<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
________________
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
3415 UNIVERSITY AVENUE, ST. PAUL, MN 55114
(Address of principal executive offices) (zip code)
(612) 645-4500
(Registrant's telephone number, including area code)
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 1998
----- --------------------------
Class A Common Stock, $.0001 par value: 23,587,800
Common Stock, $.0001 par value: 66,222,975
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
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 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
</TABLE>
2
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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
<TABLE>
<CAPTION>
For The Three Months Ended March 31
-----------------------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES $136,839 $ 99,231
COST OF SALES 84,656 64,930
-------- --------
GROSS MARGIN 52,183 34,301
OPERATING EXPENSES:
Selling and marketing 27,230 23,430
Manufacturer Incentive 11,310 11,155
General and administrative 13,437 11,245
Commissions to retailers 3,256 3,797
Engineering and operations 3,311 3,715
Depreciation and amortization 3,772 4,583
-------- --------
Net operating loss (10,133) (23,624)
OTHER INCOME:
Interest income 996 1,169
Other 8 5
-------- --------
Net loss $ (9,129) $(22,450)
-------- --------
-------- --------
Net loss per share - basic and diluted $ (0.10) $ (0.25)
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 83,737 $ 68,646
Trade accounts receivable, net 39,754 44,992
Prepaid expenses and other 9,678 11,832
-------------- -----------------
Total current assets 133,169 125,470
-------------- -----------------
PROPERTY AND EQUIPMENT:
Land 351 351
Buildings and improvements 5,103 5,075
Equipment 139,701 138,264
-------------- -----------------
145,155 143,690
Less - Accumulated depreciation (83,007) (79,235)
-------------- -----------------
Total property and equipment, net 62,148 64,455
-------------- -----------------
OTHER ASSETS:
Satellite deposits 8,580 8,380
Long-term investments, consisting
of U.S. Treasury securities
4,172 3,970
Other 3,937 4,035
-------------- -----------------
Total other assets 16,689 16,385
-------------- -----------------
$212,006 $206,310
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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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 (DEFICIT)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 61,901 $ 60,599
Deferred revenue 62,340 56,156
Manufacturer Incentive obligation 19,285 17,023
-------------- -----------------
Total current liabilities 143,526 133,778
-------------- -----------------
LONG TERM LIABILITIES:
Due to HBI 10,000 10,000
Manufacturer Incentive obligation 65,513 60,433
-------------- -----------------
Total long term liabilities 75,513 70,433
-------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $0.01 Par Value, 50
million shares authorized; none issued
or outstanding - -
Class A Common Stock -
Participating, voting, $.0001 Par
Value, 500 million shares authorized,
23,293,251 shares issued and outstanding
at March 31, 1998 and 16,172,601 at
December 31, 1997 2 2
Common Stock -
Participating, voting, $.0001 Par
Value, 100 million shares authorized,
66,517,524 shares issued and outstanding
at March 31, 1998 and 73,638,174 at
December 31, 1997 7 7
Additional paid-in capital 374,877 374,877
Accumulated deficit (381,906) (372,777)
Accumulated other comprehensive income
(deficit) (13) (10)
-------------- -----------------
Total shareholders' equity (deficit) (7,033) 2,099
-------------- -----------------
$212,006 $206,310
-------------- -----------------
-------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
For The Three Months Ended March 31
-----------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(9,129) $(22,450)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 3,772 4,583
Media credits utilized - 47
Change in operating items:
Receivables and other current assets 7,392 3,952
Accounts payable and accrued expenses 1,302 7,209
Deferred revenue 6,184 8,826
Manufacturer Incentive 7,342 11,155
Other (107) (33)
-------- --------
Net cash provided by operating activities 16,756 13,289
-------- --------
INVESTING ACTIVITIES:
Purchase of and deposits on equipment (1,665) (5,556)
Proceeds from sale of long-term investment - 3,000
-------- --------
Net cash used in investing activities (1,665) (2,556)
-------- --------
FINANCING ACTIVITIES:
Advances from affiliated companies, net - (165)
-------- --------
Net cash used in financing activities - (165)
-------- --------
Increase in cash and
cash equivalents 15,091 10,568
-------- --------
CASH AND CASH EQUIVALENTS, beginning
of period 68,646 86,518
-------- --------
CASH AND CASH EQUIVALENTS, end of period $83,737 $97,086
-------- --------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ - $ -
-------- --------
-------- --------
Income taxes $ - $ -
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
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UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND 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 March 31, 1998 and December 31, 1997, and had approximately 67.6% of the
combined voting power with respect to all matters submitted for the vote of
all shareholders at March 31, 1998.
