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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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
Securities registered pursuant to Section
12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act: Class A Common Stock,
$.0001 par value
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of September 22, 1997, 15,774,826 shares of the registrant's Class A
Common Stock were issued and outstanding, and the aggregate market value of
the Class A Common Stock held by non-affiliates of the registrant as of
September 22 was approximately $129,052,452.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Annual Report Incorporated into Part II
to Shareholders for the fiscal year
ended June 30, 1997
Selected portions of the Definitive Proxy Incorporated into Part III
Statement for the Annual Meeting of
Shareholders to be Held November 17, 1997
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PART I
ITEM 1. BUSINESS
GENERAL
United States Satellite Broadcasting Company, Inc. (the "Company") is a
provider of subscription television programming to households throughout the
continental United States via high-power direct broadcast satellite ("DBS").
The Company broadcasts a high quality digital television signal using the
Digital Satellite System ("DSS-Registered Trademark-") broadcasting system.
The Company's programming is available to virtually all of the approximately
96 million U.S. television households upon the purchase of a DSS unit, which
features an 18 inch satellite dish. The Company currently delivers up to 30
channels of video programming, with a focus on "premium" networks such as
Multichannel HBO-Registered Trademark- (5 channels), Multichannel
HBO-Registered Trademark- FAMILY (2 channels), Multichannel
SHOWTIME-Registered Trademark- (4 channels), Multichannel CINEMAX-Registered
Trademark- (3 channels), Multichannel THE MOVIE CHANNEL-TM- (2 channels),
FLIX-TM- and the SUNDANCE CHANNEL-TM-, and also including popular "basic"
channels such as MTV-Registered Trademark-, M2-Registered Trademark-,
VH-1-TM-, NICKELODEON-Registered Trademark-/NICK AT NITE-Registered
Trademark-, NICK AT NITE'S TV LAND-TM-, COMEDY CENTRAL-Registered Trademark-
and LIFETIME-Registered Trademark-. The programming delivered by the Company
includes over 900 movie titles per month. The Company also broadcasts
original news programming on the ALL NEWS CHANNEL-TM- and events and specials
on a pay-per-view basis.
The Company broadcasts from a single satellite, DBS-1, which is able to
reach the entire continental United States. DBS-1 broadcasts with minimal
signal interference because of its favorable orbital location at 101DEG. west
longitude, greater orbital spacing than that provided for non-DBS satellites and
its high-power 120 watt transponders. DBS-1 was manufactured by Hughes
Electronics Corporation ("Hughes") and is owned and operated jointly by the
Company and DIRECTV, Inc., a subsidiary of Hughes. The Company believes that
the DSS system, which incorporates the technologically advanced MPEG 2 digital
compression standard, results in a higher picture quality than any other
existing terrestrial domestic television broadcasting system. The Company
expects to replace DBS-1 at its current orbital location before the end of its
expected life in 2010. In addition to its FCC license to broadcast from 101DEG.
west longitude, the Company also has an FCC permit to construct and launch
high-power DBS systems at two other orbital locations.
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control. The
DSS unit features an easy to use on-screen electronic program guide, a ratings
control function and the capability to switch easily between DSS signals and
local programming signals. DSS units are currently manufactured and sold by
leading consumer electronics manufacturers and sold at over 26,000 retail
locations.
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. The Company and DIRECTV, Inc. share the use of the
technology underlying the DSS system, cooperate to promote and build awareness
of the DSS system and currently offer complementary programming packages. The
Company estimates that the majority of DSS households receive both
USSB-Registered Trademark- programming and DIRECTV-Registered Trademark-
programming. DIRECTV, Inc. offers approximately 175 channels of digital video
and audio programming, including news, sports, entertainment and pay-per-view
movies and events.
STRATEGY
The Company seeks to offer the highest quality, most-sought-after
television programming at a competitive price, enhance the DSS position as the
leading provider of satellite television, increase the market share of USSB
programming by offering the premier movie networks and a wide variety of
pay-per-view events, and achieve profitability.
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The Company intends to accomplish these objectives by (i) building on its
lead in the high power DBS market; (ii) capitalizing on its relationships with
leading program suppliers, with which it has multi-year agreements; (iii)
maintaining its strategic relationship with Hughes and DIRECTV, Inc. to further
benefit from the technological advantages of high-power DBS and the DSS system
and to promote and build awareness of the DSS system; (iv) enhancing its strong
relationships and joint marketing efforts with leading consumer electronics
manufacturers and retailers to further promote the sale of DSS units and USSB
programming; (v) expanding and continuing to support the large and established
retail distribution network for DSS units; (vi) continuing to provide the
highest broadcast quality; and (vii) emphasizing customer service to maintain a
high level of customer satisfaction.
THE MARKET
The Company believes that there is significant unsatisfied demand for high
quality, reasonably priced television programming. The Company believes,
therefore, that the potential market in the United States for high-power DBS
broadcasting consists of all of the approximately 96 million households with
television sets, as well as certain commercial markets, such as hotels, motels,
bars and restaurants.
The primary target markets for the Company include (i) existing cable
subscribers who desire a greater choice and variety in programming, improved
video and audio quality, better customer service and fewer signal interruptions;
and (ii) all of the U.S. television households unserved by cable. Based upon
FCC and industry data, there are approximately 62 million U.S. cable
subscribers. These subscribers reportedly pay an average of approximately $32
per month for television programming services. The Company also views as a
target market the approximately 31 million U.S. television households which have
access to cable television but are not customers of the local cable operator.
The Company believes that the demand for satellite television services in
the United States will continue to grow. The Company also believes that the DSS
system, with its digital picture and CD-quality sound, provides the consumer
with the highest quality subscription television programming currently
available. While the high-power DBS share of the U.S. television market is
currently small compared to cable, it has been steadily increasing. The Company
has conducted extensive research to better understand the television market in
the United States, the desires and preferences of consumers and the features and
benefits that will attract subscribers. This research indicates that a
substantial number of consumers are dissatisfied with cable television, that
former cable subscribers who subscribe to the DSS system are more satisfied with
it than cable and that 63% of DSS unit owners who were cable subscribers
purchased premium movie programming. This research also indicates that the most
likely USSB customers are homeowners with families who currently have or have
had cable, subscribed to the premium movie channels and consider television a
significant component of their entertainment activities. The Company believes,
based on this research, that demand for more choice in television programming,
dissatisfied cable subscribers, and consumers unserved or underserved by cable
will contribute to the market growth of the DSS system and the Company's
subscriber base.
The Company's research also indicates that the growth of the DSS market has
been hampered by the misperception that reception of local television broadcasts
is incompatible with the DSS system. The Company is commencing an extensive
information campaign, coupled with training of retail salespeople, to educate
consumers that local television broadcasts are readily received using a standard
television antenna with the DSS system.
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MARKETING
The Company engages in extensive marketing, advertising and promotional
activities to increase consumer awareness of the DSS system and USSB
programming, to promote the sale of DSS units and to generate subscriptions to
USSB programming. The Company intends to continue these efforts and anticipates
that it will continue to make substantial expenditures for new and intensified
marketing, advertising and promotional activities, including the following:
ADVERTISING. The Company's advertising activities presently consist of
television commercials aired nationally, radio commercials, and print
advertisements promoting the DSS system and USSB programming service.
PROMOTIONS. The Company promotes subscriptions to its programming service
by offering all owners of DSS units, upon initial purchase of a DSS unit, one
free promotional month of its premier programming package, USSB ENTERTAINMENT
PLUS-Registered Trademark-. During the free promotional month of programming,
the Company engages in targeted telemarketing and mailings designed to convert
free subscribers to paying subscribers. The Company believes that its free
promotional month of USSB ENTERTAINMENT PLUS is an effective marketing tool. In
addition, the Company has available for its use two minutes per hour on its
"basic" channels which it currently uses to promote the Company's programming.
To support its marketing, the Company also delivers a free channel that is
available to all owners of DSS units and, in conjunction with its programmers,
regularly provides USSB FREEVIEWs-Registered Trademark-, or access to
programming channels during certain periods of the year without charge. The
Company also engages in joint advertising and promotions with its programmers.
TV GUIDE-TM-. The Company has entered into a relationship with the
publisher of TV GUIDE to offer a "DSS Edition of TV GUIDE", available to all DSS
households. The DSS Edition of TV GUIDE provides a comprehensive listing of
all subscription channels offered on the DSS system, and features special
inserts reviewing programming offered by USSB each week.
RETAIL SUPPORT. The Company engages in an active retail support program,
which provides dealers with point-of-sale literature and displays, incentives
and training. DSS retailers promote the Company's programming and encourage
customers to activate their free promotional month and to subscribe to USSB
ENTERTAINMENT PLUS. The Company generally pays commissions to eligible
retailers when their customers become paying subscribers, regardless of which
manufacturer's DSS unit was purchased. In addition, the Company makes USSB
programming available for demonstration to the customer at the point of sale.
The Company has entered into a long-term sales agency agreement with
Thomson Consumer Electronics ("Thomson"), pursuant to which Thomson acts as the
Company's sales agent for consumer electronics outlets that Thomson services.
Thomson is the top selling television manufacturer in the United States,
marketing the "RCA," "GE" and "ProScan-Registered Trademark-" brands. Both the
Company, with a dedicated staff of approximately 40 sales personnel, and
Thomson, with a sales and support staff of approximately 350, service retail
outlets.
The Company has also entered into a sales agency agreement with AT&T,
pursuant to which AT&T markets DSS units to its customers and provides its
customers with the opportunity to receive USSB programming, including the one
free month of USSB ENTERTAINMENT PLUS.
MANUFACTURER INCENTIVE PROGRAM AND OTHER JOINT MARKETING. The Company
engages in a number of joint marketing efforts with DIRECTV, Inc. and DSS unit
manufacturers. One of these efforts, the Manufacturer Incentive program, is a
joint financial incentive arrangement with
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DIRECTV which has had the effect of contributing to certain DSS manufacturers
lowering the price of DSS units. Such arrangements run for up to four years
depending on manufacturer.
The Company also shares costs with other DSS system participants for
advertising, public relations and retail promotions. The Company believes it
also benefits from the marketing efforts of all DSS system participants. All
current manufacturers of DSS units include information regarding USSB
programming in their retail packaging and all new DSS unit manufacturers are
expected to continue this practice.
PROGRAMMING
The Company selected its programming based on extensive market research,
which indicated that potential DSS customers would have a strong desire for
movies, major pay-per-view events, and general entertainment targeted at
specific family members. As a result, the Company sought multi-year agreements
with content providers which offered programming that could satisfy this target
market. The Company currently offers DSS households many of the most widely
recognized and popular "premium" and "basic" entertainment channels. The
Company broadcasts over 900 movie titles per month and a wide variety of
specialty sports events and entertainment specials on a pay-per-view basis.
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.
The Company delivers premium networks in multichannel format to increase
viewer choice and variety. The Company is not aware of any cable system with a
comparable level of multichannel premium programming. The Company's research
indicates that multichannel programming is a popular attraction with its
subscribers, as each programmer generally "counter programs" certain of its
multiple channels; i.e., the programmer will, for example, run an action movie,
a comedy movie and a family movie in the same general time slot. The Company's
delivery of premium channels in multichannel format allows a USSB subscriber to
receive multiple channels of a premium service at a price generally paid by
cable subscribers for one premium channel. In fiscal 1997, the Company
continued its commitment to providing the best premium movie channels by adding
HBO Family (2 channels) and Showtime 3, at no additional cost to subscribers.
The Company offers its programming in a variety of subscription packages,
which currently range in price from $7.95 to $34.95 per month. From time to
time, the Company may revise its rates for promotional or competitive reasons.
In addition, the Company permits subscribers to purchase premium channel
packages without requiring them to purchase a basic package, as is generally
required with cable. USSB ENTERTAINMENT PLUS is currently purchased by
approximately 50% of the Company's paying subscribers. Subscription packages are
generally purchased monthly, but may also be purchased on a quarterly or annual
basis. All subscriptions are billed in advance of their respective time
periods.
The Company makes its pay-per-view events available to all residential DSS
owners. The Company offered 27 pay-per-view events in 1997, including Tyson vs.
Holyfield II; Foreman vs. Grimsley; International Cricket competitions; and
David Bowie and Friends. The Company also distributes some of its pay-per-view
events to commercial establishments through a third party.
The Company offers a complimentary channel to all DSS unit owners, whether
or not they are USSB programming subscribers. This channel is currently
utilized by the Company to broadcast marketing messages to maximize viewership
of upcoming USSB programming, as well as for public service broadcasting. The
Company also broadcasts in Spanish all of the programming which is provided to
it with a Spanish language soundtrack.
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Since the DSS system poses no technical barriers to receiving both USSB
programming and DIRECTV programming, all purchasers of DSS units have access to
more than 200 channels of programming. DIRECTV programming currently includes
approximately 50 channels of pay-per-view movies, as well as subscription sports
packages, established basic networks and audio services. The Company provides
programming that complements DIRECTV's existing programming packages, thus
maximizing the consumer appeal of the DSS system. There is currently no overlap
between USSB programming and DIRECTV programming.
Local television stations are readily received using a standard
television antenna with the DSS system. DSS owners can easily switch between
DSS programs and local stations by using the DSS remote control. According to
the Company's research, approximately 59% of USSB subscribers currently
receive local programming signals from standard television antennas. DSS
owners who are not able to receive local programming signals because of their
distance from terrestrial broadcasting towers may receive national network
programming through the DSS system. Local programming is also available to
DSS owners through a basic "lifeline" cable subscription.
DISTRIBUTION OF DSS UNITS
The introduction of the DSS unit is widely regarded as the most successful
introduction and fastest growing major consumer electronics product in United
States history. Since its introduction three years ago, more than four million
DSS units have been shipped to retailers.
DSS units are currently sold at over 26,000 retail locations, including
national retailers such as Best Buy, Circuit City, Radio Shack, Sears and
WalMart. DSS systems are also available at regional and independent consumer
electronics stores, satellite specialty stores, and other specialty retailers
including catalog, internet and television shopping networks. DSS units are
also distributed by the National Rural Telecommunications Cooperative, which has
approximately 300 affiliates that sell satellite equipment predominately in
rural areas.
The Company and DIRECTV, Inc. maintain marketing arrangements with AT&T
whereby AT&T offers DSS units, as well as USSB and DIRECTV programming, directly
to its customer base.
DSS units are currently manufactured and distributed under the following
brand names: RCA, Sony, GE, Hughes Network Systems, Proscan, Toshiba, Uniden,
Panasonic, Magnavox, Memorex and Hitachi.
THE DSS UNIT
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control. The
dish, which must be aimed in the direction of the 101DEG. west longitude
orbital location, can be mounted on the exterior of the home. Company research
indicates that approximately 63% of purchasers of DSS units choose to install
their units themselves, while the balance have their units professionally
installed.
The DSS unit has been designed to be as easy to use as a basic television
set. The consumer-friendly remote control allows subscribers to quickly and
easily access desired programming via a colorful on-screen program guide and
menu system. Subscribers can create lists of favorite channels, limit access to
certain types of programming and establish budget limits on pay-per-view
selections. The remote control has been designed to be compatible with a wide
variety of television sets, allowing subscribers to operate both the television
set and the DSS unit with the same remote control.
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The DSS system is also designed to receive local television broadcasts by
using readily available television antennas. Many antennas on the market
today provide improved and convenient ways to receive local television
stations with the DSS system.
The DSS system's on-screen programming guide provides program ratings for
most programs carried by the premium services and permits parents to set rating
limits and "lock out" programming which the subscriber does not wish to receive.
The DSS system is designed to be available (i.e., free from outages) 99.7%
of the time. Outages are generally the result of severe storms passing between
the satellite and the customer's dish or between the Company's transmission
facility and the satellite.
OPERATIONS
The Company's program suppliers deliver signals to the Company via
commercial satellites, fiber optics or microwave transmissions. These signals
are then uplinked, or transmitted, to the Company's transponders on the DBS-1
satellite, through antennas located at the Company's National Broadcast Center
in Oakdale, Minnesota. DBS-1 then broadcasts the signal to DSS households. The
Company also maintains a separate Auxiliary Broadcast Center which provides
redundant uplinking capability.
