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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 333-31929
ECHOSTAR DBS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1328967
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip code)
(303) 799-8222
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT 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 HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF NOVEMBER 10, 1997, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
1,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(H)(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and September 30, 1997 (Unaudited)............. 1
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1996
and 1997 (Unaudited)............................................. 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1997 (Unaudited)........ 3
Notes to Condensed Consolidated Financial Statements (Unaudited)...... 4
Item 2. Management's Narrative Analysis of Results of Operations......... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 18
Item 2. Changes in Securities........................................... *
Item 3. Defaults Upon Senior Securities................................ *
Item 4. Submission of Matters to a Vote of Security Holders............ *
Item 5. Other Information.............................................. None
Item 6. Exhibits and Reports on Form 8-K............................... 18
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION
AND SUBSIDIARIES.
- -------------------------
* This item has been omitted pursuant to the reduced disclosure format as
set forth in General Instructions (H)(l)(a) and (b) of Form 10-Q.
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents............................ $ 38,438 $ 29,775
Marketable investment securities..................... 18,807 31,252
Trade accounts receivable, net of allowance
for uncollectible accounts of $1,494 and $1,803,
respectively....................................... 13,483 54,458
Inventories.......................................... 72,767 23,050
Subscriber acquisition costs, net.................... 68,129 43,199
Other current assets................................. 19,861 8,966
------------ -------------
Total current assets................................... 231,485 190,700
Restricted Cash and Marketable Investment Securities:
1996 Notes escrow.................................... 47,491 --
Satellite Escrow..................................... -- 91,945
Interest Escrow...................................... -- 110,659
Other................................................ 31,450 2,245
------------ -------------
Total restricted cash and marketable investment
securities......................................... 78,941 204,849
Property and equipment, net............................ 528,577 546,773
FCC authorizations, net................................ 72,500 78,565
Advances to affiliates, net............................ 68,607 205,421
Deferred tax assets.................................... 79,663 79,663
Other noncurrent assets................................ 25,770 38,505
------------ -------------
Total assets....................................... $1,085,543 $1,344,476
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable............................... $ 41,228 $ 36,708
Deferred revenue..................................... 103,100 104,750
Accrued programming.................................. 9,462 16,452
Accrued expenses and other current liabilities 20,663 67,061
Deferred tax liabilities............................. 12,674 12,309
Current portion of long-term debt.................... 11,334 12,072
------------ -------------
Total current liabilities.............................. 198,461 249,352
Long-term obligations, net of current portion:
Long-term deferred satellite services revenue........ 5,949 7,039
1994 notes........................................... 437,127 483,339
1996 notes........................................... 386,165 424,431
1997 notes........................................... -- 375,000
Mortgage and other notes payable, net of
current portion.................................... 51,428 42,277
Note payable to ecc.................................. 12,000 4,800
Other long-term liabilities.......................... 1,088 9,282
------------ -------------
Total long-term obligations, net of current portion.... 893,757 1,346,168
------------ -------------
Total liabilities.................................. 1,092,218 1,595,520
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholder's Equity (Deficit):
Common stock, $.01 par value, 1,000 shares
authorized, issued and outstanding................. -- --
Additional paid-in capital........................... 108,839 108,839
Unrealized holding losses on available-for-sale
securities, net of deferred taxes.................. ( 12) --
Accumulated deficit.................................. (115,502) (359,883)
------------ -------------
Total stockholder's equity (deficit):.................. (6,675) (251,044)
------------ -------------
Total liabilities and stockholder's equity
(deficit)......................................... $1,085,543 $1,344,476
------------ -------------
------------ -------------
See accompanying Notes to Condensed Consolidated Financial Statements.
1
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1997 1996 1997
----------------- ------------ ------------------ ---------
REVENUE: (RESTATED, NOTE 1) (RESTATED, NOTE 1)
DISH Network:
Subscription television services................. $ 13,235 $ 82,078 $ 17,482 $ 192,986
Other............................................ 1,223 12,969 3,310 32,942
----------------- ------------ ------------------ ---------
Total DISH Network................................. 14,458 95,047 20,792 225,928
DTH equipment sales and integration services....... 9,973 21,975 72,694 37,410
Satellite services................................. 1,994 3,669 3,819 7,879
Other.............................................. 2,406 3,765 9,158 8,906
----------------- ------------ ------------------ ---------
Total revenue........................................ 28,831 124,456 106,463 280,123
Costs and Expenses:
DISH Network Operating Expenses:
Subscriber-related expenses..................... 7,009 42,732 9,270 97,262
Call center and other........................... 4,395 10,754 6,831 23,140
Satellite and transmission...................... 1,384 3,442 2,882 9,676
----------------- ------------ ------------------ ---------
Total DISH Network operating expenses............. 12,788 56,928 18,983 130,078
Cost of sales - DTH equipment and integration
services....................................... 9,466 11,690 72,955 25,998
DISH Network Marketing:
Subscriber promotion subsidies.................. 6,000 67,466 6,000 98,556
Advertising and other........................... 3,946 16,786 11,459 24,096
----------------- ------------ ------------------ ---------
Total DISH Network marketing expenses............. 9,946 84,252 17,459 122,652
General and administrative........................ 12,985 15,833 30,252 45,883
Amortization of subscriber acquisition costs...... 3,368 34,035 3,460 95,325
Depreciation and amortization..................... 7,879 12,922 17,543 38,220
----------------- ------------ ------------------ ---------
Total costs and expenses............................ 56,432 215,660 160,652 458,156
----------------- ------------ ------------------ ---------
Operating loss...................................... (27,601) (91,204) (54,189) (178,033)
Other Income (Expense):
Interest income................................... 4,258 5,475 12,109 8,569
Interest expense, net of amounts capitalized...... (18,515) (32,132) (44,742) (74,500)
Other............................................. 127 (76) 80 (353)
----------------- ------------ ------------------ ---------
Total other income (expense)....................... (14,130) (26,733) (32,553) (66,284)
----------------- ------------ ------------------ ---------
Loss before income taxes........................... (41,731) ( 117,937) ( 86,742) (244,317)
Income tax benefit (provision), net................ 14,962 (20) 31,050 (64)
----------------- ------------ ------------------ ---------
Net loss........................................... $(26,769) $(117,957) $( 55,692) $(244,381)
----------------- ------------ ------------------ ---------
----------------- ------------ ------------------ ---------
See accompanying Notes to Condensed Consolidated Financial Statements.
