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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
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/ / ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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OR
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/X/ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from July 1, 1997 to December 31, 1997
Commission file number 0-27492
UNITED STATES SATELLITE BROADCASTING
COMPANY, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA 41-1407863
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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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
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Securities registered pursuant to Section 12(b) of the None
Act:
Securities registered pursuant to Section 12(g) of the Class A Common Stock, $.0001 par
Act: value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 17, 1998, 16,172,601 shares of the registrant's Class A Common Stock
were issued and outstanding, and the aggregate market value of the Class A
Common Stock held by non-affiliates of the registrant as of March 17, 1998, was
approximately $151,325,349.
DOCUMENTS INCORPORATED BY REFERENCE
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Selected portions of the 1997 Report to Shareholders Incorporated into Part
II
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PART I
ITEM 1. BUSINESS
GENERAL
United States Satellite Broadcasting Company, Inc. (the "Company") is a
provider of subscription television programming to households throughout the
continental United States via high-power direct broadcast satellite ("DBS").
The Company broadcasts a high quality digital television signal using the
Digital Satellite System ("DSS-Registered Trademark-") broadcasting system.
The Company's programming is available to virtually all of the approximately
97 million U.S. television households upon the purchase of a DSS unit, which
features an 18 inch satellite dish. The Company currently can deliver up to
30 channels of video programming, with a focus on "premium" networks such as
Multichannel HBO-Registered Trademark- (5 channels), HBO-Registered
Trademark- FAMILY (2 channels), Multichannel SHOWTIME-Registered Trademark- (4
channels), Multichannel CINEMAX-Registered Trademark- (3 channels),
Multichannel THE MOVIE CHANNEL-TM- (2 channels), FLIX-Registered Trademark-,
the SUNDANCE CHANNEL-Registered Trademark-, SHOWTIME EXTREME-TM-, and FXM:
MOVIES FROM FOX. The programming delivered by the Company includes over 900
movie titles per month. The Company also broadcasts events and specials on a
pay-per-view basis, as well as public service programming.
The Company broadcasts from a single satellite, DBS-1, which is able to
reach the entire continental United States. DBS-1 broadcasts with minimal
signal interference because of its favorable orbital location at 101DEG.
west longitude, greater orbital spacing than that provided for non-DBS
satellites and its high-power 120 watt transponders. DBS-1 was manufactured
by Hughes Electronics Corporation ("Hughes") and is owned and operated
jointly by the Company and DIRECTV, Inc., a subsidiary of Hughes. The
Company believes that the DSS system, which incorporates the technologically
advanced MPEG 2 digital compression standard, results in a higher picture
quality than any other existing terrestrial domestic television broadcasting
system. The Company expects to replace DBS-1 at its current orbital location
before the end of its expected life in 2010. In addition to its FCC license
to broadcast from 101DEG. west longitude, the Company also has an FCC permit
to construct and launch high-power DBS systems at two other orbital locations.
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control.
The DSS unit features an easy to use on-screen electronic program guide, a
ratings control function and the capability to switch easily between DSS
signals and local programming signals. DSS units are currently manufactured
and sold by leading consumer electronics manufacturers and sold at over
26,000 retail locations.
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. The Company and DIRECTV, Inc. share the use of
the technology underlying the DSS system, cooperate to promote and build
awareness of the DSS system and currently offer complementary programming
packages. The Company estimates that the majority of DSS households receive
both USSB-Registered Trademark- programming and DIRECTV-Registered
Trademark- programming. DIRECTV, Inc. offers approximately 175 channels of
digital video and audio programming, including basics, news, sports,
entertainment and pay-per-view movies and events.
STRATEGY
The Company seeks to offer the highest quality, most-sought-after
premium television programming at a competitive price, enhance the DSS
position as the leading provider of satellite television, increase the market
share of USSB programming by offering the premier movie networks and a wide
variety of pay-per-view events, and achieve profitability.
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The Company intends to accomplish these objectives by (i) building on
its lead in the high power DBS market; (ii) capitalizing on its relationships
with leading program suppliers, with which it has multi-year agreements;
(iii) maintaining its strategic relationship with Hughes and DIRECTV, Inc. to
further benefit from the technological advantages of high-power DBS and the
DSS system and to promote and build awareness of the DSS system; (iv)
enhancing its strong relationships and joint marketing efforts with leading
consumer electronics manufacturers and retailers to further promote the sale
of DSS units and USSB programming; (v) expanding and continuing to support
the large and established retail distribution network for DSS units and
adding other distribution opportunities; (vi) continuing to provide the
highest broadcast quality; and (vii) emphasizing customer service to maintain
a high level of customer satisfaction.
On January 6, 1998, USSB and DIRECTV announced an arrangement that is
designed to better serve the growing base of more than three million DSS
subscribers nationwide. Under the arrangement, the basic channels previously
carried by USSB were integrated into the DIRECTV channel line-up on March 10,
1998. The channels involved were the MTV Networks (MTV, M2, VH1, Nickelodeon
and Nick at Nite's TV LAND), Lifetime and Comedy Central. At the same time,
USSB added new commercial-free premium movie services from Showtime Networks
Inc. and fXM Networks, Inc.: Showtime Extreme and fXM: Movies from Fox.
The Company expects to add additional premium movie channels in 1998.
THE MARKET
The Company believes that there is significant unsatisfied demand for
high quality, reasonably priced television programming. The Company
believes, therefore, that the potential market in the United States for
high-power DBS broadcasting consists of all of the approximately 97 million
households with television sets, as well as certain commercial markets, such
as hotels, motels, bars and restaurants.
The primary target markets for the Company include (i) existing cable
subscribers who desire a greater choice and variety in programming, improved
video and audio quality, better customer service and fewer signal
interruptions; and (ii) all of the U.S. television households unserved by
cable. Based upon the most recently available FCC data, there are
approximately 64 million U.S. cable subscribers. These subscribers
reportedly pay an average of approximately $32 per month for television
programming services. The Company also views as a target market the
approximately 30 million U.S. television households which have access to
cable television but are not customers of the local cable operator.
The Company believes that the demand for satellite television services
in the United States will continue to grow. The Company also believes that
the DSS system, with its digital picture and CD-quality sound, provides the
consumer with the highest quality subscription television programming
currently available. While the high-power DBS share of the U.S. television
market is currently small compared to cable, it has been steadily increasing.
The Company has conducted extensive research to better understand the
television market in the United States, the desires and preferences of
consumers and the features and benefits that will attract subscribers. This
research indicates that a substantial number of consumers are dissatisfied
with cable television, that former cable subscribers who subscribe to the DSS
system are more satisfied with it than cable and that 63% of DSS unit owners
who were cable subscribers purchased premium movie programming. This
research also indicates that the most likely USSB customers are homeowners
with families who currently have or have had cable, subscribed to the premium
movie channels and consider television a significant component of their
entertainment activities. The Company believes, based on this research, that
demand for more choice in television programming, dissatisfied cable
subscribers, and consumers unserved or underserved by cable will contribute
to the market growth of the DSS system and the Company's subscriber base.
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The Company's research also indicates that the growth of the DSS market
has been hampered by the misperception that reception of local television
broadcasts is incompatible with the DSS system. The Company and DIRECTV have
initiated programs designed to inform consumers and retailers about reception
of local television broadcasts and to facilitate local broadcast reception.
The Company has commenced an extensive information campaign, coupled with
training of retail salespeople, to educate consumers that local television
broadcasts are readily received using a standard television antenna with the
DSS system. DIRECTV recently announced a program to encourage retailers to
include off-air antennas with DSS purchases or to subsidize their cost.
MARKETING
The Company engages in extensive marketing, advertising and promotional
activities to increase consumer awareness of the DSS system and USSB
programming, to promote the sale of DSS units and to generate subscriptions
to USSB programming. The Company intends to continue these efforts and
anticipates that it will continue to make substantial expenditures for new
and intensified marketing, advertising and promotional activities, including
the following:
ADVERTISING. The Company's advertising activities presently consist of
television commercials aired nationally, radio commercials, and print
advertisements promoting the DSS system and USSB programming service.
PROMOTIONS. The Company promotes subscriptions to its programming
service by offering all owners of DSS units, upon initial purchase of a DSS
unit, one free promotional month of its premier programming package,
ENTERTAINMENT UNLIMITED-SM-. During the free promotional month of
programming, the Company engages in targeted telemarketing and mailings
designed to convert free subscribers to paying subscribers. The Company
believes that its free promotional month of ENTERTAINMENT UNLIMITED is an
effective marketing tool.
To support its marketing, the Company also delivers a free channel that
is available to all owners of DSS units and, in conjunction with its
programmers, regularly provides USSB FREEVIEWs-Registered Trademark-, or
access to programming channels during certain periods of the year without
charge. The Company also engages in joint advertising and promotions with
its programmers.
TV GUIDE-TM-. The Company has a relationship with the publisher of TV
GUIDE, whereby the Company offers a "DSS Edition of TV GUIDE", available to
all DSS households. The DSS Edition of TV GUIDE provides a comprehensive
listing of all subscription channels offered on the DSS system, and features
special inserts reviewing programming offered by USSB each week.
RETAIL SUPPORT. The Company engages in an active retail support
program, which provides dealers with point-of-sale literature and displays,
incentives and training. DSS retailers promote the Company's programming and
encourage customers to activate their free promotional month and to subscribe
to ENTERTAINMENT UNLIMITED. The Company generally pays commissions to
eligible retailers when their customers become paying subscribers, regardless
of which manufacturer's DSS unit was purchased. In addition, the Company
makes USSB programming available for demonstration to the customer at the
point of sale.
The Company has a long-term sales agency agreement with Thomson Consumer
Electronics ("Thomson"), pursuant to which Thomson acts as the Company's
sales agent for consumer electronics outlets that Thomson services. Thomson
is the top selling television manufacturer in the United States, marketing
the "RCA," "GE" and "ProScan-Registered Trademark-" brands. Both the Company,
with a dedicated staff of approximately 40 sales personnel, and Thomson, with
a sales and support staff of approximately 350, service retail outlets.
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MANUFACTURER INCENTIVE PROGRAM AND OTHER JOINT MARKETING. The Company
engages in a number of joint marketing efforts with DIRECTV, Inc. and DSS
unit manufacturers. One of these efforts, the Manufacturer Incentive
program, is a joint financial incentive arrangement with DIRECTV which has
had the effect of contributing to DSS manufacturers lowering the price of DSS
units. Such arrangements run for up to four years depending on the
manufacturer.
The Company also shares costs with other DSS system participants for
advertising, public relations and retail promotions. The Company believes it
also benefits from the marketing efforts of all DSS system participants. All
current manufacturers of DSS units include information regarding USSB
programming in their retail packaging and all new DSS unit manufacturers are
expected to continue this practice.
PROGRAMMING
The Company selected its programming based on extensive market research,
which indicated that potential DSS customers would have a strong desire for
movies and major pay-per-view events. As a result, the Company sought
multi-year agreements with content providers which offered programming that
could satisfy this target market. The Company broadcasts over 900 movie
titles per month and a wide variety of specialty sports events and
entertainment specials on a pay-per-view basis.
The Company delivers premium networks in multichannel format to increase
viewer choice and variety. The Company is not aware of any cable system with
a comparable level of multichannel premium programming. The Company's
research indicates that multichannel programming is a popular attraction with
its subscribers, as each programmer generally "counter programs" certain of
its multiple channels; i.e., the programmer will, for example, run an action
movie, a comedy movie and a family movie in the same general time slot. The
Company's delivery of premium channels in multichannel format allows a USSB
subscriber to receive multiple channels of a premium service at a price
generally paid by cable subscribers for one premium channel. In early 1997,
the Company continued its commitment to providing the best premium movie
channels by adding HBO Family (2 channels) and Showtime 3, at no additional
cost to subscribers. On March 10, 1998, USSB added two new commercial-free
premium movie services to its line-up: fXM: Movies from Fox, and the
national premiere of Showtime Extreme.
Coinciding with the launch of the new movie channels from Showtime and
Fox, the Company announced new programming packages effective March 10, 1998.
Programming is currently available in four subscription packages:
Entertainment Unlimited, Select Three, Select Two, and Select One. The
Company's top programming package, Entertainment Unlimited, contains all of
the premium movie channels offered by the Company. In addition to
Entertainment Unlimited, as the package names imply, DSS owners can choose to
put together their own package by selecting any one or any combination of the
premium networks offered by the Company. Current subscription prices for the
packages range from $10.99 to $32.99 per month. Management believes that the
Company offers the greatest number of premium movie channels with the highest
degree of flexibility as compared to its competitors.
The Company makes its pay-per-view events available to all residential
DSS owners. The Company also distributes some of its pay-per-view events to
commercial establishments through a third party.
The Company offers a complimentary channel to all DSS unit owners,
whether or not they are USSB programming subscribers. This channel is
currently utilized by the Company to broadcast marketing messages to maximize
viewership of upcoming USSB programming, as well as for public service
broadcasting. The Company also broadcasts in Spanish all of the programming
which is provided to it with a Spanish language soundtrack.
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Since the DSS system poses no technical barriers to receiving both USSB
programming and DIRECTV programming, all purchasers of DSS units have access
to more than 200 channels of programming. DIRECTV programming currently
includes approximately 50 channels of pay-per-view movies, as well as
subscription sports packages, established basic networks and audio services.
The Company provides programming that complements DIRECTV's existing
programming packages, thus maximizing the consumer appeal of the DSS system.
There is currently no overlap between USSB programming and DIRECTV
programming.
Local television stations are readily received using a standard
television antenna with the DSS system. DSS owners can easily switch between
DSS programs and local stations by using the DSS remote control. According to
the Company's research, approximately 60% of DSS households currently receive
local programming signals from standard television antennas. DSS owners who
are not able to receive local programming signals because of their distance
from terrestrial broadcasting towers may receive national network programming
through the DSS system. Local programming is also available to DSS owners
through a basic "lifeline" cable subscription.
DISTRIBUTION OF DSS UNITS
The introduction of the DSS unit is widely regarded as the most
successful introduction and fastest growing major consumer electronics
product in United States history. Since its introduction three years ago,
more than four million DSS units have been shipped to retailers.
DSS units are currently sold at over 26,000 retail locations, including
national retailers such as Best Buy, Circuit City, Radio Shack, Sears and
WalMart. DSS systems are also available at regional and independent consumer
electronics stores, satellite specialty stores, and other specialty retailers
including catalog, internet and television shopping networks. DSS units are
also distributed by National Rural Telecommunications Cooperative affiliates
that sell satellite equipment predominately in rural areas. The Company
recently entered into arrangements with the video subsidiaries of two
regional telephone operating companies whereby such companies will market,
sell and provide billing and customer service for DSS systems and USSB
programming. The Company's sales agency agreement with AT&T Corp. has been
terminated.
DSS units are currently manufactured and distributed by many of the most
prominent consumer electronics companies, including: RCA, Sony, GE, Hughes
Network Systems, Toshiba, Panasonic, Optimus and Hitachi.
THE DSS UNIT
The DSS unit consists of an unobtrusive 18 inch satellite dish, an
integrated receiver/decoder similar in size to a VCR and a remote control.
The dish, which must be aimed in the direction of the 101DEG. west longitude
orbital location, can be mounted on the exterior of the home. Company
research indicates that approximately 63% of purchasers of DSS units choose
to install their units themselves, while the balance have their units
professionally installed.
The DSS unit has been designed to be as easy to use as a basic
television set. The consumer-friendly remote control allows subscribers to
quickly and easily access desired programming via a colorful on-screen
program guide and menu system. Subscribers can create lists of favorite
channels, limit access to certain types of programming and establish budget
limits on pay-per-view selections. The remote control has been designed to
be compatible with a wide variety of television sets, allowing subscribers to
operate both the television set and the DSS unit with the same remote
control.
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The DSS system is also designed to receive local television broadcasts
by using readily available television antennas. Many antennas on the market
today provide improved and convenient ways to receive local stations with the
DSS system.
The DSS system's on-screen programming guide provides convenient and
easy-to-use information regarding all programming and channels, as well as
program ratings for most programs carried by the premium services and permits
parents to set rating limits and "lock out" programming which the subscriber
does not wish to receive.
The DSS system is designed to be available (i.e., free from outages)
99.7% of the time. Outages are generally the result of severe storms passing
between the satellite and the customer's dish or between the Company's
transmission facility and the satellite.
OPERATIONS
The Company's program suppliers deliver signals to the Company via
commercial satellites, fiber optics or microwave transmissions. These
signals are then uplinked, or transmitted, to the Company's transponders on
the DBS-1 satellite, through antennas located at the Company's National
Broadcast Center in Oakdale, Minnesota. DBS-1 then broadcasts the signal to
DSS households. The Company also maintains a separate Auxiliary Broadcast
Center which provides redundant uplinking capability.
All of the Company's video channels are encrypted to prevent
unauthorized reception of the signal. The conditional access system utilized
in the DSS system, which controls the encryption and decryption of the
television signal, was developed and is operated by NDS Americas Inc.