All of the Company's video channels are encrypted to prevent unauthorized
reception of the signal. The conditional access system utilized in the DSS
system, which controls the encryption and decryption of the television
signal, was developed and is operated by NDS Americas Inc. (formerly News
DataCom). The signal processing system, which is responsible for the
transmission of audio and video, was developed by Thomson. Both technologies
were developed under contract with Hughes and are available for use by the
Company pursuant to long-term agreements with Hughes. The conditional access
system was upgraded in 1997 by issuing replacement access cards to all DSS
unit owners with "first-generation" cards.
The conditional access system is controlled by a Conditional Access
Management Center located in Castle Rock, Colorado, with a backup facility in
Los Angeles, California. The conditional access system has many flexible
features, allowing for subscription services and pay-per-view services on both
an impulse and order-ahead basis.
The Company's signal processing system and all DSS units, regardless of
manufacturer, fully comply with the main profile and the main level of the MPEG
2 digital compression standard. MPEG 2 is an international standard promulgated
by the Moving Picture Expert Group. Compliance with MPEG 2 allows DSS unit
manufacturers efficiencies in designing and manufacturing receivers. Even though
the DSS system is MPEG 2 compliant, it incorporates a number of proprietary
technologies and may not be used by other high-power DBS broadcasters unless
they obtain a license to such technology from Hughes.
The Company contracts out customer service and billing functions to
Alliance Data Systems, Inc. ("ADS") (formerly BSI Business Services, Inc.).
ADS's functions include the handling of orders from subscribers, establishing
and maintaining customer accounts, inbound and outbound telemarketing, billing
and remittance processing. All of ADS's interactions with subscribers are
conducted under the Company's name. The Company seeks to provide the highest
levels of customer service and believes that customer service is important in
developing customer loyalty and in distinguishing its service from its
competitors. To date, the Company's research indicates that 82% of its
subscribers were satisfied with the Company's customer service.
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SATELLITE
The Company owns five-sixteenths of DBS-1, including a five transponder
payload on the satellite. DBS-1 was manufactured by Hughes and was launched by
Arianespace in December 1993. The satellite was designed for a minimum 12-year
life from the date of launch; however, the launch was more accurate than
initially anticipated and Lockheed Martin currently estimates that the DBS-1
satellite will have a life of 15.9 years, plus or minus 0.4 years, from its
launch date. The Company expects that it will make arrangements for a
replacement satellite to ensure continuity of its programming service prior to
the end of the useful life of DBS-1.
OTHER COMPANY ORBITAL LOCATIONS
The FCC has issued a Construction Permit and Launch Authority which
authorizes the Company to construct high-power DBS systems at 110DEG. west
longitude (three transponders) and 148DEG. west longitude (eight transponders).
In connection with this permit, the Company has entered into two satellite
construction contracts with Lockheed Martin for the construction of the two
satellites. The 110DEG. west longitude orbital slot would enable the Company
to provide a second high-power DBS service to the United States, and
additionally to Alaska and Hawaii. The 148DEG. west longitude slot would allow
the Company to provide programming between the United States and the Pacific
Rim, if the FCC and international regulatory bodies agree to grant the necessary
authorizations. See "Regulatory Matters."
COMPETITION
The Company's existing and potential competitors comprise a broad range of
companies engaged in communications and entertainment, including cable
operators, other satellite program providers, wireless cable operators, open
video providers, electric utilities with existing fiber networks, television
networks and home video products companies, as well as companies developing new
technologies. The Company anticipates that other DBS satellites will be
launched at the 110DEG. west longitude and other orbital locations, increasing
the number of competitors in the direct broadcast satellite market. Many of the
Company's competitors have greater financial and marketing resources than the
Company, and the business of providing subscription and pay television
programming is highly competitive. The Company expects that quality and variety
of programming, quality of picture and service and cost will be the key bases of
competition.
The Company believes that the DSS system has several advantages, including
superior picture and sound quality compared to terrestrial broadcasters and most
cable operators, its programming variety, its retail distribution network,
well-established brand name manufacturers, advantageous orbital location and the
limited capital expenditures required in the future. The DSS system currently
offers the broadest variety of programming available from any single source and
employs the MPEG 2 digital compression standard which, the Company believes,
results in a higher picture quality than any other existing domestic television
broadcasting system. With the 101DEG. west longitude orbital slot, the Company
(and DIRECTV, Inc.) also have the most desirable location for reaching the
entire continental United States with the least possibility of obstruction. The
Company believes that the 18 inch dish used in the DSS unit also gives the
Company an advantage over many of its competitors, who must generally rely on
larger and, in the case of C-band broadcasters, more expensive dishes.
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CABLE OPERATORS
Cable television is currently available for purchase by as much as 97% of
the approximately 96 million U.S. television households. The cable television
industry is an established provider of television programming, with
approximately 62% of total television households subscribing. Cable systems
typically offer 30 to 80 channels at an average monthly subscription price of
approximately $32.
Cable television providers benefit from their entrenched position in the
domestic consumer marketplace. Cable subscribers have relatively minimal
up-front costs as compared to DSS households, which must purchase (or lease)
and install the DSS unit. In addition, the cost of both USSB programming and
DIRECTV programming may be higher than a subscriber would pay for cable
service. Certain cable companies have indicated an intention to rebuild their
transmission systems to upgrade to digital technology or add some digital
capacity, which would provide their cable television customers with improved
picture quality and sound and/or more channels.
SATELLITE PROGRAM PROVIDERS
The FCC authorizes two types of satellite services for transmission of
television programming: (i) high-power DBS and (ii) low-power (C-band) and
medium-power (Ku-band) DBS. High-power DBS delivers high quality video and
audio signals, can be received by an easily installed, 18 inch dish with
virtually no signal interference and, depending on the satellite's orbital
location, can be broadcast throughout the continental United States from a
single satellite. Low- and medium-power DBS were intended by the FCC primarily
for commercial use.
The International Telecommunication Union, an agency of the United Nations,
allocated to the United States 32 transponders at each of eight orbital
locations for the provision of domestic high-power DBS service. The FCC has
issued licenses or construction permits for all eight orbital locations.
Although the number of potential competitors in the high-power DBS market is
limited by the number of orbital slots authorized for such service by the FCC
and by regulatory authorities of adjoining countries, additional spectrum may be
allocated to high-power DBS in the future, which would increase the number of
orbital locations beyond the present eight. In addition, satellites regulated
by foreign governments may, in the future, provide competitive DBS services
under protocols between the United States and such foreign governments. Under a
protocol between Mexico and the United States, Mexico has announced its
intention to auction an orbital location which will permit service to the United
States and the FCC has granted a Mexican entity authority in the United States
for reception of Spanish programming. If Canada were to enter into a similar
protocol, Canada also has orbital locations which would permit DBS service to
the United States.
HIGH-POWER DBS
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. DIRECTV, Inc. broadcasts over 175 channels from the
101DEG. west longitude orbital location shared with the Company, as compared
with up to 30 channels offered by the Company. DIRECTV, Inc. offers a broad
range of sports programming and emphasizes pay-per-view movies and events and
offers over 50 channels of "basic" programming. While the Company and DIRECTV,
Inc. share the goal of promoting the DSS system, they do compete for subscriber
revenues once the DSS unit is purchased by the consumer.
EchoStar Communications Corporation ("EchoStar") has launched two
high-power DBS satellites at the 119DEG. west longitude orbital location.
EchoStar offers programming which includes
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many of the premium and basic channels available on the DSS system and is
aggressively marketing its programming services and satellite dish as an
alternative to the DSS system. EchoStar manufactures the 18-inch satellite
dish needed to receive its programming and thereby has greater control over
the retail price of its satellite dish than the Company, but also bears the
financial responsibility associated with this aspect of its business. In
addition to two satellites at the 119DEG. west longitude orbital location,
EchoStar has acquired Direct Broadcast Satellite Corporation, which has filed
an application for authority to launch at 61.5DEG. west longitude. Direct
Broadcast Satellite Corporation has authority for 11 transponder slots at
61.5DEG. west longitude, which will be available to provide EchoStar's
programming. In addition, Dominion Video Satellite, Inc. has agreed to lease
five of its eight transponders at the 61.5DEG. orbital location to EchoStar.
Since EchoStar and Dominion Video Satellite, Inc. will use the same
encryption and receive system, Dominion subscribers may purchase EchoStar
programming in addition to Dominion programming. EchoStar has also acquired
24 transponder slots at 148DEG. west longitude which were auctioned in
January 1996 by the FCC.
The partners in PRIMESTAR Partners ("PRIMESTAR"), a partnership consisting
of G.E. Americom and major cable television system operators, including
Tele-Communications, Inc. ("TCI"), have agreed to form a new corporation,
PRIMESTAR, Inc., which is intended to be a publicly held company. As part of
that reorganization, the FCC has been asked to approve a transfer of control of
Tempo Satellite, Inc. ("Tempo"), which has eleven transponders authorized at
119DEG. west longitude and eleven transponders authorized at 166DEG. west
longitude, from TCI Satellite Entertainment, Inc. to PRIMESTAR, Inc. On March
8, 1997, Tempo launched its satellite to provide high power direct broadcast
satellite service at 119DEG. west longitude, but such service has not yet
commenced.
PRIMESTAR has also entered into an agreement with MCI, News Corp., and
ASkyB which will permit PRIMESTAR to acquire the 28 transponders authorized
to MCI at 110DEG. west longitude, two satellites which are presently under
construction (with a planned launch of September 1997 for the first
satellite), and other related assets. The FCC has been asked to approve the
assignment of the MCI authorization to PRIMESTAR LHC, a wholly owned
subsidiary of PRIMESTAR, Inc. If this transaction proceeds as presently
contemplated, ASkyB, which will be owned by News Corp. (80.1%) and MCI
(19.9%), will have a non-voting equity interest (31%) in PRIMESTAR. The
parties have represented to the FCC that they are willing to divest the
eleven transponders at 119DEG. west longitude if the 28 transponders at
110DEG. west longitude are permitted to be assigned to PRIMESTAR LHC.
LOW AND MEDIUM-POWER DBS
PRIMESTAR also offers a 95-channel medium power broadcast system using
capacity on a medium-power satellite owned by G.E. Americom and leases receivers
and three foot satellite dishes to subscribers. PRIMESTAR's lease program is
widely credited for the success of its medium-power satellite service which,
according to trade publications, has approximately 1.9 million subscribers.
PRIMESTAR offers programming which includes many of the premium and basic
channels available on the DSS system. PRIMESTAR promotes its service as
superior to cable and markets to the same general television viewers as the
Company. See also "High-Power DBS" above.
AlphaStar, Inc., a subsidiary of Tee-Com Electronics, Inc., which
previously offered video programming, filed for protection under the United
States Bankruptcy Code in 1997, and is no longer providing service.
Potential competitors may provide television programming at any time by
leasing transponders from an existing satellite operator. However, the number
of transponders available
10
<PAGE>
for lease on any one satellite is generally limited, making it difficult to
provide sufficient channels for a viable system.
The Company also competes with low-power (C-band) systems. These systems,
which utilize a 4 to 8 foot dish, in the aggregate serve approximately 2.3
million subscribers.
TELEPHONE COMPANIES
Certain regional telephone operating companies and long distance telephone
companies could become significant competitors of the Company in the future.
Several telephone companies have begun to enter the video programming market by
creating cable subsidiaries, acquiring existing cable operators outside of the
area they presently serve with telephone service, or by continuing their
involvement with wireless cable systems. In addition, telephone companies can
establish open video services, which they either can make available to
television programmers or utilize themselves. The Company will experience
additional competition if such companies enter the market. Among other things,
telephone companies have an existing relationship with virtually every household
in their service area, substantial financial resources and an existing
infrastructure.
WIRELESS CABLE AND OTHER MICROWAVE SYSTEMS
There are approximately 200 wireless cable systems in the United States,
serving approximately 900,000 subscribers. These systems typically offer 20 to
40 channels of programming, which may include local programming; however, these
systems will require substantial capital expenditures to upgrade to digital
technology. The FCC has recently allocated spectrum for the Local Multipoint
Distribution Service (LMDS), a form of wireless cable with increased bandwidth.
FCC auctions will be held to make the spectrum available for video, voice,
internet and data services. Companies acquiring rights for LMDS could become
providers of competitive video services.
VHF/UHF BROADCASTERS
Most areas of the United States are covered by traditional terrestrial
VHF/UHF broadcasters that typically offer three to ten channels. These stations
provide local, network and syndicated programming free of charge. The FCC has
mandated that terrestrial television stations commence digital television
service, and has granted additional spectrum on an interim basis which may be
used for multichannel programming and/or high definition television (HDTV). The
Company is unable to predict at this time the effect of such a development on
the Company's competitive position.
REGULATORY MATTERS
The Company is subject to the regulatory authority of the FCC. As a
distributor of television programming, the Company is also affected by numerous
laws and regulations. Unlike a common carrier, however, the Company is free to
set prices and serve customers according to its business judgment without rate
of return or certain other types of regulation.
The FCC has issued a license (the "License") to the Company which allows
the Company to broadcast from the 101DEG. west longitude orbital slot.
DIRECTV, Inc. is the only other entity licensed for the 101DEG. west longitude
orbital slot. No other entities can currently obtain transponders at 101DEG.
west longitude.
The License must be renewed at the end of its ten year term. FCC licenses
are generally renewed in the ordinary course, absent misconduct by the licensee.
Under the License, the Company is subject to FCC review primarily for the
following: (i) standards regarding individual
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<PAGE>
satellites (e.g., meeting minimum financial, legal and technical standards);
(ii) avoiding interference with other satellites; and (iii) complying with
rules the FCC has established specifically for high-power DBS satellite
licenses. USSB II, Inc. ("USSB II"), a wholly owned subsidiary of the Company,
holds the License and owns the five transponders. The Company and USSB II have
entered into a Transponder Use Agreement, whereby the Company is granted the
right to use the transponders. In addition, uplink facilities are separately
licensed by the Satellite Radio Branch of the FCC. The Company's National
Broadcast Center and its Auxiliary Broadcast Center have each received a
Satellite Radio Branch license.
The FCC has also issued a Construction Permit and Launch Authority (the
"Permit") to the Company. The Permit allows the Company to construct and launch
high-power DBS systems with three transponders at 110DEG. west longitude and
with eight transponders at 148DEG. west longitude. The 110DEG. west longitude
orbital slot would enable the Company to provide a second high-power DBS service
to the United States, and additionally to Alaska and Hawaii. The 148DEG. west
longitude slot would allow the Company to provide programming between the United
States and the Pacific Rim, if the FCC and international regulatory bodies agree
to grant the necessary authorizations. The Permit presently requires that these
two additional systems be operational by December 1997. The Company has
requested an extension to December 1999 in which to complete the construction
and launch of the remainder of its DBS systems. The Company's ability to
operate at the 101DEG. west longitude orbital location is not linked to the
Permit. In connection with the Permit, the Company has entered into two
satellite construction contracts with Lockheed Martin for the construction of
two satellites. Under the contract for the 110DEG. orbital location, the
Company is presently required to make future fixed payments totaling
approximately $68.1 million after having made advance payments of $5.5 million.
The Telecommunications Act of 1996 (the "Act") significantly deregulated
the telecommunications industry. The Act further clarifies that the FCC has
exclusive jurisdiction over high-power DBS service, that criminal penalties may
be imposed for piracy of high-power DBS signals, that local zoning and homeowner
covenants which impair a viewer's ability to receive DBS signals are preempted
except where necessary for safety or historic reasons and that local (but not
state) taxes on DBS service are precluded.
RELATIONSHIP WITH HUGHES
The Company has an important business relationship and course of dealing
with Hughes, based on their co-ownership of DBS-1, their shared use of the DSS
system (including its underlying technology) and their mutual objective to build
and promote consumer acceptance and growth of the DSS system. The relationship
with Hughes dates back to 1991 and is based on contractual arrangements and a
history of cooperation. The Company and Hughes (or an affiliate of Hughes) are
parties to the following agreements:
SATELLITE PAYLOAD PURCHASE AGREEMENT. In May 1991, the Company entered
into a Satellite Payload Purchase Agreement (the "SPPA") with Hughes
Communications Galaxy, Inc. ("HCG"). The SPPA provided for the purchase by the
Company of a five-sixteenths interest in DBS-1, enabled the Company and
DIRECTV, Inc. to share the cost of satellite construction and launch and enabled
the Company and DIRECTV, Inc. to become the first high-power DBS satellite
broadcasters in the United States. In addition, the SPPA provided that the
Company would pay its fair share of the development and/or acquisition costs for
the system technology, which includes conditional access, signal processing and
other systems. Through this agreement, DIRECTV, Inc. and the Company utilize a
common system and avoid any technical barriers to consumers subscribing to both
USSB programming and DIRECTV programming.