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. The accompanying
financial statements have been recast to conform to the new calendar year
presentation.
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 December 31, 1997
consolidated financial statements, the notes thereto, and the Company's
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 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
7
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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 110DEG. west longitude and eight transponders at 148DEG.
west longitude. The Permit requires the Company to comply with specified
construction and launch schedules. The FCC has the authority to revoke the
Permit if the Company fails to comply with the FCC schedule for construction
and launch. In connection therewith, the Company has entered into satellite
construction contracts with Lockheed Martin Astro Space Corp. ("Lockheed
Martin") for the construction of the two satellites (see below).
While the Company has generally been successful to date with respect to
compliance with regulatory matters, there can be no assurance that the
Company will succeed in obtaining and maintaining all requisite regulatory
approvals for its operations.
LOCKHEED MARTIN ASTRO SPACE AGREEMENT
The Company has entered into contracts with Lockheed Martin for the
construction of direct broadcast satellites at the 110DEG. orbital location
(the "110DEG. Contract") and at the 148DEG. orbital location (the "148DEG.
Contract").
Under the 110DEG. Contract, as amended effective May 1, 1998, the Company is
required to pay $76.2 million for satellite construction, of which $7.2
million has been paid through March 31, 1998. 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 earlier than December 31, 1998.
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
as follows: $6.0 million through December 31, 1998 and $63.0 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 March 31, 1998, such commitments totaled $1.8 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.
8
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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 are established and recorded upon activation of the
related DSS unit. In the quarter ended March 31, 1998, the Company charged
to expense $11.3 million, representing the full amount of those future
obligations for the Manufacturer Incentive program incurred during the
quarter ended March 31, 1998 for the sale of DSS units to new households.
Cash paid in the quarter ended March 31, 1998 totaled $4.0 million, and
future payment obligations (all of which have been previously charged to
expense) totaled $84.8 million at March 31, 1998.
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.
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (SFAS 130) was adopted by the Company effective January 1, 1998.
SFAS No. 130 requires 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 investment
by owners and distribution to owners. The changes required by SFAS No. 130
had no material effect on net income or shareholders' equity (deficit) for
quarter ended March 31, 1998.
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings and loss per Share" (SFAS No. 128) effective December 31, 1997. As
a result, all prior periods presented have been restated to conform to the
provisions of SFAS No. 128, which requires the presentation of basic and
diluted earnings and loss per share. Basic loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
during each year. Diluted
9
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loss per share is computed under the treasury stock method and is calculated
to include the dilutive effect of outstanding stock options. A
reconciliation of these amounts is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
For The Quarter Ended March 31
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss $(9,129) $(22,450)
---------- ----------
Weighted average number of common shares
outstanding - basic 89,811 89,811
Dilutive effect of option plans 35 -
---------- ----------
Common and common equivalent shares outstanding
- diluted 89,846 89,811
---------- ----------
Net loss per share - basic and diluted $(.10) $(.25)
---------- ----------
---------- ----------
</TABLE>
10
<PAGE>
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 continues to
develop 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, including consumer reaction to
USSB's revised channel line-up; 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, on vendors, including those
providing customer service and billing, and on Hughes Electronics
Corporation; sufficient availability of DSS units at retail; 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; the effects of, or costs associated
with, litigation involving the technology and the intellectual property
associated with the DSS system; 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 Transition Period ended December
31, 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 was filed on Form 10-K.
The Company provides subscription television programming via a high-power
direct broadcast satellite ("DBS") to households throughout the continental
United States. The Company broadcasts a high quality digital television
signal using the Digital Satellite System ("DSS"). The Company's programming
is available to customers who have a DSS unit, which consists of an 18-inch
satellite dish, a receiver/decoder and a remote control. All of the Company's
gross revenues and identifiable assets relate to the Company's activities in
this industry.
The Company commenced commercial operations in June 1994 and has not
generated net earnings to date. The Company achieved positive adjusted cash
flow of approximately $1.0 million (defined as earnings before interest,
taxes, depreciation, amortization and the non-cash component of the
Manufacturer Incentive program) for the quarter ended March 31, 1998.