2
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $( 55,692) $(244,381)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization................................................ 17,543 38,220
Amortization of subscriber acquisition costs................................. 3,460 95,325
Deferred income tax benefit.................................................. (26,247) (365)
Amortization of debt discount and deferred financing costs................... 41,988 60,650
Change in reserve for excess and obsolete inventory.......................... 2,579 2,230
Change in other long-term obligations........................................ 7,126 9,284
Other, net................................................................... (2,316) --
Changes in current assets and current liabilities, net......................... 10,801 (7,567)
---------------- -------------
Net cash flows used in operating activities...................................... (758) (46,604)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.................................. (54,106) (33,006)
Sales of marketable investment securities...................................... 12,361 20,573
Purchases of restricted marketable investment securities....................... (20,761) (1,495)
Advances to affiliates, net.................................................... 55,629) (119,357)
Purchases of property and equipment............................................ (8,597) (28,298)
Offering proceeds and investment earnings placed in escrow..................... (191,941) (224,858)
Funds released from escrow accounts and restricted cash - other................ 134,968 100,445
Expenditures for satellite systems under construction.......................... (136,903) (21,220)
Expenditures for FCC authorizations............................................ (13,626) (38)
Other.......................................................................... 5,252 (1,692)
---------------- -------------
Net cash flows used in investing activities...................................... (328,982) (308,946)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes....................................... 336,994 --
Net proceeds from issuance of 1997 Notes....................................... -- 362,500
Proceeds from note payable to ECC.............................................. 12,000 --
Proceeds from issuance of common stock......................................... 1 --
Repayments of mortgage indebtedness and notes payable.......................... (4,207) (15,613)
---------------- -------------
Net cash flows provided by financing activities.................................. 344,788 346,887
---------------- -------------
Net increase (decrease) in cash and cash equivalents............................. 15,048 (8,663)
Cash and cash equivalents, beginning of period................................... 13,949 38,438
---------------- -------------
Cash and cash equivalents, end of period......................................... $28,997 $29,775
---------------- -------------
---------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized............................. $ 11,192 $3,529
Cash paid for income taxes..................................................... -- --
Capitalized interest........................................................... 22,853 27,861
Note payable issued for deferred satellite construction payments for
EchoStar II.................................................................. 28,000 --
Satellite launch payment for EchoStar II applied to EchoStar I launch.......... 15,000 --
Increase in note payable for deferred satellite construction payments for
EchoStar I................................................................... 3,167 --
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar DBS Corporation and subsidiaries ("DBS Corp" or the "Company"), is
a wholly-owned subsidiary of EchoStar Communications Corporation ("ECC" and
together with its subsidiaries, "EchoStar"), a publicly-traded company on the
Nasdaq National Market. DBS Corp was formed in January 1996 for the initial
purpose of participating in a Federal Communications Commission ("FCC")
auction. On January 26, 1996, DBS Corp submitted the winning bid of $52.3
million for 24 direct broadcast satellite ("DBS") frequencies at 148DEG. West
Longtitude. Funds necessary to complete the purchase of the DBS frequencies
and commence construction of the Company's fourth DBS satellite, EchoStar IV,
have been advanced to DBS Corp by ECC and EchoStar Satellite Broadcasting
Corporation ("ESBC"). In June 1997, DBS Corp consummated an offering (the
"1997 Notes Offering") of 12 1/2% Senior Secured Notes due 2002 (the "1997
Notes"). Prior to consummation of the 1997 Notes Offering, EchoStar
contributed (the "Contribution") all of the outstanding capital stock of ESBC
to DBS Corp. As a result of the Contribution, ESBC is a wholly-owned
subsidiary of DBS Corp. This transaction was accounted for as a
reorganization of entities under common control in which ESBC is treated as
the predecessor of DBS Corp. The accompanying financial statements
retroactively reflect the resulting structure and historical results of DBS
Corp and its predecessors as a reorganization of entities under common
control.
The operations of EchoStar include three interrelated business
units: (i) a DBS subscription television service in the United States (the
"DISH Network"); (ii) the design, manufacture, distribution and sale of DBS
set-top boxes, antennae and other digital equipment for the DISH Network
("EchoStar Receiver Systems"), and the design, manufacture and distribution of
similar equipment for direct-to-home ("DTH") projects of others
internationally, together with the provision of uplink center design and
construction oversight and other project integration services for
international DTH ventures ("Technology"); and (iii) the turn-key delivery of
video, audio and data, primarily from EchoStar satellites, to customers for
business television and other satellite users. These services include uplink,
satellite transponder space, sales and installation of ground segment
equipment, and billing services ("Satellite Services"). The Company had
approximately 350,000 and 820,000 DISH Network subscribers as of December 31,
1996 and September 30, 1997, respectively. EchoStar's C-band DTH products,
programming and related services businesses are no longer material to its
operations and EchoStar expects revenues from its C-band lines of business to
continue to decline.
RECENT DEVELOPMENTS
The Company launched its third DBS satellite ("EchoStar III") on October 5,
1997. Commencing in January 1998, the Company expects to use EchoStar III to
retransmit local network programming from approximately ten of the largest
cities in the eastern and central time zones (assuming receipt of any required
retransmission consents and copyright licenses and/or congressional or
regulatory action necessary to extend and clarify the scope of the statutory
compulsory license to cover local satellite retransmission of
network-affiliated station signals), and to provide subscribers with
additional sports, foreign language, cultural, business, educational and other
niche programming. As technology advances and demand increases, the Company
also expects to use EchoStar III to provide popular Internet and other
computer data at high transmission speeds and to offer subscribers HDTV. While
all testing of EchoStar III to date indicates the satellite is functioning
properly, the ultimate success of the launch and in-orbit operation of
EchoStar III will not be established until approximately December 1997.
ECHOSTAR PROMOTIONS AND REVISION OF ACCOUNTING POLICY
During August 1996, EchoStar introduced a promotion (the "1996 Promotion")
which permits independent retailers to offer a standard EchoStar Receiver
System to consumers for a suggested retail price of $199 (as compared to the
original average retail price prior to August 1996 of approximately $499),
conditioned upon the consumer's prepaid one-year subscription to the DISH
Network's America's Top 50 CD programming package for approximately $300.
Total transaction proceeds to EchoStar are less than its aggregate costs
(equipment, programming and other) for the initial prepaid subscription
period, are initially deferred, and recognized as revenue over the related
prepaid subscription term (normally one year). The excess of EchoStar's
aggregate costs over proceeds received is expensed ("subscriber promotion
subsidies") upon shipment of the equipment. Remaining costs are deferred
4
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
and reflected in the accompanying consolidated balance sheets as subscriber
acquisition costs and amortized over the prepaid subscription term of the
subscriber. Programming costs are expensed as service is provided. Excluding
expected incremental revenues from premium and Pay-Per-View programming, this
accounting results in revenue recognition over the initial period of service
equal to the sum of programming costs and amortization of subscriber
acquisition costs.
