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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0336997
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
--- ---
ON NOVEMBER 11, 1996, REGISTRANT'S OUTSTANDING VOTING COMMON STOCK CONSISTED OF
11,022,147 SHARES OF CLASS A COMMON STOCK, 29,804,401 SHARES OF CLASS B COMMON
STOCK AND 1,616,681 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK, EACH $0.01
PAR VALUE.
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ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of December 31, 1995
and September 30, 1996 (Unaudited) ........................... 1
Statements of Operations for the three months and nine months
ended September 30, 1995 and 1996 (Unaudited)................. 2
Statements of Cash Flows for the nine months
ended September 30, 1995 and 1996 (Unaudited).................. 3
Notes to Financial Statements (Unaudited) ...................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 24
Item 6. Exhibits and Reports on Form 8-K ............................... 25
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 21,754 $ 31,079
Marketable investment securities ...................................................... 15,670 42,122
Trade accounts receivable, net ........................................................ 9,179 18,958
Inventories, net ...................................................................... 38,769 44,246
Income tax receivable ................................................................. 3,554 6,527
Deferred tax assets ................................................................... 1,779 2,457
Subscriber acquisition costs, net ..................................................... -- 43,470
Other current assets .................................................................. 13,037 22,006
-------- ----------
Total current assets .............................................................. 103,742 210,865
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES:
Dish Notes escrow ..................................................................... 73,291 --
ESBC Notes escrow ..................................................................... -- 135,449
Other ................................................................................. 26,400 41,461
PROPERTY AND EQUIPMENT, net ............................................................. 354,000 555,243
OTHER NONCURRENT ASSETS ................................................................. 65,658 138,471
-------- ----------
Total assets ...................................................................... $623,091 $1,081,489
-------- ----------
-------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ................................................................ $ 19,063 $ 26,449
Deferred programming revenue - DISH Network-SM- ....................................... -- 63,008
Deferred programming revenue - C-band ................................................. 5,563 4,308
Accrued expenses and other current liabilities ........................................ 21,335 13,959
Notes payable and current portion of long-term debt ................................... 4,782 11,344
-------- ----------
Total current liabilities ......................................................... 50,743 119,068
LONG-TERM DEFERRED PROGRAMMING REVENUE - DISH Network-SM- ............................... -- 6,790
DISH NOTES, net ......................................................................... 382,218 422,777
ESBC NOTES, net ......................................................................... -- 372,570
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion ..................... 33,444 53,842
OTHER LONG-TERM LIABILITIES ............................................................. -- 478
-------- ----------
Total liabilities ................................................................. 466,405 975,525
-------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of Series A
Cumulative Preferred Stock issued and outstanding, including accrued dividends of
$2,143,000 and $3,046,000, respectively ............................................. 17,195 18,098
Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 10,535,003
and 10,996,621 shares issued and outstanding, respectively .......................... 105 110
Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401
shares issued and outstanding ....................................................... 298 298
Common Stock Purchase Warrants ........................................................ 714 16
Class C Common Stock, 100,000,000 shares authorized, none outstanding ................. -- --
Additional paid-in capital ............................................................ 151,674 154,142
Unrealized holding gains on available-for-sale securities, net of deferred taxes ...... 239 35
Retained earnings (deficit) ........................................................... (13,539) (66,735)
-------- ----------
Total stockholders' equity ........................................................ 156,686 105,964
-------- ----------
Total liabilities and stockholders' equity ........................................ $623,091 $1,081,489
-------- ----------
-------- ----------
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
1
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1995 1996 1995 1996
------- -------- -------- --------
REVENUE:
DTH products and technical services........... $39,373 $ 37,159 $110,515 $134,358
Programming - DISH Network-SM-................ -- 15,279 -- 21,325
Programming - C-band.......................... 3,791 2,885 11,479 9,528
Loan origination and participation income..... 442 1,715 1,277 6,818
------- -------- -------- --------
Total revenue............................. 43,606 57,038 123,271 172,029
------- -------- -------- --------
EXPENSES:
DTH products and technical services........... 30,803 35,254 87,619 125,532