TRANSPONDER SERVICE AGREEMENT. The Company also entered into a Transponder
Service Agreement with Hughes Communications Satellite Services, Inc. ("HCSS"),
whereby HCSS
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<PAGE>
provides telemetry, tracking and control of DBS-1. Pursuant to this Agreement,
the Company and HCSS technical personnel are in regular contact, sharing
information regarding the satellite and cooperating in managing its operations.
INTERIM TECHNOLOGY ACCESS AND COORDINATION AGREEMENT. The Company and HCG
have entered into an Interim Technology Access and Coordination Agreement, which
clarifies certain issues regarding the sharing of the technology underlying the
DSS system and sets forth the preliminary agreement on the sharing of
development costs. In addition, DIRECTV, Inc. has primary responsibility for
security of the DSS system and undertakes initiatives to detect signal piracy
and implement countermeasures.
Even though the Company and DIRECTV, Inc. compete for subscriber revenues
from DSS households, there is currently no overlap between USSB programming and
DIRECTV programming. Accordingly, both the Company and DIRECTV, Inc. have a
common interest in promoting awareness of the DSS system, maximizing DSS unit
sales and cooperating in joint marketing efforts to promote the DSS system. See
also "Marketing."
EMPLOYEES
As of June 30, 1997, the Company employed 142 persons. None of the
Company's employees are represented by a union and the Company believes its
employee relations are satisfactory.
In addition, pursuant to an Administrative Services Agreement between the
Company and Hubbard Broadcasting, Inc. ("HBI"), the Company's largest
shareholder, the Company receives services from certain executives of HBI and
also from the tax, payroll, accounts payable, risk management, management
information systems and legal staff of HBI. The Company incurred an aggregate
charge of $996,000 for such services in fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
Stanley S. Hubbard 64 Chairman of the Board
Stanley E. Hubbard 36 Chief Executive Officer and
President
Robert W. Hubbard 32 Executive Vice President
Gerald D. Deeney 73 Treasurer, Chief Financial
Officer and Secretary
Mary Pat Ryan 40 Senior Vice President, Marketing
Bernard J. Weiss 43 Vice President,
Finance and Administration
Raymond A. Conover 47 Vice President, Engineering
Carl S. Wegener 44 Vice President, Dealer Marketing
Robert D. Pacek 54 Vice President, Information Systems
13
<PAGE>
Joseph G. Ducey 38 Vice President, Operations
STANLEY S. HUBBARD is the founder of the Company and serves as its Chairman
of the Board. Mr. Hubbard served as Chief Executive Officer of the Company from
its inception to November 1995. Mr. Hubbard is also the Chairman of the Board,
President and Chief Executive Officer of HBI and divides his professional time
between the Company and HBI and its affiliates. Mr. Hubbard is an executive with
several other entities affiliated with HBI, including Conus Communications
Company Limited Partnership ("Conus"), a satellite news gathering firm. Mr.
Hubbard, a graduate of the University of Minnesota, joined HBI in 1951. He and
his father, the founder of HBI, were co-recipients of the Distinguished Service
Award from the National Association of Broadcasters in 1995. Stanley S. Hubbard
is the father of Stanley E. Hubbard and Robert W. Hubbard. Mr. Hubbard is also
a director of Fingerhut, Inc.
STANLEY E. HUBBARD was elected Chief Executive Officer of the Company in
November 1995. From February 1993 until November 1995, Mr. Hubbard served as
President and Chief Operating Officer of the Company. Prior thereto, he served
as Vice President of the Company. He has been a director of the Company since
1991. Mr. Hubbard has also been a Vice President of HBI for more than five
years and has a broad range of television experience. He holds positions in
other affiliated companies, including director of HBI. Mr. Hubbard is also a
director of First Team Sports, Inc.
ROBERT W. HUBBARD was elected Executive Vice President of the Company in
February 1993 and elected a director of the Company in September 1992. Mr.
Hubbard has a broad range of television experience with various HBI affiliates
and divides his professional time between the Company and HBI and its
affiliates. Mr. Hubbard is also a director of HBI and serves as President of
its television group.
GERALD D. DEENEY was elected Treasurer of the Company in June 1981, Chief
Financial Officer of the Company in September 1995 and Secretary in January
1996. Mr. Deeney has been with HBI for more than thirty-five years and has been
Vice President and Treasurer of HBI for more than twenty-five years. In 1992,
Mr. Deeney was elected a director of HBI.
MARY PAT RYAN joined the Company as Vice President, Marketing in February
1994 and now is Senior Vice President, Marketing. From 1983 to 1993, Ms. Ryan
was at Draft Direct, one of the largest direct marketing agencies in the world,
and served as Executive Vice President and Director of Client Services. At Draft
Direct, Ms. Ryan managed marketing programs for HBO's Cable and Satellite
Divisions, Time Warner Cable, The Sega Channel and American Express Travelers
Cheque Group, and oversaw all administrative, business development and training
functions for client services.
BERNARD J. WEISS joined the Company in January 1994 and has been Vice
President of Finance and Administration of the Company since January 1995. From
April 1990 until January 1994, Mr. Weiss served in various financial and
operating positions at Northwest Airlines. Inc., including Director of Budgets
and Analysis. From June 1986 to 1990, Mr. Weiss served as Vice President and
acting division head of the media and communications division of First Banks.
Mr. Weiss is a Certified Public Accountant.
RAYMOND A. CONOVER has been Vice President of Engineering of the Company
since March 1994. Mr. Conover has held various positions with HBI and its
affiliates since 1972, most recently as Vice President and Director of
Engineering of Conus.
14
<PAGE>
CARL S. WEGENER joined the Company in 1993 as Director of Consumer
Electronics Marketing and was promoted to Vice President, Dealer Marketing, in
December 1994. Mr. Wegener has more than 20 years of experience in the consumer
electronics industry, including positions with RCA and Philips N.V.
ROBERT D. PACEK joined the Company as Vice President, Information Services
in March 1996. From September 1992 to March 1996, Mr. Pacek was Vice President,
Operations, of Advance, Inc., a consulting firm retained by the Company in the
area of information services. Prior thereto, he served as Deputy Director of
Information Services for the United States Navy for three years.
JOSEPH G. DUCEY was appointed Vice President, Operations in July 1996. From
June 1991 to July 1996, he had been employed by HBI and affiliates in a number
of engineering/research positions, including Engineering Program Manager for
Conus and Director of Technical Operations.
ITEM 2. PROPERTIES
The Company utilizes the following facilities:
FACILITY LOCATION SQUARE OWNED OR LEASED
FOOTAGE
Executive Offices St. Paul, Minnesota 15,043 Leased from HBI (a)
National Broadcast Center Oakdale, Minnesota 20,500 Owned
Auxiliary Broadcast Center St. Paul, Minnesota 1,300 Antennas and
equipment are
owned by the
Company; roof
site for
antennas is
leased from
HBI (b)
(a) The lease for the Company's executive offices expires on June 30, 1998.
The Company expects to renew this lease in the ordinary course.
(b) The Auxiliary Broadcast Center lease expires on June 30, 1999 and includes
three five-year renewal options.
The Company believes that its executive offices are adequate for its office
and administrative purposes for the foreseeable future and that its National
Broadcast Center is sufficient for its signal reception, signal processing and
uplinking facilities for the foreseeable future. The Company's telemarketing,
customer service and billing functions are performed for it on a contract basis
by third parties and do not require the use of Company facilities.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to litigation encountered in the normal course of
business. In the opinion of management, the resolution of such litigation
matters of which the Company is aware will not have a material adverse effect on
the Company's financial position, results of operations or cash flows. In
addition, the Company is a party to the following actions:
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 was conducted in July 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.
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<PAGE>
IPPV ENTERPRISES V. THOMSON CONSUMER ELECTRONICS, INC., HUGHES NETWORK
SYSTEMS, SONY CORPORATION OF AMERICA, HITACHI HOME ELECTRONICS
(AMERICA), INC., UNIDEN AMERICA CORPORATION, DIRECTV, INC., AND UNITED
STATES SATELLITE BROADCASTING COMPANY, INC., UNITED STATES DISTRICT
COURT, DISTRICT OF DELAWARE, CASE NO. 97-288.
In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV"), initiated a
legal proceeding in the United States District Court for the District of
Delaware against digital satellite system developers, manufacturers, including,
among others, Hughes Network Systems, Thomson Consumer Electronics and other DSS
manufacturers, DIRECTV, Inc., and the Company.
IPPV alleges that the defendants, including DIRECTV, Inc. and the Company, have
infringed several IPPV patents relating to parental control and pay-per-view
features used in the DSS system. IPPV has requested the court to award IPPV
damages, to treble such damages, and to enjoin the Company and the other
defendants from infringing IPPV's patents.
The Company has denied all material allegations in the complaint. While it is
not possible to estimate the probable outcome of this proceeding at this time,
management believes, based on advice of counsel, that it has valid defenses to
IPPV's claims. The Company does not believe that IPPV is entitled to damages or
any remedies from the Company, and management intends to vigorously defend the
action.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 1997.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Class A Common stock trades on the Nasdaq National Market
under the symbol "USSB." The following table sets forth the high and low
closing sales prices for such stock as reported on the Nasdaq National Market
for each quarter during fiscal 1997:
YEAR ENDED JUNE 30, 1997: LOW HIGH
------------------------ --- ----
First Quarter ended September 30, 1996 $22 $38
Second Quarter ended December 31, 1996 9 3/4 23
Third Quarter ended March 31, 1997 9 3/8 14 1/4
Fourth Quarter ended June 30, 1997 8 1/4 11 3/4
On September 22, 1997, the last reported sale price of the Company's Class
A Common stock was $8.56 per share. At that date, the Company had 675 Class A
Common shareholders of record.
The Company has not paid any cash dividends on its Class A Common stock and
does not intend to pay cash dividends for the foreseeable future. Earnings will
be retained for use in the operation and expansion of the Company's business.
REPORT ON SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM.
Subsequent to the Company's initial public offering, effective January 31,
1996 (Registration No. 33-99906), and pursuant to the requirements of the
Securities Act of 1933, as amended and as then in effect, the Company filed an
initial report on Form SR with the Securities and Exchange Commission on May 10,
1996 and amendments thereto on November 12, 1996 and May 12, 1997.
The following table sets forth the amount of direct or indirect payments
to others from such effective date through June 30, 1997 which have changed
since the most recently filed report on Form SR.
USE OF PROCEEDS DIRECT OR INDIRECT PAYMENTS TO OTHERS
- --------------- -------------------------------------
Purchase and Installation of Machinery
and Equipment $16,101,584
Temporary Investments
Short Term Treasuries $74,000,000
Cash $ 545,461
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Information required by this item is set forth in the Company's 1997 Annual
Report to Shareholders on page 19, under the heading "Selected Financial and
Operating Data," and is incorporated herein by reference.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this item is set forth in the Company's 1997 Annual
Report to Shareholders on pages 20 to 25, under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth in the Company's 1997 Annual
Report to Shareholders on pages 26 to 39, in the consolidated financial
statements and notes, and on page 40, under the heading "Report of Independent
Public Accountants," and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held November 17, 1997, under the heading "Election of Directors" and under
the heading "Compliance with Section 16(a) of the Exchange Act," and is
incorporated herein by reference. Information regarding executive officers of
the Company is contained in Part I, Item 1 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
November 17, 1997, under the heading "Compensation of Directors and Executive
Officers," (except for the information set forth under the subcaptions
"Report of the Compensation Committee" and "Share Investment Performance,"
which subsections are not incorporated herein) and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information required by this item is set forth in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held November 17,
1997, under the heading "Principal Shareholders" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders to be held November 17,
1997, under the heading "Certain Transactions," and is incorporated herein by
reference.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are included in the company's 1997
Annual Report to Shareholders and are incorporated in Part II, Item 8
of this Form 10-K by reference:
Report of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1996, and 1995
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule.
3. EXHIBITS
The following exhibits are filed as part of this Annual Report or,
where indicated, were previously filed and are hereby incorporated by
reference.
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
1.1 Form of Underwriting Agreement (1)
1.2 Form of Subscription Agreement (1)
3.1 Restated Articles of Incorporation (1)
3.2 Bylaws (1)
3.3 Form of Second Restatement of the Articles of Incorporation (1)
3.4 Form of Amended and Restated Bylaws (1)
4.1 Form of Stock Certificate (1)
10.1 United States Satellite Broadcasting Company, Inc. 1995 Stock
Option Plan (1)*
22
<PAGE>
10.2 Sales Agency Agreement, dated December 22, 1993, between Thomson
Consumer Electronics, Inc. and United States Satellite
Broadcasting Company, Inc. (1)**
10.3 United States Satellite Broadcasting Company, Inc. 1996
Non-Employee Director Stock Option Plan (5)*
10.4 Consulting Services Agreement, dated November 1, 1995 between
Conus Communications Company Limited Partnership and United
States Satellite Broadcasting Company, Inc. (2)
10.5 [Intentionally reserved.]
10.6 [Intentionally reserved.]
10.7 [Intentionally reserved.]
10.8 [Intentionally reserved.]
10.9 [Intentionally reserved.]
10.10 Amendment No. 1, effective July 1, 1997, to the Indenture of
Lease dated May 1994, between Hubbard Broadcasting, Inc. and
United States Satellite Broadcasting Company, Inc. (5)
10.11 Service Agreement, dated January 1, 1994 between Conus
Communications Company Limited Partnership and United States
Satellite Broadcasting Company, Inc. (1)
10.12 Indenture of Lease, dated May 1994, between Hubbard Broadcasting,
Inc. and United States Satellite Broadcasting Company, Inc. (1)
10.13 Satellite Payload Purchase Agreement, dated May 31, 1991, between
Hughes Communications Galaxy, Inc. and United States Satellite
Broadcasting Company, Inc., as amended (1)**
10.14 Interim Technology Access and Coordination Agreement, dated June
17, 1993, between Hughes Communications Galaxy, Inc. and United
States Satellite Broadcasting Company, Inc. (1)**
10.15 Transponder Service Agreement, dated May 31, 1991, between Hughes
Communications Satellite Services, Inc. and United States
Satellite Broadcasting Company, Inc. (1)**
10.16 Processing Agreement, dated March 5, 1993, between JCPenney
Business Services, Inc. and United States Satellite Broadcasting
Company, Inc. (1)**
10.17 Auxiliary Broadcast Center Lease (1)
10.18 Form of Subscription Agreement, Letter of Investment Intent and
Investor's Rights Agreement (1)
10.19 Administrative Services Agreement, effective July 1, 1994,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (1)
23
<PAGE>
10.20 Tax Sharing Agreement between United States Satellite
Broadcasting Company, Inc. and Hubbard Broadcasting, Inc. (1)
10.21 6-Channel Direct Broadcast Satellite Contract, originally dated
June 15, 1984, between Lockheed Martin Corporation (formerly RCA
Corporation) and United States Satellite Broadcasting Company,
Inc., as amended (1)**
10.22 Amendment No. 10, dated December 18, 1995, to Direct Broadcast
Satellite Contract between Lockheed Martin Corporation and United
States Satellite Broadcasting Company, Inc. (1)**
10.23 Administrative Services Agreement, effective July 1, 1996,
between United States Satellite Broadcasting Company, Inc. and
Hubbard Broadcasting, Inc. (2)
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. (3)
10.25 Amendment No. 12, effective November 27, 1996 to Direct Broadcast
Satellite Contract between Lockheed Martin Corporation and United
States Satellite Broadcasting Company, Inc. (4)
10.26 Amendment No. 13, effective December 31, 1996, to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc. (4)
10.27 Contract No. 104274-B, effective December 31, 1996, Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc. (4) ***
10.28 Amendment No. 1, effective April 11, 1997, to Direct Broadcast
Satellite Contract between United States Satellite Broadcasting
Company, Inc. and Lockheed Martin Corporation (5) ****
10.29 Amendment No. 2, effective April 30, 1997, to Direct Broadcast
Satellite Contract between United States Satellite Broadcasting
Company, Inc. and Lockheed Martin Corporation (5) ****
10.30 Amendment No. 3, effective June 1, 1997, to Direct Broadcast
Satellite Contract between United States Satellite Broadcasting
Company, Inc. and Lockheed Martin Corporation (5) ****
13.1 Selected Portions of the Company's 1997 Annual Report to
Shareholders (5)
21.1 Subsidiaries of the Company (5)
23.1 Consent of Arthur Andersen LLP (5)
27.1 Financial Data Schedule (5)
______
* Denotes management contract or compensatory plan or arrangement in which
certain directors and named executive officers participate.