The accompanying statements of operations for the three and nine months
ended September 30, 1996, have been restated. The original accounting
followed by the Company for promotional package sales of service and equipment
did not recognize an immediate charge for the subscriber subsidy, as described
above. The Company implemented this accounting policy during the fourth
quarter of 1996. The restatement had no material effect on any periods prior
to June 30, 1996. As a result of this restatement, DBS Corp's operating loss
increased from $21.6 million to $27.6 million, an increase of $6.0 million,
principally due to the immediate expensing of subscriber promotion subsidies
and its net loss increased $4.3 million (from $22.5 million to $26.8 million).
For the nine months ended September 30, 1996, DBS Corp's operating loss
increased $6.0 million (from $48.2 million to $54.2 million), principally due
to the immediate expensing of subscriber promotion subsidies, and its net loss
increased by $4.7 million from $51.0 million to $55.7 million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to EchoStar's consolidated
financial statements and footnotes thereto included in its Annual Report on
Form 10-K for the year ended December 31, 1996. Certain prior year amounts
have been reclassified to conform with the current year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and DBS Corp and all
direct and indirect wholly-owned subsidiaries thereof. The Company's
management refers readers of this Quarterly Report on Form 10-Q to EchoStar's
Quarterly Report on Form 10-Q for the nine months ended September 30, 1997.
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 for each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and September 30, 1997 principally consisted of money market
funds, corporate notes and commercial paper; such balances are stated at cost
which equates to market value.
5
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
Proceeds from sales made pursuant to the 1996 Promotion attributable to DISH
Network subscription television services are included within the caption "DISH
Network - Subscription Television Services" in the accompanying statements of
operations. The portion of the proceeds from sales made pursuant to the 1996
Promotion deemed attributable to EchoStar Receiver Systems is included within
the caption "DISH Network - Other" in the accompanying statements of
operations. The following summarizes revenues recognized pursuant to the 1996
Promotion:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1996 1997 1996 1997
------- -------- ------ --------
Subscription television $3,346 $ 36,162 $3,346 $ 93,459
services
EchoStar Receiver Systems 1,057 11,508 1,057 30,036
------- -------- ------ --------
Total $4,403 $47,670 $4,403 $123,495
------- -------- ------ --------
------- -------- ------ --------
During June 1997, the 1996 Promotion was enhanced to permit independent
retailers to offer a standard EchoStar Receiver System to consumers for a
suggested retail price of $199 without an extended subscription commitment
(the "1997 Promotion"). Net transaction costs associated with the 1997
Promotion are expensed as incurred (reported as a component of subscriber
promotion subsidies) in the accompanying statements of operations. Since
introduction of the 1997 Promotion, the majority of new subscriber activations
have resulted therefrom.
INCOME TAXES
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," requires that the tax benefit of net operating
losses ("NOLs") for financial reporting purposes be recorded as an asset and
that deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the consolidated balance sheets. To the
extent that management assesses the realization of deferred tax assets to be
less than "more likely than not," a valuation reserve is established. The
Company has fully reserved the 1997 additions to its deferred tax assets.
3. RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying condensed consolidated balance
sheets, includes cash restricted by the indenture associated with the 1997
Notes (as defined) and the remaining restricted cash proceeds from a 1996
offering (the "1996 Notes Offering") of 13 1/8% Senior Secured Discount Notes
due 2004 (the "1996 Notes"), plus in both cases investment earnings thereon.
A portion of the proceeds from the 1997 Notes Offering (as defined) is held in
two separate escrow accounts (the "Interest Escrow" and the "Satellite
Escrow") as required by the related indenture (see Note 5). Restricted cash
and marketable investment securities are invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the applicable indenture.
Other restricted cash includes $5.7 million at December 31, 1996, which was
restricted to satisfy certain covenants in the indenture associated with a
1994 offering of 12 7/8% Senior Secured Discount Notes due 2004 (the "1994
Notes") pertaining to launch insurance for EchoStar II. These covenant
requirements were satisfied during September 1997. In addition, as of
December 31, 1996, a total of $25.0 million was held in two escrow accounts
for the benefit of EchoStar Receiver System manufacturers. These deposits
were released from their respective escrow accounts during May 1997.
6
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
4. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
EchoStar Receiver Systems $ 32,799 $ 12,157
DBS receiver components 15,736 11,347
Consigned DBS receiver components 23,525 1,988
Finished goods - International 3,491 3,220
Finished goods - C-band 600 4
Spare parts and other 2,279 2,227
Reserve for excess and obsolete inventory (5,663) (7,893)
-------- -------
$ 72,767 $23,050
-------- -------
-------- -------
5. 1997 NOTES
On June 25, 1997, DBS Corp consummated the 1997 Notes Offering. The 1997
Notes Offering resulted in net proceeds to DBS Corp of approximately $362.5
million (after payment of underwriting discounts and other issuance costs
aggregating approximately $12.5 million). Interest accrues on the 1997 Notes
at a rate of 12 1/2% and is payable in cash semi-annually on January 1 and
July 1 of each year, with the first interest payment due January 1, 1998.
Approximately $109.0 million of the net proceeds of the 1997 Notes Offering
were placed in the Interest Escrow account to fund the first five semi-annual
interest payments (through January 1, 2000). Additionally, approximately
$112.0 million of the net proceeds of the 1997 Notes Offering were placed in
the Satellite Escrow account to fund the construction launch and insurance of
EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes mature on
July 1, 2002.
The 1997 Notes were issued in a private placement pursuant to Rule 144A of
the Securities Act of 1933, as amended (the "Securities Act"). The Company is
in the process of exchanging the privately issued notes for publicly
registered notes with substantially identical terms (including principal
amount, interest rate, maturity, security and ranking).
The 1997 Notes rank PARI PASSU in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated
basis by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of
certain events, will be guaranteed by ESBC and Dish, Ltd. and certain other
subsidiaries of DBS Corp and EchoStar. The 1997 Notes are secured by liens on
the capital stock of DBS Corp, EchoStar IV, and certain other assets of DBS
Corp and EchoStar. Although the 1997 Notes are titled "Senior": (i) DBS Corp
has not issued, and does not have any plans to issue, any significant
indebtedness to which the 1997 Notes would be senior; and (ii) the 1997 Notes
are effectively subordinated to all liabilities of ECC (except liabilities to
general creditors). In addition, the ability of Dish, Ltd. to make
distributions to DBS Corp is severely limited by the terms of an indenture to
which it is subject, and the cash flow generated by the assets and operations
of DBS Corp's subsidiaries will only be available to satisfy DBS Corp's
obligations on the 1997 Notes to the extent that such subsidiaries are able to
make distributions, directly or indirectly, to DBS Corp.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption
prices decreasing from 106.25% during the year commencing July 1, 2000 to 100%
on or after July 1, 2002, together with accrued and unpaid interest thereon to
the redemption date.