Management does not expect to achieve positive adjusted cash flow for the
full year 1998. However, management anticipates that the Company will achieve
positive adjusted cash flow for the full year 1999.
11
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Management expects that net losses will continue into 1999 as the Company
continues to incur substantial marketing expenses (including Manufacturer
Incentive program expenses) in order to build its subscriber base. The
Company expects that it will generate net income during the year 2000.
Although there were several significant competitive developments in 1997 and
the first quarter of 1998, the market for the Company's programming continues
to grow. The introduction of DSS units is widely regarded as the most
successful introduction of a major consumer electronics product in United
States history. At March 31, 1998, approximately 3.59 million households were
authorized to receive DSS service ("DSS households"), up from 3.32 million at
December 31, 1997. As part of its ongoing strategy to focus on premium movie
entertainment and to simplify the DSS offering at retail, on March 10, 1998,
the Company and DIRECTV integrated the basic channels carried by USSB into
DIRECTV's programming line-up and the Company added two new commercial-free
premium movie channels: Showtime Extreme and fXM: Movies from Fox. Although
the integration of the basic channels was essentially completed as of March
31, 1998, the ultimate impact of these developments depends on many factors,
including consumer reaction to the Company's all-premium movie channel
line-up, which management expects will occur during a period of several
months. Preliminary indications are that, over the next several quarters,
the number of subscribers and revenue will continue to grow, but at a slower
rate. Since the basic channels generally provided lower margins than the
premium channels, the Company's gross margins have improved.
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 1,799,000 at
March 31, 1998 from approximately 1,740,000 at December 31, 1997.
Approximately 106,000 additional households were receiving a free promotional
month of USSB programming as of March 31, 1998.
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 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.
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.
12
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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>
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
Dec. 31,
1997 1,740 215 1,955 2,757 63% 3,318
March 31,
1998 1,799 106 1,905 3,128 58% 3,595
</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 programming 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 programming. The amounts shown
reflect the elimination of certain DSS deactivations. See note (e).
(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 (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 makes periodic reconciliations to estimate
the number of DSS households as accurately as possible.
As of March 31, 1998, the Company achieved a penetration of convertible
households of approximately 58 percent. The reduction in the penetration
percentage compared to previous quarters was impacted by the integration of
the basic channels described above, including the loss of 72,000 USSB
customers who subscribed only to the basic channels. For the quarter, the
Company experienced a net growth of 59,000 subscribers.
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 the quarter ended March 31, 1998, per subscriber revenues were also
affected by a reduction in subscription rates implemented by the Company on
March 10, 1998 for certain programming packages, as part of the basic channels
integration. The Company expects that average per subscriber revenue will
continue to decline as the effects of the lower subscription rates are
experienced over a full quarter.
13
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REVENUES:
(In thousands, except per subscriber data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
1998 1997 1997 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue
per paying subscriber (a) $24.22 $24.66 $24.71 $24.86 $24.86
Programming revenues (b) $136,839 $128,769 $114,383 $114,236 $99,231
</TABLE>
- ----------------
(a) Excludes pay-per-view event, commercial and TV GUIDE-TM- revenues.
(b) Includes pay-per-view event, commercial and TV GUIDE revenues.
RESULTS OF OPERATIONS
REVENUE OVERVIEW. The Company's total revenues increased to $136.8 million
for the quarter ended March 31, 1998, compared to $99.2 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 1,799,000 at March 31, 1998, from approximately
1,378,000 at March 31, 1997, offset by the reduction in certain per
subscriber rates, as described above.
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. The revenues from such events are highly dependent on the
type and number of pay-per-view events offered, and are expected to vary
accordingly.
COST OF SALES AND GROSS MARGIN. 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
$84.7 million for the quarter ended March 31, 1998, compared to $64.9 million
for the comparable prior year period. The increase in cost of programming was
primarily the result of an increased number of subscribers from the
comparable prior year period. The Company's gross margin percentage
increased to 38.1% for the quarter ended March 31, 1998, compared to 34.6%
for the comparable prior year period. The increase reflects the fact that
the Company's current programming offerings of premium channels carry higher
margins than the basic channels, as well as the achievement of certain
volume-based discounts in programming costs in the first quarter. Generally,
gross margin percentage 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 $62.3
million for the quarter ended March 31, 1998, compared to $57.9 million for
the comparable prior year period. The increase was primarily attributable to
the cost of providing the Company's services to a growing subscriber base,
including increased marketing, customer service and general and
administration expenses.