Programming - DISH Network-SM-................ -- 6,108 -- 7,877
Programming - C-band.......................... 3,473 2,573 10,297 8,631
Selling, general and administrative........... 8,268 23,736 23,454 53,552
Depreciation and amortization................. 721 10,265 1,490 20,021
------- -------- -------- --------
Total expenses............................ 43,265 77,936 122,860 215,613
------- -------- -------- --------
OPERATING INCOME (LOSS)........................ 341 (20,898) 411 (43,584)
------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 4,435 5,335 11,078 14,718
Interest expense, net of amounts capitalized.. (5,859) (19,996) (18,749) (53,180)
Other, net.................................... 208 91 168 (43)
------- -------- -------- --------
Total other income (expense).............. (1,216) (14,570) (7,503) (38,505)
------- -------- -------- --------
NET LOSS BEFORE INCOME TAXES................... (875) (35,468) (7,092) (82,089)
BENEFIT FOR INCOME TAXES....................... 515 12,950 2,705 29,796
------- -------- -------- --------
NET LOSS....................................... $ (360) $(22,518) $ (4,387) $(52,293)
------- -------- -------- --------
------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON SHARES......... $ (661) $(22,819) $ (5,290) $(53,196)
------- -------- -------- --------
------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 37,544 40,456 34,965 40,455
------- -------- -------- --------
------- -------- -------- --------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE.... $ (.02) $ (.56) $ (.15) $ (1.31)
------- -------- -------- --------
------- -------- -------- --------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (4,387) $ (52,293)
Adjustments to reconcile net loss to net
cash flows from operating activities --
Depreciation and amortization............................. 1,490 20,021
Provision for doubtful accounts........................... -- 587
Benefit for deferred taxes................................ (6,509) (25,481)
Amortization of deferred debt issuance costs on
Dish Notes and ESBC Notes................................ 945 1,759
Amortization of discount on Dish Notes and
ESBC Notes, net of amounts capitalized................... 17,455 40,229
Equity in (earnings) losses of joint venture.............. (39) 62
Change in reserve for excess and obsolete inventory....... 277 2,579
Change in long-term deferred programming revenue.......... -- 6,790
Change in accrued interest on notes receivable from DBSC.. -- (2,220)
Change in accrued interest on convertible
subordinated debentures from SSET........................ (427) (418)
Other, net................................................ (401) 476
Changes in working capital items --
Trade accounts receivable................................ (1,284) (10,366)
Inventories.............................................. (6,358) (8,056)
Income tax receivable.................................... -- (2,973)
Other current assets..................................... (846) (8,969)
Liability under cash management program.................. (57) --
Trade accounts payable................................... (10,441) 7,386
Deferred programming revenue............................. (719) 61,753
Accrued expenses and other current liabilities........... 1,016 7,624
--------- ---------
Net cash flows from operating activities................ (10,285) 38,490
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............... (240,800) (54,111)
Sales of marketable investment securities................... 206,512 27,846
Purchases of restricted marketable investment securities.... (15,000) (20,761)
Funds released from restricted cash and marketable
investment securities - other.............................. -- 5,700
Purchases of property and equipment......................... (1,727) (13,400)
Proceeds from sale of property and equipment................ 27 --
Offering proceeds and investment earnings placed in escrow.. (7,570) (191,941)
Refund of launch payment placed in escrow................... -- (4,500)
Funds released from escrow accounts......................... 51,842 133,768
Payments received on convertible subordinated
debentures from SSET....................................... -- 5,252
Investment in convertible subordinated debentures from DBSI. (1,000) (3,000)
Long-term notes receivable from DBSC........................ -- (20,000)
Expenditures for satellite systems under construction....... (58,984) (167,829)
Investment in subscriber acquisition costs.................. -- (46,918)
Deposit on FCC authorization................................ -- (10,459)
Expenditures for FCC authorizations......................... -- (3,167)
--------- ---------
Net cash flows from investing activities................ (66,700) (363,520)
--------- ---------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1996
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable...... $ (167) $ (4,207)
Stock options exercised .................................. -- 1,568
Net proceeds from issuance of Class A Common Stock........ 62,933 --
Net proceeds from issuance of ESBC Notes.................. -- 336,994
------- --------
Net cash flows from financing activities................ 62,766 334,355
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (14,219) 9,325
CASH AND CASH EQUIVALENTS, beginning of period ............. 17,506 21,754
------- --------
CASH AND CASH EQUIVALENTS, end of period ................... $ 3,287 $ 31,079
------- --------
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized......... $ 353 $ 11,192
Cash paid for income taxes................................. 1,739 --
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
Cumulative Series A Preferred Stock dividends.............. 903 903
Employee incentives funded by issuance of Class A
Common Stock.............................................. -- 207
See accompanying notes to consolidated financial
statements are an integral part of these statements.