The 1997 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of DBS Corp to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of certain
asset sales; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to DBS Corp's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and
(viii) enter into transactions with affiliates. In addition, DBS Corp may pay
dividends on its equity securities only if: (1) no default is continuing under
the 1997 Notes Indenture; and (2) after giving effect to such dividend and the
incurrence of any
7
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
indebtedness (the proceeds of which are used to finance the dividend), DBS
Corps's ratio of total indebtedness to cash flow (calculated in accordance
with the 1997 Notes Indenture) would not exceed 6.0 to 1.0. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of the
difference of cumulative consolidated cash flow (calculated in accordance with
the 1997 Notes Indenture) minus 150% of consolidated interest expense of DBS
Corp (calculated in accordance with the 1997 Notes Indenture) plus an amount
equal to 100% of the aggregate net cash proceeds received by DBS Corp and its
subsidiaries from the issuance or sale of equity interests of DBS Corp or
EchoStar (other than equity interests sold to a subsidiary of DBS Corp or
EchoStar, since June 25, 1997).
In the event of a change of control, as defined in the 1997 Notes Indenture,
DBS Corp will be required to make an offer to repurchase all of the 1997 Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon, to the date of repurchase.
6. RECLASSIFICATIONS TO THE STATEMENTS OF OPERATIONS
Beginning with this Quarterly Report, the Company has revised its statements
of operations to reflect them in a manner that management believes will help
investors to more easily follow its operations as they expand and change
moving forward. If the Company had presented its statements of operations for
the quarterly periods ended March 31, 1997 and June 30, 1997 in this revised
format, the statements of operations would have appeared as follows:
SIX MONTHS
THREE MONTHS ENDED ENDED
------------------------------ -------------
MARCH 31, 1997 JUNE 30, 1997 JUNE 30, 1997
-------------- ------------- -------------
REVENUE:
DISH Network:
Subscription television services $ 48,050 $ 62,858 $110,908
Other 8,206 11,767 19,973
-------------- ------------- -------------
Total DISH Network 56,256 74,625 130,881
DTH equipment sales and integration services 1,958 13,477 15,435
Satellite services 2,165 2,045 4,210
Other 2,580 2,561 5,141
-------------- ------------- -------------
Total revenue 62,959 92,708 155,667
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses 23,040 31,491 54,531
Call center and other 6,445 5,941 12,386
Satellite and transmission 2,785 3,449 6,234
-------------- ------------- -------------
Total DISH Network operating expenses 32,270 40,881 73,151
Cost of sales - DTH equipment and integration services 2,228 12,079 14,307
DISH Network Marketing:
Subscriber promotion subsidies 12,777 18,313 31,090
Advertising and other 3,276 4,034 7,310
-------------- ------------- -------------
Total DISH Network marketing expenses 16,053 22,347 38,400
General and administrative 15,031 15,021 30,052
Amortization of subscriber acquisition costs 28,062 33,228 61,290
Depreciation and amortization 12,643 12,655 25,298
-------------- ------------- -------------
Total costs and expenses 106,287 136,211 242,498
-------------- ------------- -------------
Operating loss $(43,328) $(43,503) $(86,831)
-------------- ------------- -------------
-------------- ------------- -------------
8
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
7. OTHER REVENUE
In 1995, the Company began focusing substantial resources on development of
the DISH Network. Consequently, and coincident with the introduction of DBS
subscription television services, revenues associated with the sale of C-band
equipment and programming have decreased significantly. This trend is
expected to continue for the foreseeable future. For the above reasons, the
Company has reported the net result of C-band operations as "other revenue" in
the accompanying statements of operations. "Other revenue" consists of the
following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
1996 1997 1996 1997
-------- ------- ------- -------
REVENUE:
C-band equipment sales $11,756 $ 7,090 $43,850 $22,190
programming 2,879 1,750 9,518 5,831
Other revenue 88 1,996 253 3,346
-------- ------- ------- -------
Total revenue 14,723 10,836 53,621 31,367
COSTS AND EXPENSES:
Cost of C-band equipment
sold (9,142) (5,204) (34,578) (16,337)
C-band programming (2,636) (1,429) (8,746) (4,842)
Other (539) (438) (1,139) (1,282)
-------- ------- ------- -------
Total costs and expenses (12,317) (7,071) (44,463) (22,461)
-------- ------- ------- -------
Other revenue $ 2,406 $ 3,765 $ 9,158 $8,906
-------- ------- ------- -------
-------- ------- ------- -------
8. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of September 30, 1997, these commitments totaled
approximately $205.4 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $206.1 million. All of
the purchases related to these commitments are expected to be made during
1997. The Company expects to finance these purchases from unrestricted cash
and additional cash flows generated from sales of DISH Network programming and
related DBS inventory. In addition to the above, EchoStar will expend $93.4
million between October 1, 1997 and the second quarter of 1998 related to the
construction, launch and insurance of EchoStar IV.
News Corporation Litigation
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude ("WL") purchased by MCI
Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction during 1996. During late April 1997,
substantial disagreements arose between the parties regarding their obligations
under the News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has
asserted numerous counterclaims against EchoStar and its Chairman and Chief
Executive Officer, Charles W. Ergen. The case has been set for a five week
trial commencing in June 1998. While EchoStar is confident of its position
and believes it will ultimately prevail, the litigation process could continue
for many years and there can be no assurance concerning the outcome of the
litigation. An adverse decision could have a material adverse effect on
EchoStar's financial position and results of operations.
8. OTHER RISKS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position or results of operations of
the Company.
9
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- Continued
9. SUBSEQUENT EVENTS
On October 2, 1997, ECC consummated an offering (the "Series B Preferred
Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004, par value $0.01 per share (including any additional shares of such
stock issued from time to time in lieu of cash dividends, the "Series B
Preferred Stock"). The Series B Preferred Offering resulted in net proceeds
to EchoStar of approximately $193.0 million. The Series B Preferred Stock was
issued in a private placement pursuant to Rule 144A of the Securities Act.
On November 4, 1997, ECC consummated an offering (the "Series C Preferred
Offering") of 2.3 million shares of 6 3/4% Series C Cumulative Convertible
Preferred Stock. The Series C Preferred Offering, after exercise by the
underwriters of the 15% over-allotment option, resulted in net proceeds to
EchoStar of approximately $96.5 million.