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<PAGE>
** Portions of these documents were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company for
confidential treatment pursuant to Rule 406 under the Securities Act of
1933, as amended, in connection with the filing of the Registration
Statement described in note (1) below.
*** Portions of this document were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended, in connection with the filing of the Company's
Report on Form 10-Q described in note (4) below.
**** Portions of this document were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company for
confidential treatment pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended, in connection with the filing of this Report on
Form 10-K.
(1) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Registration Statement on Form S-1, File No. 33-99906.
(2) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-K for the fiscal year ended June 30, 1996.
(3) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-Q for the quarter ended September 30, 1996.
(4) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-Q for the quarter ended December 31, 1996.
(5) Filed herewith.
(b) REPORTS ON FORM 8-K
None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 26, 1997 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------------
Stanley E. Hubbard
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Stanley S. Hubbard Chairman of the Board September 4, 1997
- --------------------------
Stanley S. Hubbard
/s/ Stanley E. Hubbard Chief Executive Officer, September 22, 1997
- -------------------------- President, and Director
Stanley E. Hubbard (Principal Executive Officer)
/s/ Robert W. Hubbard Executive Vice President and September 22, 1997
- -------------------------- Director
Robert W. Hubbard
/s/ Gerald D. Deeney Treasurer and Chief Financial September 22, 1997
- -------------------------- Officer (Principal Financial
Gerald D. Deeney and Accounting Officer)
/s/ Herbert S. Schlosser Director September 22, 1997
- --------------------------
Herbert S. Schlosser
/s/ David S. Allen Director September 22, 1997
- --------------------------
David S. Allen
/s/ Frank N. Magid Director September 22, 1997
- --------------------------
Frank N. Magid
/s/ Peter G. Skinner Director September 22, 1997
- --------------------------
Peter G. Skinner
/s/ William D. Savoy Director September 22, 1997
- --------------------------
William D. Savoy
/s/ John W. Marvin Director September 22, 1997
- --------------------------
John W. Marvin
26
<PAGE>
/s/ Ward L. Quaal Director September 22, 1997
- --------------------------
Ward L. Quaal
Director September __, 1997
- --------------------------
Kenneth G. Langone
/s/ Louis G. Zachary, Jr. Director September 22, 1997
- --------------------------
Louis G. Zachary, Jr.
/s/ Peter F. Frenzer Director September 22, 1997
- --------------------------
Peter F. Frenzer
27
<PAGE>
Exhibit 10.3
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
1996 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
1. PURPOSE OF PLAN
This Plan shall be known as the "United States Satellite Broadcasting
Company, Inc. 1996 Non-Employee Director Stock Option Plan" and is hereinafter
referred to as the "Plan." The purposes of the Plan are to attract and retain
the best available personnel for service as directors of United States Satellite
Broadcasting Company, Inc. (the "Company") and to provide additional incentive
to the non-employee directors to continue to serve on the Board of Directors by
affording them an opportunity to acquire a proprietary interest in the Company.
It is intended that these purposes be effected through the granting of stock
options as provided herein.
2. STOCK SUBJECT TO PLAN
The stock to be subject to options under the Plan shall be shares of the
Company's authorized Class A Common Stock, par value of $.0001 per share (the
"Shares"). Subject to the adjustment as provided in Section 12 hereof, the
maximum number of Shares for which options may be exercised under this Plan
shall be 150,000 Shares. Any Shares subject to an option under the Plan which,
for any reason, expires or is terminated unexercised as to such Shares, shall be
available for options thereafter granted during the term of the Plan and may be
again subjected to an option under the Plan.
3. ADMINISTRATION OF PLAN
The Plan shall be effective as of November 20, 1996, according to the terms
and conditions herein, and subject to subsequent approval by the shareholders of
the Company. The Plan shall be administered by the Board of Directors of the
Company (the "Board"). The Board may authorize the Compensation Committee
thereof, consisting of at least three (3) members appointed by the Board (the
"Committee"), to exercise the powers conferred on the Board under the Plan,
other than the power under Section 13 hereof to amend or terminate the Plan and
the power to grant Initial Options (as hereinafter defined).
The interpretation and construction by the Board or Committee of any
provisions of the Plan or of any option granted hereunder shall be final. No
member of the Board or Committee shall be liable for any action or determination
made in good faith with respect to the Plan or any option granted hereunder.
4. ELIGIBILITY AND GRANT
(a) Each member of the Board who satisfies all of the following criteria
shall automatically be a participant (a "Participant") in the Plan:
(i) Such member is not, and has not during the immediately preceding
12-month period been, an employee of the Company or any subsidiary of the
Company; and
(ii) Such member does not hold any options to purchase Shares of the
Company, except for stock options previously granted pursuant to the Plan.
<PAGE>
Subject to Section 15 hereof, on the first day following the Company's
Annual Meeting of Shareholders, provided that the Participant is a director of
the Company on such date (the "Date of Grant"), each Participant is hereby
granted options to purchase 1,000 Shares.
(b) Any person who is not a director on the effective date of the Plan and
is otherwise qualified to receive an option pursuant to Section 4(a) may be
granted options upon initial election or appointment to the Board ("Initial
Options"), in addition to the options granted pursuant to Section 4(a) hereof.
Initial Options may be granted in such amounts, and with such terms and
conditions, as may be approved by the Company's Board of Directors, upon
recommendation thereto by the Company's Nominating Committee after consultation
with the Chair of the Company's Compensation Committee; provided, however, that
the terms of Initial Options shall be subject to Sections 3 and 6-15 hereof.
5. EXERCISABILITY AND VESTING
Unless otherwise provided herein, the options granted to a Participant
shall immediately vest and be exercisable on the Date of Grant.
6. PRICE AND PAYMENT
The option price for all options granted under the Plan shall be 100% of
the fair market value of the Shares at the Date of Grant of such option. The
"Fair Market Value" on a specified date shall mean the average of the bid and
asked prices or the closing price, whichever is appropriate, at which a Share is
traded on The Nasdaq Stock Market's National Market, or the closing price for a
Share on the stock exchange, if any, on which Shares are primarily traded, but
if no Shares were traded on such dates, then on the last previous date on which
a Share was so traded or, if none of the above is applicable, the value of a
Share as established by the Board for such date using any reasonable method of
valuation. The option price shall be payable at the time written notice of
exercise is given to the Company. Payment for Shares issued upon exercise of an
option may consist of cash, check, exchange of shares (by tendering to the
Company shares previously owned by the Participant which have a Fair Market
Value on the date of exercise equal to the option price), or a combination
thereof.
7. TERM
Each option and all rights and obligations thereunder shall, subject to the
provisions of Section 9 hereof, expire on that date which is ten (10) years from
the Date of Grant of such option. Each option shall be evidenced by a stock
option agreement between the Company and the Participant to whom the option is
granted.
8. EXERCISE OF OPTION
(a) The exercise of any option and the sale of the Shares obtained thereby
shall be done only in compliance with applicable securities laws.
(b) The exercise of any option granted hereunder shall only be effective
at such time as counsel to the Company shall have determined that the issuance
and delivery of Shares pursuant to such exercise will not violate any state or
federal securities or other laws. The Company may, in its sole discretion,
defer the effectiveness of any option exercised hereunder in order to permit
registration or an exemption from registration for such issuance of Shares for
the purpose of compliance with applicable federal and state securities laws.
2
<PAGE>
(c) A Participant electing to exercise an option shall give written notice
to the Company of such election and of the number of Shares subject to such
exercise. The full purchase price of such Shares shall be tendered with such
notice of exercise. Until such person has been issued a certificate or
certificates for the Shares subject to such exercise, he or she shall possess no
rights as a shareholder with respect to such Shares.
9. EARLY TERMINATION OF OPTION
(a) If a Participant ceases to be a director of the Company, the option
may, within 90 days after such Participant's death or termination as a director,
be exercised to the extent that such Participant was entitled to exercise such
option on the date of his or her death or termination, by the Participant or the
person or persons to whom such Participant's rights under the option shall pass
by will or by the applicable laws of descent and distribution, his or her
personal representative, or his or her permitted transferee (as provided in
Section 11 hereof), as may be appropriate, but in no case after the expiration
of the applicable term of the option.
(b) Nothing in the Plan or in any agreement hereunder shall confer on any
Participant any right to continue as a director of the Company or affect, in any
way, the right of the Company to terminate his or her service as a director at
any time.
10. SUSPENSION OR TERMINATION OF OPTIONS
No option shall be exercisable by any person after the expiration of ten
(10) years from the Date of Grant of such option. If the Chief Executive
Officer of the Company or his or her designee reasonably believes that a
Participant has committed an act of misconduct (as set forth below), the Chief
Executive Officer may suspend the Participant's right to exercise any option
pending a determination by the Board (excluding the Director accused of such
misconduct). If the Board (excluding the Director accused of such misconduct)
determines that the Participant has committed an act of embezzlement, fraud,
dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary
duty or deliberate disregard of Company rules or policies resulting in loss,
damage or injury to the Company, or if a Participant makes an unauthorized
disclosure of any Company trade secret or confidential information, engages in
any conduct constituting unfair competition, induces any Company customer to
breach a contract with the Company, or induces any principal for whom the
Company acts as agent to terminate such agency relationship, neither the
Participant nor his or her estate shall be entitled to exercise any option
whatsoever. In making such a determination, the Board (excluding the Director
accused of such misconduct) shall give the Participant an opportunity to appear
and present evidence on the Participant's behalf at a hearing before the Board.
11. NON-TRANSFERABILITY
No option granted under the Plan shall be transferable by a Participant,
other than (a) by will or the laws of descent and distribution, (b) pursuant to
a qualified domestic relations order as defined by the Internal Revenue Code of
1986, as amended, or Title I of the Employee Retirement Income Security Act or
the rules thereunder, or (c) to the corporate employer of the Participant.
During the lifetime of a Participant, the option shall be exercisable only by
such Participant or a permitted transferee.
12. DILUTION OR OTHER ADJUSTMENTS
If there shall be any change in the Shares of the Company through merger,
consolidation, reorganization, recapitalization, stock dividend (of whatever
amount), stock split or other change in
3
<PAGE>
the corporate structure, appropriate adjustments in the Plan and outstanding
options shall be made by the Board. In the event of any such changes,
adjustments shall include, where appropriate, changes in the aggregate number of
Shares subject to the Plan and in the number of Shares and the price per Share
subject to outstanding options, in order to prevent dilution or enlargement of
option rights.
13. AMENDMENT OR DISCONTINUANCE OF PLAN
The Board may amend or discontinue the Plan at any time. No amendment of
the Plan shall, without shareholder approval: (i) change the eligibility
requirements or the limits on options in Section 3 hereof; (ii) decrease the
minimum option price provided in Section 6 hereof; (iii) extend the maximum
option term under Section 7 hereof; or (iv) materially increase the benefits
which may accrue to participants under the Plan. Except as provided in Section
10 hereof, the Board shall not alter or impair any option theretofore granted
under the Plan without the consent of the holder of the option.
14. TERMINATION OF PLAN
Unless the Plan shall have been discontinued as provided in Section 13
hereof, the Plan shall terminate on November 1, 2001. No option may be granted
after such date, but termination of the Plan shall not, without the consent of
the Optionee, alter or impair any rights or obligations under any option
theretofore granted.
15. SHAREHOLDER APPROVAL
The Plan shall be null and void, and each option granted hereunder shall be
null and void, if the shareholders of the Company shall not have approved the
Plan prior to November 19, 1997.
4
<PAGE>
Exhibit 10.10
AMENDMENT NO. 1
TO
INDENTURE OF LEASE
THIS AMENDMENT NO. 1 TO INDENTURE OF LEASE, entered into effective July
1, 1997, between HUBBARD BROADCASTING, INC., a Minnesota corporation, 3415
University Avenue, St. Paul, Minnesota 55114 ("Lessor"), and UNITED STATES
SATELLITE BROADCASTING COMPANY, INC., a Minnesota corporation, 3415
University Avenue, St. Paul, Minnesota 55114 ("Tenant"), amends that certain
Indenture of Lease between Lessor and Tenant dated May 1994 (the "Lease").
For good and valuable consideration, the Lease is hereby amended as
follows:
1. PREMISES. The description of the premises on page 1, paragraph 3 is
amended by deleting the typewritten language commencing with the word "All"
through the word "Premises," and inserting in lieu thereof the following:
PREMISES
"Those parts of the Hubbard Building and the Link Building
located at 3415 University Avenue, St. Paul, Minnesota, more
particularly described under the heading "Leased Premises" in
EXHIBIT A attached hereto and made a part hereof (the "Leased
Premises").
2. OPTION. Lessor grants Tenant an option to lease the following
premises:
OPTION PREMISES
"That part of the Conus Building located at 3415 University Avenue, St.
Paul, Minnesota, or a discrete part thereof, more particularly described
under the heading "Option Premises" in EXHIBIT A attached hereto and
made a part hereof (the "Option Premises").
3. EXHIBITS. EXHIBIT A and EXHIBIT B (marked "Rev. 7/97") as attached
to this Amendment No. 1 are hereby inserted in lieu of the Exhibit A and
Exhibit B which are attached to the Lease.
1
<PAGE>
4. EXERCISE OF OPTION. Tenant may exercise its option to lease the
Option Premises by giving notice to Lessor, (which shall specify whether
Tenant intends to lease all or a discrete portion of the Option Premises) and
the date Tenant desires to take possession. Lessor shall make the Option
Premises available to Tenant promptly after receipt of notice, but shall not
be obligated to make the Option Premises available to Tenant less than thirty
(30) days after the date of notice. Rent shall be prorated for any month of
partial occupancy of the Option Premises.
5. TERM. The term of the Lease for the Premises, and any part of the
Option Premises leased by Tenant, set forth on page 1, paragraph 4,
commencing in line 4, is amended by deleting the typewritten language
commencing with the numerals "1994" through the numerals "1997," and
inserting in lieu thereof:
"Three (3) years commencing July 1, 1997, and terminating June
30, 2000"
6. RENT.
(a) The rent as set forth on Schedule 1 to the Lease is amended by
deleting the language in the four (4) columns and inserting the following in
lieu thereof:
MONTHLY MONTHLY
INSTALLMENT INSTALLMENT
RENT PER OF RENT ON ANNUAL RENT OF RENT ON ANNUAL RENT
SQUARE LEASED ON LEASED OPTION ON OPTION
PERIOD FOOT PREMISES PREMISES PREMISES PREMISES
- --------------------------------------------------------------------------------
7/1/97 - $12.50 $15,669.79 $188,037.50 $2,121.88 $25,462.50
6/30/98
- --------------------------------------------------------------------------------
7/1/98 - $14.40 $18,051.60 $216,619.00 $2,444.40 $29,332.80
6/30/99
- --------------------------------------------------------------------------------
7/1/99 - $15.50 $19,430.54 $233,166.00 $2,631.13 $31,573.50
6/30/00
- --------------------------------------------------------------------------------
(b) RENT PRORATED. If Tenant takes less than the whole of the Option
Premises, the rental for such space shall be prorated based on the number of
square feet in the portion of the Option Premises occupied by Tenant.
2
<PAGE>
7. OPTION TO TERMINATE LEASE. Either party may terminate this Lease
upon twelve (12) months advance written notice, such termination to be
effective at the expiration of such twelve (12) month period.
8. OTHER TERMS UNCHANGED. Except as provided above, all other terms and
conditions of the Lease remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 as of
the date first above written.
HUBBARD BROADCASTING, INC.