4
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
THIS FORM 10-Q OF ECHOSTAR CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THE FORM 10-Q AND INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ECHOSTAR
WITH RESPECT TO, AMONG OTHER THINGS: (I) ECHOSTAR'S FINANCING PLANS; (II)
TRENDS AFFECTING ECHOSTAR'S FINANCIAL CONDITIONS OR RESULTS OF OPERATIONS;
(III) ECHOSTAR'S GROWTH STRATEGY; (IV) ECHOSTAR'S ANTICIPATED RESULTS OF
FUTURE OPERATIONS; AND (V) REGULATORY MATTERS AFFECTING ECHOSTAR. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD
LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) BUSINESS AND BASIS OF PRESENTATION
PRINCIPAL BUSINESS AND FINANCING ACTIVITIES
EchoStar Communications Corporation and subsidiaries ("EchoStar") is
one of only two direct broadcast satellite ("DBS") companies in the United
States with the capacity to provide comprehensive nationwide DBS programming
service in 1996. EchoStar's DBS service (the "DISH Network-SM-") commenced
operations in March 1996 after the successful launch of its first satellite
("EchoStar I") in December 1995. EchoStar launched its second satellite
EchoStar II ("EchoStar II") on September 10, 1996. EchoStar significantly
increased the channel capacity and programming offerings of the DISH
Network-SM- when EchoStar II became fully operational in November 1996.
EchoStar now provides approximately 120 channels of near laser disc
quality digital video programming and over 30 channels of CD quality audio
programming to the entire continental United States ("CONUS"). In addition to
its DISH Network-SM- business, EchoStar is engaged in the design,
manufacture, distribution and installation of satellite direct to home
("DTH") products, domestic distribution of DTH programming and consumer
financing of EchoStar's domestic DTH products and services.
EchoStar's primary objective is to become one of the leading
providers of subscription television and other satellite delivered services
in the United States. EchoStar had approximately 190,000 and 250,000
subscribers to DISH Network-SM- programming as of September 30, 1996 and
November 11, 1996, respectively.
EchoStar's Satellite Broadcasting Corporation ("ESBC") is a
wholly-onwed direct subsidiary of EchoStar. Dish, Ltd. is a wholly-owned
direct subsidiary of ESBC. Substantially all of EchoStar's operating
activities are conducted by subsidiaries of Dish, Ltd.
In June 1994, Dish, Ltd. completed a public offering (the "Dish Notes
Offering") of 12 7/8% Senior Secured Discount Notes due 2004 (the "Dish
Notes") and Warrants (collectively, the "Dish Notes Offering"), resulting in
net proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries
are subject to the terms and conditions of the Indenture related to the Dish
Notes (the "Dish Notes Indenture"). Substantially all of the Warrants issued
in connection with the Dish Notes Offering have been exercised. In June 1995,
EchoStar completed an offering of its Class A Common Stock, resulting in net
proceeds of approximately $63.0 million (the "Equity Offering").
In March 1996, ESBC completed a private offering (the "ESBC Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, resulting in
net proceeds of approximately $337.0 million. ESBC subsequently filed a
Registration Statement on Form S-1 to effect the exchange of those Notes for
publicly registered debentures (the "ESBC Notes") with the same terms.