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
14
<PAGE>
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 $27.2 million for the quarter
ended March 31, 1998, compared to $23.4 million for the comparable prior year
period. 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 are established and recorded upon activation of the
related DSS unit. Manufacturer Incentive program expenses totaled $11.3
million for the quarter ended March 31, 1998, compared to $11.2 million in
the comparable prior year period. While the expense level remained
relatively constant on a quarter-to-quarter basis, the expense for the
quarter ended March 31, 1998 reflects a temporary reduction of costs with one
manufacturer in accordance with the arrangement with such manufacturer. The
Company expects the total expense under the Manufacturer Incentive program to
continue to be a significant component of the Company's operating expenses
and cash flows.
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
$13.4 million for the quarter ended March 31, 1998, compared to $11.2 million
for the comparable prior year period. The increase was primarily
attributable to increased billing and remittance processing costs, resulting
from the growth of the Company's subscriber base. In addition, the Company
may incur increased costs for certain customer service and billing services
due primarily to market conditions. 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.
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. As a
result, commissions to retailers were $3.3 million for the quarter ended
March 31, 1998, compared to $3.8 million for the comparable 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 were $3.3
million for the quarter ended March 31, 1998, compared to $3.7 million for
the comparable prior year period. The prior year amount included additional
expenses incurred by the Company in 1997 to upgrade the conditional access
system.
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 $3.8 million
for the quarter ended March 31, 1998, compared to $4.6 million for the
comparable prior year period.
15
<PAGE>
NET OPERATING LOSS. The Company recorded a net operating loss for the
quarter ended March 31, 1998 of $10.1 million, compared to $23.6 million for
the comparable prior year period.
INTEREST INCOME. Interest income for the quarter ended March 31, 1998 was
$1.0 million compared to $1.2 million for the comparable prior year period.
NET LOSS. The Company recorded a net loss for the quarter ended March 31,
1998 of $9.1 million, compared to $22.5 million for the comparable prior year
period.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES. Cash and cash equivalents increased to
$83.7 million at March 31, 1998 from $68.6 million at December 31, 1997. The
significant components of the changes in cash and cash equivalents were as
follows (in millions):
<TABLE>
<CAPTION>
Quarter Ended March 31
----------------------
1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents, beginning of quarter $68.6 $ 86.5
Net loss (9.1) (22.5)
Depreciation and amortization 3.8 4.6
Changes in operating items 22.1 31.1
Net capital expenditures (1.7) (5.6)
Other - 2.9
----- -----
Cash and cash equivalents, end of quarter $83.7 $ 97.0
----- -----
----- -----
</TABLE>
The increase in cash at March 31, 1998 primarily reflects the receipt of
prepaid annual subscription renewals and the number of new subscribers added
in the first quarter.
The Company expects the total expense under the Manufacturer Incentive
program will continue to be a significant component of the Company's
operating expenses and cash flows. As the level of retail DSS unit sales
increases, the expense and cash flow related to this program will increase
accordingly. However, management believes that the Company's current cash
position and cash generated from operations is adequate to meet anticipated
operating expenses through 1998. Management further believes that its cash
balances will not be less than $35-40 million during the next twelve months,
assuming that cash reserves are not utilized for any major capital
expenditures.
The Company may require external financing for future major capital
expenditures, such as the construction of a new satellite, DBS-4, at the
101DEG. west longitude orbital location or the cost of satellites at the
110DEG. and 148DEG. 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 110DEG. or
148DEG. 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 March 31, 1998 was a negative $10.4
million, compared to a negative working capital of $8.3 million at December
31, 1997. This change resulted primarily from the Company's net loss and the
increase in the current portion of the Manufacturer Incentive program
obligation. Management expects that working capital will remain negative
through 1998 as the Manufacturer Incentive program obligation increases with
the growth of DSS households.
16
<PAGE>
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.
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 contains additional information
on these matters.
