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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-27492
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1407863
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3415 UNIVERSITY AVENUE, ST. PAUL, MN 55114
(Address of principal executive offices) (zip code)
(612) 645-4500
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 3, 1997
----- -------------------------------
Class A Common Stock, $.0001 par value: 16,172,601
Common Stock, $.0001 par value: 73,638,174
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Interim Financial Statements 7
Item 2. Management's Discussion and Analysis 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
For the Three Months
Ended September 30
------------------------
1997 1996
---------- ---------
REVENUES $ 114,383 $ 79,244
COST OF SALES 73,557 52,246
---------- ---------
GROSS MARGIN 40,826 26,998
OPERATING EXPENSES:
Selling and marketing 30,245 30,449
Manufacturer Incentive 17,916 1,371
General and administrative 11,607 10,196
Commissions to retailers 3,462 3,484
Engineering and operations 2,549 2,160
Depreciation and amortization 4,303 4,309
---------- ---------
Net operating loss (29,256) (24,971)
OTHER (INCOME) EXPENSE:
Interest (income) (1,218) (1,429)
Other 109 (60)
---------- ---------
Loss before income taxes (28,147) (23,482)
INCOME TAX PROVISION - -
Net loss $ (28,147) $ (23,482)
---------- ---------
---------- ---------
Net loss per share $ (0.31) $ (0.26)
---------- ---------
---------- ---------
Weighted average shares outstanding 89,811 89,841
---------- ---------
---------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
Sept. 30, June 30,
1997 1997
----------- ----------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 78,925 $ 93,364
Trade accounts receivable, net 39,072 38,846
Prepaid expenses and other current assets 7,599 8,283
---------- ----------
Total current assets 125,596 140,493
---------- ----------
PROPERTY AND EQUIPMENT:
Land 351 351
Buildings and improvements 4,935 5,790
Equipment 136,781 134,760
---------- ----------
142,067 140,901
Less - Accumulated depreciation (74,832) (70,529)
---------- ----------
Total property and equipment, net 67,235 70,372
---------- ----------
OTHER ASSETS:
Satellite deposits 8,230 6,930
Long-term investments, consisting of U.S. Treasury
securities 3,968 3,963
Other 254 255
---------- ----------
Total other assets 12,452 11,148
---------- ----------
$ 205,283 $ 222,013
---------- ----------
---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
Sept. 30, June 30,
1997 1997
----------- ----------
(unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 57,029 $ 61,271
Deferred revenue 52,392 52,240
Manufacturer Incentive obligation 12,030 8,446
--------- ---------
Total current liabilities 121,451 121,957
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LONG TERM LIABILITIES
Due to HBI 10,000 10,382
Manufacturer Incentive obligation 44,306 32,007
--------- ---------
Total long term liabilities 54,306 42,389
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COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, 50 million shares
authorized; none issued or outstanding - -
Class A Common Stock -
Participating, voting, $.0001 par value, 500
million shares authorized, 15,774,826 shares
issued and outstanding at September 30, 1997
and 15,588,851 at June 30, 1997 2 2
Common Stock -
Participating, voting, $.0001 par value, 100
million shares authorized, 74,035,949 shares
issued and outstanding at September 30, 1997
and 74,221,924 at June 30, 1997 7 7
Additional paid-in capital 378,114 378,114
Accumulated deficit (345,350) (317,204)
Unrealized loss on investments (10) (12)
--------- ---------
32,763 60,907
Unused media credits (3,237) (3,240)
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Total shareholders' equity 29,526 57,667
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$ 205,283 $ 222,013
--------- ---------
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The accompanying notes are an integral part of these
consolidated financial statements.