Proceeds from the ESBC Notes Offering have been or will be used for: (i)
continued development, marketing and distribution of the DISH Network-SM-; (ii)
EchoStar's purchase of DBS
5
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
frequencies at 148DEG. WL (the "148 Frequencies"); (iii) partial funding of
the construction, launch and insurance of the satellites DBSC I ("EchoStar
III") and EchoStar IV; (iv) additional launch costs of EchoStar II; and (v)
other general corporate purposes. The 148 Frequencies were acquired by
EchoStar at a public auction held by the Federal Communications Commission
("FCC") in January 1996 (the "FCC Auction"). In connection with the ESBC
Notes Offering, EchoStar contributed all of the outstanding capital stock of
its wholly owned subsidiary, Dish, Ltd., to ESBC. This transaction has been
accounted for as a reorganization of entities under common control whereby
Dish, Ltd. has been treated as the predecessor to ESBC. ESBC is subject to
all, and EchoStar is subject to certain of, the terms and conditions of the
Indenture related to the ESBC Notes (the "ESBC Notes Indenture").
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and all of its direct and
indirect wholly owned subsidiaries.
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
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the Combined and
Consolidated Financial Statements and footnotes thereto included in EchoStar
Communications Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. Certain prior year amounts have been reclassified to
conform with the current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management 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 revenue and expenses for each
reporting period. Actual results could differ from those estimates.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position when compared to its
historical results. EchoStar consummated the Dish Notes Offering, the ESBC
Notes Offering and the Equity Offering to partially satisfy the capital
requirements for the construction, launch and operation of EchoStar I,
EchoStar II, EchoStar III and EchoStar IV. Annual interest expense on the
Dish Notes and ESBC Notes and depreciation of the investment in the
satellites and related assets is of a magnitude that exceeds historical
levels of income before taxes. Consequently, beginning in 1995 EchoStar
reported significant net losses and expects net losses to continue through at
least 1998. As of September 30, 1996, EchoStar expects to invest
approximately an additional $400 million to fund contractor financing
obligations with respect to EchoStar I and EchoStar II and to complete the
construction phase and launch of EchoStar III and EchoStar IV (Note 6).
EchoStar's plans also include the financing, construction and launch of two
fixed service satellites, additional DBS satellites and Ku-band and KuX-band
satellites, assuming receipt of all required FCC licenses and permits.
In August 1996, EchoStar introduced a nationwide marketing promotion
(the "EchoStar Promotion") which offers a standard EchoStar Receiver System
to consumers for $199 (as compared to the original average retail price
in March 1996 of approximately $499), conditioned upon the consumer's prepaid
purchase of one year of America's Top 40 CD-SM- programming package
(America's Top 50 CD-SM- programming package effective November 1, 1996) for
approximately $300. The EchoStar Promotion has significantly increased the
affordability of EchoStar Receiver Systems for consumers. The primary
purposes of the EchoStar Promotion are to rapidly build a subscriber base, to
expand retail distribution of EchoStar's products and to build consumer
awareness of the DISH Network-SM- brand. This promotion is consistent with and
emphasizes EchoStar's long-term business strategy which focuses on generating
the majority of its future revenue through sales of DISH Network-SM-
programming to a substantial subscriber base. The
6
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
EchoStar Promotion requires significant investment by EchoStar to acquire
subscribers, but EchoStar believes the investment is fully recoverable from
the DBS programming revenues expected to be generated. EchoStar receivers
process only DISH Network-SM- signals because of the proprietary encryption
technology employed. Further, because of high consumer satisfaction ratings,
EchoStar anticipates very high service renewal rates, resulting in minimum
subscriber lives of atConsequently, the satellite receivers and other
reception equipment can not be utilized with competitors' DBS systems, and
unlike the cellular phone industry, subscribers can not seamlessly migrate to
alternative DBS providers. Further, based on high DBS industry consumer
satisfaction ratings, initial feedback from consumers and dealers and low
EchoStar subscriber turnover rates, EchoStar anticipates high service renewal
rates, leading to an expected average minimum subscriber life of at least
three years. However, as renewal data least three years. Initially,
howeverfor subscribers to the DISH Network-SM- is not yet available, among
other things, EchoStar has elected to amortize its subscriber acquisition
costs over a one year period, which. This amortization period is equal to the
term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. In addition, EchoStar's
experience to date is that a majority of subscribers buy additionala majority
of DISH Network-SM- subscribers have purchased premium and Pay-Per-View
programming for incremental amounts overabove the prepaid minimum required by
the EchoStar Promotion, which reduces the time necessary to recover the
average investment per subscriber. EchoStar's present marketing strategy is
based on current and anticipated competitive conditions which may change, and
such changes could be adverse to EchoStar.