(formerly News DataCom). The signal processing system, which is responsible
for the transmission of audio and video, was developed by Thomson. Both
technologies were developed under contract with Hughes and are available for
use by the Company pursuant to long-term agreements with Hughes. The
conditional access system was upgraded in 1997 by issuing replacement access
cards to all DSS unit owners with "first-generation" cards.
The conditional access system is controlled by a Conditional Access
Management Center located in Castle Rock, Colorado, with a backup facility in
Los Angeles, California. The conditional access system has many flexible
features, allowing for subscription services and pay-per-view services on
both an impulse and order-ahead basis.
The Company's signal processing system and all DSS units, regardless of
manufacturer, fully comply with the main profile and the main level of the
MPEG 2 digital compression standard. MPEG 2 is an international standard
promulgated by the Moving Picture Expert Group. Compliance with MPEG 2 allows
DSS unit manufacturers efficiencies in designing and manufacturing receivers.
Even though the DSS system is MPEG 2 compliant, it incorporates a number of
proprietary technologies and may not be used by other high-power DBS
broadcasters unless they obtain a license to such technology from Hughes.
The Company contracts out customer service and billing functions to
Alliance Data Systems, Inc. ("ADS") (formerly BSI Business Services, Inc.).
ADS's functions include the handling of orders from subscribers, establishing
and maintaining customer accounts, inbound and outbound telemarketing,
billing and remittance processing. All of ADS's interactions with
subscribers are conducted under the Company's name. The Company seeks to
provide the highest levels of customer service and believes that customer
service is important in developing customer loyalty and in distinguishing its
service from its competitors.
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SATELLITE
The Company owns five-sixteenths of DBS-1, including a five transponder
payload on the satellite. DBS-1 was manufactured by Hughes and was launched
by Arianespace in December 1993. Hughes currently estimates that the DBS-1
satellite will have a life of 15.9 years, plus or minus 0.4 years, from its
launch date. The Company expects that it will make arrangements for a
replacement satellite to ensure continuity of its programming service prior
to the end of the useful life of DBS-1.
OTHER COMPANY ORBITAL LOCATIONS
The FCC has issued a Construction Permit and Launch Authority which
authorizes the Company to construct high-power DBS systems at 110DEG. west
longitude (three transponders) and 148DEG. west longitude (eight
transponders). In connection with this permit, the Company has entered into
two satellite construction contracts with Lockheed Martin for the
construction of the two satellites. The 110DEG. west longitude orbital slot
would enable the Company to provide a second high-power DBS service to the
United States, and additionally to Alaska and Hawaii. The 148DEG. west
longitude slot would allow the Company to provide programming between the
United States and the Pacific Rim, if the FCC and international regulatory
bodies agree to grant the necessary authorizations. See "Regulatory Matters."
COMPETITION
The Company's existing and potential competitors comprise a broad range
of companies engaged in communications and entertainment, including cable
operators, other direct-to-home satellite service providers, wireless cable
operators, open video providers, electric utilities with existing fiber
networks, television networks and home video products companies, as well as
companies developing new technologies. The FCC has granted several entities
authority to construct and launch satellites in the Ka-band which could
provide direct-to-home services, potentially allowing customers to
participate in activities from distance learning to interactive home
shopping. One company has proposed using the Ka-band to uplink local
television station signals within their Designated Market Areas and making
such signals available to all DBS providers for sale by the DBS providers to
their subscribers. The Company anticipates that other DBS satellites will be
launched at the 110DEG. west longitude and other orbital locations, increasing
the number of competitors in the direct broadcast satellite market. Many of
the Company's competitors have greater financial and marketing resources than
the Company, and the business of providing subscription and pay television
programming is highly competitive. The Company expects that quality and
variety of programming, quality of picture and service and cost will be the
key bases of competition.
The Company believes that the DSS system has several advantages,
including superior picture and sound quality compared to terrestrial
broadcasters and most cable operators, its programming variety, its retail
distribution network, well-established brand name manufacturers, advantageous
orbital location and the limited capital expenditures required in the future.
The DSS system currently offers the broadest variety of programming available
from any single source and employs the MPEG 2 digital compression standard
which, the Company believes, results in a higher picture quality than any
other existing domestic television broadcasting system. With the 101DEG.
west longitude orbital slot, the Company (and DIRECTV, Inc.) also have the
most desirable location for reaching the entire continental United States
with the least possibility of obstruction. The Company believes that the 18
inch dish used in the DSS unit also gives the Company an advantage over many
of its competitors, who must generally rely on larger and, in the case of
C-band broadcasters, more expensive dishes.
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CABLE OPERATORS
Cable television is currently available for purchase by as much as 97%
of the approximately 97 million U.S. television households. The cable
television industry is an established provider of television programming,
with approximately 66% of total television households subscribing. Cable
systems typically offer 30 to 80 channels at an average monthly subscription
price of approximately $32.
Cable television providers benefit from their entrenched position in the
domestic consumer marketplace. Cable subscribers have relatively minimal
up-front costs as compared to DSS households, which must purchase (or lease)
and install the DSS unit. In addition, the cost of both USSB programming and
DIRECTV programming may be higher than a subscriber would pay for cable
service. Certain cable companies have indicated an intention to rebuild their
transmission systems to upgrade to digital technology or add some digital
capacity, which would provide their cable television customers with improved
picture quality and sound and/or more channels.
SATELLITE PROGRAM PROVIDERS
The FCC authorizes two types of satellite services for transmission of
television programming: (i) high-power DBS and (ii) low-power (C-band) and
medium-power (Ku-band) DBS. In addition, the FCC has recently authorized the
use of Ka-Band satellites, although none have been constructed or launched.
High-power DBS delivers high quality video and audio signals, can be received
by an easily installed, 18 inch dish with virtually no signal interference
and, depending on the satellite's orbital location, can be broadcast
throughout the continental United States from a single satellite. Low- and
medium-power DBS were intended by the FCC primarily for commercial use.
The International Telecommunication Union, an agency of the United
Nations, allocated to the United States 32 transponders at each of eight
orbital locations for the provision of domestic high-power DBS service. The
FCC has issued licenses or construction permits for all eight orbital
locations. Although the number of potential competitors in the high-power DBS
market is limited by the number of orbital slots authorized for such service
by the FCC and by regulatory authorities of adjoining countries, additional
spectrum may be allocated to high-power DBS in the future, which would
increase the number of orbital locations beyond the present eight. In
addition, satellites regulated by foreign governments may, in the future,
provide competitive DBS services under protocols between the United States
and such foreign governments. Under a protocol between Mexico and the United
States, Mexico has an orbital location which permits service to the United
States and the FCC has granted a Mexican entity authority in the United
States for reception of Spanish programming. If Canada were to enter into a
similar protocol, Canada also has orbital locations which would permit DBS
service to the United States.
HIGH-POWER DBS
The Company and DIRECTV, Inc. were the first domestic providers of
high-power DBS programming. DIRECTV, Inc. broadcasts over 175 channels from
the 101DEG. west longitude orbital location shared with the Company, as
compared with up to 30 channels offered by the Company. DIRECTV, Inc. offers
a broad range of sports programming and emphasizes pay-per-view movies and
events and offers over 50 channels of "basic" programming. While the Company
and DIRECTV, Inc. share the goal of promoting the DSS system, they do compete
for subscriber revenues once the DSS unit is purchased by the consumer.
EchoStar Communications Corporation ("EchoStar") provides service using
three high-power DBS satellites. Two satellites are at the 119DEG. west
longitude orbital location. EchoStar offers programming which includes many
of the premium and basic channels available on the DSS
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system and is aggressively marketing its programming services and satellite
dish as an alternative to the DSS system. EchoStar manufactures the 18-inch
satellite dish needed to receive its programming and thereby has greater
control over the retail price of its satellite dish than the Company, but
also bears the financial responsibility associated with this aspect of its
business. In addition to two satellites at the 119DEG. west longitude
orbital location, EchoStar has acquired Direct Broadcast Satellite
Corporation, which has launched a satellite at 61.5DEG. west longitude.
Direct Broadcast Satellite Corporation has authority for 11 transponder slots
at 61.5DEG. west longitude, which is available to provide EchoStar's
programming. In addition, Dominion Video Satellite, Inc. has agreed to lease
six of its eight transponders at the 61.5DEG. orbital location to EchoStar.
Since EchoStar and Dominion Video Satellite, Inc. will use the same
encryption and receive system, Dominion subscribers may purchase EchoStar
programming in addition to Dominion programming. EchoStar has also acquired
24 transponder slots at 148DEG. west longitude which were auctioned in
January 1996 by the FCC and has requested authority from the FCC to relocate
one of its two satellites at 119DEG. west longitude to 148DEG. west longitude.
The partners in PRIMESTAR Partners ("PRIMESTAR"), a partnership
consisting of G.E. Americom and major cable television system operators,
including Tele-Communications, Inc. ("TCI"), have agreed to form a new
corporation, PRIMESTAR, Inc., which is intended to be a publicly held
company. As part of that reorganization, the FCC has been asked to approve a
transfer of control of Tempo Satellite, Inc. ("Tempo"), which has eleven
transponders authorized at 119DEG. west longitude and eleven transponders
authorized at 166DEG. west longitude, from TCI Satellite Entertainment, Inc.
to PRIMESTAR, Inc. On March 8, 1997, Tempo launched its satellite to provide
high power direct broadcast satellite service at 119DEG. west longitude, but
such service has not yet commenced.
PRIMESTAR has also entered into an agreement with MCI, News Corp., and
ASkyB which will permit PRIMESTAR to acquire the 28 transponders authorized
to MCI at 110DEG. west longitude, two satellites which are presently under
construction, and other related assets. The FCC has been asked to approve
the assignment of the MCI authorization to PRIMESTAR LHC, a wholly owned
subsidiary of PRIMESTAR, Inc. If this transaction proceeds as presently
contemplated, ASkyB, which will be owned by News Corp. (80.1%) and MCI
(19.9%), will have a non-voting equity interest (31%) in PRIMESTAR. The
parties have represented to the FCC that they are willing to divest the
eleven transponders at 119DEG. west longitude if the 28 transponders at
110DEG. west longitude are permitted to be assigned to PRIMESTAR LHC.
LOW AND MEDIUM-POWER DBS
PRIMESTAR also offers a 95 channel medium power broadcast system using
capacity on a medium-power satellite owned by G.E. Americom and leases
receivers and three foot satellite dishes to subscribers. PRIMESTAR's lease
program is widely credited for the success of its medium-power satellite
service which, according to trade publications, has approximately 2.0 million
subscribers. PRIMESTAR offers programming which includes many of the premium
and basic channels available on the DSS system. PRIMESTAR promotes its
service as superior to cable and markets to the same general television
viewers as the Company. See also "High-Power DBS" above.
Potential competitors may provide television programming at any time by
leasing transponders from an existing satellite operator. However, the
number of transponders available for lease on any one satellite is generally
limited, making it difficult to provide sufficient channels for a viable
system.
The Company also competes with low-power (C-band) systems. These
systems, which utilize a 4 to 8 foot dish, in the aggregate serve
approximately 2.3 million subscribers.
10
<PAGE>
TELEPHONE COMPANIES
Certain regional telephone operating companies and long distance
telephone companies could become significant competitors of the Company in
the future. Several telephone companies have begun to enter the video
programming market by creating cable subsidiaries, acquiring existing cable
operators outside of the area they presently serve with telephone service, or
by continuing their involvement with wireless cable systems. In addition,
telephone companies can establish open video services, which they either can
make available to television programmers or utilize themselves. Among other
things, telephone companies have an existing relationship with virtually
every household in their service area, substantial financial resources and an
existing infrastructure. However, the Company has recently entered into an
agreement in principle with Bell Atlantic Video Services Company under which
Bell Atlantic will market, sell and provide billing and customer service for
DSS systems and USSB programming. The Company has also entered into an
agreement with Southwestern Bell Video Services, Inc. for the sale and
marketing of DSS systems and USSB programming to multiple dwelling units. As
noted above under "Business - Distribution of DSS Units," the Company's sales
agency agreement with AT&T Corp. has been terminated.
WIRELESS CABLE AND OTHER MICROWAVE SYSTEMS
There are approximately 200 wireless cable systems in the United States,
serving approximately 900,000 subscribers. These systems typically offer 20
to 40 channels of programming, which may include local programming; however,
these systems will require substantial capital expenditures to upgrade to
digital technology. The FCC has recently allocated spectrum for the Local
Multipoint Distribution Service (LMDS), a form of wireless cable with
increased bandwidth. FCC auctions are being conducted to make the spectrum
available for video, voice, internet and data services. Companies acquiring
rights for LMDS could become providers of competitive video services.
VHF/UHF BROADCASTERS
Most areas of the United States are covered by traditional terrestrial
VHF/UHF broadcasters that typically offer three to ten channels. These
stations provide local, network and syndicated programming free of charge.
The FCC has mandated that terrestrial television stations commence digital
television service, and has granted additional spectrum on an interim basis
which may be used for multichannel programming and/or high definition
television (HDTV). The Company is unable to predict at this time the effect
of such a development on the Company's competitive position.
REGULATORY MATTERS
The Company is subject to the regulatory authority of the FCC. As a
distributor of television programming, the Company is also affected by
numerous laws and regulations. Unlike a common carrier, however, the Company
is free to set prices and serve customers according to its business judgment
without rate of return or certain other types of regulation.
The FCC has issued a license (the "License") to the Company which allows
the Company to broadcast from the 101DEG. west longitude orbital slot.
DIRECTV, Inc. is the only other entity licensed for the 101DEG. west
longitude orbital slot. No other entities can currently obtain transponders
at 101DEG. west longitude.
The License must be renewed at the end of its ten year term. FCC
licenses are generally renewed in the ordinary course, absent misconduct by
the licensee. Under the License, the
11
<PAGE>
Company is subject to FCC review primarily for the following: (i) standards
regarding individual satellites (e.g., meeting minimum financial, legal and
technical standards); (ii) avoiding interference with other satellites; and
(iii) complying with rules the FCC has established specifically for
high-power DBS satellite licenses. USSB II, Inc. ("USSB II"), a wholly owned
subsidiary of the Company, holds the License and owns the five transponders.
The Company and USSB II have entered into a Transponder Use Agreement,
whereby the Company is granted the right to use the transponders. In
addition, uplink facilities are separately licensed by the Satellite Radio
Branch of the FCC. The Company's National Broadcast Center and its Auxiliary
Broadcast Center have each received a Satellite Radio Branch license.
The FCC has also issued a Construction Permit and Launch Authority (the
"Permit") to the Company. The Permit allows the Company to construct and
launch high-power DBS systems with three transponders at 110DEG. west
longitude and with eight transponders at 148DEG. west longitude. The 110DEG.
west longitude orbital slot would enable the Company to provide a second
high-power DBS service to the United States, and additionally to Alaska and
Hawaii. The 148DEG. west longitude slot would allow the Company to provide
programming between the United States and the Pacific Rim, if the FCC and
international regulatory bodies agree to grant the necessary authorizations.
The Permit required that these two additional systems be operational by
December 1997. The Company has requested an extension to December 1999 in
which to complete the construction and launch of the remainder of its DBS
systems. The Company's request is presently pending before the FCC. The
Company's ability to operate at the 101DEG. west longitude orbital location
is not linked to the Permit. In connection with the Permit, the Company has
entered into two satellite construction contracts with Lockheed Martin for
the construction of two satellites. Under the contract for the 110DEG.
orbital location, the Company is presently required to make future fixed
payments totaling approximately $67.6 million after having made advance
payments of $8.4 million.
The Telecommunications Act of 1996 (the "Act") significantly deregulated
the telecommunications industry. The Act further clarifies that the FCC has
exclusive jurisdiction over high-power DBS service, that criminal penalties
may be imposed for piracy of high-power DBS signals, that local zoning and
homeowner covenants which impair a viewer's ability to receive DBS signals
are preempted except where necessary for safety or historic reasons and that
local (but not state) taxes on DBS service are precluded.
On February 26, 1998, the FCC released a Notice of Proposed Rulemaking.
This Rulemaking seeks to streamline and simplify the Commission's rules
governing DBS service. In addition to proposing changes in the processing
and service Rules, the Rulemaking requests comments on ownership issues such
as foreign ownership and horizontal concentration limitations on common
ownership of cable and DBS providers in the multi-channel video program
distribution market. At present, the Company is uanble to determine the
effects of such proposed rules on its operations or competitive position.
RELATIONSHIP WITH HUGHES
The Company has an important business relationship and course of dealing
with Hughes, based on their co-ownership of DBS-1, their shared use of the
DSS system (including its underlying technology) and their mutual objective
to build and promote consumer acceptance and growth of the DSS system. The
relationship with Hughes dates back to 1991 and is based on contractual
arrangements and a history of cooperation. The Company and Hughes (or an
affiliate of Hughes) are parties to the following agreements:
SATELLITE PAYLOAD PURCHASE AGREEMENT. In May 1991, the Company entered
into a Satellite Payload Purchase Agreement (the "SPPA") with Hughes
Communications Galaxy, Inc. ("HCG"). The SPPA provided for the purchase by
the Company of a five-sixteenths interest in DBS-1,
12
<PAGE>
enabled the Company and DIRECTV, Inc. to share the cost of satellite
construction and launch and enabled the Company and DIRECTV, Inc. to become
the first high-power DBS satellite broadcasters in the United States. In
addition, the SPPA provided that the Company would pay its fair share of the
development and/or acquisition costs for the system technology, which
includes conditional access, signal processing and other systems. Through
this agreement, DIRECTV, Inc. and the Company utilize a common system and
avoid any technical barriers to consumers subscribing to both USSB
programming and DIRECTV programming.