Also on November 4, 1997, ECC consummated an offering of 3.1 million
shares of its Class A Common Stock (the "Common Stock Offering"). The Common
Stock Offering resulted in net proceeds to EchoStar of approximately $57.7
million.
10
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT ARE
NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM ANY FUTURE
RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE
FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS TO
FINANCE THE COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE, DIRECT
BROADCAST SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND OTHER
PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE
INABILITY OF THE COMPANY TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER
APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY OF THE COMPANY TO OBTAIN
NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION ("FCC");
GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER RISK FACTORS DESCRIBED FROM
TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ("SEC"). IN ADDITION TO STATEMENTS, WHICH EXPLICITLY DESCRIBE SUCH
RISKS AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS LABELED WITH
THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," OR
"INTENDS" TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE
HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD
CONSIDER THE RISKS DESCRIBED HEREIN.
OVERVIEW
EchoStar DBS Corporation and subsidiaries ("DBS Corp" or the "Company")
is a wholly-owned subsidiary of EchoStar Communications Corporation ("ECC" and
together with its subsidiaries, "EchoStar"), a publicly-traded company on the
Nasdaq National Market. The operations of EchoStar include three interrelated
business units: (i) a direct broadcast satellite ("DBS") subscription
television service in the United States (the "DISH Network"); (ii) the design,
manufacture, distribution and sale of DBS set-top boxes, antennae and other
digital equipment for the DISH Network ("EchoStar Receiver Systems"), and the
design, manufacture and distribution of similar equipment for direct-to-home
("DTH") projects of others internationally, together with the provision of
uplink center design and construction oversight and other project integration
services for international DTH ventures ("Technology"); and (iii) the turn-key
delivery of video, audio and data, primarily from EchoStar satellites, to
customers for business television and other satellite users. These services
include uplink, satellite transponder space, sales and installation of ground
segment equipment, and billing services ("Satellite Services"). EchoStar's
C-band DTH products, programming and related services businesses are no longer
material to its operations and EchoStar expects revenues from its C-band lines
of business to continue to decline.
EchoStar's Technology and Satellite Services businesses result from
development of the DISH Network, and EchoStar's revenues are, and will
continue to be, derived principally from subscription fees for DISH Network
programming. While there can be no assurance, EchoStar believes that revenue
from its Technology and Satellite Services businesses may increase in the
future assuming, among other things, the successful launch of EchoStar's third
and fourth DBS satellites ("EchoStar III" and "EchoStar IV," respectively).
Further, those businesses are expected to continue to support and create
revenue opportunities for the DISH Network. For example, the design of
digital set-top equipment for international DTH customers is performed by the
same employees who design EchoStar Receiver Systems. Consequently,
international Technology projects may result in improvements in design and
economies of scale in the production of EchoStar Receiver Systems for the DISH
Network. Further, since Satellite Services customers have DISH Network
set-top equipment in their homes and businesses, they are more likely than the
general population to subscribe to DISH Network programming.
EchoStar III was launched on October 5, 1997. Commencing in January
1998, the Company expects to use EchoStar III to retransmit local network
programming from approximately ten of the largest cities in the eastern and
central time zones (assuming receipt of any required retransmission consents
and copyright licenses and/or congressional or regulatory action necessary to
extend and clarify the scope of the statutory compulsory license to cover
local satellite retransmission of network-affiliated station signals), and to
provide subscribers with additional sports, foreign language, cultural,
business, educational and other niche programming. As technology advances and
demand increases, the Company also expects to use EchoStar III to provide
popular Internet and other computer data at high transmission speeds and to
offer subscribers HDTV. While all testing of EchoStar III to date indicates the
11
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
satellite is functioning properly, the ultimate success of the launch and
in-orbit operation of EchoStar III will not be established until approximately
December 1997.
KEY OPERATING AND FINANCIAL STATISTICS. As of September 30, 1997,
EchoStar had approximately 820,000 DISH Network subscribers compared to
approximately 190,000 subscribers at September 30, 1996. During the three and
nine months ended September 30, 1997, EchoStar added approximately 230,000 and
470,000 DISH Network subscribers, respectively. While EchoStar's factory
manufacturing capacity is adequate to meet demand, subscriber activations
during the third quarter exceeded EchoStar's expectations. As a result of
stronger than expected sales and because certain components of EchoStar
Receiver Systems must be ordered as much as 120 days in advance, certain
models of EchoStar Receiver Systems will have limited availability during the
fourth quarter and EchoStar expects that its fourth quarter subscriber growth
will be limited to approximately the same number of subscribers added during
the third quarter. EchoStar believes that it has ordered, or can timely order,
sufficient quantities of components to meet reasonably expected demand during
1998.
During the three and nine months ended September 30, 1997, subscriber
churn approximated 1.2% per month. EchoStar's subscriber acquisition costs,
inclusive of advertising expenses, for the three and nine months ended
September 30, 1997 approximated $300 and $350, respectively.
EchoStar Marketing Promotions. During August 1996, EchoStar introduced a
promotion (the "1996 Promotion") which permitted independent retailers to
offer a standard EchoStar Receiver System to consumers for a suggested retail
price of $199 (as compared to the original average retail price prior to
August 1996 of approximately $499), conditioned upon the consumer's prepaid
one-year subscription to the DISH Network's America's Top 50 CD programming
package for approximately $300. Total transaction proceeds to EchoStar are
less than its aggregate costs (equipment, programming and other) for the
initial prepaid subscription period, are initially deferred, and recognized as
revenue over the related prepaid subscription period (normally one year).
During the period from August 1996 through May 1997, substantially all new
subscriber activations resulted from the 1996 Promotion.
During June 1997, the 1996 Promotion was enhanced to permit independent
retailers to offer a standard EchoStar Receiver System to consumers for a
suggested retail price of $199 without an extended subscription commitment
(the "1997 Promotion"). Net transaction costs associated with the 1997
Promotion are expensed as incurred (reported as a component of subscriber
promotion subsidies) in the accompanying statements of operations. Since
introduction of the 1997 Promotion, the majority of new subscriber activations
have resulted therefrom.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996.
REVENUE. Total revenue for the three months ended September 30, 1997 was
$124.4 million, an increase of $95.6 million as compared to total revenue for
the three months ended September 30, 1996 of $28.8 million. The increase in
total revenue in 1997 was primarily attributable to DISH Network subscriber
growth. The Company expects this trend to continue as the number of DISH
Network subscribers increases, and as EchoStar develops its Technology and
Satellite Services businesses. Consistent with the increases in total revenue
during the three months ended September 30,1997, EchoStar experienced a
corresponding increase in trade accounts receivable at September 30, 1997.