By: /s/ Robert W. Hubbard
-----------------------------------------------
Its: Vice President
-----------------------------------------------
UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Bernard J. Weiss
-----------------------------------------------
Its: Vice President
-----------------------------------------------
3
<PAGE>
ACKNOWLEDGMENT BY LESSOR
State of Minnesota ) ss.
County of Ramsey )
The foregoing instrument was acknowledged before me this 24th day of
September, 1997, by Robert W. Hubbard, the Vice President of HUBBARD
BROADCASTING, INC., a Minnesota corporation, on behalf of the corporation.
/s/ Kristin D. Shuldes
-------------------------------------------------
Notary Public
ACKNOWLEDGMENT BY TENANT
State of Minnesota ) ss.
County of Ramsey )
The foregoing instrument was acknowledged before me this 24th day of
September, 1997, by Bernard J. Weiss, the Vice President of UNITED STATES
SATELLITE BROADCASTING COMPANY, INC., a Minnesota corporation, on behalf of
the corporation.
/s/ Kristin D. Shuldes
--------------------------------------------------
Notary Public
4
<PAGE>
AMENDMENT NO. 1
CONTRACT NO. 104274-B
DIRECT BROADCAST SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT NO. 1 is effective April 11, 1997
----------------
WHEREAS, USSB and the Contractor (hereinafter referred to as the "Parties"),
recognizing that certain clarifications and corrections are required in the
Terms and Conditions of the Contract;
NOW THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, agree to the following:
I. In Contract Terms and Conditions, Article 5.B Payment Milestone Table,
change Milestone Numbers 1 and 2 as follows:
MILESTONE (MONTHS VALUE
NUMBER MILESTONE DESCRIPTION AFTER EDC) ($US)
1 Structure Subcontract Issued 4.0
2 System PDR Held 7.5
II. In Contract Terms and Conditions, Article 5.C., change the electronics
funds transfer address to:
Citibank New York
399 Park Ave.
New York, New York 10043
ABA #021000089
Acct #38469306
Corp. ID #95-2693884
III. In Contract Terms and Conditions, Article 26., change the Contractor
point of contact as follows:
Attention: Wm. W. Whisenant
Telephone: 408-543-3420
Facsimile: 408-543-3404
E-Mail [email protected]
<PAGE>
IV. Except as specifically set forth above the Contract referenced above shall
remain in full force and effect in accordance with the terms and conditions
as originally written and such terms and conditions shall not be affected
or modified by this Amendment No. 1.
IN WITNESS THEREOF, the Parties have caused this Amendment No. 1 to be signed by
their duly authorized officer or representative.
United States Satellite Broadcasting Lockheed Martin Corporation
Company, Inc.
(Signature on File) (Signature on File)
By: By:
---------------------------- ------------------------------------
Robert W. Hubbard Wm. W. Whisenant
Executive Vice President Contracts Manager
Lockheed Martin Telecommunications
<PAGE>
AMENDMENT NO. 2
CONTRACT NO. 104274-B
DIRECT BROADCAST SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT NO. 2 is effective April 30, 1997
----------------
WHEREAS, USSB and the Contractor (hereinafter referred to as the "Parties"),
have executed a Letter of Agreement dated April 30, 1997 to extend, for a period
of thirty 30 days beginning in May, 1997, all Delivery Dates and Progress and
Milestones and;
WHEREAS the Parties, recognizing that changes are required in the Contract, have
created this Amendment No. 2;
NOW THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, agree to the following:
I. In the Terms and Conditions of the subject Contract:
A. In Article 3.B, Price, change the Price for Item 1 and the Total
Contract Price as follows:
ITEM QTY. DESCRIPTION PRICE
1. 1 Spacecraft as defined in Exhibit A
2. 1 Lot Launch and Mission Operation Services
as defined in Exhibit B
3. 1 Lot On-Orbit Flight Operations Services
4. 1 Lot Data and Documentation as defined
in Exhibit B, Table 1
5. -- In-Orbit Incentive Payments
TOTAL CONTRACT PRICE:
*(not separately priced)
<PAGE>
B. In Article 4.A, Deliverable Items and Delivery Schedule, change the
Delivery Date as follows:
ITEM DESCRIPTION DELIVERY DATE
1. Spacecraft Twenty-six and one-half (26.5)
months after EDC.
C. In Article 5.A, Progress and Milestone Payments, change the Progress
Payment Plan as follows:
PROGRESS PAYMENT PLAN
PAYMENT NUMBER MONTHLY TOTAL CUMULATIVE TOTAL
DATE ($ IN U.S. MILLIONS) ($ IN U.S. MILLIONS)
1 12/31/96
2 January - '97
3 February
4 March
5 April
6 May
7 June
8 July
9 August
10 September
11 October
12 November
13 December
14 January - '98
15 February
16 March
17 April
18 May
19 June
20 July
21 August
22 September
23 October
24 November
25 December
D. In Article 5.B, Progress and Milestone Payments, change the Payment
Milestone Table as follows:
2
<PAGE>
PAYMENT MILESTONE TABLE
DUE DATE
MILESTONE (MONTHS VALUE
NUMBER MILESTONE DESCRIPTION AFTER EDC) ($US)
1 Structure Subcontract Issued 4.0
2 System PDR Held 8.5
3 Provide Launch Vehicle services contractor 11.0
with Spacecraft Preliminary Dynamic Model
4 System Critical Design Review Held 13.5
5 90% of System CDR Action Items Completed 14.5
6 Spacecraft Structure Received
(core module/payload panels) 16.0
7 Spacecraft TWTAs Received 16.5
8 Spacecraft Antenna Tests Complete 19.0
9 Satisfactory Completion of Pre-Shipment Review 25.0
E. In Article 9.A.1, Options for Backup Spacecraft, change the Option
Exercise Date and Delivery Date as follows:
<TABLE>
<CAPTION>
PRODUCT OPTION EXERCISE DELIVERY
QUANTITY DESCRIPTION DATE PRICE($) DATE
<S> <C> <C> <C> <C>
1 backup spacecraft No Later Than 7 TBD 6 Months After
("Backup Spacecraft") Months After EDC Delivery of the
identical to the Spacecraft Spacecraft
specified in Article 2,
paragraph B
</TABLE>
F. In Article 15.A, USSB's Right to Terminate, change the Termination
Schedule as follows:
TERMINATION SCHEDULE
DATE MONTHLY TOTAL CUMULATIVE TOTAL
($ IN US MILLIONS)L ($ IN US MILLIONS)
January 31-1997
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
3
<PAGE>
January 31-1998
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
January 31-1999
G. In Article 17.C, Taxes and Duties, the second sentence is changed as
follows:
Portions of the Work may include some imported goods. Notwithstanding
the above, in the event any portion of the Work and its included
imported goods are not exported in a timely manner (not more than
three (3) years and one (1) month after EDC) due to USSB's actions or
in actions, any duties, taxes, and penalties arising therefrom will be
USSB's responsibility.
H. In Article 19.A.(1), Termination for Default, change as follows:
(1) final acceptance of the Spacecraft fails to occur on or before a
date that permits the Spacecraft to be launched within the launch
period established by the Launch Vehicle services contractor's launch
manifest, which date shall in no event be earlier than twenty-seven
(27) months after ARO;
I. In Article 19.B, Termination for Default, the first sentence is
changed as follows:
With respect to paragraph A.(1) of this Article 19, USSB agrees to use
commercially reasonable efforts to establish the first day of the
launch period for the Launch Vehicle at twenty-seven (27) months after
ARO.
II. In Exhibit B, USSB-1 Statement of Work, Document No. WS20072997 Revision
New, dated 12/31/96:
A. In Paragraph 3.1, Deliverable Data and Documentation, change Table 1
as follows:
TABLE 1. CONTRACTOR DATA REQUIREMENTS LIST
- --------------------------------------------------------------------------------
ITEM REVIEW, WORK
NO. DESCRIPTION APPROVAL, DUE DATE STATEMENT
INFORMATION SECTION
- --------------------------------------------------------------------------------
A PROGRAM MANAGEMENT CDRLS
6. Storage and Transportation Plan R 7 months EDC 10.1
- --------------------------------------------------------------------------------
4
<PAGE>
B. Paragraph 3.2.1, Hardware, the second sentence is changed as follows:
The Spacecraft shall be made available to ship January, 1999.
C. Paragraph 3.3, Summary Delivery Schedule, change Table 2 as follows:
TABLE 2. USSB-1 SUMMARY DELIVERY SCHEDULE
------------------------------------------------------
NO. MILESTONE DATE
------------------------------------------------------
1. Spacecraft Preliminary Design Review 8/19/97
2. Spacecraft Critical Design Review 2/17/98
3. TRAINING TBD
4. Pre-Shipment Review 1/19/99
5. Spacecraft Available to Ship 1/31/99
6. Launch Readiness Review TBD
7. Launch TBD
8. In Orbit Test TBD
------------------------------------------------------
D. Paragraph 3.4.1, Buyer Furnished Data, change as follows:
1. Payload frequency plan Date: July 1, 1997
2. Antenna coverage plan Date: July 1, 1997
E. Paragraph 11.0, Launch Vehicle and Site Interfaces, the second
paragraph is changed as follows:
a) The Buyer shall select a Launch Vehicle which complies with the
interface specifications by
June 16, 1997.
b) [No change]
c) The Buyer shall provide the preliminary Coupled Loads Analysis
(CLA) results by June 16, 1997.
d) [No change]
e) The Buyer shall provide the final CLA results by 19 months ARO.
f) The Buyer shall provide all separation hardware and the flight
adapter for a fit check and separation shock test to be delivered
to the Contractor's plant no later than 19 months ARO. The Buyer
shall provide the necessary launch agency support for conducting
these tests.
g) [No change]
h) [No change]
i) [No change]
IV. Except as specifically set forth above the Contract referenced above shall
remain in full force and effect in accordance with the terms and conditions as
originally written and such terms and conditions shall not be affected or
modified by this Amendment No. 2.
5
<PAGE>
IN WITNESS THEREOF, the Parties have caused this Amendment No. 2 to be signed by
their duly authorized officer or representative.
United States Satellite Broadcasting Lockheed Martin
Company, Inc. Corporation
(Signature on File) (Signature on File)
By: By:
------------------------------ ----------------------------------
Robert W. Hubbard Wm. W. Whisenant
Executive Vice President Contracts Manager
Lockheed Martin Telecommunications
6
<PAGE>
AMENDMENT NO. 3
CONTRACT NO. 104274-B
DIRECT BROADCAST SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT NO. is effective June 1, 1997.
--------------
WHEREAS, USSB and the Contractor (hereinafter referred to as the "Parties"),
have agreed to suspend all program activities for the period effective July 1,
1997 through January 5, 1998 and;
WHEREAS the Parties, recognizing that changes are required in the Contract, have
created this Amendment No. 3;
NOW THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, agree to the following:
I. In the Terms and Conditions of the subject Contract:
A. In Article 2, Scope of Work, change Exhibit list as follows:
Exhibit A Spacecraft Performance Specification PS20072996, dated
31 December 1996
Exhibit B Statement of Work WS20072997, dated 31 December 1996
Exhibit C Comprehensive Test Plan LMMS 20072728, dated 31
December 1996
Exhibit D Product Assurance Plan LMMS 20072732, Rev. C.
B. In Article 3.B, Price, change the Price for Item 1 and the Total
Contract Price as follows:
ITEM QTY. DESCRIPTION PRICE
1. 1 Spacecraft as defined in Exhibit A
2. 1 Lot Launch and Mission Operation Services
as defined in Exhibit B
3. 1 Lot On-Orbit Flight Operations Services
4. 1 Lot Data and Documentation as defined in
Exhibit B, Table 1
<PAGE>
5. -- In-Orbit Incentive Payments
TOTAL CONTRACT PRICE:
*(not separately priced)
C. In Article 4.A, Deliverable Items and Delivery Schedule, change the
Delivery Date as follows:
ITEM DESCRIPTION DELIVERY DATE
1. Spacecraft Thirty-two and one-half (32.5)
months after EDC.
D. In Article 5.A, Progress and Milestone Payments, change the Progress
Payment Plan as follows:
PROGRESS PAYMENT PLAN
PAYMENT NUMBER MONTHLY TOTAL CUMULATIVE TOTAL
DATE ($ IN U.S. MILLIONS) ($ IN U.S. MILLIONS)
1 12/31/96
2 January - '97
3 February
4 March
5 April
6 May
7 June
8 July
9 August
10 September
11 October
12 November
13 December
14 January - 1998
15 February
16 March
17 April
18 May
19 June
20 July
21 August
22 September
23 October
24 November
25 December
26 January - 1999
27 February
28 March
2
<PAGE>
29 April
30 May
31 June
32 July
33 Aug
E. In Article 5.B, Progress and Milestone Payments, change the Payment
Milestone Table as follows:
PAYMENT MILESTONE TABLE
DUE DATE
MILESTONE (MONTHS VALUE
NUMBER MILESTONE DESCRIPTION AFTER EDC) ($US)
1 System PDR Held 14.5
2 Structure Subcontract Issued 16.0
3 Provide Launch Vehicle services 17.0
contractor with Spacecraft Preliminary
Dynamic Model
4 System Critical Design Review Held 21.0
5 90% of System CDR Action Items Completed 22.0
6 Spacecraft Structure Received 23.0
(core module/payload panels)
7 Spacecraft TWTAs Received 23.5
8 Spacecraft Antenna Tests Complete 27.0
9 Satisfactory Completion of Pre-Shipment Review 32.0
F. In Article 9.A.1, Options for Backup Spacecraft, change the Option
Exercise Date and Delivery Date as follows:
PRODUCT OPTION EXERCISE DELIVERY
QUANTITY DESCRIPTION DATE PRICE($) DATE
1 backup spacecraft No Later Than 13 6 Months After
("Backup Spacecraft") Months After EDC Delivery of the
identical to the Spacecraft
Spacecraft specified
in Article 2,
paragraph B
G. In Article 10.A, Price Reduction for Late Delivery, change the first
sentence as follows:
In the event that the Spacecraft is not delivered within thirty (30)
days after the date of delivery specified in Article 4 of this
Contract, as extended by the number of days of excusable delay to
which the Contractor is entitled in accordance with Article 18, the
Total Contract Price of this Contract shall be reduced at the rate of
U.S. _________ for each week's delay from week one (1) up to week
thirteen (13) and by U.S. _________ for each week's delay from week
fourteen (14) to week twenty-eight (28) or until the maximum amount of
U.S. _________ of cumulative liquidated damages is reached.
3
<PAGE>
H. In Article 15.A, USSB's Right to Terminate, change the Termination
Schedule as follows:
TERMINATION SCHEDULE
MONTHLY TOTAL CUMULATIVE TOTAL
DATE ($ IN US MILLIONS) ($ IN US MILLIONS)
January 31-1997
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
January 31-1998
February 28
March 31
April 30
May 31
June 30
July 31
August 31
September 30
October 31
November 30
December 31
January 31-1999
February 28
March 31
April 30
May 31
June 30
July 31
August 31
I. In Article 17.C, Taxes and Duties, the second sentence is changed as
follows:
Portions of the Work may include some imported goods. Notwithstanding the
above, in the event any portion of the Work and its included imported
goods are not exported in a timely manner (not more than three (3) years
and seven (7) month after EDC) due to USSB's actions or in actions, any
duties, taxes, and penalties arising therefrom will be USSB's
responsibility.
4
<PAGE>
J. In Article 19.A.(1), Termination for Default, change as follows:
(1) final acceptance of the Spacecraft fails to occur on or before a
date that permits the Spacecraft to be launched within the launch
period established by the Launch Vehicle services contractor's launch
manifest, which date shall in no event be earlier than thirty-three
(33) months after ARO;
K. In Article 19.B, Termination for Default, the first sentence is
changed as follows:
With respect to paragraph A.(1) of this Article 19, USSB agrees to use
commercially reasonable efforts to establish the first day of the
launch period for the Launch Vehicle at thirty-three (33) months after
ARO.
L. In Article 36.B, Launch Vehicle Designation, change the second
sentence as follows:
USSB shall notify Contractor in writing of USSB's Launch Vehicle
designation no later than twelve and one-half (12.5) months after EDC.