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
For the Three
Months Ended
September 30
--------------------
1997 1996
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OPERATING ACTIVITIES:
Net Loss $(28,147) $ (23,482)
Adjustments to reconcile net loss to net cash used in
operating activities -
Depreciation and amortization 4,303 4,309
Media credits utilized 3 230
Change in operating items:
Receivables and other current assets 458 (7,936)
Accounts payable and accrued expenses (4,242) 12,978
Deferred revenue 152 1,232
Manufacturer Incentive 15,883 1,371
Other (1) (1)
-------- ---------
Net cash used in operating activities (11,591) (11,299)
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INVESTING ACTIVITIES:
Purchase of and deposits on equipment (2,466) (1,189)
-------- ---------
Net cash used in investing activities (2,466) (1,189)
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FINANCING ACTIVITIES:
Advances from affiliated companies, net (382) 65
Proceeds from debt borrowings - -
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Net cash provided by financing activities (382) 65
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Increase (decrease) in cash and cash
equivalents (14,439) (12,423)
CASH AND CASH EQUIVALENTS, beginning of period 93,364 114,166
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CASH AND CASH EQUIVALENTS, end of period $ 78,925 $ 101,743
-------- ---------
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SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ -
Income taxes - -
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The accompanying notes are an integral part of these
consolidated financial statements.
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION:
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 September 30, 1997, and had approximately 61.5% of the
combined voting power with respect to all matters submitted for the vote of all
shareholders at September 30, 1997.
NOTE 2. CHANGE IN FISCAL YEAR:
On September 4, 1997, the Board of Directors of the Company voted to change the
Company's fiscal year end from June 30 to December 31, beginning with a six
month transition period ending on December 31, 1997.
NOTE 3. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Generally Accepted Accounting Principles for interim
financial statements and, therefore, do not include all information and
disclosures required by Generally Accepted Accounting Principles for complete
financial statements. In the opinion of management, such statements reflect all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for interim periods
presented are not necessarily indicative of the results which may be expected
for the entire fiscal year. These statements should be read in conjunction with
the June 30, 1997 consolidated financial statements, the notes thereto, and the
Company's Annual Report on Form 10-K.
NOTE 4. COMMITMENTS AND CONTINGENCIES:
REGULATORY MATTERS
USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license from
the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101 DEG. 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
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(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 110
DEG. west longitude and eight transponders at 148 DEG. west longitude. The
Permit requires the Company to comply with specified construction and launch
schedules. The FCC has the authority to revoke the Permit if the Company fails
to comply with the FCC schedule for construction and launch. In connection
therewith, the Company has entered into 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 110 DEG. orbital location (the "110 DEG.
Contract") and at the 148 DEG. orbital location (the "148 DEG. Contract").
Under the 110 DEG. Contract, as amended effective June 1, 1997, the Company is
required to pay $73.6 million for satellite construction, of which $6.8 million
has been paid to date. The contract also provides for payments for ongoing
operations services and in-orbit performance incentive payments during the life
of the satellite. In addition, substantial costs would be incurred to launch
and insure the satellite. No material payments are anticipated under the 148
DEG. Contract earlier than December 31, 1997. The Company has previously paid
$1.4 million under a predecessor contract for satellites at both the 110 DEG.
and 148 DEG. 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 110 DEG. Contract, aggregate amounts due are as follows:
$39.5 million through December 31, 1998 and $27.3 million in the year ended
December 31, 1999.
ADVERTISING AND PROMOTIONS
The Company has entered into commitments to purchase or participate in joint
purchases of broadcast, print and other media for advertising and promotional
purposes. At September 30, 1997, such commitments totaled $7.3 million due
through December 31, 1998, all of which are noncancelable.
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.
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LITIGATION
In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated
legal proceedings against the Company and others before the United States
International Trade Commission ("ITC"), and in the United States District Court
for the Northern District of California. 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. See Part II, Item 1 of this Report on Form
10-Q for a description of this matter.
In June 1997, IPPV Enterprises, a Georgia partnership ("IPPV") initiated a legal
proceeding against the Company and others in the United States District Court
for the District of Delaware. 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. See Part II, Item 1 of this Report on Form 10-Q
for a description of this matter.