CAPITAL EXPENDITURES. Capital expenditures for the quarter ended March 31,
1998 totaled $1.7 million, consisting primarily of satellite deposits and
purchased computer hardware and 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 condensed
consolidated financial statements contains additional information on this
matter.
NET OPERATING LOSS CARRY FORWARD. At March 31, 1998, the Company's net
operating loss carry forward was $309.3 million for federal tax purposes and
$381.9 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. Such carryforwards expire in the years 2000
through 2013.
YEAR 2000
The Company has analyzed the Year 2000 compliance issues related to its
computer systems. To be Year 2000 compliant, computer systems that have time
sensitive software must recognize a date using "00" as the year 2000 rather
than the year 1900. Certain systems have been determined to be Year 2000
compliant. The Company is executing an implementation plan whereby all
systems critical to managing the business will be made Year 2000 compliant,
and is working with its customer service and billing vendor to assure that
the vendor's systems will be Year 2000 compliant. The Company does not
expect the cost to be incurred relating to Year 2000 issues to have a
material effect on its results of operations.
SEASONALITY
Sales of DSS units appear to 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.
17
<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.
On December 4, 1997, the ITC determined not to review the Administrative Law
Judge's determination. On January 8, 1998, PMC filed a Petition to Review
this decision of the ITC in the Court of Appeals for the Federal Circuit.
The Company intends to seek leave to intervene in this appeal.
In the second action, PMC filed a complaint in the United States District
Court for the Northern District of California alleging, among other things,
that USSB and DIRECTV directly infringe at least one claim of each of the
three patents. PMC also alleges that USSB and DIRECTV have contributed to and
induced the infringement of two of said patents by the other respondents.
PMC has alleged that the Company's infringement of the said patents is
willful. PMC has requested an award of damages, that such damages be trebled,
that the Company and the other respondents be enjoined from further
infringement of said patents, and award of its attorneys' fees.
The Company denies that it has engaged in any acts of infringement, either
directly or indirectly as alleged in PMC's complaint. Pursuant to a
stipulated motion to stay the action pending the resolution of the ITC
investigation described above, the district court entered an order to that
effect.
18
<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,
pay-per-view and other features used in the DSS system. IPPV has requested
the court to award IPPV damages, and to treble such damages. Four of the five
IPPV patents in the suit have expired and the fifth will expire in 2002.
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.
19
<PAGE>
ITEM 2. USE OF PROCEEDS
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
("SEC") on May 10, 1996 and amendments thereto on November 12, 1996 and May
12, 1997. Further information was reported in the Company's periodic reports
filed with the SEC, commencing with its Report on Form 10-Q for the quarter
ended September 30, 1997.
The following table sets forth the amount of direct or indirect payments to
others from such effective date through March 31, 1998 which have changed
since the most recently filed Report.
<TABLE>
<CAPTION>
Direct or Indirect
Use of Proceeds Payments to Others
--------------- ------------------
<S> <C>
Working Capital $31,820,034
Purchase and Installation of Machinery and Equipment 22,005,806
Temporary Investments
Short Term Treasuries 55,000,000
Cash 1,401,935
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.33 Amendment No. 5, effective May 1, 1998, to Direct Broadcast
Satellite Contract No. 104274-B between United States Satellite
Broadcasting Company, Inc. and Lockheed Martin Corporation.(*)
27.1 Financial Data Schedule
- -----------
(*)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-Q.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1998 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)
21
<PAGE>
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
Index of Exhibits to Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1998
Exhibit No. Exhibit Description
----------- -------------------
10.33 Amendment No. 5, effective May 1, 1998, to Direct
Broadcast Satellite Contract No. 104274-B between
United States Satellite Broadcasting Company, Inc. and
Lockheed Martin Corporation.
27.1 Financial Data Schedule
22
<PAGE>
AMENDMENT NO. 5
CONTRACT NO. 104274-B
DIRECT BROADCAST SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT is effective May 1, 1998.
