Form 10-
Q and Note 4 to the condensed consolidated financial statements contain
additional information on this matter.
CAPITAL EXPENDITURES. Capital expenditures for the nine months ended March 31,
1997 totaled $9.0 million, consisting primarily of satellite deposits and
purchased computer software. The Company is required to make progress payments
under its contract with Lockheed Martin. If DBS-4 is built and put into
operation at 101DEG. west longitude, the Company will also incur additional
capital expenditures. Note 4 to the condensed consolidated financial statements
contains additional information on this matter.
NET OPERATING LOSS CARRY FORWARD. At March 31, 1997, the Company's net
operating loss carry forward was $284 million for federal tax purposes and $308
million for financial 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 may be subject to seasonal sales patterns experienced by the
consumer electronics industry. As the Company's subscriber base has increased,
it does not appear that seasonality has had a material effect on the Company's
revenues to date, although seasonality may affect the rate of subscriber growth
in any given quarter.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IN THE MATTER OF CERTAIN DIGITAL SATELLITE SYSTEM (DSS) RECEIVERS AND
COMPONENTS THEREOF, United States International Trade Commission,
Investigation No. 337-TA-392; and PERSONALIZED MEDIA COMMUNICATIONS,
L.L.C. V. THOMSON CONSUMER ELECTRONICS, ET AL., United States District
Court, Northern District of California, Case No. C-96 20957.
In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated a
legal proceeding before the United States International Trade Commission ("ITC")
and a separate proceeding in the United States District Court for the Northern
District of California against digital satellite system developers,
manufacturers and programmers, including, among others, Hughes Network Systems,
Thomson Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the
Company.
In the ITC action, PMC alleges that Hughes Network Systems, Thomson Consumer
Electronics and other DSS manufacturers have infringed, and that DIRECTV, Inc.
and the Company have contributed to and/or induced the infringement of, a patent
owned by PMC and requests the ITC to (i) bar the importing, marketing,
promoting, distributing, or sale of imported infringing DSS receivers in the
United States which are covered by PMC's patent and (ii) prohibit DIRECTV, Inc.
and the Company from broadcasting television programming to any imported
infringing DSS receiver. A trial of the ITC proceeding before an administrative
law judge is presently scheduled for June 30, 1997 and an initial determination
by the administrative law judge is expected in October 1997. The ITC is
expected to render its decision by January 1998.
In the Federal District Court action, PMC alleges that the same defendants,
including DIRECTV, Inc. and the Company, have infringed at least one claim of
several PMC patents and have induced the infringement of PMC's patents by
various DSS manufacturers. PMC has requested the court to award PMC damages, to
treble such damages, and to enjoin the Company and the other defendants from
infringing PMC's patents. The Court and all parties have agreed that the
Federal District Court action be stayed pending resolution of the ITC
investigation.
The Company has denied all material allegations in both complaints. While it is
not possible to estimate the probable outcome of these proceedings at this time,
management believes, based on advice of counsel, that it has valid defenses to
PMC's claims and that, in particular, PMC's request in the ITC proceeding to
block DIRECTV, Inc. and the Company from broadcasting to imported DSS receivers
is unprecedented. The Company does not believe that PMC is entitled to damages
or any remedies from the Company, and management intends to vigorously defend
both actions.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1997 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)
22
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARY
Index of Exhibits to Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1997
Exhibit No. Exhibit Description
---------- -------------------
27.1 Financial Data Schedule
<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 MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 97,086
<SECURITIES> 3,924
<RECEIVABLES> 43,961
<ALLOWANCES> 5,342
<INVENTORY> 0
<CURRENT-ASSETS> 140,399
<PP&E> 137,381
<DEPRECIATION> 65,392
<TOTAL-ASSETS> 221,952
<CURRENT-LIABILITIES> 120,983
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 67,041
<TOTAL-LIABILITY-AND-EQUITY> 221,952
<SALES> 270,579
<TOTAL-REVENUES> 270,579
<CGS> 177,558
<TOTAL-COSTS> 177,558
<OTHER-EXPENSES> 169,863
<LOSS-PROVISION> 14,172
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (87,007)
<INCOME-TAX> 0
<INCOME-CONTINUING> (87,007)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (87,007)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
</TABLE>