The Company is also exposed to other litigation encountered in the normal course
of business. In the opinion of management, the resolution of these other
litigation matters of which the Company is aware will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
MANUFACTURER INCENTIVE PROGRAM
On August 26, 1996, the Company, together with DIRECTV, Inc. (the Company's
DSS partner), announced that it had entered into financial incentive
arrangements with certain manufacturers of DSS equipment to assist these
manufacturers in lowering the price of DSS units. Such arrangements, which
run for up to four years depending on manufacturer, commit the Company to pay
the manufacturers over a five-year period from the date new DSS households
are authorized to receive programming. The expense and liability for such
future commitments is established and recorded upon activation of the related
DSS unit. In the quarter ended September 30, 1997, the Company charged to
expense $17.9 million, representing the full amount of those future
obligations for the Manufacturer Incentive program incurred during the
quarter ended September 30, 1997 for the sale of DSS units to new households.
Cash paid in the quarter ended September 30, 1997 totaled $2.0 million, and
future payment obligations (all of which have been previously charged to
expense) total $56.3 million at September 30, 1997.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-looking statements in this Report on Form 10-Q (statements which are
phrased in terms of anticipation, expectation, belief or the like or which refer
to future events, developments or conditions) 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, USSB's
programming and the effects of changes in USSB's programming offerings;
increases in costs, including programming costs, in excess of those anticipated
by the Company; 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 110 DEG. 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.
OVERVIEW
On September 4, 1997, the Board of Directors of the Company voted to change the
Company's fiscal year end from June 30 to December 31, beginning with a six
month transition period ending on December 31, 1997 (the "Transition Period").
A transition report for the period July 1, 1997 through December 31, 1997 will
be filed on Form 10-K.
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 anticipates that the Company will achieve
positive adjusted cash flow (defined as earnings before interest, taxes,
depreciation, amortization and the non-cash component of the Manufacturer
Incentive program) during at least one quarter in 1998, although not for the
year as a whole, and anticipates that the Company will achieve positive adjusted
cash flow for the full year in 1999. Management expects that the Company will
experience net losses for the Transition Period and that net losses will
continue into 1999 as the Company continues to incur substantial marketing
expenses (including Manufacturer Incentive program expenses) in order to
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build its subscriber base. However, the Company expects that it will generate
net income during the year 2000.
The market for the Company's programming has continued 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 September
30, 1997, approximately 2.89 million households were authorized to receive DSS
service ("DSS households"), up from 2.65 million at June 30, 1997. Management
believes that the Company's growth has been driven primarily by the strength of
the premium movie channels offered by the Company. Management periodically
evaluates its programming offerings and packages and may modify its programming
to maximize subscriber satisfaction.
SUMMARY OF SUBSCRIBER AND REVENUE DATA
Management currently measures the Company's performance by two key measures:
subscriber base and revenues.
The number of USSB paying subscribers grew to approximately 1,584,000 at
September 30, 1997 from approximately 1,455,000 at June 30, 1997. Approximately
113,000 additional households were receiving a free promotional month of USSB
programming as of September 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-Registered Trademark-
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 subscription decision. As of
September 30, 1997, the Company achieved a penetration of convertible households
of approximately 64 percent (i.e., nearly two-thirds of 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.
<TABLE>
<CAPTION>
SUBSCRIBER BASE:
(In thousands)
TOTAL USSB
PAYING PERCENT OF
SUBSCRIBERS USSB
FOR THE USSB USSB AND USSB CONVERTIBLE ESTIMATED
QUARTER PAYING PROMOTIONAL PROMOTIONAL CONVERTIBLE HOUSEHOLDS DSS
ENDED SUBSCRIBERS (a) ACTIVATIONS (b) ACTIVATIONS HOUSEHOLDS (c) SERVED (d) HOUSEHOLDS (e)
----- ----------- ----------- ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Sept. 30,
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
Sept. 30,
1997 1,584 113 1,697 2,462 64% 2,887
</TABLE>
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(a) USSB paying subscribers as of the end of such period.
(b) USSB household activations that were receiving a free promotional month of
USSB Entertainment Plus-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.
(d) Total USSB Paying Subscribers as of the end of the period as a percent of
USSB Convertible Households.