DISH Network subscription television services revenue totaled $82.1
million for the three months ended September 30, 1997, an increase of $68.8
million compared to the three months ended September 30, 1996. This increase
was directly attributable to the increase in the number of DISH Network
subscribers as of September 30, 1997 as compared to September 30, 1996.
Average monthly revenue per subscriber approximated $39.50 for the three
months ended September 30, 1997 compared to approximately $34.50 for the same
period in 1996. The increase in monthly revenue per subscriber was primarily
due to additional channels added upon commencement of operations of EchoStar's
second DBS satellite ("EchoStar II") in November 1996. DISH Network
subscription television services revenue consists primarily of revenue from
basic, premium and pay-per-view subscription television services.
12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
Other DISH Network revenue totaled $13.0 million for the three months
ended September 30, 1997, an increase of $11.7 million compared to the three
months ended September 30, 1996. Other DISH Network revenue consists
primarily of the recognition of revenue related to EchoStar Receiver Systems
sold pursuant to the 1996 Promotion, DBS system installation revenue, and loan
origination and participation income. During the three months ended September
30, 1997, EchoStar recognized approximately $11.5 million of revenue relating
to EchoStar Receiver Systems sold pursuant the 1996 Promotion, an increase of
$10.4 million as compared to the three months ended September 30, 1996.
EchoStar expects revenue related to the 1996 Promotion to decline at an
accelerated rate in future periods and to end entirely in 1998, one year
following the last sale pursuant to the 1996 Promotion.
For the three months ended September 30, 1997, DTH equipment sales and
integration services was comprised primarily of revenue from set-top boxes and
other DTH equipment sold to international DBS service operators. For the
three months ended September 30, 1997, DTH equipment sales and integration
services totaled $22.0 million. EchoStar currently has agreements with two
international DBS service operators for the distribution of digital satellite
broadcasting equipment. EchoStar recognized revenues of approximately $18.5
million related to these agreements during the three months ended September
30, 1997. Approximately $17.0 million of this revenue related to the sale of
set-top boxes and other DTH equipment and approximately $1.5 million of
revenue related to the provision of integration services (revenue from uplink
center design and construction oversight and other project integration
services for international DTH ventures).
While EchoStar continues to actively pursue other similar distribution
and integration service opportunities, no assurance can be given that any such
additional negotiations will be successful. Although EchoStar expects its
Technology business may grow at an accelerated rate, EchoStar's future revenue
from the sale of DTH equipment and integration services in international
markets depends largely on the success of the DBS operator in that country,
which, in turn, depends on other factors, such as the level of consumer
acceptance of DBS products and the intensity of competition for international
subscription television subscribers. No assurance can be given regarding the
level of expected future revenues which may be generated from EchoStar's
alliances with foreign DTH operators.
For the three months ended September 30, 1996, DTH equipment sales and
integration services consisted primarily of EchoStar Receiver Systems and
related accessories sold prior to the August 1996 nationwide rollout of the
1996 Promotion. DTH equipment sales and integration services revenue for the
three months ended September 30, 1996 totaled $10.0 million.
Satellite services revenue totaled $3.7 million for the three months
ended September 30, 1997, an increase of $1.7 million, or 84%, compared to the
three months ended September 30, 1996. Satellite services revenue primarily
consists of signal carriage revenues from content providers and business
television service revenue for the broadcast of organization specific
telecasts. The increase in satellite services revenue was primarily
attributable to an increase in the number of content providers combined with
increased usage by EchoStar's business television customers.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$56.9 million for the three months ended September 30, 1997, an increase of
$44.1 million as compared to the same period in 1996. The increase in DISH
Network operating expenses was primarily attributable to the increase in the
number of DISH Network subscribers. Subscriber-related expenses totaled $42.7
million for the three months ended September 30, 1997, an increase of $35.7
million compared to the same period in the prior year. Such expenses, which
include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable subscriber
expenses, totaled 52% of subscription television services revenues, compared
to 53% of subscription television services revenues during the same period in
1996. Satellite and transmission expenses are comprised primarily of costs
associated with the operation of EchoStar's digital broadcast center and costs
of maintaining in-orbit insurance on EchoStar's DBS satellites. Satellite and
transmission expenses increased $2.1 million compared to the same period in
1996 primarily as a result of the September 1996 launch of EchoStar II. Call
center and other operating expenses consist primarily of costs incurred in the
operation of EchoStar's DISH Network call center and expenses associated with
subscriber equipment installation. Call Center and other operating expenses
totaled $10.8 million for the three months ended September 30, 1997, an
increase of $6.4 million as compared to the same period in 1996. The increase
in call center and other operating expenses was directly attributable to the
increase in the number of DISH Network subscribers. EchoStar expects DISH
Network operating
13
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
expenses to continue to increase in the future as subscribers are added.
However, as its DISH Network subscriber base continues to expand, EchoStar
expects that such costs as a percentage of DISH Network revenue will decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- -DTH equipment and integration services totaled $11.7 million for the three
months ended September 30, 1997 (net of the reclassification of freight
expenses of $1.7 million incurred during the first six months of 1997
associated with shipment of EchoStar Receiver Systems), an increase of $2.2
million, or 23%, as compared to the same period in 1996. For the three months
ended September 30, 1997, cost of sales - DTH equipment and integration
services represents costs associated with set-top boxes and related components
sold to international DTH operators. For the three months ended September 30,
1996, cost of sales - DTH equipment and integration services totaled $9.5
million and represent costs of EchoStar Receiver Systems sold prior to the
August 1996 rollout of the 1996 Promotion.
DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled
$84.3 million for the three months ended September 30, 1997, an increase of
$74.3 million as compared to the same period in 1996. The increase in DISH
Network marketing expenses was primarily attributable to the increase in
subscriber promotion subsidies. Subscriber promotion subsidies represent the
excess of transaction costs over transaction proceeds at the time of sale
associated with EchoStar's various promotions. Such costs totaled
approximately $67.5 million (including a $1.7 million reclassification of
freight expenses described above), an increase of $61.5 million as compared to
the same period in 1996. The increase in subscriber promotion subsidies was
primarily attributable to the commencement of the 1997 Promotion and an
increase in the number of EchoStar Receiver Systems sold during the three
months ended September 30, 1997 as compared to the same period in 1996.