TRANSPONDER SERVICE AGREEMENT. The Company also entered into a
Transponder Service Agreement with Hughes Communications Satellite Services,
Inc. ("HCSS"), whereby HCSS provides telemetry, tracking and control of
DBS-1. Pursuant to this Agreement, the Company and HCSS technical personnel
are in regular contact, sharing information regarding the satellite and
cooperating in managing its operations.
INTERIM TECHNOLOGY ACCESS AND COORDINATION AGREEMENT. The Company and
HCG have entered into an Interim Technology Access and Coordination
Agreement, which clarifies certain issues regarding the sharing of the
technology underlying the DSS system and sets forth the preliminary agreement
on the sharing of development costs. In addition, DIRECTV, Inc. has primary
responsibility for security of the DSS system and undertakes initiatives to
detect signal piracy and implement countermeasures.
Even though the Company and DIRECTV, Inc. compete for subscriber
revenues from DSS households, there is currently no overlap between USSB
programming and DIRECTV programming. The Company recently cooperated with
DIRECTV, Inc. in integrating its basic channels into DIRECTV's programming,
so that USSB could concentrate on offering premium movie channels.
Accordingly, both the Company and DIRECTV, Inc. have a common interest in
promoting awareness of the DSS system, maximizing DSS unit sales and
cooperating in joint marketing efforts to promote the DSS system. See also
"Marketing."
EMPLOYEES
As of December 31, 1997, the Company employed 152 persons. None of the
Company's employees are represented by a union and the Company believes its
employee relations are satisfactory.
In addition, pursuant to an Administrative Services Agreement between
the Company and Hubbard Broadcasting, Inc. ("HBI"), the Company's largest
shareholder, the Company receives services from certain executives of HBI and
also from the tax, payroll, accounts payable, risk management, management
information systems and legal staff of HBI. The Company incurred an
aggregate charge of $625,900 for such services during the six month
transition period ended December 31, 1997 (the "Transition Period").
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Stanley S. Hubbard 64 Chairman of the Board
Stanley E. Hubbard 36 Chief Executive Officer and
President
Robert W. Hubbard 33 Executive Vice President
13
<PAGE>
Gerald D. Deeney 74 Treasurer, Chief Financial
Officer and Secretary
Mary Pat Ryan 41 Senior Vice President, Marketing
Bernard J. Weiss 44 Vice President,
Finance and Administration
STANLEY S. HUBBARD is the founder of the Company and serves as its
Chairman of the Board. Mr. Hubbard served as Chief Executive Officer of the
Company from its inception to November 1995. Mr. Hubbard is also the
Chairman of the Board, President and Chief Executive Officer of HBI and
divides his professional time between the Company and HBI and its affiliates.
Mr. Hubbard is an executive with several other entities affiliated with HBI,
including Conus Communications Company Limited Partnership ("Conus"), a
satellite news gathering firm. Mr. Hubbard, a graduate of the University of
Minnesota, joined HBI in 1951. He and his father, the founder of HBI, were
co-recipients of the Distinguished Service Award from the National
Association of Broadcasters in 1995. Stanley S. Hubbard is the father of
Stanley E. Hubbard and Robert W. Hubbard. Mr. Hubbard is also a director of
Fingerhut, Inc.
STANLEY E. HUBBARD was elected Chief Executive Officer of the Company in
November 1995. From February 1993 until November 1995, Mr. Hubbard served as
President and Chief Operating Officer of the Company. Prior thereto, he
served as Vice President of the Company. He has been a director of the
Company since 1991. Mr. Hubbard has also been a Vice President of HBI for
more than five years and has a broad range of television experience. He
holds positions in other affiliated companies, including director of HBI.
Mr. Hubbard is also a director of First Team Sports, Inc.
ROBERT W. HUBBARD was elected Executive Vice President of the Company in
February 1993 and elected a director of the Company in September 1992. Mr.
Hubbard has a broad range of television experience with various HBI
affiliates and divides his professional time between the Company and HBI and
its affiliates. Mr. Hubbard is also a director of HBI and serves as
President of its television group.
GERALD D. DEENEY was elected Treasurer of the Company in June 1981,
Chief Financial Officer of the Company in September 1995 and Secretary in
January 1996. Mr. Deeney has been with HBI for more than thirty-five years
and has been Vice President and Treasurer of HBI for more than twenty-five
years. In 1992, Mr. Deeney was elected a director of HBI.
MARY PAT RYAN joined the Company as Vice President, Marketing in
February 1994 and now is Senior Vice President, Marketing. From 1983 to
1993, Ms. Ryan was at Draft Worldwide, one of the largest direct marketing
agencies in the world, and served as Executive Vice President and Director of
Client Services. At Draft Worldwide, Ms. Ryan managed marketing programs for
HBO's Cable and Satellite Divisions, Time Warner Cable, The Sega Channel and
American Express Travelers Cheque Group, and oversaw all administrative,
business development and training functions for client services.
BERNARD J. WEISS joined the Company in January 1994 and has been Vice
President of Finance and Administration of the Company since January 1995.
From April 1990 until January 1994, Mr. Weiss served in various financial and
operating positions at Northwest Airlines. Inc., including Director of
Budgets and Analysis. From June 1986 to 1990, Mr. Weiss served as Vice
President and acting division head of the media and communications division
of First Banks. Mr. Weiss is a Certified Public Accountant.
14
<PAGE>
ITEM 2. PROPERTIES
The Company utilizes the following facilities:
<TABLE>
SQUARE
FACILITY LOCATION FOOTAGE OWNED OR LEASED
-------- -------- ------- ---------------
<S> <C> <C> <C>
Executive Offices St. Paul, 15,043 Leased from HBI(a)
Minnesota
National Broadcast Oakdale, 20,500 Owned
Center Minnesota
Auxiliary Broadcast St. Paul, 1,300 Antennas and
Center Minnesota equipment are owned
by the Company; roof
site for antennas is
leased from HBI(b)
</TABLE>
(a) The lease for the Company's executive offices expires on June 30, 2000.
The Company expects to renew this lease in the ordinary course. The
Lease may be terminated by either party upon one (1) year's notice.
(b) The Auxiliary Broadcast Center lease expires on June 30, 1999 and
includes three five-year renewal options.
The Company believes that its executive offices are adequate for its
office and administrative purposes for the foreseeable future and that its
National Broadcast Center is sufficient for its signal reception, signal
processing and uplinking facilities for the foreseeable future. The
Company's telemarketing, customer service and billing functions are performed
for it on a contract basis by third parties and do not require the use of
Company facilities.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is exposed to litigation encountered in the normal course of
business. In the opinion of management, the resolution of such litigation
matters of which the Company is aware will not have a material adverse effect on
the Company's financial position, results of operations or cash flows. In
addition, the Company is a party to the following actions:
IN THE MATTER OF CERTAIN DIGITAL SATELLITE SYSTEM (DSS) RECEIVERS AND
COMPONENTS THEREOF, United States International Trade Commission,
Investigation No. 337-TA-392; and PERSONALIZED MEDIA COMMUNICATIONS, L.L.C.
v. THOMSON CONSUMER ELECTRONICS, ET AL., United States District Court,
Northern District of California, Case No. C-96 20957.
In November 1996, Personalized Media Communications, L.L.C. ("PMC") initiated a
legal proceeding before the United States International Trade Commission ("ITC")
and a separate proceeding in the United States District Court for the Northern
District of California against digital satellite system developers,
manufacturers and programmers, including, among others, Hughes Network Systems,
Thomson Consumer Electronics and other DSS manufacturers, DIRECTV, Inc., and the
Company.
In the ITC action, PMC alleges that Hughes Network Systems, Thomson Consumer
Electronics and other DSS manufacturers have infringed, and that DIRECTV, Inc.
and the Company have contributed to and/or induced the infringement of, a patent
owned by PMC and requests the ITC to (i) bar the importing, marketing,
promoting, distributing, or sale of imported infringing DSS receivers in the
United States which are covered by PMC's patent and (ii) prohibit DIRECTV, Inc.
and the Company from broadcasting television programming to any imported
infringing DSS receiver. A trial of the ITC proceeding before an administrative
law judge was conducted in July 1997, and an initial determination by the
administrative law judge was rendered in October 1997 ruling against PMC's
claims on all material issues. In December 1997 the ITC accepted the
determination of the Administrative Law Judge, and PMC has appealed that
decision. The appeal is pending in the Court of Appeals for the Federal
Circuit.
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 stay is currently in force.
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 decision by
the ITC, that it has valid defenses to PMC's claims. 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.
16
<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.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 1997, the Company held its 1997 Annual Meeting of
Shareholders (the "Meeting").
At the Meeting, each of the following persons were elected as a director of
the Company. The persons designated as Class A Directors were elected solely by
the holders of the Class A Common Stock. The Directors designated Other
Directors were elected by the holders of the Class A Common Stock and the Common
Stock, voting together as a single class.
CLASS A DIRECTORS
-----------------
Peter F. Frenzer
William D. Savoy
Louis G. Zachary, Jr.
OTHER DIRECTORS
---------------
Stanley S. Hubbard
Stanley E. Hubbard
Robert W. Hubbard
Herbert S. Schlosser
David S. Allen
Frank N. Magid
Peter G. Skinner
John W. Marvin
Ward L. Quaal
In addition, shareholders were asked to ratify the selection by the Board
of Directors of Arthur Andersen LLP as the Company's independent public
accountants for the Transition Period and the 1998 fiscal year. The vote on
such matter was as follows:
651,407,830 in favor; 240,236 opposed; 37,284 abstained. There were no
broker "non-votes."
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock trades on the Nasdaq National Market
under the symbol "USSB." The following table sets forth the high and low
closing sales prices for such stock as reported on the Nasdaq National Market
for each quarter during the Transition Period:
Transition Period ended December 31, 1997: LOW HIGH
------------------------------------------ --- ----
Quarter ended September 30, 1997 8 1/4 9 1/4
Quarter ended December 31, 1997 7 5/8 10 3/4
On March 17, 1998, the last reported sale price of the Company's Class A
Common Stock was $9.875 per share. At that date, the Company had 679 Class A
Common shareholders of record.
The Company has not paid any cash dividends on its Class A Common Stock and
does not intend to pay cash dividends for the foreseeable future. Earnings will
be retained for use in the operation and expansion of the Company's business.
REPORT ON SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM.
Subsequent to the Company's initial public offering, effective January 31,
1996 (Registration No. 33-99906), and pursuant to the requirements of the
Securities Act of 1933, as amended and as then in effect, the Company filed an
initial report on Form SR with the Securities and Exchange Commission on May 10,
1996 and amendments thereto on November 12, 1996, May 12, 1997. Further
information was reported in the Company's 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 December 31, 1997 which have changed
since the most recently filed report on Form 10-Q.
<TABLE>
Use of Proceeds Direct or Indirect Payments to Others
- --------------- -------------------------------------
<S> <C>
Working Capital $31,820,034
Purchase and Installation of Machinery
and Equipment 20,340,535
Temporary Investments
Short Term Treasuries 55,000,000
Cash 3,067,206
</TABLE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
Information required by this item is set forth in the Company's 1997 Report
to Shareholders on page 7, under the heading "Selected Financial and Operating
Data," and is incorporated herein by reference.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information required by this item is set forth in the Company's 1997 Report
to Shareholders on pages 8 to 15, under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is set forth in the Company's 1997 Report
to Shareholders on pages 16 to 29, in the consolidated financial statements and
notes, and on page 30, under the heading "Report of Independent Public
Accountants," and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides certain information with respect to the members of
the Board of Directors. Three directors, the Class A Directors, are elected
solely by the holders of Class A Common Stock. The remaining directors are
elected by the holders of the Class A Common Stock and the holders of Common
Stock, voting as a single class.
CLASS A DIRECTORS
- -----------------
Peter F. Frenzer 63
William D. Savoy 33
Louis G. Zachary, Jr. 39
OTHER DIRECTORS
- ---------------
Stanley S. Hubbard 64
Stanley E. Hubbard 36
Robert W. Hubbard 33
Herbert S. Schlosser 71
David S. Allen 68
Frank N. Magid 66
Peter G. Skinner 53
John W. Marvin 50
Ward L. Quaal 78
Information with respect to Messrs. Stanley S. Hubbard, Stanley E. Hubbard and
Robert W. Hubbard and the other executive officers of the Company is contained
in Part I, Item 1 of this Report on Form 10-K under the heading "Business -
Executive Officers of the Registrant," and is incorporated herein by reference.
HERBERT S. SCHLOSSER was elected a director of the Company in March 1994.
Since 1986, Mr. Schlosser has served as Senior Advisor, Broadcasting and
Entertainment with Schroder & Co. Inc. Mr. Schlosser was Executive Vice
President of RCA Corporation from 1978 until 1985 and prior to that was
President of the National Broadcasting Company. Mr. Schlosser is also a
director of Data Broadcasting Corporation, a financial data communications
company, and Central European Media Enterprises Ltd., a company which holds
interests in private commercial television stations in central and eastern
Europe.
21
<PAGE>
DAVID S. ALLEN has been a director of the Company since 1994. Mr. Allen is
currently Chairman and Chief Executive Officer of The Boatworks, a boat sales
and service company. From 1980 through March 1993, Mr. Allen served as
Chairman, President and Chief Executive Officer of Petry, Inc., which provides
services to HBI relating to the sale of HBI's commercial time. Petry, Inc. is
one of the largest sales organizations of national television advertising in the
U.S.
FRANK N. MAGID was elected a director of the Company in 1994. Mr. Magid
has been the Chairman and Chief Executive Officer of Frank N. Magid Associates,
a television industry research and consulting firm since 1957.
PETER G. SKINNER was elected a director of the Company in March 1994.
Since 1985, Mr. Skinner has been General Counsel, Secretary, and Senior Vice
President (since 1989) for Dow Jones & Company, Inc. ("Dow Jones").
JOHN W. MARVIN was elected a director of the Company in March 1994. Since
1974, Mr. Marvin has held various positions with Marvin Lumber and Cedar
Company, including Plant Manager, Board Member and Chief Operating Officer.
WARD L. QUAAL was elected a director of the Company in September 1982. Mr.
Quaal has been President of Ward L. Quaal Company, management consultants to the
broadcasting industry, since October 1974. Previously, he was President of
Tribune Broadcasting Company. Mr. Quaal is a recipient of the Distinguished
Service Award from the National Association of Broadcasters.
PETER F. FRENZER was elected to the Board of Directors in July 1996. Mr.
Frenzer recently retired from Nationwide Insurance Enterprise after 21 years of
service. From 1991 to 1996, he was President of Nationwide Life Insurance
Company and, from 1981 to 1995, he was Chief Investment Officer of Nationwide
Insurance Enterprise.
WILLIAM D. SAVOY was elected a director of the Company in March 1994.
Since 1990, Mr. Savoy has served as Vice President of Vulcan Ventures, Inc.
("Vulcan"), a venture capital firm owned by Paul Allen, a co-founder of
Microsoft, Inc. From 1987 until November 1990, Mr. Savoy was employed by
Layered, Inc., a company controlled by Mr. Allen, and became its President in
1988. Mr. Savoy has served as President for Vulcan Northwest, Inc., a company
wholly-owned by Mr. Allen, from November 1990 until the present. Mr. Savoy
serves on the Advisory Board of Directors of DreamWorks SKG and the Board of
Directors of CINET, Inc.; Harbinger Corporation; Metricom, Inc.; Telescan Inc.;
Ticketmaster; and USA Networks, Inc.
LOUIS G. ZACHARY, JR. was elected to the Board of Directors of the Company
in July 1996. Mr. Zachary is a Managing Director in the investment banking
department of Credit Suisse First Boston Corporation, which he joined in 1981.
Messrs. Stanley S. Hubbard, Robert W. Hubbard, and Deeney are also employed
by, and spend a significant portion of their time on, the businesses of Hubbard
Broadcasting, Inc. ("HBI") and its affiliates other than the Company. Mr.
Stanley E. Hubbard devotes his professional time primarily to the business of
the Company, but does hold positions with HBI and its affiliates which will
require a certain amount of his time. The Company does not anticipate any
material change in the relative amount of time such persons will spend on the
Company's matters. Each of such persons who is a director has indicated to the
Company that, should a conflict of interest arise, he will promptly disclose
such conflict to the Company's Board of Directors and refrain from voting on
such matter as a director.
22
<PAGE>
COMMITTEE AND BOARD MEETINGS
The Company's Board of Directors has an Audit Committee which (i) reviews the
Company's quarterly and annual financial statements, its filings on Forms 10-K
and 10-Q and earnings releases regarding financial results, (ii) makes
recommendations regarding the Company's independent public accountants and scope
of their services, (iii) reviews the adequacy of accounting policies, compliance
assurance procedures and internal controls, (iv) reviews auditors' independence
and (v) reports to the Board on the adequacy of disclosures and adherence to
accounting principles. Messrs. Marvin, Skinner and Savoy comprised the Audit
Committee during the Transition Period. The Audit Committee met five times
during the Transition Period ended December 31, 1997.