(e) Total estimated number of households with active DSS units which are
authorized to receive either USSB or DIRECTV programming as of the end of
the period. Estimate based on cumulative DSS activations, less cumulative
DSS deactivations, less activations by dealers, manufacturing facilities,
technical facilities and commercial locations known to the Company, and
less additional receivers in a single household, as of the end of such
period. The Company makes periodic reconciliations to estimate the number
of DSS households as accurately as possible.
The Company's per subscriber and programming revenues are shown below for the
periods indicated. From time to time, the Company engages in certain
promotional activities which include special rates for limited periods, which
could result in lower average per subscriber revenues for such periods. In
addition, the Company's programming revenues associated with increased DSS unit
sales are largely reflected in subsequent quarters due to the lag between the
purchase of a DSS unit and its installation and activation, combined with the
free promotional month of programming offered by the Company.
REVENUES:
(In thousands, except per subscriber data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------
SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30
1997 1997 1997 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $24.71 $24.86 $24.86 $24.93 $25.43
Programming revenues (b) $114,383 $114,236 $99,231 $92,104 $79,244
</TABLE>
- ---------------
(a) Excludes pay-per-view event, commercial and TV GUIDE-Trade Mark- revenues.
(b) Includes pay-per-view event, commercial and TV GUIDE revenues.
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $114.4 million for
the quarter ended September 30, 1997, compared to $79.2 million for the
comparable prior year period. The revenue increase was primarily attributable
to a larger subscriber base.
REVENUES. The Company derives its revenues principally from monthly fees from
subscribers for television programming. Revenues are primarily a function of
the number of subscribers, the mix of programming packages selected by
subscribers and the rates charged. The increase in revenues for the period was
primarily attributable to the increase in the number of paying subscribers to
approximately 1,584,000 at September 30, 1997, from approximately 1,045,000 at
September 30, 1996. Average monthly revenue per subscriber for the quarter
ended September 30, 1997 was $24.71 compared to $24.86 for the quarter ended
June 30, 1997. This decrease resulted primarily
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from promotions offered from time to time which are 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 pay-per-view revenues to date
have been 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. Cost of sales also includes the
purchase of rights to broadcast event programming on a pay-per-view basis. The
cost of programming increased to $73.6 million for the quarter ended September
30, 1997, compared to $52.2 million for the comparable prior year period. The
increases in cost of programming were primarily the result of an increased
number of subscribers from the comparable prior year period. Programming costs
as a percent of programming revenues will vary based on the mix of programming
packages taken by subscribers, the pay-per-view events, and the extent to which
volume-based discounts from the Company's programming providers are realized.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $70.1 million
for the quarter ended September 30, 1997, compared to $52.0 million for the
comparable prior year period. The increase was primarily attributable to the
Manufacturer Incentive program and the cost of providing the Company's services
to a growing subscriber base, including increased marketing, customer service,
security and encryption fees.
SELLING AND MARKETING. Selling and marketing costs include promotional and
advertising costs, the costs of direct marketing and customer service and
amounts expended pursuant to joint marketing efforts with other DSS broadcasting
system participants. The Company's overall selling and marketing efforts also
include the Manufacturer Incentive program, which is discussed below. Excluding
Manufacturer Incentive program expenses, selling and marketing expenses were
$30.2 million for the quarter ended September 30, 1997, compared to $30.4
million for the comparable prior year period. These amounts include
expenditures to increase consumer awareness of both the DSS system and USSB
programming, as well as customer service.
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 the related DSS unit.
Manufacturer Incentive program expenses totaled $17.9 million for the quarter
ended September 30, 1997, compared to $1.4 million in the comparable prior year
period. The Company expects the total expense under the Manufacturer Incentive
program for the Transition Period to range from approximately $35.0 to $40.0
million and the total cash payments during such period to range from
approximately $5.0 to $7.0 million.
GENERAL AND ADMINISTRATIVE. General and administrative costs include in-orbit
and general insurance costs, billing and remittance processing, staff functions
such as finance and information services, and administrative services provided
by HBI. General and administrative expenses increased to $11.6 million for the
quarter ended September 30, 1997, compared to $10.2 million for the comparable
prior year period. Although total general and administrative costs have
increased between the periods, elements of general and administrative expense
have declined as a percent of revenues as certain of the expenses are fixed.