II. In Exhibit B, USSB-1 Statement of Work, Document No. WS20072997, dated
12/31/96:
A. In Paragraph 1.0, Scope, change the second sentence as follows:
The Spacecraft shall be manufactured and tested in accordance with
Exhibits C (USSB Comprehensive Test Plan LMMS 20072728) and D (Product
Assurance Plan LMMS 20072732, Rev. C); and shipped to the designated
launch site in accordance with the Contract.
B. In Paragraph 2.0, Applicable Documents, change the list as follows:
Exhibit A
PS20072996 USSB-1 Spacecraft Performance Specification, dated 31
December 1996
Exhibit C
LMMS 20072728 USSB Comprehensive Test Plan, dated 31 December 1996
Exhibit D
LMMS 20072732 Product Assurance Plan
Rev. C
C. In Paragraph 3.1, Deliverable Data and Documentation, change Table 1
as follows:
5
<PAGE>
TABLE 1. CONTRACTOR DATA REQUIREMENTS LIST
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ITEM REVIEW, WORK
NO. DESCRIPTION APPROVAL, DUE DATE STATEMENT
INFORMATION SECTION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A PROGRAM MANAGEMENT CDRLs
1. Quarterly Program Management R Beginning in January 1998, the 10th of each 3.1.2
Report month following completion of a quarter
2. Monthly Status Report R Beginning in January 1998, the 10th of each following month 3.1.2
6. Storage and Transportation Plan R 13 months EDC 10.1
B PRODUCT ASSURANCE CDRLs
9. Program Approved Parts List R Preliminary at SPDR - Final at SCDR 7.3
</TABLE>
D. Paragraph 3.2.1, Hardware, the second sentence is changed as follows:
The Spacecraft shall be made available to ship August, 1999.
E. Paragraph 3.3, Summary Delivery Schedule, change Table 2 as follows:
TABLE 2. USSB-1 SUMMARY DELIVERY SCHEDULE
----------------------------------------------------
NO. MILESTONE DATE
----------------------------------------------------
1. Spacecraft Preliminary Design Review 2/26/98
2. Spacecraft Critical Design Review 9/30/98
3. TRAINING TBD
4. Pre-Shipment Review 8/3/99
5. Spacecraft Available to Ship 8/15/99
6. Launch Readiness Review TBD
7. Launch TBD
8. In Orbit Test TBD
---------------------------------------------------
F. Paragraph 3.4.1, Buyer Furnished Data, change as follows:
6
<PAGE>
1. Payload frequency plan Date: January 15, 1998
2. Antenna coverage plan Date: January 15, 1998
G. Paragraph 11.0, Launch Vehicle and Site Interfaces, the second
paragraph is changed as follows:
a) The Buyer shall select a Launch Vehicle which complies with the
interface specifications by January 15, 1998.
b) [No change]
c) The Buyer shall provide the preliminary Coupled Loads Analysis
(CLA) results by January 15, 1998.
d) [No change]
e) The Buyer shall provide the final CLA results by 25 months ARO.
f) The Buyer shall provide all separation hardware and the flight
adapter for a fit check and separation shock test to be delivered
to the Contractor's plant no later than 25 months ARO. The Buyer
shall provide the necessary launch agency support for conducting
these tests.
g) [No change]
h) [No change]
i) [No change]
IV. Except as specifically set forth above the Contract referenced above shall
remain in full force and effect in accordance with the terms and conditions as
originally written and such terms and conditions shall not be affected or
modified by this Amendment No. 3.
IN WITNESS THEREOF, the Parties have caused this Amendment No. 3 to be signed by
their duly authorized officer or representative.
United States Satellite Broadcasting Lockheed Martin
Company, Inc. Corporation
(Signature on file) (Signature on file)
By: By:
------------------------ ----------------------------
Robert W. Hubbard Wm. W. Whisenant
Executive Vice President Contracts Manager
Lockheed Martin
Telecommunications
7
<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
For the Years Ended June 30
(In thousands, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $384,815 $191,997 $42,337 $ -- $ --
Cost of sales 250,781 127,183 27,868 -- --
- ---------------------------------------------------------------------------------------------
Gross margin 134,034 64,814 14,469 -- --
Operating expenses:
Selling and marketing 104,437 80,971 37,542 2,495 119
Manufacturer incentive 42,354 -- -- -- --
Depreciation and amortization 18,510 20,940 23,340 7,723 6
General and administrative 43,965 20,645 13,623 6,158 2,176
Engineering and operations 11,882 5,925 3,584 1,497 159
Commissions to retailers 14,507 11,254 2,923 -- --
Management fees (a) -- 6,667 -- -- --
- ---------------------------------------------------------------------------------------------
Net operating loss (101,621) (81,588) (66,543) (17,873) (2,460)
Other (income) expense:
Interest expense -- 7,284 8,567 4,585 1,574
Interest (income) (5,285) (4,291) (1,552) (566) --
Cost to terminate Credit Agreement -- 9,504 -- -- --
Other (46) 994 1,165 309 27
- ---------------------------------------------------------------------------------------------
Loss before income taxes (96,290) (95,079) (74,723) (22,201) (4,061)
Income tax provision -- -- -- 2 --
- ---------------------------------------------------------------------------------------------
Net loss ($96,290) ($95,079) ($74,723) ($22,203) ($4,061)
- ---------------------------------------------------------------------------------------------
Net loss per share ($1.07) ($1.06) ($0.83) ($0.26) ($0.05)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,811 89,862 89,811 84,383 78,965
<CAPTION>
At June 30
(In thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents $93,364 $114,166 $12,498 $ 7,744 $19
Working capital (deficit) 18,536 75,261 (9,267) 4,708 (7,844)
Long-term investments, consisting
of U.S. Treasury securities 3,963 6,836 12,832 19,802 --
Total assets 222,013 232,143 140,215 181,797 51,718
Long-term debt -- -- 96,912 93,373 11,933
Shareholders' equity 57,667 153,672 5,045 78,014 16,660
</TABLE>
(a) In connection with management services performed by Hubbard Broadcasting,
Inc. ("HBI") for the Company during fiscal 1992, fiscal 1993 and fiscal 1994,
the Company agreed to pay HBI an aggregate of $10.0 million, of which $3.3
million was accrued in fiscal 1992 and the remainder accrued in the first
quarter of fiscal 1996, when it became likely certain preconditions to payment
would be satisfied.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
United States Satellite Broadcasting Company, Inc. ("USSB" or the
"Company") provides subscription television programming via a high-power direct
broadcast satellite ("DBS") to households throughout the continental United
States. The Company broadcasts a high quality digital television signal using
the Digital Satellite System ("DSS-Registered Trademark-"). The Company's
programming is available to customers who have a DSS unit, which consists of an
18-inch satellite dish, a receiver/decoder and a remote control. All of the
Company's gross revenues and identifiable assets relate to the Company's
activities in this industry.
The Company commenced commercial operations in June 1994, and has not
generated net earnings to date. Management expects that the Company will
experience net losses in fiscal 1998 and that net losses will continue for the
foreseeable future as the Company continues to build its subscriber base.
Although there were several significant competitive developments in fiscal
1997, 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 June 30,
approximately 2.65 million households were authorized to receive DSS service
("DSS households"), up from 2.50 million at March 31, 1997.
Forward-looking statements in this Annual Report 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 the DSS system and USSB's programming; competitive issues, including
changes by competitors to their product offerings and pricing strategies, and
the effect of digital cable programming and digital broadcast television
service, which may be used for multichannel programming or high definition
television (HDTV); the entry of new competitors into video programming, such
as electric utilities and regional operating telephone companies; dependence
on third-party programmers and upon Hughes Electronics Corporation;
dependence on a single DBS satellite; 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.
The Company anticipates that other DBS satellites will be launched at the
110DEG. west longitude and other orbital locations, increasing the number of
competitors in the satellite broadcasting market. 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. See Part I, Item 1, "Business -
Competition" of the Company's Report on Form 10-K for the year ended June 30,
1997 for a further discussion of certain of these risks.
SUMMARY OF SUBSCRIBER AND REVENUE DATA
Management measures the Company's performance by two key measures:
subscriber base and revenues.
The number of USSB paying subscribers grew to approximately 1,455,000 at
June 30, 1997 from approximately 1,378,000 at March 31, 1997. Approximately
75,000 additional households were receiving a free promotional month of USSB
programming as of June 30, 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 that have
received the free promotional month of USSB's Entertainment Plus programming
("convertible households"). 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
20
<PAGE>
subscription decision. As of June 30, 1997, the Company achieved a penetration
of convertible households of approximately 64 percent (i.e., almost two-thirds
of DSS households that have received the free promotional month of USSB
programming are currently paying USSB subscribers).
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>
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
June 30,
1997 1,455 75 1,530 2,289 64% 2,651
</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: (i)
cumulative DSS deactivations, (ii) activations by dealers, manufacturing
facilities, technical facilities and commercial locations known to the
Company, and (iii) 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, and
the free promotional month of programming offered by the Company.
<TABLE>
<CAPTION>
REVENUES:
(In thousands, except per subscriber data)
FOR THE QUARTER ENDED
- ---------------------
JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30
1997 1997 1996 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $24.86 $24.86 $24.93 $25.43 $25.10
Total revenues $114,236 $99,231 $92,104 $79,244 $64,288
</TABLE>
(a) Excludes pay-per-view event, commercial and TV GUIDE-TM- subscription
revenues.
The Company's churn rate was 28.6% for the twelve months ended June 30,
1997. Churn rate represents the number of the Company's paying customers who
terminated their subscriptions or whose subscriptions were terminated by the
Company during such twelve month period, and who did not resubscribe during that
period, expressed as a percentage of the total number of paying subscribers at
the end of such period. In fiscal 1997, 2.8% of the Company's churn rate
consisted of subscribers who were attributable to a third-party financing
program which is now terminated. In addition, certain of the Company's
promotional efforts may attract a higher percentage of short-term subscribers,
thus increasing the Company's churn rate from time to time. The Company
believes that its churn rate was affected by such promotional efforts in fiscal
1997.
21
<PAGE>
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $384.8 million for
the year ended June 30, 1997, compared to $192.0 million for the year ended June
30, 1996, and $42.3 million for fiscal 1995. The revenue increases between the
three fiscal years were primarily attributable to a larger subscriber base.
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 three fiscal years
was primarily attributable to the increase in the number of paying
subscribers to approximately 1,455,000 at June 30, 1997, up from
approximately 918,000 at June 30, 1996, and 321,000 at June 30, 1995. For a
substantial portion of the 1995 fiscal year, the Company was in the start-up
phase of its commercial operations. Average monthly revenue per subscriber
for the fiscal year ended June 30, 1997 was $24.99, compared to $25.22 in
fiscal 1996 and $26.29 in fiscal 1995. These decreases resulted primarily
from promotions designed to increase the Company's penetration of convertible
USSB households.
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. A significant portion of the Company's fiscal 1997
pay-per-view revenues were attributable to heavyweight boxing events. The
revenues from such events are highly dependent on the particular boxing card
offered, and are expected to vary accordingly.
COST OF SALES. Cost of sales consists 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 $250.8 million for the year ended June 30,
1997, compared to $127.2 million for the year ended June 30, 1996, and $27.9
million for fiscal 1995. The increase in cost of programming for these fiscal
periods was primarily the result of an increased number of subscribers in each
period. Cost of sales represented 65.2 percent of programming revenues for
fiscal 1997 and 66.2 percent for fiscal 1996. Programming costs as a percent of
programming revenues will vary based on the mix of programming packages taken by
subscribers, the number and type 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 $235.7 million
for fiscal 1997, compared to $146.4 million for fiscal 1996 and $81.0 million
for fiscal 1995. The increase for all periods 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. For fiscal
1997, the Manufacturer Incentive program also contributed to the increase.
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
$104.4 million for the year ended June 30, 1997, compared to $81.0 million
for fiscal 1996 and $37.5 million for fiscal 1995. The increase for all
periods was primarily attributable to expenditures to increase consumer
awareness of both the DSS system and USSB programming, as well as customer
service associated with the growth of the Company's subscriber base. In
addition, expenses associated with the Company's telemarketing and direct
mail marketing programs, which are directed at purchasers of DSS units who
activate with the Company, have increased as the number of such DSS
activations has increased.
MANUFACTURER INCENTIVE PROGRAM. Manufacturer Incentive program expense
relates to financial incentive arrangements with certain manufacturers of DSS
equipment. These arrangements have had the effect of contributing to certain
DSS manufacturers 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 programming. The expense and liability for such future
commitments is established and recorded upon activation of
22
<PAGE>
the related DSS unit. Manufacturer Incentive program expenses totaled $42.4
million for the year ended June 30, 1997. No amounts were incurred in the
comparable prior year periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
relates mainly to the Company's transponders on DBS-1 and transmission
equipment located both at the Company's National Broadcast Center and its
Auxiliary Broadcast Center. Depreciation and amortization was $18.5 million
for the year ended June 30, 1997, compared to $20.9 million for fiscal 1996
and $23.3 million for fiscal 1995. The decrease in fiscal 1997 as compared
to fiscal 1996 was primarily attributable to the effects of an accelerated
method of depreciation for the Company's transponders, which results in
decreasing periodic depreciation expense over their useful life. Fiscal 1995
was the first full year in which depreciation was incurred on transponders
and facilities. Most of the depreciation charge resulted from the Company's
five-sixteenths ownership of DBS-1, which was launched in December 1993 and
became operational in March 1994.
GENERAL AND ADMINISTRATIVE. General and administrative costs include
in-orbit and general insurance costs, billing and remittance processing, staff
functions such as finance and information services, and administrative services
provided by HBI. General and administrative expenses increased to $44.0 million
for the year ended June 30, 1997, compared to $20.6 million for fiscal 1996 and
$13.6 million for fiscal 1995. The increases for all periods were primarily
attributable to increased billing and remittance processing costs and increased
bad debt expense, both resulting from the growth of the Company's subscriber
base.
ENGINEERING AND OPERATIONS. Engineering and operations expenses include the
operation of the National Broadcast Center and the Auxiliary Broadcast Center,
fees charged in connection with the operation of the conditional access system
(determined by subscriber levels) and satellite telemetry, tracking and control
expenses. Engineering and operations expenses increased to $11.9 million for the
year ended June 30, 1997, compared to $5.9 million for fiscal 1996 and $3.6
million for fiscal 1995. The increases were primarily attributable to higher
security and encryption fees, which are paid on a per subscriber basis. An
upgrade in the conditional access system also contributed to the increase in
1997.
COMMISSIONS TO RETAILERS. Commissions to retailers consist of amounts paid
by the Company to eligible DSS retailers whose customers become paying
subscribers, and are intended to encourage retailers to promote the sale of DSS
units and subscriptions to USSB programming. Commissions to retailers increased
to $14.5 million for the year ended June 30, 1997, compared to $11.3 million for
fiscal 1996, and $2.9 million for fiscal 1995. The increases in all fiscal
periods reflect increased USSB programming subscriptions.
MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued in
fiscal 1996, representing the remainder of fees for contracted management
services rendered to the Company by HBI during fiscal 1993 and fiscal 1994.
NET OPERATING LOSS. The Company recorded a net operating loss for the year ended
June 30, 1997 of $101.6 million, compared to net operating losses of $81.6
million for fiscal 1996 and $66.5 million for fiscal 1995.
INTEREST EXPENSE. The Company incurred no interest expense for the year
ended June 30, 1997, compared to $7.3 million for fiscal 1996 and $8.6 million
for fiscal 1995. Changes in interest expense reflect changes in the amount and
duration of the Company's borrowings under its credit agreement.
INTEREST INCOME. Interest income for the year ended June 30, 1997 was $5.3
million, compared to $4.3 million for fiscal 1996 and $1.6 million for fiscal
1995. Interest income in fiscal 1997 increased as a result of the investment of
the proceeds of the public offering of the Company's Class A Common Stock, which
closed on February 6, 1996.
NET LOSS. The Company recorded a net loss for the fiscal year ended June 30,
1997 of $96.3 million, compared to $95.1 for fiscal 1996 and $74.7 million for
fiscal 1995.
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
23
<PAGE>
$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.