Advertising and other expenses increased $12.8 million to $16.8 million during
the three months ended September 30, 1997 as a result of increased marketing
activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $15.8 million for the three months ended September 30, 1997,
an increase of $2.8 million as compared to the same period in 1996. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of DISH Network. G&A expenses as a percentage
of total revenue decreased to 13% during the three months ended September 30,
1997 as compared to 45% during the same period in 1996. EchoStar expects that
its G&A expenses as a percent of total revenue will continue to decrease in
future periods.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization
of subscriber acquisition costs) ("EBITDA") was negative $44.2 million for the
three months ended September 30, 1997 as compared to negative EBITDA of $16.4
million during the same period of 1996. This decrease in EBITDA resulted from
the factors affecting revenue and expenses discussed above. EchoStar believes
that EDITDA results will improve in future periods as its subscriber
acquisition costs decrease and the number of DISH Network subscribers
increases. In the event that new subscriber activations exceed expectations,
EchoStar's EBITDA results would be negatively impacted (as a result of the
accounting treatment applied to the 1997 Promotion whereby net subscriber
acquisition costs are expensed upon subscriber activation).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended September 30, 1997 (including amortization of
subscriber acquisition costs of $3.4 million and $34.0 million for the three
months ended September 30, 1996 and September 30, 1997, respectively),
aggregated $47.0 million, an increase of $35.7 million, as compared to the
same period 1996. The increase in depreciation and amortization expenses
principally resulted from amortization of subscriber acquisition costs and
depreciation of EchoStar II (placed in service during the fourth quarter of
1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $26.7 million for
the three months ended September 30, 1997, an increase of $12.6 million as
compared to the same period during 1996. The increase in other expense in the
third quarter of 1997 resulted primarily from interest expense associated with
the 1997 Notes (as defined), which were issued in June 1997, and increases in
interest expenses associated with EchoStar's 12 7/8% Senior Secured Discount
Notes due 2004 (the "1994 Notes") and its 13 1/8% Senior Secured Discount
Notes due 2004 (the "1996 Notes") due to higher accreted balances thereon.
These increases in interest expenses were partially offset by increases in
capitalized interest. Capitalized interest (principally attributable to
satellite construction) approximated $11.2 million during the three months
ended September 30, 1997, compared to approximately $8.5 million during the
three months ended September 30, 1996.
14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
INCOME TAX BENEFIT. The decrease in the income tax benefit of $15.0
million (from $15.0 million for the three months ended September 30, 1996 to
an income tax provision of $20,000 for the three months ended September 30,
1997) principally resulted from EchoStar's decision to fully reserve the third
quarter addition to its net deferred tax asset. EchoStar's net deferred tax
assets (approximately $67.4 million at September 30, 1997) relate to temporary
differences for amortization of original issue discount on the 1994 Notes and
1996 Notes, net operating loss carryforwards, and various accrued expenses
which are not deductible until paid. If future operating results differ
materially and adversely from EchoStar's current expectations, its judgment
regarding the magnitude of its reserve may change.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996.
REVENUE. Total revenue for the nine months ended September 30, 1997 was
$280.1 million, an increase of $173.7 million, as compared to total revenue
for the nine months ended September 30, 1996 of $106.4 million. This increase
was primarily attributable to the increase in the number of DISH Network
subscribers.
DISH Network subscription television services revenue totaled $193.0
million for the nine months ended September 30, 1997, an increase of $175.5
million compared to the nine months ended September 30, 1996. This increase
resulted from operation of the DISH Network during the entirety of the nine
months ended September 30, 1997 (DISH Network operations commenced in March
1996) as well as from the increase in the number of DISH Network subscribers.
During the nine months ended September 30, 1997, EchoStar added 470,000 DISH
Network subscribers and average revenue per subscriber approximated $39.00.
Other DISH Network revenue totaled $32.9 million for the nine months
ended September 30, 1997, an increase of $29.6 million compared to the nine
months ended September 30, 1996. Other DISH Network revenue consists
primarily of the recognition of revenue related to EchoStar Receiver Systems
sold pursuant to the 1996 Promotion, DBS system installation revenue, and loan
origination and participation income. During the nine months ended September
30, 1997, EchoStar recognized approximately $30.0 million of revenue relating
to EchoStar Receiver Systems sold pursuant the 1996 Promotion, an increase of
$29.0 million as compared to the nine months ended September 30, 1996.
EchoStar expects revenue related to the 1996 Promotion to decline at an
accelerated rate in future periods and to end entirely in 1998, one year
following the last sale pursuant to the 1996 Promotion.
During the nine months ended September 30, 1997, DTH equipment sales and
integration services revenue was comprised primarily of revenue from the sale
of set-top boxes and other DTH equipment sold to international DBS service
operators. These revenues totaled $37.4 million of which approximately $17.0
million was related to the sale of set-top boxes and other DTH equipment.
EchoStar also recognized revenues of approximately $13.4 million relating to
the provision of integration services.
During the nine months ended September 30, 1996, DTH equipment sales and
integration services revenue resulted from the sale, prior to the August 1996
nationwide introduction of the 1996 Promotion, of EchoStar Receiver Systems.
DTH equipment sales totaled $72.7 million during the nine months ended
September 30, 1996.
Satellite services revenue totaled $7.9 million for the nine months ended
September 30, 1997, an increase of $4.1 million, or 106%, compared to the same
period in 1996. The increase in satellite services revenue primarily resulted
from operation of EchoStar I and EchoStar II during the entirety of 1997, an
increase in the number of content providers, and increased usage by EchoStar's
business television customers.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$130.1 million for the nine months ended September 30, 1997, an increase of
$111.1 million as compared to the same period in 1996. The increase in DISH
Network operating expenses was primarily attributable to operation of the DISH
Network during the entirety of 1997 and the increase in the number of DISH
Network subscribers. Subscriber-related expenses totaled $97.3 million for
the nine months ended September 30, 1997, an increase of $88.0 million as
compared to the same period in the prior year. Such expenses as a percent of
subscription television services revenues were 50%, compared to 53% of
subscription television services revenues during the same period in 1996.
Satellite and transmission expenses increased $6.8 million compared to the
same period in 1996, primarily as a result of operation of the DISH Network
during the entirety of 1997 and the commencement of operation of EchoStar II.