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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. These expenses generally run for three years
at decreasing rates for each subscriber year. Commissions to retailers were
$3.5 million for the quarter ended September 30, 1997, virtually unchanged from
the prior year period.
ENGINEERING AND OPERATIONS. Engineering and operations expenses include the
operation of the National Broadcast Center and the Auxiliary Broadcast Center,
fees charged in connection with the operation of the conditional access system
(determined by subscriber levels) and satellite telemetry, tracking and control
expenses. Engineering and operations expenses increased to $2.5 million for the
quarter ended September 30, 1997, compared to $2.2 million for the comparable
prior year period. The increases were primarily attributable to higher security
and encryption costs, which are paid on a per subscriber basis.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses relate
mainly to the Company's five-sixteenths ownership of DBS-1 and transmission
equipment located both at the Company's National Broadcast Center and its
Auxiliary Broadcast Center. Depreciation and amortization were $4.3 million for
each of the quarterly periods ended September 30.
NET OPERATING LOSS. The Company recorded a net operating loss for the quarter
ended September 30, 1997 of $29.3 million, compared to $25.0 million for the
comparable prior year period.
INTEREST INCOME. Interest income for the quarter ended September 30, 1997 was
$1.2 million compared to $1.4 million for the comparable prior year period.
NET LOSS. The Company recorded a net loss for the quarter ended September 30,
1997 of $28.1 million, compared to $23.5 million for the comparable prior year
period.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Prior to February 1996, the Company's operations were financed by equity
contributions from shareholders, approximately $31.2 million of cash advances
from HBI and approximately $42.0 million in privately-issued notes and
associated warrants. Such advances from HBI were converted into equity in
fiscal 1990 and fiscal 1994 and, upon consummation of the recapitalization of
the Company in February 1996, the notes were converted into equity and the
warrants were canceled. In addition, the Company's operations were financed by
$90.0 million of borrowings made between January and December 1995 under a
credit agreement with a syndicate of financial institutions. Upon completion of
the public offering of the Company's Class A Common Stock in February 1996, the
Company received net proceeds of approximately $206.2 million, repaid all
outstanding bank debt and invested the balance of the net proceeds in short-term
United States Treasury-backed securities.
LIQUIDITY AND CAPITAL RESOURCES. Cash and cash equivalents declined from $93.4
million at June 30, 1997 to $78.9 million at September 30, 1997. The
significant components of the changes in cash and cash equivalents were as
follows (in millions):
14
<PAGE>
Quarter Ended September 30
--------------------------
1997 1996
---- ----
Cash and cash equivalents, beginning of quarter $93.4 $114.1
Net loss (28.1) (23.5)
Depreciation and amortization 4.3 4.3
Changes in operating items 12.2 7.8
Net capital expenditures (2.5) (1.2)
Other - (0.4) .2
----- ------
Cash and cash equivalents, end of quarter $78.9 $101.7
----- ------
----- ------
Management believes that the Company's current cash position and cash
generated from operations is adequate to meet the anticipated operating
expenses of the business during the Transition Period and through 1998.
Management further believes that its cash balance will not be less than
$40.0 - $50.0 million during such periods. In prior years, prepaid
subscriptions in the period between November and February provided a
significant inflow of cash for the Company. While there can be no assurance
this pattern will repeat itself, management anticipates a similar situation
in late 1997 and early 1998.
The Company expects the total expense under the Manufacturer Incentive program
for the Transition Period to range from approximately $35.0 million to $40.0
million and the total cash payments to range from approximately $5.0 to $7.0
million. As the level of retail DSS unit sales increase, the expense and cash
flow related to this program will increase accordingly.
The Company may require external financing for future major capital expenditures
such as the construction of a new satellite, DBS-4, at the 101 DEG. west
longitude orbital location, or the cost of satellites at the 110 DEG. and 148
DEG. west longitude 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 110 DEG. or 148 DEG. west longitude
locations. The Company believes that such financing is available from a number
of sources and is evaluating options which would provide additional flexibility
in satisfying the Company's future financing needs.