The Company's Board of Directors has a Compensation Committee which (i) reviews
compensation philosophy and major compensation plans for executives, (ii)
administers the Company's stock option plans and (iii) approves the compensation
of the Company's executive officers. Messrs. Frenzer, Quaal and Schlosser
comprised the Compensation Committee during the Transition Period. The
Compensation Committee met two times during the Transition Period ended December
31, 1997.
The Company's Board of Directors has a Nominating Committee, which makes
recommendations to the Board of Directors as to nominees for election to the
Board. Messrs. Stanley S. Hubbard, Allen and Magid comprised the Nominating
Committee during the Transition Period. The Nominating Committee met one time
during the Transition Period ended December 31, 1997.
The Board of Directors also has an Executive Committee, consisting of Messrs.
Stanley S. Hubbard, Stanley E. Hubbard, Robert W. Hubbard and Schlosser.
Between meetings of the Board of Directors, the Executive Committee exercises
all the powers of the Board of Directors in the management and direction of the
business and affairs of the Company, except as provided otherwise by law,
resolutions of the Board of Directors, the Company's By-laws, or its Articles of
Incorporation.
During the Transition Period, the Board held two meetings. Each director
attended 75% or more of the meetings of the Board held while each was a director
during such Transition Period and of the meetings of Committees of which he was
a member during such Transition Period, except that Mr. Allen did not attend one
Board of Directors meeting, and Mr. Savoy did not attend two meetings of the
Audit Committee. Mr. Frenzer was appointed to the Compensation Committee at the
November 17, 1997 Board of Directors meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee was, during the Transition Period or
previously, an officer or employee of the Company.
Mr. Quaal is the President of Ward L. Quaal Company, which performs government
relations work for both the Company and HBI. The Company has paid $20,812
during the six months ended December 31, 1997, and $126,333, $141,683 and
$61,007 in 1995, 1996 and 1997, respectively, to such company.
23
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the Securities and Exchange Commission ("SEC") initial reports of
ownership and changes in ownership of Common Stock and other equity securities
of the Company. Officers, directors and greater than ten percent shareholders
are required by SEC regulation to furnish the Company with all Section 16(a)
forms they file.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, all Section 16(a) filing requirements applicable to officers,
directors and greater than ten percent shareholders were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows compensation information for the
Company's Chief Executive Officer and the four most highly compensated executive
officers of the Company for services rendered in all capacities during the six
months ended December 31, 1997 and the years ended December 31, 1995, 1996 and
1997.
<TABLE>
ANNUAL COMPENSATION
ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION
POSITION PERIOD ($) ($) ($)
------ ------ ----- ------------
<S> <C> <C> <C> <C>
Stanley E. Hubbard 7/1/97-12/31/97 175,000 ___ ___
CEO, President 1997 350,000 ___ ___
1996 231,539 ___ ___
1995 100,000
Robert W. Hubbard 7/1/97-12/31/97 125,000 ___ ___
Executive V.P. 1997 250,000 ___ ___
1996 180,770 ___ ___
1995 100,000
Mary Pat Ryan 7/1/97-12/31/97 112,500 50,000(1) 1,897(2)
Sr. V.P., Marketing 1997 225,000 100,000 6,400(2)
1996 229,327 100,000 6,000(2)
1995 211,539 75,000 4,232(2)
Bernard J. Weiss 7/1/97-12/31/97 70,000 25,000(1) 3,600(2)
V.P. Finance and 1997 140,000 50,000 6,400(2)
Administration 1996 137,308 50,000 6,000(2)
1995 124,616 25,000 3,509(2)
24
<PAGE>
Carl S. Wegener 7/1/97-12/31/97 65,000 12,500(1) 2,850(2)
V. P. Dealer Marketing 1997 130,000 25,000 5,450(2)
1996 129,808 25,000 5,492(2)
1995 125,000 17,000 4,045(2)
</TABLE>
(1) Amounts accrued for the six month period, but paid in 1998.
(2) Consists of a matching contribution made by the Company to such executive
officer's 401(k) plan.
DIRECTOR COMPENSATION
The Company pays non-employee directors an annual retainer of $15,000 and $500
for each Board of Directors or committee meeting which they attend (with
committee chairpersons receiving $750 per committee meeting). Directors of the
Company also participate in a non-employee director option plan which provides
for the automatic grant of options to purchase 1,000 Class A Common Shares to
each non-employee director upon election (and each re-election) to the Board.
The compensation earned by certain directors, including options, is paid (or
granted, in the case of options) directly to the employers of such directors.
EMPLOYMENT AGREEMENTS
The Company does not have employment agreements with any of its executive
officers.
OPTION/SAR GRANTS IN SIX MONTHS ENDED DECEMBER 31, 1997
<TABLE>
Potentially Realizable Value
Percent of at Assumed Annual Rates
Number of Total Options/ of Stock Price
Securities SARs Appreciation for
Underlying Granted to Exercise or Option Term
Options/SARs Employees in Base Price Expiration ----------------------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ------------ -------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mary Pat Ryan 30,000 11.9 $7.75 November 16, 2007 146,218 370,545
Bernard J. Weiss 15,000 6.0 $7.75 November 16, 2007 73,109 185,273
Carl S. Wegener 10,000 4.0 $7.75 November 16, 2007 48,739 123,515
</TABLE>
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of Class A Common Stock and Common Stock
by (i) each shareholder known by the Company to be the beneficial owner of
more than 5 percent of either class, (ii) each nominee for director, (iii)
each executive officer and (iv) all executive officers and directors of the
Company as a group. Such information is presented as of March 5, 1998.
SHARES OF CLASS A COMMON STOCK AND COMMON STOCK
BENEFICIALLY OWNED (1)
<TABLE>
PERCENT PERCENT OF PERCENT OF
NAME AND ADDRESS OF COMMON TOTAL
OF BENEFICIAL OWNER(2) NUMBER CLASS A STOCK VOTING POWER
- ---------------------- ------ ------- ----- ------------
<S> <C> <C> <C> <C>
Hubbard Broadcasting, Inc. ("HBI") 11,790 (Class A) * 63.2 61.8
3415 University Avenue 46,522,825
St. Paul, Minnesota 55114 (Common Stock)(3)
Stanley S. Hubbard 7,740 (Class A) * 63.2 61.8
46,522,825 (Common Stock)(4)
Stanley E. Hubbard 7,740 (Class A) * 62.5 61.2
46,051,225 (Common Stock)(5)
Robert W. Hubbard 7,740 (Class A) * 62.5 61.2
46,051,225 (Common Stock)(5)
Nationwide Mutual Insurance Company 5,065,500 --- 6.9 6.7
One Nationwide Plaza (Common Stock)
Columbus, Ohio 43216
Quantum Industrial Partners, L.D.C. 4,941,150 --- 6.7 6.6
Kaya Flamboyan 9 (Common Stock)
Willemstad, Curacao, Netherlands
Antilles
Peter G. Skinner 3,000 (Class A) * 6.0 5.9
Dow Jones & Company 4,411,800 (Common Stock)(6)
200 Liberty Street
New York, New York 10281
Dow Jones & Company 2,000 (Class A)(7) --- 6.0 5.9
200 Liberty Street 4,411,800
New York, New York 10281 (Common Stock)
Pittway Corporation 4,167,375 --- 5.7 5.5
200 South Wacker Drive (Common Stock)
Chicago, Illinois 60606
Vulcan Ventures, Inc. 3,529,425 --- 4.8 4.7
110 110th Avenue Northeast (Common Stock)
Bellevue, Washington 98004
</TABLE>
- -----------
* Less than one percent
(1) Each share of Common Stock is convertible into one share of Class A
Common Stock at the option of the holder.
(2) Unless otherwise noted, the address is 3415 University Avenue, St. Paul,
Minnesota 55114.
(3) Includes (i) 2,025 shares of Class A Common Stock held by each of Stanley
S. Hubbard, Stanley E. Hubbard and Robert W. Hubbard and (ii) 471,600
shares of Common Stock held in trust for certain employees of HBI, for
which Stanley S. Hubbard acts as trustee.
(4) Includes (i) 46,051,225 shares of Common Stock held by HBI, (ii) 471,600
shares of Common Stock held in trust for certain employees of HBI, for
which Stanley S. Hubbard acts as trustee, and (iii) 5,715 shares of Class A
Common Stock held by HBI.
(5) Includes 46,051,225 shares of Common Stock and 5,715 shares of Class A
Common Stock held by HBI.
(6) Includes options to purchase 2,000 shares of Class A Common Stock granted
to Dow Jones & Company, all of which are currently exercisable, and
4,411,800 of shares of Common Stock held by Dow Jones & Company, of which
Mr. Skinner is General Counsel, Secretary and Senior Vice President.
(7) Consists of options to purchase shares of Class A Common Stock, all of
which are currently exercisable.
26
<PAGE>
<TABLE>
PERCENT PERCENT OF PERCENT OF
NAME AND ADDRESS OF COMMON TOTAL
OF BENEFICIAL OWNER(2) NUMBER CLASS A STOCK VOTING POWER
- ---------------------- ------ ------- ----- ------------
<S> <C> <C> <C> <C>
William D. Savoy 2,000 (Class A)(7) * 4.8 4.7
Vulcan Ventures, Inc. 3,529,425 (Common Stock)(8)
110 110th Avenue Northwest
Bellevue, Washington 98004
John W. Marvin 14,000 (Class A)(9) * 1.8 1.8
Marvin Lumber and Cedar Company 1,323,525 (Common Stock)(10)
Highway 11
Warroad, Minnesota 56763
Frank N. Magid 662,225 (Class A)(11) 4.1 --- *
David S. Allen 2,000 (Class A)(7) * * *
286,650 (Common Stock)
Gerald D. Deeney 3,000 (Class A) * * *
122,550 (Common Stock)
Ward L. Quaal 2,000 (Class A)(7) * * *
94,350 (Common Stock)
Herbert S. Schlosser 2,000 (Class A)(7) * * *
83,775 (Common Stock)
Mary Pat Ryan 105,000 (Class A)(12) * --- *
Bernard J. Weiss 35,500 (Class A)(13) * --- *
Peter F. Frenzer 4,000 (Class A)(14) * --- *
Louis G. Zachary, Jr. 2,000 (Class A)(7) * --- *
All directors and executive officers 848,515 (Class A) 5.2 76.5 75.0
as a group (15 persons)(15) 56,374,900 (Common Stock)
</TABLE>
- ----------
(8) Consists of shares held by Vulcan Ventures, Inc., of which Mr. Savoy is
Vice President.
(9) Includes options to purchase 2,000 shares of Class A Common Stock, all
of which are currently exercisable.
(10) Consists of shares of Common Stock held by Marvin Lumber and Cedar
Company, of which Mr. Marvin is Chief Operating Officer.
(11) Includes options to purchase 2,000 shares of Class A Common Stock, all
of which are currently exercisable.
(12) Consists of options to purchase 105,000 shares of Class A Common Stock,
30,000 of which are currently exercisable.
(13) Includes options to purchase 35,000 shares of Class A Common Stock,
8,000 of which are currently exercisable.
(14) Includes options to purchase 2,000 shares of Class A Common Stock, all
of which are currently exercisable.
(15) Footnote (3) and Footnotes (6)-(19) are incorporated herein by reference.
27
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to an Administrative Services Agreement between HBI and the Company,
HBI charges the Company a portion of the expenses of the HBI departments that
provide services to the Company, namely legal, management information systems,
tax, risk management, payroll and accounts payable. Pursuant to this Agreement,
the Company paid $625,900 to HBI for the six months ended December 31, 1997,
$1,123,900 in 1997, $978,000 in 1996, $902,000 to HBI in 1995, and expects to
pay HBI $1,300,000 in 1998.
The Company and HBI have filed combined state tax returns as required in
Minnesota and New Mexico. Utilizing the Company's net operating loss
carryforwards, HBI realized benefits as to the state returns of approximately
$0.1 million for the six months ended December 31, 1997, $0.2 million in 1997,
$1.4 million in 1996 and $1.4 million in 1995 and, HBI and the Company have
entered into a Tax Sharing Agreement relating to such filings. Under this
Agreement, HBI will reimburse the Company for such benefits in the year they
would otherwise be realized by the Company.
The Company leases 15,043 square feet of office and administrative space in St.
Paul, Minnesota from HBI under a lease expiring on June 30, 2000. Under such
lease, the Company paid HBI $97,100 for the six months ended December 31, 1997,
$151,375 in 1997, $81,630 in 1996 and $66,350 in 1995, and expects to pay
approximately $180,000 in 1998.
The Company owns its National Broadcast Center in Oakdale, Minnesota, which
consists of 20,500 square feet. The land for the facility was purchased in May
1993, from Minnesota Mining and Manufacturing Company ("3M"), and the Company
and HBI agreed to provide advertising time on USSB programming and/or HBI's
television stations in value equal to the purchase price of $340,000. HBI has
agreed to provide all of such advertising time at no cost to the Company. In
1997, 3M exercised its right under the agreement to be paid an adjusted purchase
price in cash, and the Company paid such amount in satisfaction of its remaining
obligations under the agreement.
The Company has entered into various agreements with Conus Communications
Limited Partnership ("Conus") for the provision of engineering and other
services. HBI and Stanley S. Hubbard, the Chairman of the Board of the Company,
are each general partners of Conus. For such services, the Company paid Conus
$82,000 in the six months ended December 31, 1997, $203,000 in 1997, $165,000 in
1996, and $554,000 in 1995. The Company anticipates that it will pay Conus
approximately $210,000 in 1998 for such services.
The ALL NEWS CHANNEL is a joint venture of Viacom Satellite News, Inc. and
Conus. Pursuant to its programming agreement with the ALL NEWS CHANNEL, the
Company paid such joint venture $2,765,350 in the six months ended December 31,
1997, $5,211,700 in 1997, $3,598,800 in 1996, and $1,524,000 in 1995.
Management believes that the parties will review the current agreement during
1998 in light of the integration of the basic channels previously carried by
USSB into the DIRECTV channel line-up. Under the current arrangement with ALL
NEWS CHANNEL, such payments are related to the number of subscribers. The
Company is unable to predict the amount of payments which will be made in 1998.
The Company has entered into programming development agreements with certain of
its shareholders. It has agreed with Vulcan that in the event Vulcan can
develop viable specialty programming related to computers, and the Company has
sufficient transponder capacity, Vulcan shall be the exclusive provider of such
programming, other than such programming as may be included as incidental
programming by the Company's other programming providers. The Company has
agreed to broadcast up to ten hours of such programming per week. At
present, the
28
<PAGE>
Company is unaware of any such programming being developed by Vulcan.
William D. Savoy, a director of the Company, is Vice President of Vulcan.
The Company has also agreed with Dow Jones that Dow Jones shall have development
rights with respect to business and financial programming and shall be the
exclusive third-party provider of business and financial programming carried on
the Company's programming other than such as may be included as incidental
programming by the Company's other programmers. Dow Jones has the right to
require the Company to broadcast up to six hours per weekday of such programming
if such programming becomes available. Peter G. Skinner, a director of the
Company, is General Counsel, Secretary and President of Television Operations of
Dow Jones.
Certain directors and former directors of the Company perform or have performed
consulting services for the Company. Frank N. Magid Associates, Inc., of which
Mr. Magid is President, performs research for both the Company and HBI. The
Company has paid $330,372 for the six months ended December 31, 1997, $807,575
in 1997, $733,809 in 1996, and $371,943 in 1995 to such company, and anticipates
payments of approximately $750,000 in 1998.
Mr. Quaal is the President of Ward L. Quaal Company, which performs government
relations work for both the Company and HBI. The Company has paid $20,812 for
the six months ended December 31, 1997, $61,007 in 1997, $141,683 in 1996, and
$126,333 in 1995 to such company. The Company expects to pay such company
approximately $50,000 in 1998.
The Company believes that all of the foregoing transactions have been on terms
no less favorable to the Company than could have been obtained from unaffiliated
third parties.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following information is included in the Company's 1997 Report
to Shareholders and are incorporated in Part II, Item 8 of this Form
10-K by reference:
Report of Independent Public Accountants
Consolidated Statements of Operations for the Years Ended December
31, 1997, 1996, and 1995 and the six month period ended December 31,
1997
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 and the six month period ended
December 31, 1997
Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995 and the six month period ended December 31,
1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information
is not present in amounts sufficient to require submission of the
schedule.
3. EXHIBITS
The following exhibits are filed as part of this Report on Form
10-K or, where indicated, were previously filed and are hereby
incorporated by reference.