COMPONENTS OF CASH FLOWS. The significant components of the changes in cash
and cash equivalents for the fiscal years ended June 30, 1997, 1996 and 1995
were as follows (in millions):
Fiscal Year Ended June 30
1997 1996 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net loss ($96.3) ($95.1) ($74.7)
Depreciation and amortization 18.5 20.9 23.3
Changes in working capital 27.5 22.7 16.6
Net capital expenditures (13.9) (4.4) (6.3)
Net investment activities 3.0 6.0 26.0
Manufacturer Incentive program 40.5 -- --
Debt repayment -- (91.9) (42.4)
Net cash proceeds from sales of stock -- 206.2 0.7
Proceeds from debt borrowings -- 31.3 60.6
Other, including intercompany charges (.1) 6.0 1.0
- --------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents ($20.8) $101.7 $4.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS. As of June 30, 1997, cash and cash equivalents
totaled $93.4 million, compared to $114.2 at June 30, 1996, and $12.5 million at
June 30, 1995. The decrease from fiscal 1996 to fiscal 1997 reflects the net
use of cash resulting from the Company's operations during the 1997 fiscal year.
This decrease was offset in part by increased cash received due to a higher
level of prepaid annual subscriptions. The increase from fiscal 1995 to fiscal
1996 reflects the February 1996 initial public offering.
WORKING CAPITAL. Working capital at June 30, 1997 was $18.5 million,
compared to $75.3 million at June 30, 1996, and a working capital deficit of
$9.3 million at June 30, 1995. This decrease in working capital from fiscal
1996 to fiscal 1997 resulted from an increase in accounts payable and accrued
expenses of $23.1 million, due primarily to increased advertising, promotion and
program provider license fee expenses. Additionally, deferred revenue increased
$22.3 million resulting from greater levels of pre-paid subscriptions. This
decrease was offset in part by an increase in net trade accounts receivable of
$12.6 million, due to growth in paying subscriber levels. The increase in
working capital from fiscal 1995 to fiscal 1996 reflects the February 1996
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES. After completion of the initial public
offering of the Company's Class A Common Stock, the Company invested the net
proceeds of the offering in short-term United States Treasury-backed
securities. In April 1996, the Company elected to repay the entire
outstanding balance of the term loan under its credit agreement of $90.0
million and to terminate the credit agreement.
24
<PAGE>
The Company expects the total expense under the Manufacturer Incentive
program for fiscal 1998 to range from approximately $40 to $50 million and
the total cash payments to range from approximately $15 to $20 million. As
the levels of retail DSS unit sales increase, the expense and cash flow
related to this program will increase accordingly.
Management believes that the Company's current cash position is adequate to
meet the operating expenses of the business during fiscal 1998. However, the
Company may require external financing for future major capital expenditures
such as the construction of the DBS-4 satellite 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. west longitude locations. The Company
believes that such financing would be available from a number of sources and is
evaluating options 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. The ultimate outcome of
these matters and the resulting effect on the liquidity and financial position
of the Company cannot be determined with certainty.
IPPV Enterprises, a Georgia partnership, has commenced a legal proceeding
against Thomson Consumer Electronics, Hughes Network Systems, other DSS
manufacturers, DIRECTV, Inc., and the Company. The ultimate outcome of this
matter and the resulting effect on the liquidity and financial position of the
Company cannot be determined with certainty.
CAPITAL EXPENDITURES. Capital expenditures for the year ended June 30,
1997 totaled $13.9 million, consisting primarily of satellite deposits and
purchased computer software. The Company is required to make progress
payments under its contract with Lockheed Martin for satellite construction
at the 110DEG. west longitude orbital location. 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 consolidated financial
statements contains additional information on this matter.
NET OPERATING LOSS CARRYFORWARD. At June 30, 1997, the Company's net
operating loss carryforward was $282.5 million for federal tax purposes and
$317.2 million for financial reporting purposes. The difference in loss
carryforward amounts primarily represents differing amounts of depreciation
reported 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.
25
<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30
(In thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------
REVENUES $384,815 $191,997 $42,337
COST OF SALES 250,781 127,183 27,868
- --------------------------------------------------------------------------------
GROSS MARGIN 134,034 64,814 14,469
OPERATING EXPENSES
Selling and marketing 104,437 80,971 37,542
Manufacturer Incentive 42,354 -- --
Depreciation and amortization 18,510 20,940 23,340
General and administrative 43,965 20,645 13,623
Engineering and operations 11,882 5,925 3,584
Commissions to retailers 14,507 11,254 2,923
Management fees due to HBI -- 6,667 --
- --------------------------------------------------------------------------------
Net operating loss (101,621) (81,588) (66,543)
OTHER (INCOME) EXPENSE
Interest expense -- 7,284 8,567
Interest (income) (5,285) (4,291) (1,552)
Cost to terminate Credit Agreement -- 9,504 --
Other (46) 994 1,165
- --------------------------------------------------------------------------------
Net loss ($96,290) ($95,079) ($74,723)
- --------------------------------------------------------------------------------
Net loss per share ($1.07) ($1.06) ($0.83)
- --------------------------------------------------------------------------------
Weighted average shares outstanding 89,811 89,862 89,811
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) 1997 1996
- --------------------------------------------------------------------------------
Assets
CURRENT ASSETS
Cash and cash equivalents $93,364 $114,166
Trade accounts receivable, less allowance of
$5,892 and $634 at June 30, 1997 and
1996, respectively 38,846 26,271
Prepaid expenses and other 8,283 2,865
- --------------------------------------------------------------------------------
Total current assets 140,493 143,302
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 351 351
Buildings and improvements 5,790 4,785
Equipment 134,760 127,366
- --------------------------------------------------------------------------------
140,901 132,502
Less - Accumulated depreciation (70,529) (52,019)
- --------------------------------------------------------------------------------
Total property and equipment, net 70,372 80,483
- --------------------------------------------------------------------------------
OTHER ASSETS
Satellite deposits 6,930 1,380
Long-term investments, consisting of U.S.
Treasury securities 3,963 6,836
Other 255 142
- --------------------------------------------------------------------------------
Total other assets 11,148 8,358
- --------------------------------------------------------------------------------
$222,013 $232,143
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $50,574 $28,554
Deferred revenue 52,240 29,894
Manufacturer Incentive obligation 8,446 --
Accrued expenses -
Retailer commissions 7,308 5,835
Other 3,389 3,758
- --------------------------------------------------------------------------------
Total current liabilities 121,957 68,041
- --------------------------------------------------------------------------------
MANUFACTURER INCENTIVE OBLIGATION 32,007 --
DUE TO HBI 10,382 10,430
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 5)
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, 15,588,851
shares issued and outstanding at June 30, 1997
and 12,601,250 at June 30, 1996 2 1
Common Stock -
Participating, voting, $.0001 par value,
100 million shares authorized, 74,221,924
shares issued and outstanding at June 30, 1997
and 77,209,525 at June 30, 1996 7 8
Additional paid-in capital 378,114 378,114
Accumulated deficit (317,204) (220,914)
Unrealized loss on investments (12) (105)
- --------------------------------------------------------------------------------
60,907 157,104
Unused media credits (3,240) (3,432)
- --------------------------------------------------------------------------------
Total shareholders' equity 57,667 153,672
- --------------------------------------------------------------------------------
$222,013 $232,143
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance
sheets.
27
<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A
-------- Common Stock Additional
Common Stock -------------- Paid-In
(In thousands, except per share data) Shares Amount Shares Amount Warrants Capital
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT JUNE 30, 1994 16,749 $2 73,062 $7 $7,350 $126,691
Common stock contributed to
the Company -- -- (127) -- -- --
Sale of Class A common stock for
$5.66 per share, net 127 -- -- -- -- 732
Media credits utilized -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995 16,876 2 72,935 7 7,350 127,423
Conversion of shares pursuant
to Recapitalization (16,876) (2) 16,876 2 -- --
Conversion of notes and cancellation
of warrants -- -- 7,412 1 (7,350) 44,491
Conversion of shares available for
overallotment 1,245 -- (1,245) -- -- --
Transfer of common stock from HBI -- -- (15,712) (2) -- --
Sale of Class A common stock for
$27 per share, net 8,300 1 -- -- -- 206,200
Conversion of shares pursuant to
certain shareholder rights 3,056 -- (3,056) -- -- --
Media credits utilized -- -- -- -- -- --
Unrealized gain (loss) on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996 12,601 1 77,210 8 -- 378,114
Conversion of shares pursuant to
certain shareholder rights 2,988 1 (2,988) (1) -- --
Media credits utilized -- -- -- -- -- --
Unrealized gain (loss) on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997 15,589 $2 74,222 $7 $-- $378,114
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Unrealized Gain Unused
Accumulated (Loss) on Media
(In thousands, except per share data) Deficit Investments Credits Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT JUNE 30, 1994 ($51,112) -- ($4,924) $78,014
Common stock contributed to
the Company -- -- -- --
Sale of Class A common stock for
$5.66 per share, net -- -- -- 732
Media credits utilized -- -- 1,022 1,022
Net loss (74,723) -- -- (74,723)
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1995 (125,835) -- (3,902) 5,045
Conversion of shares pursuant
to Recapitalization -- -- -- --
Conversion of notes and cancellation
of warrants -- -- -- 37,142
Conversion of shares available for
overallotment -- -- -- --
Transfer of common stock from HBI-- -- -- -- (2)
Sale of Class A common stock for
$27 per share, net -- -- -- 206,201
Conversion of shares pursuant to
certain shareholder rights -- -- -- --
Media credits utilized -- -- 470 470
Unrealized gain (loss) on investments -- (105) -- (105)
Net loss (95,079) -- -- (95,079)
- ----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1996 (220,914) (105) (3,432) 153,672
Conversion of shares pursuant to
certain shareholder rights -- -- -- --
Media credits utilized -- -- 192 192
Unrealized gain (loss) on investments -- 93 -- 93
Net loss (96,290) -- -- (96,290)
- ---------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997 ($317,204) ($12) ($3,240) $57,667
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
United States Satellite Broadcasting Company, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Loss ($96,290) ($95,079) ($74,723)
Adjustments to reconcile net loss to net
cash used in operating activities -
Depreciation and amortization 18,510 20,940 23,340
Interest accretion, net -- 844 1,400
Deferred loan origination fees
charged to expense in
connection with termination
of Credit Agreement -- 5,465 --
Unrealized loss on investments 93 (105) --
Media credits utilized 192 470 1,022
Change in operating items:
Trade accounts receivable (12,575) (19,097) (7,174)
Prepaid expenses and other
current assets (5,418) 1,994 (1,335)
Accounts payable 22,020 15,824 8,981
Accrued expenses 1,104 1,935 4,475
Deferred revenue 22,346 16,484 13,410
Manufacturer Incentive 40,453 -- --
Other (240) (1,135) (4,250)
- --------------------------------------------------------------------------------
Net cash used in operating
activities (9,805) (51,460) (34,854)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of and deposits on equipment (13,949) (4,423) (6,270)
Proceeds from sales of short-term
investments -- -- 19,424
Proceeds from sale of long-term
available-for-sale investments 3,000 5,996 6,600
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (10,949) 1,573 19,754
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (repayments to) affiliated
companies (48) 5,970 984
Proceeds from debt borrowings -- 31,306 60,613
Repayment of debt -- (91,922) (42,475)
Proceeds from sale of common stock -- 206,201 732
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (48) 151,555 19,854
- --------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents (20,802) 101,668 4,754
CASH AND CASH EQUIVALENTS, beginning of
period 114,166 12,498 7,744
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 93,364 $ 114,166 $ 12,498
- --------------------------------------------------------------------------------
NONCASH TRANSACTIONS
Transponder purchase price adjustment and
reduction of related debt balance $ -- $ -- $ 16,000
- --------------------------------------------------------------------------------
Conversion of notes and cancellation of
warrants $ -- $ 44,491 $ --
- --------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the period for -
Interest $ -- $ 6,755 $ 7,336
Income taxes $ -- $ -- $ --
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
United States Satellite Broadcasting Company, Inc. and Subsidiaries ("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, 1997 and 1996, and had approximately 61.4% of the combined voting
power with respect to all matters submitted for the vote of all shareholders at
June 30, 1997.
Until July 1, 1994, the Company was a development stage company. The
Company has incurred losses since its inception and had an accumulated deficit
of approximately $317 million as of June 30, 1997. Management anticipates that
net losses will continue for the foreseeable future because the Company plans to
continue to incur substantial selling and marketing expenses to expand its
subscriber base. In addition, existing contractual obligations (see Note 4) may
require capital resources in excess of cash balances plus anticipated operating
cash flows during fiscal 1998 and beyond. The Company may consider debt
financing alternatives to augment those resources. The Company believes that
such financing would be available from a number of sources. However, if such
financing is not available on terms satisfactory to the Company, management has
the ability to reduce its planned consumer and trade marketing expenditures.
Such reductions could have the effect of slowing the rate of subscriber growth
in fiscal 1998 and beyond.
In addition to the capital needs described above, the success of future
operations will be dependent on further development of the Company's subscriber
base from which to generate revenues and continued growth of the market for
Digital Satellite Systems.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned Subsidiaries, including USSB II, Inc. ("USSB II"). USSB II owns
the Company's satellite transponders and holds the Company's FCC licenses and
permits (see Note 4). All significant intercompany accounts and transactions
have been eliminated in consolidation.
FISCAL YEAR
All references to years in the consolidated financial statements and
accompanying notes refer to the Company's respective fiscal years ended June 30.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist primarily of short-term United States
Treasury-backed securities with original maturities of less than 90 days, are
stated at cost, which approximates fair value.
INVESTMENTS
Long-term investments consist of a U.S. Treasury security maturing in 1999,
which the Company classifies as available-for-sale. At June 30, 1997, the
security's aggregate amortized cost approximated its market value of $3,963,000.
During fiscal 1997 the Company sold $3.0 million of U.S. Treasury securities.
At June 30, 1996, the securities held on that date had an aggregate amortized
cost basis of $6,941,000 and an aggregate market value of approximately
$6,836,000. The security held at June 30, 1997 bears interest at 5.5%.
Unrealized gains and losses are reported as a separate component of
shareholders' equity.
30
<PAGE>
MANUFACTURER INCENTIVE PROGRAM
The Company's costs under its financial incentive arrangements with certain
manufacturers of DSS equipment are charged to expense as incurred. See Note 4
for additional disclosure regarding these arrangements.
RETAILER COMMISSIONS
The Company generally pays commissions to eligible retailers for their customers
who are paying subscribers. Commissions paid are charged to expense over the
related subscription period. Deferred retailer commissions totaled $1,781,500 at
June 30, 1997 and $1,401,000 at June 30, 1996 and are included with prepaid
expenses and other current assets in the accompanying consolidated balance
sheets. Accrued retailer commissions totaled $7,308,000 at June 30, 1997 and
$5,835,000 at June 30, 1996.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods based on estimated useful lives as
follows:
Satellite Transponders 10 years
Other Equipment 5-10 years
Buildings & Improvements 31 years
FINANCIAL INSTRUMENTS
Unless otherwise indicated, the recorded value of the Company's financial
instruments approximates their fair value.
REVENUE RECOGNITION
Programming revenues are recorded as income when the respective services are
rendered. Subscriptions received in advance of the delivery of the related
programming are recorded as deferred revenue.
ADVERTISING AND PROMOTIONS
Costs for advertising and promotional materials and activities (including the
cost, if any, of programming provided to current or prospective customers free
of charge) are charged to expense as incurred.
RESEARCH AND DEVELOPMENT
Costs related to the Company's research and development efforts are charged to
expense as incurred.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities. These
differences will result in taxable or deductible amounts in the future based on
enacted tax laws and are applicable to the periods in which the differences are
expected to affect taxable income.
NET LOSS PER SHARE
Net loss per share is computed based on weighted average shares outstanding,
which have been retroactively restated for the 75-for-one stock split effected
in fiscal 1996 as a component of the Company's recapitalization (see Note 2).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 will be restated in
accordance with SFAS 128.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130), effective for fiscal years beginning after December 15,
1997. SFAS No. 130 will require the Company to report and display comprehensive
income and its components. Comprehensive income is defined as changes in equity
of a business enterprise during a period except those resulting from investments
by owners and distributions to owners. The changes required by SFAS No. 130
will not affect net income or shareholders' equity.
31
<PAGE>
2. SHAREHOLDERS' EQUITY
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 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.
CONVERSION RIGHTS
On May 1, 1996, approximately 3.1 million shares of the Company's Common Stock,
with 10 votes per share, automatically converted into 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. During fiscal
1997, approximately 3.0 million shares of Common Stock were converted into Class
A Common Stock.