Call center
15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
and other operating expenses totaled $23.1 million for the nine months ended
September 30, 1997, an increase of $16.3 million as compared to the same
period in 1996. The increase in these expenses was attributable to operation
of the DISH Network during the entirety of 1997 and from the increase in the
number of DISH Network subscribers.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- -DTH equipment and integration services totaled $26.0 million for the nine
months ended September 30, 1997, a decrease of $47.0 million, or 64%, compared
to the same period in 1996. For the nine months ended September 30, 1997, cost
of sales - DTH equipment and integration services principally consisted of
costs associated with the sale of EchoStar Receiver Systems and related
components and the provision of integration services to international DTH
operators. During the nine months ended September 30, 1996, cost of sales -
DTH equipment and integration services represented costs of EchoStar Receiver
Systems and related components sold prior to the August 1996 nationwide
rollout of the 1996 Promotion. As previously described, EchoStar Receiver
Systems sold pursuant to the 1996 Promotion are not included within this
caption on the accompanying statements of operations but are deferred (i.e.,
subscriber acquisition costs) and amortized over the prepaid subscription
period.
DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled
$122.7 million for the nine months ended September 30, 1997, an increase of
$105.2 million as compared to the same period in 1996. The increase in DISH
Network marketing expenses was primarily the result of the increase in
subscriber promotion subsidies. Such costs totaled approximately $98.6
million, an increase of $92.6 million, compared to the same period in 1996.
The increase in subscriber promotion subsidies was primarily attributable to
the commencement of the 1997 Promotion. Advertising and other expenses
increased $12.6 million, or 110%, to $24.1 million during the nine months
ended September 30, 1997, principally due to the operation of the DISH Network
during the entirety of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $45.8 million
for the nine months ended September 30, 1997, an increase of $15.6 million as
compared to the same period in 1996. The increase in G&A expenses resulted
from increased personnel expenses to support the growth of DISH Network. G&A
expenses as a percentage of total revenue decreased to 16% for the nine months
ended September 30, 1997, compared to 28% during the same period in 1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
was negative $44.5 million for the nine months ended September 30, 1997,
compared to negative EBITDA of $33.2 million for the same period in 1996.
This decrease in EBITDA of $11.3 million resulted from the factors affecting
revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the nine months ended September 30, 1997 (including amortization of
subscriber acquisition costs of $3.5 million and $95.3 million for the nine
months ended September 30, 1996 and September 30, 1997, respectively)
aggregated $133.5 million, an increase of $112.5 million, as compared to the
same period in 1996. The increase in depreciation and amortization expenses
resulted from amortization of subscriber acquisition costs and depreciation of
EchoStar II.
OTHER INCOME AND EXPENSE. Other expense, net totaled $66.3 million for
the nine months ended September 30, 1997, an increase of $33.7 million, as
compared to the same period 1996. The increase in other expense during the
nine months ended September 30, 1997 resulted from an increase in interest
expenses associated with the 1994 Notes, the 1996 Notes, and the 1997 Notes.
Additionally, interest income decreased approximately $3.5 million as a result
of a decrease in invested balances. EchoStar capitalized $27.9 million and
$22.9 million of interest during the nine months ended September 30, 1997 and
1996, respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $31.1
million (from $31.1 million for the nine months ended September 30, 1996 to an
income tax provision of $64,000 for the nine months ended September 30, 1997)
was the result of EchoStar's decision to fully reserve the 1997 additions to
its net deferred tax asset.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), which supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements
for reporting earnings per share ("EPS") by requiring companies only to report
"basic" and "diluted" EPS.
16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS -- Continued
SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997 but requires retroactive restatement upon adoption.
EchoStar will adopt SFAS No. 128 in the fourth quarter of 1997. EchoStar does
not believe such adoption will have a material effect on either its previously
reported or future EPS.
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS
No. 129), which continues the existing requirements of APB No. 15 but expands
the number of companies subject to portions of its requirements.
Specifically, SFAS No. 129 requires that entities previously exempt from the
requirements of APB No. 15 disclose the pertinent rights and privileges of all
securities other than ordinary common stock. SFAS No. 129 is effective for
periods ending after December 15, 1997. EchoStar was not exempt from APB No.
15; accordingly, the adoption of SFAS No. 129 will not have any effect on
EchoStar.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 does not require a
specific format for that financial statement but requires that the enterprise
display an amount representing total comprehensive income for the period in
that financial statement. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 will require
additional disclosure in EchoStar's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131") which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating statements. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The adoption of SFAS No. 131 will require
additional disclosure in EchoStar's financial statements.
17
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar Communications Corporation ("EchoStar")
and The News Corporation Limited ("News") announced an agreement (the "News
Agreement") pursuant to which, among other things, News agreed to acquire
approximately 50% of the outstanding capital stock of EchoStar. News also
agreed to make available for use by EchoStar the DBS permit for 28 frequencies
at 110DEG. West Longitude ("WL") purchased by MCI Communications Corporation
("MCI") for over $682 million following a 1996 Federal Communications
Commission ("FCC") auction. During late April 1997, substantial disagreements
arose between the parties regarding their obligations under the News
Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting
that the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without
interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure
to act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based
on, among other things, a jointly prepared a ten-year business plan showing
expected profits for EchoStar in excess of $10 billion based on consummation
of the transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in
the First Amended Complaint and asserts twenty defenses, including bad faith,
misconduct and failure to disclose material information on the part of
EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary American Sky
Broadcasting LLC ("AskyB") assert that EchoStar and Ergen breached their
agreements with News and failed to act and negotiate with News in good faith.
EchoStar has responded to News' answer and denied the allegations in their
counterclaims. EchoStar also has asserted various affirmative defenses.
EchoStar intends to diligently defend against the counterclaims. The parties
are now in discovery. The case has been set for a five week trial commencing
June 1, 1998, but that date could be postponed. The litigation process could
continue for many years and there can be no assurance concerning the outcome
of the litigation. An adverse decision could have a material adverse effect
on EchoStar's financial position and results of operations.
On April 25, 1997, EchoStar Satellite Corporation ("ESC") and Sagem, S.A.
("Sagem"), a French Corporation, executed a settlement and release agreement
under which Sagem agreed to return the $10.0 million down payment made to
Sagem and agreed to release the $15.0 million placed in escrow with a bank in
connection with a manufacturing agreement entered into in April 1995. ESC and
Sagem have released all claims against each other.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1997.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR DBS CORPORATION
By: /S/ STEVEN B. SCHAVER
---------------------------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
By: /S/ JOHN R. HAGER
---------------------------------------------------
John R. Hager
Treasurer and Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: November 14, 1997
5
1,000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
29,775
31,252
56,261
1,803
23,050
190,700
619,759
72,986
1,344,476
249,352
1,329,847
0
0
0
(251,044)
1,344,476
263,338
280,123
156,076
458,156
66,284
2,714
74,500
(244,317)
64
(244,381)
0
0
0
(244,381)
(244,381)
(244,381)
INCLUDES SALES OF PROGRAMMING.
INCLUDES COSTS OF PROGRAMMING.
NET OF AMOUNTS CAPITALIZED.