EXHIBIT NO. EXHIBIT DESCRIPTION
1.1 Form of Underwriting Agreement(1)
1.2 Form of Subscription Agreement(1)
3.1 Restated Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Form of Second Restatement of the Articles of Incorporation(1)
3.4 Form of Amended and Restated Bylaws(1)
4.1 Form of Stock Certificate(1)
30
<PAGE>
10.1 United States Satellite Broadcasting Company, Inc. 1995
Stock Option Plan(1)*
10.2 Sales Agency Agreement, dated December 22, 1993, between
Thomson Consumer Electronics, Inc. and United States
Satellite Broadcasting Company, Inc.(1)**
10.3 United States Satellite Broadcasting Company, Inc. 1996
Non-Employee Director Stock Option Plan(5)*
10.4 Consulting Services Agreement, dated November 1, 1995
between Conus Communications Company Limited Partnership and
United States Satellite Broadcasting Company, Inc.(2)
10.5 [Intentionally reserved.]
10.6 [Intentionally reserved.]
10.7 [Intentionally reserved.]
10.8 [Intentionally reserved.]
10.9 [Intentionally reserved.]
10.10 Amendment No. 1, effective July 1, 1997, to the Indenture of
Lease dated May 1994, between Hubbard Broadcasting, Inc. and
United States Satellite Broadcasting Company, Inc.(5)
10.11 Service Agreement, dated January 1, 1994 between Conus
Communications Company Limited Partnership and United States
Satellite Broadcasting Company, Inc.(1)
10.12 Indenture of Lease, dated May 1994, between Hubbard
Broadcasting, Inc. and United States Satellite Broadcasting
Company, Inc.(1)
10.13 Satellite Payload Purchase Agreement, dated May 31, 1991,
between Hughes Communications Galaxy, Inc. and United States
Satellite Broadcasting Company, Inc., as amended(1)**
10.14 Interim Technology Access and Coordination Agreement, dated
June 17, 1993, between Hughes Communications Galaxy, Inc.
and United States Satellite Broadcasting Company, Inc.(1)**
10.15 Transponder Service Agreement, dated May 31, 1991, between
Hughes Communications Satellite Services, Inc. and United
States Satellite Broadcasting Company, Inc.(1)**
10.16 Processing Agreement, dated March 5, 1993, between JCPenney
Business Services, Inc. and United States Satellite Broadcasting
Company, Inc.(1)**
10.17 Auxiliary Broadcast Center Lease(1)
10.18 Form of Subscription Agreement, Letter of Investment Intent
and Investor's Rights Agreement(1)
31
<PAGE>
10.19 Administrative Services Agreement, effective July 1, 1994,
between United States Satellite Broadcasting Company, Inc.
and Hubbard Broadcasting, Inc.(1)
10.20 Tax Sharing Agreement between United States Satellite
Broadcasting Company, Inc. and Hubbard Broadcasting, Inc.(1)
10.21 6-Channel Direct Broadcast Satellite Contract, originally
dated June 15, 1984, between Lockheed Martin Corporation
(formerly RCA Corporation) and United States Satellite
Broadcasting Company, Inc., as amended(1)**
10.22 Amendment No. 10, dated December 18, 1995, to Direct Broadcast
Satellite Contract between Lockheed Martin Corporation and
United States Satellite Broadcasting Company, Inc.(1)**
10.23 Administrative Services Agreement, effective July 1, 1996,
between United States Satellite Broadcasting Company, Inc.
and Hubbard Broadcasting, Inc.(2)
10.24 Amendment No. 11, effective September 30, 1996, to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.(3)
10.25 Amendment No. 12, effective November 27, 1996 to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.(4)
10.26 Amendment No. 13, effective December 31, 1996, to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.(4)
10.27 Contract No. 104274-B, effective December 31, 1996, Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.(4)***
10.28 Amendment No. 1, effective April 11, 1997, to Direct
Broadcast Satellite Contract between United States Satellite
Broadcasting Company, Inc. and Lockheed Martin Corporation(5)***
10.29 Amendment No. 2, effective April 30, 1997, to Direct
Broadcast Satellite Contract between United States Satellite
Broadcasting Company, Inc. and Lockheed Martin Corporation(5)***
10.30 Amendment No. 3, effective June 1, 1997, to Direct Broadcast
Satellite Contract between United States Satellite
Broadcasting Company, Inc. and Lockheed Martin Corporation(5)***
10.31 Amendment No. 14, effective December 31, 1997, to Direct
Broadcast Satellite Contract between Lockheed Martin Corporation
and United States Satellite Broadcasting Company, Inc.(6)
10.32 Amendment No. 4, effective December 31, 1997, to Direct
Broadcast Satellite Contract between United States Satellite
Broadcasting Company, Inc. and Lockheed Martin Corporation(6)****
32
<PAGE>
13.1 Selected Portions of the Company's 1997 Report to Shareholders(6)
21.1 Subsidiaries of the Company(6)
23.1 Consent of Arthur Andersen LLP(6)
27.1 Financial Data Schedule(6)
99.1 Additional Exhibit; Report on Form 8-K dated September 4, 1997(6)
- -------------
* Denotes management contract or compensatory plan or arrangement in which
certain directors and named executive officers participate.
** Portions of these documents were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company
for confidential treatment pursuant to Rule 406 under the Securities Act
of 1933, as amended, in connection with the filing of the Registration
Statement described in note(1) below.
*** Portions of this document were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company
for confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, in connection with the prior filing of
the Company's Reports on Form 10-Q and 10-K described in notes (4) and
(5) below.
**** Portions of this document were redacted and filed separately with the
Securities and Exchange Commission pursuant to a request by the Company
for confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, in connection with the filing of this
Report on Form 10-K.
(1) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Registration Statement on Form S-1, File No. 33-99906.
(2) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-K for the fiscal year ended June 30, 1996.
(3) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-Q for the quarter ended September 30, 1996.
(4) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-Q for the quarter ended December 31, 1996.
(5) Pursuant to Rule 12b-32, this exhibit is incorporated by reference
under the same exhibit number to the exhibits filed with the Company's
Report on Form 10-K for the year ended June 30, 1997.
(6) Filed herewith.
33
<PAGE>
(b) Report on Form 8-K.
The Company filed a 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.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1998 UNITED STATES SATELLITE
BROADCASTING COMPANY, INC.
By: /s/ Stanley E. Hubbard
-------------------------------------
Stanley E. Hubbard
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
---------- ----- ----
/s/ Stanley S. Hubbard
- -------------------------- Chairman of the Board March 27, 1998
Stanley S. Hubbard
/s/ Stanley E. Hubbard
- -------------------------- Chief Executive Officer, March 27, 1998
Stanley E. Hubbard President, and Director
(Principal Executive Officer)
/s/ Robert W. Hubbard
- -------------------------- Executive Vice President March 27, 1998
Robert W. Hubbard and Director
/s/ Gerald D. Deeney Treasurer and Chief Financial March 27, 1998
- -------------------------- Officer (Principal Financial
Gerald D. Deeney and Accounting Officer)
/s/ Herbert S. Schlosser
- -------------------------- Director March 27, 1998
Herbert S. Schlosser
/s/ David S. Allen
- -------------------------- Director March 27, 1998
David S. Allen
/s/ Frank N. Magid
- -------------------------- Director March 27, 1998
Frank N. Magid
/s/ Peter G. Skinner
- -------------------------- Director March 27, 1998
Peter G. Skinner
/s/ William D. Savoy
- -------------------------- Director March 27, 1998
William D. Savoy
/s/ John W. Marvin
- -------------------------- Director March 27, 1998
John W. Marvin
35
<PAGE>
/s/ Ward L. Quaal
- -------------------------- Director March 27, 1998
Ward L. Quaal
/s/ Louis G. Zachary, Jr.
- -------------------------- Director March 27, 1998
Louis G. Zachary, Jr.
/s/ Peter F. Frenzer
- -------------------------- Director March 27, 1998
Peter F. Frenzer
36
<PAGE>
AMENDMENT NO. 14
CONTRACT NO. 104274
DIRECT BROADCAST SATELLITE CONTRACT
DATED JUNE 15, 1984
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT NO. 14 is effective December 31, 1997.
WHEREAS, United States Satellite Broadcasting Company Inc. (USSB) requires
additional time to evaluate its alternatives with regard to the eight (8)
channel spacecraft described in Exhibit A2 of the Contract and requests an
extension of the System Definition Phase before authorizing Lockheed Martin
Corporation (hereinafter referred to as "Contractor") to proceed with
Construction Phase Commencement ("CPC") of the eight (8) channel spacecraft; and
WHEREAS, the Contractor is willing to grant such an extension and reschedule the
CPC for the eight (8) channel spacecraft in accordance with the changes made
herein;
NOW THEREFORE, in consideration of the promises and mutual covenants herein
contained, USSB and the Contractor (hereinafter referred to as the "Parties")
agree to the following:
I. Change the date of the eight (8) channel spacecraft CPC and the date USSB
must notify the Contractor of USSB's intent not to proceed to December 31,
1998.
II. All other dates specified in the Contract's ARTICLE 3. DELIVERABLE ITEMS
AND DELIVERY SCHEDULE and ARTICLE 4. PAYMENT, beginning with the CPC
payment number thirteen (13), are deferred twelve (12) months from the date
specified in previous Amendment No. 13. Thus, payment number thirteen (13)
is due on December 31, 1998, and payment number fourteen (14) is due on
January 31, 1999, and so forth, through payment number fifty-six (56).
III. Prior to CPC for the eight (8) channel spacecraft, the Parties agree to
modify the Articles and Exhibits of this Contract. Such modifications
shall, at a minimum, include revising Exhibit A2 to specify Contractor's
Series A2100 spacecraft as well as appropriate adjustments to the delivery
schedule, price, and progress payment plan. In the event that
<PAGE>
the Parties do not agree to such modifications as evidenced by a written
amendment to this Contract, or a new similar written agreement, by the
date of the CPC, but in no event later than December 31, 1998, this
Contract shall be considered terminated for the convenience of USSB in
accordance with Article 15. Notwithstanding the provisions of Article
15, all payments made by USSB to the Contractor shall be retained in
their entirety by the Contractor.
IV. In consideration of the extension to this Contract USSB agrees to pay
Lockheed Martin, upon invoice, the sum of Fifty Thousand Dollars ($50,000)
on or before January 31, 1998.
IN WITNESS THEREOF, the Parties have caused this Amendment No. 14 to be signed
by their duly authorized officer or representative.
Lockheed Martin Corporation United States Satellite Broadcasting Company, Inc.
By: /s/ Wm. W. Whisenant By: /s/ Robert W. Hubbard
------------------------ -----------------------------
Wm. W. Whisenant Robert W. Hubbard
Contract Manager Executive Vice President
Lockheed Martin
Telecommunications
<PAGE>
AMENDMENT NO. 4
CONTRACT NO. 104272-B
DIRECT BROADCAST SATELLITE CONTRACT
BETWEEN
UNITED STATES SATELLITE BROADCASTING COMPANY, INC.
AND
LOCKHEED MARTIN CORPORATION
THIS AMENDMENT is effective December 31, 1997.
WHEREAS, USSB and the Contractor (hereinafter referred to as the "Parties"),
have agreed to an extension in the suspension of all program activities
effective January 1, 1998 through a period not to exceed May 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. 4;
NOW THEREFORE, in consideration of the promises and mutual covenants hereinafter
contained, the Parties agree to the following:
I. Beginning on January 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 May 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>
Total Increase in Price Total Increase in
Date of Increment Monthly Increment of Spacecraft Total Contract Price
- ----------------- ----------------- ----------------------- --------------------
<S> <C> <C> <C>
January 1, 1998
February 1, 1998
March 1, 1998
April 1, 1998
</TABLE>
<PAGE>
B. In Article 4.B, Deliverable Items and Delivery Schedule, the
current delivery schedule for all deliverables will be increased by
one month for each month this suspension is extended beyond January
1, 1998.
C. In Article 5.A, Progress and Milestone Payments, the Progress
Payment Plan, beginning with Payment Number 14 and continuing
through Payment Number 17 will be adjusted to
each month as follows:
<TABLE>
<CAPTION>
Monthly Total Cumulative Total
Date of Increment Payment Number ($ in U.S. Millions) ($ in U.S. Millions)
- ----------------- --------------- --------------------- --------------------
<S> <C> <C> <C>
January 1, 1998 14
February 1, 1998 15
March 1, 1998 16
April 1, 1998 17
</TABLE>
D. In Article 15A, USSB's Right to Terminate, the Termination Schedule
shall be changed as follows:
<TABLE>
<CAPTION>
Monthly Total Cumulative Total
Date of Increment ($ in U.S. Millions) ($ in U.S. Millions)
- ----------------- --------------------- --------------------
<S> <C> <C>
January - 1998
February
March
April
</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 May
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. 4.
<PAGE>
IN WITNESS THEREOF, the Parties have caused this Amendment No. 4 to be signed by
their duly authorized officer or representative.
United States Satellite Broadcasting Lockheed Martin Corporation
Company, Inc.
By: /s/ Robert W. Hubbard By: /s/ Wm. W. Whisenant
----------------------------- ------------------------
Robert W. Hubbard Wm. W. Whisenant
Executive Vice President Contract Manager
Lockheed Martin
Telecommunications
<PAGE>
Selected Financial and Operating Data
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $243,152 $456,619 $ 292,624 $107,926 $ 5,132 $ --
Cost of sales 154,764 292,917 193,356 70,961 3,362 --
- --------------------------------------------------------------------------------------------------------------------------
Gross margin 88,388 163,702 99,268 36,965 1,770 --
Operating expenses:
Selling and marketing 57,635 99,399 102,715 62,922 17,598 520
Manufacturer Incentive 42,759 66,726 18,387 -- -- --
General and administrative 23,995 46,935 31,992 17,040 10,539 2,988
Commissions to retailers 6,882 14,537 13,909 6,813 307 --
Engineering and operations 6,302 9,801 11,644 4,564 3,022 252
Depreciation and amortization 8,706 18,426 19,687 21,323 19,775 12
Management fees (a) -- -- -- 6,667 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net operating loss (57,891) (92,122) (99,066) (82,364) (49,471) (3,772)
OTHER (INCOME) EXPENSE:
Interest expense -- -- 2,326 9,081 8,218 1,520
Interest (income) (2,378) (4,919) (6,244) (1,556) (1,352) --
Cost to terminate Credit Agreement -- -- 9,504 -- -- --
Other 60 103 307 1,489 526 (997)
- --------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (55,573) (87,306) (104,959) (91,378) (56,863) (4,295)
Income tax provision -- -- -- -- 1 1
- --------------------------------------------------------------------------------------------------------------------------
Net loss $(55,573) $(87,306) $(104,959) $(91,378) $(56,864) $(4,296)
- --------------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $ (0.62) $ (0.97) $ (1.17) $ (1.02) $ (0.63) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents $ 68,646 $ 86,518 $ 19,683 $ 1,817 $ 212
Working capital (deficit) (8,308) 31,065 (17,786) (27,353) (427)
Long-term investments, consisting of
U.S. Treasury securities 3,970 6,941 13,001 15,298 --
Total assets 206,310 217,354 149,571 130,472 66,729
Long-term debt -- -- 128,456 68,775 20,268
Shareholders' equity 2,099 89,477 (48,972) 41,728 21,626
</TABLE>
(a) IN CONNECTION WITH MANAGEMENT SERVICES PERFORMED BY HUBBARD
BROADCASTING, INC. ("HBI") FOR THE COMPANY DURING 1992 THROUGH 1994, THE
COMPANY AGREED TO PAY HBI AN AGGREGATE OF $10.0 MILLION, OF WHICH
$3.3 MILLION WAS ACCRUED IN 1992 AND THE REMAINDER ACCRUED IN THE QUARTER
ENDED SEPTEMBER 30, 1995, WHEN IT BECAME LIKELY CERTAIN PRECONDITIONS TO
PAYMENT WOULD BE SATISFIED.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Change in Fiscal Year
On September 4, 1997, the Board of Directors of United States Satellite
Broadcasting Company, Inc. ("USSB" or 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"). The following discussion compares the six month period ended
December 31, 1997 to the six month period ended December 31, 1996 and also
compares the calendar years 1997, 1996 and 1995.
Overview
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 and 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 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. However, management expects
that the Company will generate net income during the year 2000.
Although there were several significant competitive developments in
1997, the potential market for the Company's programming continues to grow.
The introduction of DSS units is widely regarded as the most successful
introduction of a major consumer electronics product in United States
history. At December 31, 1997, approximately 3.32 million households were
authorized to receive DSS service ("DSS households"), up from 2.89 million at
September 30, 1997.
As part of its ongoing strategy to tighten its focus on premium movie
entertainment and to simplify the DSS offering at retail, on January 6, 1998,
the Company and DIRECTV announced an arrangement under which the basic
channels previously carried by USSB were integrated into the DIRECTV channel
line-up, commencing March 10, 1998. The channels involved were the MTV
Networks (MTV, M2, VH1, Nickelodeon and Nick at Nite's TV LAND), Lifetime and
Comedy Central. As a result of this arrangement, consumers can now receive a
full complement of basic channels from DIRECTV, while the biggest selection
of premium movie channels are available from USSB. In furtherance of this
strategy, USSB announced the national premiere of two new commercial-free
premium movie services: Showtime Extreme and fXM: Movies from Fox, which
debuted on USSB on March 10, 1998. As a result of these developments,
management anticipates that the number of subscribers and total revenues will
continue to grow, although at a slower rate during the integration period.