In accordance with certain shareholder agreements, prior to the Company's
initial public offering, the ownership percentages of certain shareholders,
other than HBI, were protected from dilution, based on total outstanding shares
of 89,810,775, until the ownership of HBI was reduced to 51%. In connection
with the Company's initial public offering, 15,711,950 shares of old common
stock were contributed by HBI to the Company for no consideration in fiscal
1996. In addition, certain shareholders holding 22,645,350 shares of Common
Stock have certain "piggy-back" rights to participate in certain public
offerings of the Company's stock and certain "co-sale" rights to include all or
a portion of their shares in certain sales by HBI of its stock of the Company.
UNUSED MEDIA CREDITS
In connection with a sale of old class A common stock in fiscal 1994, the
Company received a $5.0 million media credit. The media credit, as amended, can
be utilized towards a portion of the cost of advertising purchased from
subsidiaries of this shareholder through January 1998. The unused media credit
balance ($3.2 million at June 30, 1997 and $3.4 million at June 30, 1996) has
been recorded as a reduction of shareholders' equity.
32
<PAGE>
STOCK-BASED COMPENSATION
In December 1995, the Company's shareholders approved a stock option plan
(the "1995 Plan") and, in November 1996, the Company's shareholders approved
a Non-Employee Director Stock Option Plan (the "1996 Non-Employee Director
Plan") (together, the "Option Plans"). The Option Plans authorize the
granting of options to purchase up to an aggregate of 2,150,000 shares of
Class A Common Stock. The 1995 Plan provides for employees, officers and
consultants of the Company to be granted options to purchase Class A Common
Stock of two types: (i) those that qualify as incentive stock options
("Incentive Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and (ii) those that do not qualify as
Incentive Options ("Nonstatutory Options"). All options granted under the
1996 Non-Employee Director Plan are Nonstatutory Options. The Option Plans
are administered by the Compensation Committee. Under the 1995 Plan, the
Compensation Committee determines the persons who are to receive options, the
terms and the number of shares subject to each option and whether the option
is to be an Incentive Option or a Nonstatutory Option. The 1996 Non-Employee
Director Plan provides for the automatic, non-discretionary, grant of
options. Information regarding the Option Plans is as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
1997 1996
-------------------------------------------------------------------------------------
Shares Weighted Shares Weighted
Under Average Under Average
Option Exercise Option Exercise
Plan Exercise Price Price Plan Exercise Price Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 449,300 $27.00-$36.00 $27.16 -- -- --
Granted 31,000 $11.50-$18.75 $14.00 454,300 $27.00-$36.00 $27.15
Exercised -- -- -- -- -- --
Forfeited 35,600 $27.00-$28.50 $27.45 5,000 $27.00 $27.00
------- --------
Outstanding at end of year 444,700 $11.50-$36.00 $26.21 449,300 $27.00-$36.00 $27.16
Exercisable at end of year 93,740 $11.50-$36.00 $25.30 -- -- --
Weighted average fair value
of options granted $9.86 $16.66
----- ------
----- ------
</TABLE>
As of June 30, 1997, the outstanding stock options granted in fiscal 1996 have a
remaining contractual life of approximately 8.5 years and the outstanding stock
options granted in fiscal 1997 have a remaining contractual life of
approximately 9.5 years.
The Company accounts for the Option Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Option Plans been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS No. 123),
the Company's pro forma net loss and pro forma loss per share would have been as
follows (in thousands):
<PAGE>
Years Ended June 30,
1997 1996
Net loss applicable to common shareholders
As Reported $(96,290) $(95,079)
Pro Forma $(96,596) $(102,648)
Net loss per common and common equivalent share
As Reported $(1.07) $(1.06)
Pro Forma $(1.08) $(1.14)
33
<PAGE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.2% in 1996 and 6.4% in
1997; expected life of 10 years for 1997 and 1996; expected volatility of 45%
in 1996 and 33.0% in 1997.
3. LONG-TERM DEBT
CREDIT AGREEMENT
In December 1994, the Company entered into a credit agreement with a syndicate
of financial institutions (the "Credit Agreement"), which provided for
borrowings up to $90.0 million, $60.0 million of which was borrowed at closing
in January 1995. During August 1995, the Company borrowed another $20.0 million
under the Credit Agreement and, in December 1995, borrowed an additional $10.0
million. Borrowings under the Credit Agreement bore interest at LIBOR plus 4.5%
per annum.
In April 1996, the Company elected to repay the entire outstanding balance
of the term loan under the Credit Agreement of $90.0 million and to terminate
the Credit Agreement. In connection with the termination, the Company paid
previously deferred interest of $1.9 million and a prepayment fee of
approximately $4.0 million. The Company also charged to expense deferred loan
origination fees of approximately $5.4 million which were previously being
amortized over the life of the Credit Agreement.
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
During 1994, the Company issued and sold unsecured convertible subordinated
promissory notes (the "Notes") for $34.5 million. The Notes were scheduled to
mature in March 1999 at a face value of $42 million and interest accreted at
an imputed rate of 3.94%. The Notes were subject to mandatory conversion into
shares of old class A common stock equal to the face amount of the Notes
divided by $5.66 if the gross proceeds of an initial public offering of the
Company were to exceed $50 million at an offering price of at least $7.00 per
share. Such conversion occurred as part of the recapitalization described in
Note 2 at which time the Notes (including cumulative accretion) had a
recorded balance of $37.1 million. The conversion did not result in the
issuance of additional shares of the Company, as HBI simultaneously
contributed to USSB an equivalent number of shares. Issued with the
convertible subordinated promissory notes were warrants valued at $7.5
million, which were canceled as a part of the recapitalization.
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
34
<PAGE>
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 June 1, 1997, the
Company is required to pay $73.6 million for satellite construction, of which
$5.5 million has been paid through June 30, 1997. 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. The Company has previously paid $1.4 million under a predecessor
contract for satellites at both the 110DEG. and 148DEG. orbital locations.
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. If satellite
construction proceeds as scheduled under the 110DEG. Contract, aggregate
amounts due are scheduled in the fiscal years as follows: $22.3 million in
1998, $41.9 million in 1999 and $3.9 million in 2000.
ADVERTISING AND PROMOTIONS
The Company has entered into commitments to purchase or participate in joint
purchases of broadcast, print and other media for advertising and promotional
purposes. At June 30, 1997, such commitments totaled $22.3 million due in fiscal
1998, with the noncancellable portion of such commitments totaling $18.9
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
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. 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.
In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated
a legal proceeding in the United States District Court for the District of
Delaware 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 several IPPV patents
relating to parental control and pay-per-view features used in the DSS
system. The Company has denied all material allegations in the complaint.
It is not possible to estimate the probable outcome of this matter at this
time. The Company does not believe that IPPV is entitled to damages or any
remedies from the Company, and management intends to vigorously defend the
action.
35
<PAGE>
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. 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 programming. The expense and liability for such future
commitments is established and recorded upon activation of the related DSS unit.
In fiscal 1997, the Company charged to expense $42.4 million, representing the
full amount of those future obligations for the Manufacturer Incentive program
incurred during the period for the sale of DSS units to new households. Net of
cash paid in fiscal 1997 totaling $1.9 million, such future obligations totaled
$40.5 million at June 30, 1997, payable in the fiscal years as follows:
(in thousands)
1998 $ 8,446
1999 8,446
2000 8,446
2001 8,446
2002 6,669
-----
$40,453
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the Company expects that as the
level of retail DSS unit sales increase, the expense and cash flow related to
these arrangements will increase accordingly.
The fair value of the future obligation at June 30, 1997 is approximately
$33.5 million and has been calculated by discounting the future cash flows at
the Company's estimated incremental borrowing rate.
5. RELATED-PARTY TRANSACTIONS
Certain officers and directors of the Company are also employed by, and spend a
significant portion of their time on, the businesses of HBI and its affiliates
other than the Company. Each of such persons who is a director has indicated to
the Company that, should a conflict of interest arise, he will promptly disclose
such conflict to the Company's Board of Directors and refrain from voting on
such matter as a director.
DUE TO HBI
Debt due to HBI consists principally of amounts accrued for management services
valued at $10.0 million provided to the Company by HBI during fiscal years 1992
through 1994 under an agreement which expired June 30, 1994. The balance does
not bear interest. The Company was contingently obligated to pay these amounts
and they will not become due until, in Company management's opinion, adequate
working capital exists. As a result of certain significant financial performance
thresholds, USSB management discontinued accruing the $3.3 million annual charge
after 1992 and did not intend to accrue any additional charges until and unless
it was determined payment could be considered probable. When the Company decided
to proceed with its initial public stock offering, management determined that it
became likely that certain preconditions would ultimately be satisfied, and
therefore made this obligation probable, although the timing of the cash payment
of the $10.0 million has not been determined. Accordingly, during first quarter
of fiscal 1996, the Company accrued as an operating expense the remaining $6.7
million of its management fee obligation. The Company intends to defer payment
of these charges for the foreseeable future.
Concurrent with the growth of the Company's revenue in 1995, HBI began to
provide certain general and administrative services to the Company under a
two-year agreement which ended June 30, 1996. Effective July 1, 1996, the
Company and HBI entered into a similar agreement for services to be rendered
in fiscal 1997. This agreement can be renewed by the Company for fiscal 1998
and subsequent years. Under these agreements, the Company incurred a charge
of $996,000 in fiscal 1997, $960,000 in fiscal 1996 and $844,000 in fiscal
1995.
36
<PAGE>
The Company expects to incur a charge to HBI under the agreement for general
and administrative services totaling $1,252,000 in fiscal 1998, to be paid on
a monthly basis.
The Company's general and administrative expenses also include consulting
fees paid to entities related to directors and officers of the Company totaling
$1.8 million in fiscal 1997, $1.5 million in fiscal 1996, and $1.0 million in
fiscal 1995.
In connection with the Company's initial public offering, the Company paid
aggregate commissions of $13.9 million to the underwriters of its offering.
Certain directors of the Company are employed by or affiliated with certain of
these underwriters.
The Company purchases programming, engineering services and other services
from other entities affiliated with HBI. Certain engineering and other services
are purchased from a partnership in which HBI is a general partner, under an
agreement which runs through December 1997. Certain programming is purchased
from a joint venture in which such partnership is a partner, under an agreement
which runs through 1999. Amounts included in the accompanying consolidated
statements of operations which were purchased from these affiliated entities are
as follows (in thousands):
For the Years Ended June 30
1997 1996 1995
- ----------------------------------------------------------------------
Cost of programming $4,378 $2,348 $607
Engineering and operations 213 205 853
Selling and marketing -- -- 35
- ----------------------------------------------------------------------
$4,591 $2,553 $1,495
- ----------------------------------------------------------------------
The Company believes that the services provided between the Company and HBI
and its subsidiaries and affiliates, and by entities with which certain
directors are affiliated, are on terms comparable to those available from third
parties and that such terms are reasonable.
OTHER
The Company's employees participate in a 401(k) plan sponsored by HBI. Under the
terms of the plan, the Company may make annual base contributions and can match
participant contributions for each year. An employee becomes eligible to
participate in the plan after 12 months of service during which the employee has
worked 1,000 hours. HBI made contributions (which were reimbursed by the
Company) to the plan of $131,000 on behalf of the Company's employees during
fiscal 1997, $88,000 during fiscal 1996, and $15,000 during fiscal 1995.
37
<PAGE>
6. INCOME TAXES
The Company's deferred tax assets and liabilities, all of which are long-term,
are summarized as follows (in thousands):
Deferred Tax Asset (Liability)
- ----------------------------------------------------------------------
As of June 30 1997 1996
- ----------------------------------------------------------------------
Deferred tax assets:
Manufacturer Incentive $ 16,181 $ -
Preoperating capitalized costs 3,144 5,031
Capitalized interest 362 725
Management services 4,337 4,337
Other 4,046 1,571
Net operating loss carryforward 112,973 90,729
Total deferred tax assets 141,043 102,393
Deferred tax liabilities:
Depreciation (14,881) (14,719)
Total deferred tax liability (14,881) (14,719)
- ----------------------------------------------------------------------
Valuation allowance (126,162) (87,674)
- ----------------------------------------------------------------------
Net deferred tax balance $ -- $ --
- ----------------------------------------------------------------------
The Company has net operating losses for federal tax reporting purposes
totaling $282.4 million available for carryover to subsequent years as of June
30, 1997, expiring in years 2000 through 2013. The valuation allowance applied
against the Company's net deferred tax assets increased by $38.6 million in
fiscal 1997, by $37.8 million in fiscal 1996, and by $29.7 million in fiscal
1995.
The Company and HBI file separate federal tax returns and a combined
state tax return in Minnesota and New Mexico. HBI has benefited from this
unitary relationship as it has utilized USSB losses to reduce its combined
income subject to apportionment in Minnesota and New Mexico through December
31, 1996. The benefit that HBI realized was approximately $.8 million in
fiscal 1997, $1.2 million in fiscal 1996, and $1.5 million in fiscal 1995.
This unitary relationship has reduced the Company's Minnesota net operating
loss carryforward. Benefits realized by HBI in fiscal years preceding 1994
were not significant. Under a tax sharing agreement, HBI will reimburse the
Company for such benefits in the year they would otherwise have been realized
by the Company.
38
<PAGE>
7. QUARTERLY CONDENSED FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly data for fiscal 1997 and 1996 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter Full Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Revenues $79,244 $92,104 $99,231 $114,236 $384,815
Cost of sales 52,246 60,382 64,930 73,223 250,781
Gross margin 26,998 31,722 34,301 41,013 134,034
Operating expenses 51,969 74,141 57,925 51,620 235,655
Net operating loss (24,971) (42,419) (23,624) (10,607) (101,621)
Other (income) expense, net (1,489) (1,344) (1,174) (1,324) (5,331)
Net loss (23,482) (41,075) (22,450) (9,283) (96,290)
Weighted average shares
outstanding 89,841 89,811 89,812 89,811 89,811
Loss per share $(0.26) $(0.46) $(0.25) $(0.10) $(1.07)
1996
Revenues $30,720 $40,001 $56,988 $64,288 $191,997
Cost of sales 20,064 26,391 37,579 43,149 127,183
Gross margin 10,656 13,610 19,409 21,139 64,814
Operating expenses 35,547 38,631 39,801 32,423 146,402
Net operating loss (24,891) (25,021) (20,392) (11,284) (81,588)
Other (income) expense, net 2,268 2,497 1,066 7,660 13,491
Net loss (27,159) (27,518) (21,458) (18,944) (95,079)
Weighted average shares
outstanding 89,811 89,811 89,860 89,937 89,862
Loss per share $(0.30) $(0.31) $(0.24) $(0.21) $(1.06)
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United States Satellite Broadcasting Company, Inc.
We have audited the consolidated balance sheets of United States Satellite
Broadcasting Company, Inc. (a Minnesota corporation) and Subsidiaries as of June
30, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended June 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United States Satellite
Broadcasting Company, Inc. and Subsidiaries as of June 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
July 31, 1997
40
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
The following corporations are subsidiaries of United States Satellite
Broadcasting Company, Inc.:
USSB II, Inc., a Minnesota corporation
Lower St. Croix Marketing Company, Inc., a Minnesota corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated July 31, 1997 in United States
Satellite Broadcasting Company, Inc.'s annual report to shareholders.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
September 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
INCORPORATED BY REFERENCE IN ITEM 8 ON PAGE 20 OF THE COMPANY'S REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 93,364
<SECURITIES> 3,963
<RECEIVABLES> 44,738
<ALLOWANCES> 5,892
<INVENTORY> 0
<CURRENT-ASSETS> 140,493
<PP&E> 140,901
<DEPRECIATION> 70,529
<TOTAL-ASSETS> 222,013
<CURRENT-LIABILITIES> 121,957
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 57,658
<TOTAL-LIABILITY-AND-EQUITY> 222,013
<SALES> 384,815
<TOTAL-REVENUES> 384,815
<CGS> 250,781
<TOTAL-COSTS> 250,781
<OTHER-EXPENSES> 235,655
<LOSS-PROVISION> 19,147
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (96,290)
<INCOME-TAX> 0
<INCOME-CONTINUING> (96,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,290)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