EchoStar has agreements with two manufacturers to supply DBS
receivers for EchoStar. Only one of the manufacturers has produced a receiver
acceptable to EchoStar. EchoStar previously deposited $10.0 million with the
non-performing manufacturer and has an additional $15.0 million in an escrow
account (the "Non-Performing Manufacturer Escrow Account") as security for
EchoStar's payment obligations under that contract. EchoStar has given this
non-performing manufacturer notice of its intent to terminate the contract,
and therefore and has filed suit against that manufacturer. Consequently,
EchoStar is currently dependent on one manufacturing source for its
receivers. Since EchoStar has given the non-performing manufacturer notice of
its intent to terminate the contract, EchoStar has not included amounts due
under the contract in EchoStar's future purchase commitments. The performing
manufacturer is presently manufacturing receivers in sufficient quantities to
meet currently expected demand. If EchoStar's sole manufacturer is unable for
any reason to produce receivers in a quantity sufficient to meet demand,
EchoStar's liquidity and results of operations would be adversely affected.
There can be no assurance EchoStar will be able to recover any amounts
deposited with the non-performing manufacturer or held in escrow.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar
expects negative stockholders' equity towill result before December 31, 1997.
EchoStar's expected net losses will result primarily from: (i) the
amortization of the original issue discount on the Dish Notes and ESBC Notes;
(ii) increases in depreciation expense on the satellites and other fixed
assets; (iii) amortization of subscriber acquisition costs; and (iv)
increases in selling, general and administrative expenses to support the DISH
Network-SM-. Although a negative equity position has significant
implications, including, but not limited to, non-compliance with NASDAQ
National Market listing criteria, EchoStar believes this event will not
materially affect the implementation and execution of its business strategy.
When EchoStar ceases to satisfy NASDAQ's National Market listing criteria,
EchoStar's Common Stock will be subject to being delisted unless an exception
is granted by the National Association of Securities Dealers. If an exception
were not granted, trading in EchoStar Common Stock would thereafter be
conducted in the over-the-counter market. Consequently, it an investor may
find itwould be more difficult to dispose of, or to obtain accurate
quotations as to the price of, the EchoStar Common Stock. Delisting would
result in a decline in EchoStar's Common Stock trading market which could
potentially depress stock and bond prices, among other things.
As a result of the factors discussed above, EchoStar will need to
raise additional capital to complete the construction and launch of EchoStar
III and EchoStar IV. There can be no assurance that necessary funds will be
available or, if available, that they will be available on terms favorable to
EchoStar. In anticipation of its future capital requirements and in order to
fully implement its business strategy, EchoStar regularly examines, and is
currently examining, opportunities to expand its DBS business, technology
base and product lines through means such as licenses, joint ventures,
strategic alliances, strategic investments and acquisitions of assets or
ongoing businesses. Currently, EchoStar has not made a commitment to any new
strategic transaction. At any time, however, EchoStar may agree to enter into
a new strategic transaction. Should EchoStar agree to enter into a new
strategic transaction, there can be no assurance as to the terms or timing of
the transaction, whether the transaction will be consummated or whether
7
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases
in the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
EchoStar considers all investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as
of December 31, 1995, and September 30, 1996 consist of money market funds,
corporate notes and commercial paper stated at cost which equates to market
value.