However, since the basic channels generally provided lower margins than the
premium channels, management expects that the Company's gross margins will
improve.
Forward-looking statements contained in this 1997 Report to Shareholders
(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; unforeseen consumer reaction to the
marketing, packaging and pricing of the Company's new offerings; increases in
costs, including programming costs, in excess
8
<PAGE>
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, vendors, and upon Hughes Electronics Corporation;
dependence on a single DBS satellite; dependence on continued effectiveness
of the security and signal encryption features of the DSS system; potentially
adverse governmental regulation and actions; and overall economic conditions.
The Company anticipates that other DBS satellites will be launched at the
110DEG west longitude and other orbital locations, increasing the number of
competitors in the satellite broadcasting market. The Telecommunications Act
of 1996 significantly deregulated the telecommunications industry. The effect
of such deregulation on the Company's business, results of operations and
financial condition cannot be predicted. See Part 1, Item 1, "Business -
Competition" of the Company's Report on Form 10-K for the Transition Period
for a further discussion of certain of these risks.
Summary of Subscriber and Revenue Data
Management measures the Company's performance by two key measures: subscriber
base and revenues.
The number of USSB paying subscribers grew to approximately 1,740,000 at
December 31, 1997 from approximately 1,584,000 at September 30, 1997.
Approximately 215,000 additional households were receiving a free promotional
month of USSB programming as of December 31, 1997.
In addition to tracking the absolute number of subscribers, management
assesses the Company's penetration of its potential DSS market by comparing
the number of USSB paying subscribers to the total number of households that
have received the free promotional month of USSB 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 December 31, 1997, the
Company achieved a penetration of convertible households of approximately 63
percent (i.e., almost two-thirds of DSS households that have received the
free promotional month of USSB programming are currently USSB paying
subscribers).
The summary immediately below shows, as of the end of each period, USSB
paying subscribers, USSB promotional activations, USSB convertible households
and the percentage of convertible households served by the Company. The
estimated number of DSS households is also shown.
Subscriber Base: (IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL USSB PERCENT
PAYING OF USSB
USSB SUBSCRIBERS AND USSB CONVERTIBLE
USSB PAYING PROMOTIONAL PROMOTIONAL CONVERTIBLE HOUSEHOLDS ESTIMATED DSS
FOR THE QUARTER ENDED SUBSCRIBERS (a) ACTIVATIONS (b) ACTIVATIONS HOUSEHOLDS (c) SERVED (d) HOUSEHOLDS (e)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 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
September 30, 1997 1,584 113 1,697 2,462 64% 2,887
December 31, 1997 1,740 215 1,955 2,757 63% 3,318
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</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.
9
<PAGE>
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 that include special rates for limited periods, which
could result in lower average per subscriber revenues for such periods. In
addition, the Company's programming revenues associated with increased DSS
unit sales are largely reflected in subsequent quarters due to the lag
between the purchase of a DSS unit and its installation and activation, and
the free promotional month of programming offered by the Company.
Revenues: (IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 DECEMBER 31
FOR THE QUARTER ENDED 1997 1997 1997 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average monthly subscription revenue per paying subscriber (a) $ 24.66 $ 24.71 $ 24.86 $ 24.86 $ 24.93
Total revenues (b) $128,769 $114,383 $114,236 $99,231 $92,104
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) EXCLUDES PAY-PER-VIEW EVENT, COMMERCIAL AND TV GUIDE-TM- REVENUES.
(b) INCLUDES PAY-PER-VIEW EVENT, COMMERCIAL AND TV GUIDE REVENUES.
The Company's annual churn rate as of December 31, 1997 was 24.7%. Churn
rate represents the number of the Company's paying customers who terminated
their subscriptions or whose subscriptions were terminated by the Company
during such twelve month period, and who did not resubscribe during that
period, expressed as a percentage of the total number of paying subscribers
at the end of such period. Certain of the Company's promotional efforts may
attract a higher percentage of short-term subscribers, thus increasing the
Company's churn rate from time to time.
Results of Operations
TRANSITION PERIOD ENDED DECEMBER 31, 1997 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 1996.
REVENUE OVERVIEW. The Company's total revenues increased to $243.2 million
for the six months ended December 31, 1997, compared to $171.3 million for
the six months ended December 31, 1996. The revenue increase between the two
six-month periods 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 a function of the
number of subscribers, the mix of programming packages selected by customers
and the rates charged. The increase in revenues for the six-month periods was
primarily attributable to the increase in the number of paying subscribers to
approximately 1,740,000 at December 31, 1997, up from approximately 1,220,000
at December 31, 1996.
Pay-per-view revenues, which vary with the number and type of events
provided on a pay-per-view basis in any fiscal period, are included in the
Company's total 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. 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 $154.8 million for the six-month
period ended December 31, 1997, compared to $112.6 million for the six-month
period ended December 31, 1996. The increase in cost of programming was
primarily the result of an increased number of subscribers. Cost of sales
represented 63.7 percent of programming revenues for the six-month period
ended December 31, 1997 and 65.7 percent for
10
<PAGE>
the six-month period ended December 31, 1996. Programming costs as a percent
of programming revenues will vary based on the mix of programming packages
taken by subscribers, the number and type of pay-per-view events, and the
extent to which volume-based discounts from the Company's programming
providers are realized.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $146.3
million for the six-month period ended December 31, 1997, compared to $126.1
million for the six-month period ended December 31, 1996. This increase was
primarily attributable to the cost of providing the Company's services to a
growing subscriber base, including increased marketing, customer service,
security and encryption fees. The Manufacturer Incentive program also
contributed to the increase.
SELLING AND MARKETING. Selling and marketing costs include promotional
and advertising costs, the costs of direct marketing and customer service and
amounts expended pursuant to joint marketing efforts with other DSS
broadcasting system participants. The Company's overall selling and marketing
effort includes the Manufacturer Incentive program, which is discussed below.
Excluding Manufacturer Incentive program expenses, selling and marketing
expenses decreased to $57.6 million for the six months ended December 31,
1997, compared to $62.7 million for the six months ended December 31, 1996.
This decrease was primarily attributable to reduced advertising and marketing
expenditures, offset partially by increased customer service expenditures
associated with the growth of the Company's subscriber base. In addition,
expenses associated with the Company's telemarketing and direct mail
marketing programs, which are directed at purchasers of DSS units who
activate with the Company, have increased as the number of such DSS
activations has increased.
MANUFACTURER INCENTIVE PROGRAM. Manufacturer Incentive program expense
relates to financial incentive arrangements with certain manufacturers of DSS
equipment. These arrangements have had the effect of contributing to certain
DSS manufacturers lowering the price of DSS units. Such arrangements, which
run for up to four years depending on manufacturer, commit the Company to pay
the manufacturers over a five-year period from the date new DSS households
are authorized to receive programming. The expense and liability for such
future commitments is established and recorded upon activation of the related
DSS unit. Manufacturer Incentive program expenses totaled $42.8 million for
the six months ended December 31, 1997, compared to $18.4 million for the six
months ended December 31, 1996. The Company expects the total expenses 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
$24.0 million for the six months ended December 31, 1997, compared to $21.0
million for the six months ended December 31, 1996. The increase was
primarily attributable to increased billing and remittance processing costs
resulting from the growth of the Company's subscriber base. Although total
general and administrative costs have increased, elements of general and
administrative expenses have declined as a percent of revenues as certain of
these 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. Commissions to
retailers were $6.9 million in both six month periods. The effects of an
increased subscriber base were offset by a decreasing per-subscriber rate on
the 1996 subscriber base.
11
<PAGE>
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 $6.3
million for the six months ended December 31, 1997, compared to $8.4 million
for the six months ended December 31, 1996. Such expenses were higher during
the six months ended December 31, 1996 because the Company incurred
significant costs in connection with an upgrade to the conditional access
system. From time to time, the Company will incur additional expenses in
connection with periodic upgrades to the security feature of 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 was
$8.7 million for the six months ended December 31, 1997, compared to $8.8
million for the six months ended December 31, 1996.
NET OPERATING LOSS. The Company recorded a net operating loss for the six
months ended December 31, 1997 of $57.9 million, compared to a net operating
loss of $67.4 million for the six months ended December 31, 1996.
INTEREST INCOME. Interest income for the six months ended December 31,
1997 was $2.4 million, compared to $2.7 million for the six months ended
December 31, 1996.
NET LOSS. The Company recorded a net loss for the six months ended December
31, 1997 of $55.6 million, compared to $64.6 for the six months ended
December 31, 1996.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995.
REVENUE OVERVIEW. The Company's total revenues increased to $456.6 million
for 1997, compared to $292.6 million for 1996, and $107.9 million for 1995.
The revenue increases from year to year were primarily attributable to a
larger subscriber base.
REVENUES. The increase in revenues for the three years was primarily
attributable to the increase in the number of paying subscribers to
approximately 1,740,000 at December 31, 1997, up from approximately 1,220,000
at December 31, 1996, and 629,000 at December 31, 1995. Average monthly
revenue per subscriber for 1997 was $24.76, compared to $25.10 for 1996 and
$25.81 for 1995. As the Company's penetration of its market increases,
management believes that average monthly revenue per subscriber will trend
downward slightly, reflecting a broader customer base. In addition, in any
given period, decreases may result 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. 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. The cost of programming increased to $292.9 million for
the year ended December 31, 1997, compared to $193.4 million for 1996, and
$71.0 million for 1995. The increase in cost of programming for these periods
was primarily the result of an increased number of subscribers in each
period. Cost of sales represented 64.1 percent of programming revenues for
1997, 66.1 percent for 1996 and 65.8 percent for 1995. Programming costs as a
percent of programming revenues will vary based on the mix of programming
packages taken by subscribers, the number and type of pay-per-view events,
and the extent to which volume-based discounts from the Company's programming
providers are realized.
OPERATING EXPENSE OVERVIEW. Total operating expenses increased to $255.8
million for 1997, compared to $198.3 million for 1996 and $119.3 million for
1995. The increase for all periods was primarily attributable to the cost of
providing the Company's services to a growing subscriber base, including
increased marketing, customer service, security and encryption fees. For
1997, the Manufacturer Incentive program also contributed to the increase.
12
<PAGE>
SELLING AND MARKETING. The Company's overall selling and marketing
efforts include the Manufacturer Incentive program, which is discussed below.
Excluding Manufacturer Incentive program expenses, selling and marketing
expenses were $99.4 million for the year ended December 31, 1997, compared to
$102.7 million for 1996 and $62.9 million for 1995. The decrease between 1997
and 1996 was primarily attributable to reduced advertising and marketing
expenditures, offset partially by increased customer service expenditures
associated with the growth of the Company's subscriber base.
MANUFACTURER INCENTIVE PROGRAM. Manufacturer Incentive program expenses
totaled $66.7 million for the year ended December 31, 1997, compared to $18.4
million for 1996. No amounts were incurred in 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $46.9 million for 1997, compared to $32.0 million for 1996 and
$17.0 million for 1995. The increases for all periods were primarily
attributable to increased billing and remittance processing costs and
increased bad debt expense, both resulting from the growth of the Company's
subscriber base. Although total general and administrative costs have
increased, elements of general and administrative expenses have declined as a
percent of revenues as certain of these expenses are fixed.
COMMISSIONS TO RETAILERS. Commissions to retailers increased to $14.5
million for 1997, compared to $13.9 million for 1996, and $6.9 million for
1995. The increases in all years reflect increased USSB programming
subscriptions, offset by the effect of lower per-subscriber commission rates
over time.
ENGINEERING AND OPERATIONS. Engineering and operations expenses were
$9.8 million for 1997, compared to $11.6 million for 1996 and $4.6 million
for 1995. Such expenses were higher during 1996 because the Company incurred
significant costs in connection with an upgrade to the conditional access
system. From time to time, the Company will incur additional expenses in
connection with periodic upgrades to the security feature of the conditional
access system. The increase between 1996 and 1995 was primarily attributable
to higher security and encryption fees, which are paid on a per subscriber
basis.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $18.4
million for 1997, compared to $19.7 million for 1996 and $21.3 million for
1995.
MANAGEMENT FEES. Management fees due to HBI of $6.7 million were accrued
in 1995, representing the balance of fees for contracted management services
rendered to the Company by HBI from 1992 through 1994.
NET OPERATING LOSS. The Company recorded a net operating loss for 1997 of
$92.1 million, compared to net operating losses of $99.1 million for 1996 and
$82.4 million for 1995.
INTEREST EXPENSE. The Company incurred no interest expense for 1997,
compared to $2.3 million for 1996 and $9.1 million for 1995. Changes in
interest expense reflect changes in the amount and duration of the Company's
borrowings during these periods.
INTEREST INCOME. Interest income for 1997 was $4.9 million, compared to
$6.2 million for 1996 and $1.6 million for 1995. Interest income in 1996
increased as a result of the investment of the proceeds of the public
offering of the Company's Class A Common Stock, which closed on February 6,
1996.
NET LOSS. The Company recorded a net loss for 1997 of $87.3 million, compared
to $105.0 million for 1996 and $91.4 million for 1995.
Financial Position, Liquidity and Capital Resources
Prior to February 1996, the Company's operations were financed by equity
contributions from shareholders, approximately $31.2 million of cash advances
from HBI and approximately $42.0 million in privately-issued notes and
associated warrants. Such advances from HBI were converted into equity in
1990 and 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
13
<PAGE>
received proceeds of approximately $206.2 million, repaid all outstanding
bank debt and terminated the credit agreement. The Company incurred a charge
of $9.5 million in connection with the termination of the credit agreement.
LIQUIDITY AND CAPITAL RESOURCES. The significant components of the
changes in cash and cash equivalents were as follows for the periods
presented (in millions):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents, beginning of period $ 93.4 $ 86.5 $ 19.7 $ 1.8
Net loss (55.6) (87.3) (105.0) (91.4)
Depreciation and amortization 8.7 18.4 19.7 21.3
Changes in operating items (10.3) 4.4 17.0 25.3
Net capital expenditures (4.2) (14.9) (5.5) (7.7)
Manufacturer Incentive program 37.0 59.1 14.6 --
Other, including stock sales and debt repayment (.4) 2.4 126.0 70.4
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 68.6 $ 68.6 $ 86.5 $ 19.7
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease shown from 1996 to 1997 reflects the net use of cash
resulting from the Company's operations. The increase from 1995 to 1996
reflects the Company's receipt of proceeds from its February 1996 initial
public offering.
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. However, 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 through 1998. Management
further believes that its cash balance will not be less than $35.0-$40.0
million during such period.
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. Negative working capital of $8.3 million existed at
December 31, 1997, compared to a positive working capital of $31.1 million at
December 31, 1996. This decrease in working capital in 1997 from 1996
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
14
<PAGE>
as the Manufacturer Incentive program obligation increases with the growth of
DSS households. The Company's working capital at December 31, 1995 was a
negative $17.8 million. As a result of the completion of the public offering
of the Company's Class A Common Stock in February 1996, the Company's working
capital increased by approximately $206.2 million.
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.
Note 5 to the Consolidated Financial Statements contains additional
information on these matters.
CAPITAL EXPENDITURES. Capital expenditures for the year ended December
31, 1997 totaled $14.9 million, consisting primarily of satellite deposits
and purchased computer software. The Company is required to make progress
payments under its contract with Lockheed Martin for satellite construction
at the 110_ 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 5 to the consolidated financial statements
contains additional information on this matter.
NET OPERATING LOSS CARRYFORWARD. At December 31, 1997, the Company's net
operating loss carryforward was $304.5 million for federal tax purposes. Such
carryforwards expire in the years 2000 through 2013. Management expects to
utilize this amount when taxable income is achieved.
Year 2000
During 1997, the Company analyzed 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 were determined to be year 2000 compliant
during 1997. 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 cost incurred in 1997
relating to year 2000 issues was immaterial. The Company does not expect the
cost to be incurred over the next two years to have a material effect on its
results of operations.
Seasonality
Sales of DSS units may be subject to seasonal sales patterns experienced by
the consumer electronics industry. As the Company's subscriber base has
increased, it does not appear that seasonality has had a material effect on
the Company's revenues to date, although seasonality may affect the rate of
subscriber growth in any given quarter.