WHEREAS, USSB and the Contractor (hereinafter referred to as the "Parties"),
have agreed to an extension in the suspension of all program activities
effective May 1, 1998 through a period not to exceed October 1, 1998 and;
WHEREAS the Parties, recognizing that a specific date ending the extension of
the suspension may occur at any time during such period and;
WHEREAS the Parties, recognizing that changes are required in the Contract,
have created this Amendment No. 5;
NOW THEREFORE, in consideration of the promises and mutual covenants
hereinafter contained, the Parties agree to the following:
I. Beginning on May 1, 1998, and on the first day of each month thereafter
until the first day of the subsequent month after Contractor's receipt of
USSB's written Request for Resumption of Activities, and continuing through
a period not to exceed October 1, 1998, the Parties agree to amend the
Terms and Conditions of the subject Contract as follows:
A. In Article 3.B, Price, the price of the Spacecraft and the Total
Contract Price shall be adjusted on a monthly basis as follows:
<TABLE>
<CAPTION>
Date of Monthly Total Increase in Total Increase in
Increment Increment Price of Spacecraft Total Contract Price
--------- --------- ------------------- --------------------
<S> <C> <C> <C>
May 1, 1998
June 1, 1998
July 1, 1998 * * *
August 1, 1998
September 1,1998
October 1, 1998
</TABLE>
B. With respect to Article 4, Deliverable Items and Delivery Schedule,
upon the receipt by the Contractor of USSB's written Request for
Resumption of Activities on or before June 1, 1998 the delivery
schedule for the Spacecraft will be the end of the Fourth Quarter,
1999. With the receipt by the Contractor of USSB's written Request
for Resumption of Activities after June 1, 1998 and on or before
October 1, 1998, the delivery schedule for the Spacecraft will be
negotiated in accordance with the provisions of Section II of this
Amendment.
Page 1 of 2
<PAGE>
C. In Article 5.A, Progress and Milestone Payments, the Progress Payment
Plan, beginning with Payment Number 18 and continuing through Payment
Number 23 will be adjusted to * each month as
follows:
<TABLE>
<CAPTION>
Date of Payment Monthly Total Cumulative Total
Increment Number ($ in U.S. Millions) ($ in U.S. Millions)
--------- --------- -------------------- --------------------
<S> <C> <C> <C>
May 1, 1998
June 1, 1998
July 1, 1998 * * *
August 1, 1998
September 1, 1998
October 1, 1998
</TABLE>
D. In Article 15A, USSB's Right to Terminate, the Termination Schedule
shall be changed as follows:
<TABLE>
<CAPTION>
Date of Monthly Total Cumulative Total
Increment ($ in U.S. Millions) ($ in U.S. Millions)
--------- -------------------- --------------------
<S> <C> <C>
May - 1998
June
July * *
August
September
October
</TABLE>
II. Upon receipt by the Contractor of USSB's written Notice of Resumption of
Activities, the Parties agree to modify the Articles and Exhibits of this
Contract. Such modifications shall, at a minimum, provide the appropriate
adjustments to the balance of all schedules, amounts, and events described
and contemplated by this Amendment but not adjusted by this amendment and
will be predicated on the date of USSB's written Request for Resumption of
Activities. In the event that the Parties do not agree to such
modifications as evidenced by a written amendment to this Contract by
October 1, 1998, this Contract will be considered terminated for the
convenience of USSB in accordance with the provisions of Article 15.
III. Except as specifically set forth above all other terms and conditions
of the Contract 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. 5.
IN WITNESS THEREOF, the Parties have caused this Amendment No. 5 to be signed by
their duly authorized officer or representative.
United States Satellite Lockheed Martin Corporation
Broadcasting Company, Inc.
By: /s/ Robert W. Hubbard By: /s/ William W. Whisenant
------------------------------ ----------------------------------
Robert W. Hubbard Wm. W. Whisenant
Executive Vice President Contracts Manager
Lockheed Martin Telecommunications
*Material deleted pursuant to request for confidential treatment.
Page 2 of 2
<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 1 ON PAGES 3 AND 4 OF THE COMPANY'S REPORT ON
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 83,737
<SECURITIES> 4,172
<RECEIVABLES> 46,696
<ALLOWANCES> 6,942
<INVENTORY> 0
<CURRENT-ASSETS> 133,169
<PP&E> 145,155
<DEPRECIATION> 83,007
<TOTAL-ASSETS> 212,006
<CURRENT-LIABILITIES> 143,526
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> (7,042)
<TOTAL-LIABILITY-AND-EQUITY> 212,006
<SALES> 136,839
<TOTAL-REVENUES> 136,839
<CGS> 84,656
<TOTAL-COSTS> 84,656
<OTHER-EXPENSES> 62,316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,129)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,129)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