WORKING CAPITAL. Working capital at September 30, 1997 was $4.1 million,
compared to working capital of $18.5 million at June 30, 1997. The decrease
resulted primarily from the Company's net loss for the quarter ended
September 30, 1997, the increase in the current portion of the Manufacturer
Incentive program obligation, and capital expenditures for enhancements to
computer systems and satellite deposits. Management expects that working
capital may become negative by the end of the Transition Period, and will
remain negative through 1998 as the Manufacturer Incentive program obligation
increases with the growth of DSS households.
LITIGATION. 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. Part II, Item 1 of
this Report on Form 10-Q and Note 4 to the condensed consolidated financial
statements contain additional information on this matter.
15
<PAGE>
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. Part II, Item 1 of this
Report on Form 10-Q and Note 4 to the condensed consolidated financial
statements contain additional information on this matter.
CAPITAL EXPENDITURES. Capital expenditures for the quarter ended September 30,
1997 totaled $2.5 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 110
DEG. west longitude orbital location. If DBS-4 is built and put into operation
at 101 DEG. west longitude, the Company will also incur additional capital
expenditures. Note 4 to the condensed consolidated financial statements
contains additional information on this matter.
NET OPERATING LOSS CARRY FORWARD. At September 30, 1997, the Company's net
operating loss carry forward was $294.4 million for federal tax purposes and
$345.4 million for financial reporting purposes. The difference in loss carry
forward primarily represents differing amounts of depreciation and Manufacturer
Incentive program expense reported by the Company for tax and 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
and the levels of prepaid subscriptions in any given quarter.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. 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 was rendered in October 1997 ruling against PMC's
claims on all material issues. The ITC is expected to issue 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, and the favorable initial
determination by the ITC Administrative Law Judge 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.
17
<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, and to treble such damages. The IPPV patents in the suit have all
expired.
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,
and management intends to vigorously defend the action.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
99.1 Additional Exhibit; Report on Form 8-K dated September 4, 1997
b. Report on Form 8-K dated September 4, 1997 describing, under Item 8,
the action of the Board of Directors of the Registrant changing the
Registrant's fiscal year end from June 30 to December 31, beginning
with a transition period ending on December 31, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 13, 1997 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------
Stanley E. Hubbard
President and Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Gerald D. Deeney
-------------------------------
Gerald D. Deeney
Treasurer and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
20
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
Index of Exhibits to Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1997
Exhibit No. Exhibit Description
----------- -------------------
27.1 Financial Data Schedule
99.1 Report on Form 8-K
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS FOR THE
FISCAL PERIOD TO DATE FOUND ON PAGES 3-6 INCLUSIVE OF THE COMPANY'S FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 78,925
<SECURITIES> 3,968
<RECEIVABLES> 45,100
<ALLOWANCES> 6,028
<INVENTORY> 0
<CURRENT-ASSETS> 125,596
<PP&E> 142,067
<DEPRECIATION> 74,832
<TOTAL-ASSETS> 205,283
<CURRENT-LIABILITIES> 121,451
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 29,517
<TOTAL-LIABILITY-AND-EQUITY> 205,283
<SALES> 114,383
<TOTAL-REVENUES> 114,383
<CGS> 73,557
<TOTAL-COSTS> 73,557
<OTHER-EXPENSES> 70,082
<LOSS-PROVISION> 3,781
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (28,147)
<INCOME-TAX> 0
<INCOME-CONTINUING> (28,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,147)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 4, 1997
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 8. CHANGE IN FISCAL YEAR
On September 4, 1997, the Board of Directors of the registrant voted to
change the registrant's fiscal year end from June 30 to December 31, beginning
with a short fiscal year ending on December 31, 1997. A transition report for
the period July 1, 1997 through December 31, 1997 will be filed on Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 18, 1997 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Gerald D. Deeney
-------------------------------
Gerald D. Deeney
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
2