15
<PAGE>
Consolidated Statements of Operations
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $243,152 $456,619 $ 292,624 $107,926
COST OF SALES 154,764 292,917 193,356 70,961
- ---------------------------------------------------------------------------------------------------------
GROSS MARGIN 88,388 163,702 99,268 36,965
OPERATING EXPENSES
Selling and marketing 57,635 99,399 102,715 62,922
Manufacturer Incentive 42,759 66,726 18,387 --
General and administrative 23,995 46,935 31,992 17,040
Commissions to retailers 6,882 14,537 13,909 6,813
Engineering and operations 6,302 9,801 11,644 4,564
Depreciation and amortization 8,706 18,426 19,687 21,323
Management fees due to HBI -- -- -- 6,667
- ---------------------------------------------------------------------------------------------------------
Net operating loss (57,891) (92,122) (99,066) (82,364)
- ---------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSE
Interest expense -- -- 2,326 9,081
Interest (income) (2,378) (4,919) (6,244) (1,556)
Cost to terminate Credit Agreement -- -- 9,504 --
Other 60 103 307 1,489
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net loss $(55,573) $(87,306) $(104,959) $(91,378)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $ (0.62) $ (0.97) $ (1.17) $ (1.02)
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
<PAGE>
Consolidated Balance Sheets
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 68,646 $ 86,518
Trade accounts receivable, less allowance of $6,074 and $2,388 at December 31, 1997
and 1996, respectively 44,992 42,402
Prepaid expenses and other 11,832 4,863
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 125,470 133,783
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 351 351
Buildings and improvements 5,075 4,875
Equipment 138,264 130,610
- -----------------------------------------------------------------------------------------------------------------------
143,690 135,836
Less - Accumulated depreciation (79,235) (60,809)
- -----------------------------------------------------------------------------------------------------------------------
Total property and equipment, net 64,455 75,027
- -----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Satellite deposits 8,380 1,441
Long-term investments, consisting of U.S. Treasury securities 3,970 6,941
Other 4,035 162
- -----------------------------------------------------------------------------------------------------------------------
Total other assets 16,385 8,544
- -----------------------------------------------------------------------------------------------------------------------
$206,310 $217,354
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 60,599 $ 51,921
Deferred revenue 56,156 47,120
Manufacturer Incentive obligation 17,023 3,677
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 133,778 102,718
- -----------------------------------------------------------------------------------------------------------------------
MANUFACTURER INCENTIVE OBLIGATION 60,433 14,632
DUE TO HBI 10,000 10,527
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, 50 million shares authorized; none issued or outstanding -- --
Class A Common Stock -
Participating, voting, $.0001 par value, 500 million shares authorized,16,172,601 and
15,114,676 shares issued and outstanding at December 31, 1997 and 1996, respectively 2 2
Common Stock -
Participating, voting, $.0001 par value, 100 million shares authorized, 73,638,174 and
74,696,099 shares issued and outstanding at December 31, 1997 and 1996, respectively 7 7
Additional paid-in capital 374,877 378,114
Accumulated deficit (372,777) (285,471)
Unrealized loss on investments (10) (22)
- -----------------------------------------------------------------------------------------------------------------------
2,099 92,630
Unused media credits -- (3,153)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,099 89,477
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
$ 206,310 $ 217,354
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
17
<PAGE>
Consolidated Statements of Shareholders' Equity
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT SHARES AMOUNT WARRANTS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT DECEMBER 31 1994 16,876 $2 72,935 $ 7 $7,350
Unrealized gain on investments - - - - -
Media credits utilized - - - - -
Net loss - - - - -
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1995 16,876 2 72,935 7 7,350
Conversion of shares
pursuant to Recapitalization (16,876) (2) 16,876 2 -
Conversion of notes and
cancellation of warrants - - 7,412 1 (7,350)
Conversion of shares available
for overallotment 1,245 - (1,245) - -
Transfer of common stock from HBI - - (15,712) (2) -
Sale of Class A common stock
for $27 per share, net 8,300 1 - - -
Conversion of shares pursuant
to certain shareholder rights 5,570 1 (5,570) 1 -
Media credits utilized - - - - -
Unrealized loss on investments - - - - -
Net loss - - - - -
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31 1996 15,115 2 74,696 7 -
Conversion of shares pursuant
to certain shareholder rights 1,058 - (1,058) - -
Media credits utilized - - - - -
Media credits cancelled - - - - -
Unrealized gain on investments - - - - -
Net loss - - - - -
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 16,173 $ 2 73,638 $ 7 $ -
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997 15,589 $2 74,222 $ 7 $ -
Conversion of shares pursuant
to certain shareholder rights 584 - (584) - -
Media credits utilized - - - - -
Media credits cancelled - - - - -
Unrealized gain on investments - - - - -
Net loss - - - - -
- -------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 16,173 $ 2 73,638 $7 $ -
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
UNREALIZED
ADDITIONAL GAIN UNUSED
PAID-IN ACCUMULATED (LOSS) ON MEDIA
CAPITAL DEFICIT INVESTMENTS CREDITS TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT DECEMBER 31 1994 $127,423 $ (89,134) $ - $(4,330) $ 41,318
Unrealized gain on investments - - 154 - 154
Media credits utilized - - - 934 934
Net loss - (91,378) - - (91,378)
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1995 127,423 (180,512) 154 (3,396) (48,972)
Conversion of shares
pursuant to Recapitalization - - - - -
Conversion of notes and
cancellation of warrants 44,491 - - - 37,142
Conversion of shares available
for overallotment - - - - -
Transfer of common stock from HBI - - - - (2)
Sale of Class A common stock
for $27 per share, net 206,200 - - - 206,201
Conversion of shares pursuant
to certain shareholder rights - - - - -
Media credits utilized - - - 243 243
Unrealized loss on investments - - (176) - (176)
Net loss - (104,959) - - (104,959)
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31 1996 378,114 (285,471) (22) (3,153) 89,477
Conversion of shares pursuant
to certain shareholder rights - - - - -
Media credits utilized - - - (84) (84)
Media credits cancelled (3,237) - - 3,237 -
Unrealized gain on investments - - 12 - 12
Net loss - (87,306) - - (87,306)
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 $374,877 $(372,777) $(10) $ - $ 2,099
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997:
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT JUNE 30, 1997 $378,114 $(317,204) $(12) $(3,240) $57,667
Conversion of shares pursuant
to certain shareholder rights - - - - -
Media credits utilized - - - 3 3
Media credits cancelled (3,237) - - 3,237 -
Unrealized gain on investments - - 2 - 2
Net loss - (55,573) - - (55,573)
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY AT DECEMBER 31, 1997 $374,877 $(372,777) $(10) $ - $ 2,099
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
18
<PAGE>
Consolidated Statements of Cash Flows
UNITED STATES SATELLITE BROADCASTING COMPANY, INC. AND SUBSIDIARIES
<TABLE>
FOR THE SIX MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) DECEMBER 31, 1997 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(55,573) $ (87,306) $(104,959) $(91,378)
Adjustments to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 8,706 18,426 19,687 21,323
Interest accretion, net - - 122 1,428
Deferred loan origination fees charged to
expense in connection with termination
of Credit Agreement - - 5,465 -
Media credits utilized 3 (84) 243 934
Change in operating items:
Trade accounts receivable (6,146) (2,590) (25,532) (12,539)
Prepaid expenses and other current assets (3,549) (6,969) (278) (577)
Accounts payable and accrued expenses (672) 8,679 19,851 25,740
Deferred revenue 3,916 9,036 23,943 16,728
Manufacturer Incentive 37,003 59,146 14,632 -
Other (3,785) (3,829) (974) (4,057)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (20,097) (5,491) (47,800) (42,398)
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of and deposits on equipment (4,239) (14,854) (5,487) (7,697)
Proceeds from sales of short-term investments - - - 367
Proceeds from sale of long-term
available-for-sale investments - 3,000 5,996 2,100
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (4,239) (11,854) 509 (5,230)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Advances from (repayments to) affiliated companies (382) (527) (637) 7,242
Proceeds from debt borrowings - - 485 91,436
Repayment of debt - - (91,922) (33,184)
Proceeds from sale of common stock - - 206,200 -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (382) (527) 114,126 65,494
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (24,718) (17,872) 66,835 17,866
CASH AND CASH EQUIVALENTS, beginning of period 93,364 86,518 19,683 1,817
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 68,646 $ 68,646 $ 86,518 $ 19,683
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
NONCASH TRANSACTIONS
Conversion of notes and cancellation of warrants $ - $ - $44,491 $ -
- -----------------------------------------------------------------------------------------------------------------
Expiration of unused media credits $ (3,237) $ (3,237) $ - $ -
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION
Cash paid during the period for -
Interest $ - $ - $ - $ 6,739
Income taxes $ - $ - $ - $ -
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
19
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 Organization and Summary of Significant Accounting Principles
United States Satellite Broadcasting Company, Inc. and Subsidiaries ("USSB"
or the "Company") provide subscription television programming via a
high-power direct broadcast satellite ("DBS") to households throughout the
continental United States. The Company broadcasts a high quality digital
television signal using the Digital Satellite System ("DSS-Registered
Trademark-"). The Company's programming is available to customers who have a
DSS unit, which consists of an 18-inch satellite dish, a receiver/decoder and
a remote control. All of the Company's gross revenues and identifiable assets
relate to the Company's activities in this industry.
Hubbard Broadcasting, Inc. ("HBI") beneficially owned 51.8% of the Company as
of December 31, 1997 and 1996, and had approximately 61.8% of the combined
voting power with respect to all matters submitted for the vote of all
shareholders at December 31, 1997.
Until July 1, 1994, the Company was a development stage company. The
Company has incurred losses since its inception and had an accumulated
deficit of approximately $372.8 million as of December 31, 1997. Management
anticipates that losses will continue into 1999 because the Company plans to
continue to incur substantial selling and marketing expenses (including
Manufacturer Incentive program expenses) to expand its subscriber base. The
Company's future success will be dependent on continued growth of the
Company's subscriber base and attaining profitability.
Existing contractual obligations (see Note 5) may require capital resources
in excess of cash balances plus anticipated operating cash flows during 1998
and beyond. The Company may consider debt financing alternatives to augment
those resources. The Company believes that such financing would be available
from a number of sources. However, if such financing is not available on
terms satisfactory to the Company, management has the ability to reduce its
planned consumer and trade marketing expenditures. Such reductions could have
the effect of slowing the rate of subscriber growth in 1998 and beyond.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned Subsidiaries, including USSB II, Inc. ("USSB II"). USSB II
owns the Company's satellite transponders and holds the Company's FCC
licenses and permits (see Note 5). All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist primarily of short-term United
States Treasury-backed securities with original maturities of less than 90
days, are stated at cost, which approximates fair value.
INVESTMENTS
Long-term investments at December 31, 1997, consist of a U.S. Treasury
security maturing in 1999, which the Company classifies as
available-for-sale. The security bears interest at 5.5% and its aggregate
amortized cost approximated its market value of $3,970,000 at December 31,
1997. During 1997 the Company sold $3.0 million of U.S. Treasury securities.
The securities held on December 31, 1996, had an aggregate amortized cost
that approximated their market value of $6,941,000. Unrealized gains and
losses are reported as a separate component of shareholders' equity.
MANUFACTURER INCENTIVE PROGRAM
The Company's costs under its financial incentive arrangements with
manufacturers of DSS equipment are charged to expense as incurred. See Note 5
for additional disclosure regarding these arrangements.
20
<PAGE>
RETAILER COMMISSIONS
The Company generally pays commissions to eligible retailers for their
customers who are paying subscribers. Commissions paid are charged to expense
over the related subscription period. Deferred retailer commissions totaled
$546,000 and $1,790,000 at December 31, 1997 and December 31, 1996,
respectively, and are included with prepaid expenses and other current assets
in the accompanying consolidated balance sheets. Accrued retailer commissions
totaled $5,996,000 at December 31, 1997 and $6,543,000 at December 31, 1996.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
accelerated and straight-line methods based on estimated useful lives as
follows:
<TABLE>
<S> <C>
Satellite Transponders 10 years
Other Equipment 5-10 years
Buildings & Improvements 31 years
</TABLE>
FINANCIAL INSTRUMENTS
Unless otherwise indicated, the recorded value of the Company's financial
instruments approximates their fair value.
REVENUE RECOGNITION
Programming revenues are recorded as income when the respective services are
rendered. Subscriptions received in advance of the delivery of the related
programming are recorded as deferred revenue.
ADVERTISING AND PROMOTIONS
Costs for advertising and promotional materials and activities (including the
cost, if any, of programming provided to current or prospective customers
free of charge) are charged to expense as incurred.
RESEARCH AND DEVELOPMENT
Costs related to the Company's research and development efforts are charged
to expense as incurred.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities. These differences will result in taxable or deductible amounts
in the future based on enacted tax laws and are applicable to the periods in
which the differences are expected to affect taxable income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), effective for fiscal years beginning after December 15, 1997. SFAS No.
130 will require the Company to report and display comprehensive income and its
components. Comprehensive income is defined as changes in equity of a business
enterprise during a period except those resulting from investments by owners and
distributions to owners. The changes required by SFAS No. 130 will not affect
net income or shareholders' equity.
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.
Summarized financial data for the six month period ended December 31, 1996 is
presented for purposes of comparison
as follows:
<TABLE>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C>
Revenue $ 171,348
Cost of Sales 112,628
- ----------------------------------------------------
Gross Margin 58,720
Operating Expenses 126,110
- ----------------------------------------------------
Net Operating Loss (67,390)
Other (income) expense, net (2,833)
- ----------------------------------------------------
Net Loss (64,557)
- ----------------------------------------------------
- ----------------------------------------------------
Net Loss per share - basic and diluted $ (0.72)
- ----------------------------------------------------
- ----------------------------------------------------
</TABLE>
21
<PAGE>
NOTE 3 Shareholders' Equity
RECAPITALIZATION AND INITIAL PUBLIC OFFERING
In the third quarter of 1995, the Company decided to proceed with an initial
public offering of its Class A Common Stock. In connection with the offering,
on January 31, 1996, the Company effected a recapitalization of the Company's
capital structure.
Prior to the recapitalization, the Company's capitalization consisted of two
classes of common stock (referred to herein as "old common stock" and "old class
A common stock"). Terms of the recapitalization included (i) a change in the
authorized capital of the Company to consist of 100,000,000 shares of Common
Stock, 500,000,000 shares of Class A Common Stock and 50,000,000 shares of
undesignated Preferred Stock; (ii) the conversion of the Company's old common
stock and old class A common stock into shares of Common Stock; (iii) the
conversion of certain convertible subordinated promissory notes into shares of
Common Stock and the cancellation of warrants issued to the holders of those
notes; (iv) a 75-for-one split of the new capital stock; and (v) the
contribution by HBI of 8,300,000 shares of Common Stock in connection with the
public offering and 7,411,950 shares of Common Stock in connection with
conversion of the convertible subordinated promissory notes, pursuant to HBI's
agreements with certain current shareholders, in order to prevent those
shareholders from experiencing dilution in their ownership of the Company. The
Company's consolidated financial statements are presented as if the above
changes in authorized capital and the 75-for-one split of new capital stock had
been effective for all periods presented.
The offering (which closed on February 6, 1996) consisted of the sale by the
Company of 8,300,000 shares of Class A Common Stock at $27.00 per share,
generating proceeds of approximately $206.2 million, net of underwriting
commissions and other expenses incurred in connection with the offering.
Pursuant to the overallotment provisions in the underwriting agreement,
certain shareholders who had purchased shares of the Company's capital stock in
previous private placements sold 1,245,000 shares of newly converted Class A
Common Stock in connection with the offering. The Company did not receive any of
the proceeds of such sales.
CONVERSION RIGHTS
On May 1, 1996, approximately 3.1 million shares of the Company's Common Stock,
with 10 votes per share, automatically converted into Class A Common Stock, with
one vote per share, at a conversion ratio of 1:1. On July 30, 1996, the
remainder of the Company's Common Stock, with 10 votes per share, became
eligible, at the option of the holders thereof, to convert into Class A Common
Stock, with one vote per share, at a conversion ratio of 1:1.
In accordance with certain shareholder agreements, prior to the Company's
initial public offering, the ownership percentages of certain shareholders,
other than HBI, were protected from dilution, based on total outstanding shares
of 89,810,775, until the ownership of HBI was reduced to 51%. In connection with
the Company's initial public offering, 15,711,950 shares of old common stock
were contributed by HBI to the Company for no consideration in 1996. In
addition, certain shareholders holding 22,645,350 shares of Common Stock have
certain "piggy-back" rights to participate in certain public offerings of the
Company's stock and certain "co-sale" rights to include all or a portion of
their shares in certain sales by HBI of its stock of the Company.
UNUSED MEDIA CREDITS
In connection with a sale of old class A common stock in 1994, the Company
received a $5.0 million media credit. The unused balance of the media credit at
December 31, 1997 ($3.2 million) was canceled by the Company. Such cancellation
was recorded as a reduction of additional paid-in capital to reflect the actual
net proceeds realized from the original stock sale.
STOCK-BASED COMPENSATION
In December 1995, the Company's shareholders approved a stock option plan
(the "1995 Plan") and, in November 1996, the Company's shareholders approved
a Non-Employee Director Stock Option Plan (the "1996 Non-Employee Director
Plan") (together, the "Option Plans"). The Option Plans authorize the
granting of options to purchase up to an aggregate of 2,150,000 shares of
Class A Common Stock. The 1995 Plan provides for employees, officers and
consultants of the Company
22
<PAGE>
to be granted options to purchase Class A Common Stock of two types: (i)
those that qualify as incentive stock options ("Incentive Options") within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
and (ii) those that do not qualify as Incentive Options ("Nonstatutory
Options"). All options granted under the 1996 Non-Employee Director Plan are
Nonstatutory Options. The Option Plans are administered by the Compensation
Committee. Under the 1995 Plan, the Compensation Committee determines the
persons who are to receive options, the terms and the number of shares
subject to each option and whether the option is to be an Incentive Option or
a Nonstatutory Option. The 1996 Non-Employee Director Plan provides for the
automatic, non-discretionary, grant of options. Information regarding the
Option Plans is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES UNDER WEIGHTED AVERAGE SHARES UNDER WEIGHTED AVERAGE
OPTION PLAN EXERCISE PRICE EXERCISE PRICE OPTION PLAN EXERCISE PRICE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 439,700 $11.50 - $36.00 $26.55 - - -
Granted 260,300 $ 7.50 - $12.00 $8.04 475,300 $11.50 - $36.00 $26.62
Exercised - - - - - -
Forfeited (10,000) $11.50 - $27.00 $24.45 (35,600) $27.00 - $28.50 $27.45
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 690,000 $ 7.75 - $36.00 $19.58 439,700 $11.50 - $36.00 $26.55
Exercisable at end of year 103,946 $ 7.75 - $36.00 $23.64 11,000 $11.50 $11.50
Weighted average fair value
of options granted $5.24 $17.72
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED DECEMBER 31 1997
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES UNDER WEIGHTED AVERAGE
OPTION PLAN EXERCISE PRICE EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 444,700 $11.50 - $36.00 $27.16
Granted 250,300 $ 7.75 - $ 9.25 $ 7.88
Exercised - - -
Forfeited (5,000) $11.50 - $27.00 $23.90
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 690,000 $ 7.75 - $36.00 $19.58
Exercisable at end of year 103,940 $ 7.75 - $36.00 $23.64
Weighted average fair value of options granted $5.11
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the outstanding stock options granted in 1996 have a
remaining contractual life of approximately 8.1 years and the outstanding stock
options granted in 1997 have a remaining contractual life of approximately 9.8
years.
The Company accounts for the Option Plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
Option Plans been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the
Company's pro forma net loss and pro forma loss per share would have been as
follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED YEARS ENDED DECEMBER 31
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss As Reported $(55,573) $(87,306) $(104,959)
Pro Forma $(56,851) $(88,670) $(112,750)
Net loss per share - basic and diluted As Reported $ (0.62) $ (0.97) $ (1.17)
Pro Forma $ (0.63) $ (0.99) $ (1.26)
</TABLE>
23
<PAGE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates of 6.2% in 1996 and 6.3% in
1997; expected life of 10 years for 1997 and 1996; expected volatility of 45%
in 1996 and 39.5% in 1997.
LOSS PER SHARE
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 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 SIX MONTHS ENDED YEARS ENDED DECEMBER 31
- ----------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(55,573) $(87,306) $(104,959) $(91,378)
Weighted average number of common
shares outstanding - basic 89,811 89,811 89,811 89,811
Dilutive effect of option plans 5 5 - -
- ----------------------------------------------------------------------------------------------------
Common and common equivalent shares
outstanding - diluted 89,816 89,816 89,811 89,811
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Net loss per share - basic and
diluted $ (.62) $ (.97) $ (1.17) $(1.02)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4 Long-Term Debt
CREDIT AGREEMENT
In December 1994, the Company entered into a credit agreement with a syndicate
of financial institutions (the "Credit Agreement"), which provided for
borrowings up to $90.0 million, $60.0 million of which was borrowed at closing
in January 1995. During August 1995, the Company borrowed another $20.0 million
under the Credit Agreement and, in December 1995, borrowed an additional $10.0
million. Borrowings under the Credit Agreement bore interest at LIBOR plus 4.5%
per annum.
In April 1996, the Company elected to repay the entire outstanding balance of
the term loan under the Credit Agreement of $90.0 million and to terminate the
Credit Agreement. In connection with the termination, the Company paid
previously deferred interest of $1.9 million and a prepayment fee of
approximately $4.0 million. The Company also charged to expense deferred loan
origination fees of approximately $5.5 million which were previously being
amortized over the life of the Credit Agreement.
CONVERTIBLE SUBORDINATED PROMISSORY NOTES
During 1994, the Company issued and sold unsecured convertible subordinated
promissory notes (the "Notes") for $34.5 million. The Notes were scheduled to
mature in March 1999 at a face value of $42 million and interest accreted at an
imputed rate of 3.94%. The Notes were subject to mandatory conversion into
shares of old class A common stock equal to the face amount of the Notes divided
by $5.66 if the gross proceeds of an initial public offering of the Company were
to exceed $50 million at an offering price of at least $7.00 per share. Such
conversion occurred as part of the recapitalization described in Note 3 at which
time the Notes (including cumulative accretion) had a recorded balance of $37.1
million. The conversion did not result in the issuance of additional shares of
the Company, as HBI simultaneously contributed to USSB an equivalent number of
shares. Issued with the convertible subordinated promissory notes were warrants
valued at $7.5 million, which were canceled as a part of the recapitalization.
24
<PAGE>
NOTE 5 Commitments and Contingencies
REGULATORY MATTERS
USSB II, Inc. (a wholly owned subsidiary of the Company) holds a license from
the Federal Communications Commission (the "FCC") to broadcast from five
transponders at 101DEG. west longitude (the "License"). The Company must
continue to maintain the License to operate its business. The License expires in
June 1999 and is renewable at ten-year intervals. Although the Company expects
to obtain such renewals in the ordinary course, there can be no assurance that
such renewals will be granted.
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the FCC.
Under the License, the Company is subject to FCC review primarily for the
following: (i) standards regarding individual satellites (e.g., meeting minimum
financial, legal and technical standards); (ii) avoiding interference with other
satellites; and (iii) complying with rules the FCC has established specifically
for high-power DBS satellite licenses. In addition, uplink facilities are
separately licensed by the FCC. The Company's National Broadcast Center and the
Auxiliary Broadcast Center have each received its FCC license. FCC rules are
subject to change in response to industry developments, new technology and
political considerations.
The FCC has also granted the Company a Construction Permit and Launch
Authority (the "Permit"), held by USSB II, for satellites with three
transponders at 110DEG. west longitude and eight transponders at 148DEG. west
longitude. The Permit requires the Company to comply with specified construction
and launch schedules. The FCC has the authority to revoke the Permit if the
Company fails to comply with the FCC schedule for construction and launch. In
connection therewith, the Company has entered into 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 December 31, 1997, the
Company is required to pay $74.6 million for satellite construction, of which
$7.0 million has been paid to date. The contract also provides for payments
for ongoing operations services and in-orbit performance incentive payments
during the life of the satellite. In addition, substantial costs would be
incurred to launch and insure the satellite. No material payments are
anticipated under the 148DEG. Contract, as amended effective December 31,
1997, earlier than December 31, 1998. The Company has previously paid $1.4
million under a predecessor contract for the construction of satellites at
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: $22.5
million through December 31, 1998 and $45.1 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 December 31, 1997, such commitments totaled $5.9 million due
through December 31, 1998, with the non-cancellable portion of such
commitments totaling $3.6 million.
INSURANCE
The Company maintains business interruption and in-orbit insurance coverages at
levels management considers necessary to address the normal risks of operating
via communications satellite, including damage, destruction or failure of the
satellite or its transponders. Additionally, the Company maintains general
liability and directors' and officers' insurance coverages.
25
<PAGE>
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 I, Item 3 of
this Report on Form 10-K 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 I, Item 3 of this Report on Form
10-K 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 six
months ended December 31, 1997, the Company charged to expense $42.8 million,
representing the full amount of those future obligations for the Manufacturer
Incentive program incurred during the six months ended December 31, 1997 for the
sale of DSS units to new households. For the year ended December 31, 1997, the
Company charged to expense $66.7 million, and $18.4 million for the year ended
December 31, 1996. Net of cash paid in 1997 totaling $7.6 million, such future
obligations totaled $77.5 million at December 31, 1997, payable in the following
years:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------
<S> <C>
1998 $17,023
1999 17,023
2000 17,023
2001 16,655
2002 9,732
- ----------------------------
$77,456
- ----------------------------
- ----------------------------
</TABLE>
While the amounts to be incurred in the future by the Company under these
arrangements cannot be precisely estimated, the company expects that as the
level of retail DSS unit sales increase, the expense and cash flow related to
these arrangements will increase accordingly.
The fair value of the future obligation at December 31, 1997 is approximately
$64.3 million and has been calculated by discounting the future cash flows at
the Company's estimated incremental borrowing rate.
NOTE 6 Related-Party Transactions
Certain officers and directors of the Company are also employed by, and spend a
significant portion of their time on, the businesses of HBI and its affiliates
other than the Company. Each of such persons who is a director has indicated to
the Company that, should a conflict of interest arise, he will promptly disclose
such conflict to the Company's Board of Directors and refrain from voting on
such matter as a director.
DUE TO HBI
Debt due to HBI consists principally of amounts accrued for management services
valued at $10.0 million provided to the Company by HBI during the years 1992
through 1994 under an agreement which expired June 30, 1994. The balance does
not bear interest. The Company was contingently obligated to
26
<PAGE>
pay these amounts and they will not become due until, in Company management's
opinion, adequate working capital exists. As a result of certain significant
financial performance thresholds, USSB management discontinued accruing the $3.3
million annual charge after 1992 and did not intend to accrue any additional
charges until and unless it was determined payment could be considered probable.
When the Company decided to proceed with its initial public stock offering,
management determined that it became likely that certain preconditions would
ultimately be satisfied, and therefore made this obligation probable, although
the timing of the cash payment of the $10.0 million has not been determined.
Accordingly, during the quarter ended September 30, 1995, the Company accrued as
an operating expense the remaining $6.7 million of its management fee
obligation. The Company intends to defer payment of these charges for the
foreseeable future.
HBI provides certain general and administrative services to the Company under
an agreement that is renewed annually. The Company incurred a charge of $625,900
for such services for the six months ended December 31, 1997, $1,123,900 for
1997, $978,000 for 1996 and $902,000 for 1995. The Company expects to incur a
charge to HBI for general and administrative services of $1.3 million in 1998,
to be paid on a monthly basis.
The Company's general and administrative expenses also include consulting
fees paid to entities related to directors and officers of the Company
totaling $0.4 million for the six months ended December 31, 1997, $0.9
million for 1997, $0.9 million for 1996, and $0.5 million for 1995.
In connection with the Company's initial public offering, the Company paid
aggregate commissions of $13.9 million to the underwriters of its offering.
Certain directors of the Company are employed by or affiliated with certain of
these underwriters.
The Company purchases programming, engineering services and other services
from other entities affiliated with HBI. Certain engineering and other services
are purchased from a partnership in which HBI is a general partner. Certain
programming is purchased from a joint venture in which such partnership is a
partner. Management believes that the parties will review the current agreement
during 1998 in light of the integration of the basic channels previously carried
by USSB into the DIRECTV channel line-up. Amounts included in the accompanying
consolidated statements of operations which were purchased from these affiliated
entities are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED YEARS ENDED DECEMBER 31
- ---------------------------------------------------------------------------------------
DECEMBER 31, 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cost of programming $2,765 $5,212 $3,599 $1,524
Engineering and operations 82 203 165 554
Selling and marketing - - - 45
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
$2,847 $5,415 $3,764 $2,123
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
The Company believes that the services provided between the Company and HBI
and its subsidiaries and affiliates, and by entities with which certain
directors are affiliated, are on terms comparable to those available from third
parties and that such terms are reasonable.
OTHER
The Company's employees participate in a 401(k) plan sponsored by HBI. Under the
terms of the plan, the Company may make annual base contributions and can match
participant contributions for each year. An employee becomes eligible to
participate in the plan after 12 months of service during which the employee has
worked 1,000 hours. HBI made contributions to the plan on behalf of the
Company's employees (which amounts were reimbursed by the Company) of $90,000
during the six months ended December 31, 1997, $157,000 during 1997, $116,000
during 1996, and $47,000 during 1995.
27
<PAGE>
NOTE 7 Income Taxes
The Company's deferred tax assets and liabilities, all of which are long-term,
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED TAX ASSET (LIABILITY) AS OF DECEMBER 31 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Manufacturer incentive $ 30,983 -
Preoperating capitalized costs 2,201 4,087
Capitalized interest 181 544
Management services 4,337 4,338
Other 3,995 9,541
Net operating loss carryforward 121,825 107,170
- ---------------------------------------------------------------------------------
Total deferred tax assets 163,522 125,680
Deferred tax liabilities:
Depreciation (15,149) (14,800)
Total deferred tax liability (15,149) (14,800)
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Valuation allowance (148,373) (110,880)
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Net deferred tax balance $ - $ -
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
The Company has net operating losses for federal tax reporting purposes
totaling $304.5 million available for carryover to subsequent years as of
December 31, 1997, expiring in years 2000 through 2013. The valuation allowance
applied against the Company's net deferred tax assets increased by $22.2 million
for the six months ended December 31, 1997, $37.5 million for 1997, by $39.3
million for 1996, and by $21.4 million for 1995.
The Company and HBI file separate federal tax returns and a combined state
tax return in Minnesota and New Mexico. HBI has benefited from this unitary
relationship as it has utilized USSB losses to reduce its combined income
subject to apportionment in Minnesota and New Mexico through December 31,
1996. The benefit that HBI realized was approximately $0.1 million for the
six months ended December 31, 1997, $0.2 million for 1997, $1.4 million for
1996, and $1.4 million for 1995. This unitary relationship has reduced the
Company's Minnesota net operating loss carryforward. Benefits realized by HBI
in years preceding 1994 were not significant. Under a tax sharing agreement,
HBI will reimburse the Company for such benefits in the year they would
otherwise have been realized by the Company.
28
<PAGE>
NOTE 8 Quarterly Condensed Financial Information (Unaudited)
Summarized unaudited quarterly data for 1997 and 1996 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER FULL YEAR
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Revenues $ 99,231 $114,236 $114,383 $128,769 $ 456,619
Cost of sales 64,930 73,223 73,557 81,207 292,917
- ------------------------------------------------------------------------------------------------------------------
Gross Margin 34,301 41,013 40,826 47,562 163,702
Operating expenses 57,925 51,620 70,082 76,197 255,824
- ------------------------------------------------------------------------------------------------------------------
Net operating loss (23,624) (10,607) (29,256) (28,635) (92,122)
Other (income) expense, net (1,174) (1,324) (1,109) (1,209) (4,816)
- ------------------------------------------------------------------------------------------------------------------
Net loss (22,450) (9,283) (28,147) (27,426) (87,306)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,812 89,811 89,811 89,821 89,816
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $ (0.25) $ (0.10) $ (0.31) $ (0.31) $ (0.97)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1996
Revenues $ 56,988 $ 64,288 $ 79,244 $ 92,104 $ 292,624
Cost of sales 37,579 43,149 52,246 60,382 193,356
- ------------------------------------------------------------------------------------------------------------------
Gross margin 19,409 21,139 26,998 31,722 99,268
Operating expenses 39,801 32,423 51,969 74,141 198,334
- ------------------------------------------------------------------------------------------------------------------
Net operating loss (20,392) (11,284) (24,971) (42,419) (99,066)
Other (income) expense, net 1,066 7,660 (1,489) (1,344) 5,893
- ------------------------------------------------------------------------------------------------------------------
Net loss (21,458) (18,944) (23,482) (41,075) (104,959)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,860 89,937 89,841 89,811 89,811
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Net loss per share - basic and diluted $ (0.24) $ (0.21) $ (0.26) $ (0.46) $ (1.17)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United States Satellite Broadcasting Company, Inc.
We have audited the consolidated balance sheets of United States Satellite
Broadcasting Company, Inc. (a Minnesota corporation) and Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997 and for the six month period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of United States Satellite
Broadcasting Company, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 and for the six month
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
MINNEAPOLIS MINNESOTA
JANUARY 30, 1997
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE COMPANY
The following corporations are subsidiaries of United States Satellite
Broadcasting Company, Inc.:
USSB II, Inc., a Minnesota corporation
Lower St. Croix Marketing Company, Inc., a Minnesota corporation
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Report on Form 10-K and in the Registration Statement of
United States Satellite Broadcasting Company, Inc. on Form S-8, filed on
November 18, 1997, of our report dated January 30, 1998 in United States
Satellite Broadcasting Company, Inc.'s 1997 Report to Shareholders.
/S/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS
INCORPORATED BY REFERENCE IN ITEM 8 ON PAGE 20 OF THE COMPANY'S REPORT ON FORM
10-K FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 68,646
<SECURITIES> 3,970
<RECEIVABLES> 51,066
<ALLOWANCES> 6,074
<INVENTORY> 0
<CURRENT-ASSETS> 125,470
<PP&E> 143,690
<DEPRECIATION> 79,235
<TOTAL-ASSETS> 206,310
<CURRENT-LIABILITIES> 133,778
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 2,090
<TOTAL-LIABILITY-AND-EQUITY> 206,310
<SALES> 243,152
<TOTAL-REVENUES> 243,152
<CGS> 154,764
<TOTAL-COSTS> 154,764
<OTHER-EXPENSES> 146,279
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (55,573)
<INCOME-TAX> 0
<INCOME-CONTINUING> (55,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,573)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</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
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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
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Gerald D. Deeney
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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