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
EchoStar classifies all marketable investment securities as
available-for-sale. Accordingly, these investments are reflected at market
value based on quoted market prices. Related unrealized gains and losses are
reported as a separate component of stockholders' equity, net of related
deferred income taxes. The specific identification method is used to
determine cost in computing realized gains and losses.
Restricted Cash and Marketable Investment Securities in Escrow
Accounts as reflected on the accompanying consolidated balance sheets
represent the remaining net proceeds received from the Dish Notes Offering,
and a portion of the proceeds from the ESBC Notes Offering, plus interest
earned, less amounts expended to date in connection with the development,
construction and continued growth of the DISH NetworkSM. These proceeds are
held in separate escrow accounts (the "Dish Escrow Account" and the "ESBC
Escrow Account") for the benefit of the holders of the Dish Notes and ESBC
Notes, respectively, and are invested in certain debt and other marketable
investment securities, as permitted by the respective Indentures, until
disbursed for the express purposes identified in the Dish Notes Offering
Prospectus and the ESBC Notes Offering Prospectus, as the case may be.
Other Restricted Cash includes $11.4 million and $5.7 million at
December 31, 1995 and September 30, 1996, respectively, to satisfy certain
covenants in the Dish Notes Indenture regarding launch insurance for EchoStar
I and EchoStar II. In addition, as of December 31, 1995 and September 30,
1996, $15.0 million was in the Non-Performing Manufacturer Escrow Account
established pursuant to a DBS receiver manufacturing contract for payment to
the manufacturer as certain milestones are reachedAccount. As of September
30, 1996, approximately $20.0 million was in a separate escrow account
established pursuant to a second DBS receiver manufacturing agreement,
covering EchoStar's payment obligations and. Additionally, approximately
$750,000 was in an escrow account for the purpose of cash collateralizing
standby letters of credit to a vendor. The major components of Restricted
Cash and Marketable Investment Securities are as follows (in thousands):
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------------- ----------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST (LOSS) VALUE
--------- ---------- ------- --------- ---------- --------
Commercial paper.......... $66,214 $ -- $66,214 $115,444 $ -- $115,444
Government bonds ......... 32,904 420 33,324 41,040 (33) 41,007
Corporate notes........... -- -- -- 19,111 (62) 19,049
Certificates of deposit... -- -- -- 750 -- 750
Accrued interest.......... 153 -- 153 660 -- 660
------- ---- ------- -------- ---- --------
$99,271 $420 $99,691 $177,005 $(95) $176,910
------- ---- ------- -------- ---- --------
------- ---- ------- -------- ---- --------
8
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to EchoStar's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
EchoStar Receiver Systems.................... $ -- $20,878
DBS receiver components...................... 9,615 11,544
Consigned DBS receiver components............ -- 6,633
Finished goods - C-band...................... 11,161 4,246
Finished goods - International............... 9,297 3,518
Competitor DBS Receivers..................... 9,404 --
Spare parts.................................. 2,089 2,199
Reserve for excess and obsolete inventory.... (2,797) (4,772)
------- -------
$38,769 $44,246
------- -------
------- -------
SUBSCRIBER ACQUISITION COSTS
To attract subscribers to the DISH Network-SM-, EchoStar has
sponsored certain sales promotions through EchoStar's various distribution
outlets. EchoStar effectively allows consumers to buy Currently, EchoStar has
chosen to reduce the retail price of EchoStar's proprietary DBS reception
equipment at less than cost if they when consumers subscribe to and prepay
for DISH Network-SM- programming service for a minimum of one year.
Transaction proceeds to EchoStar applicable to the DISH Network-SM-
programming (a minimum of $300 per subscriber) are deferred and recognized as
revenue over the period of service. The remaining transaction proceeds are
recognized as equipment revenue on shipment and an equal amount is charged to
expense. EchoStar's investment in each subscriber is equal to the cost of the
equipment, less any remaining non-programming transaction proceeds to
EchoStar, measures EchoStar's investment in each new subscriber EchoStar.
This amount is deferred and is being amortized over a one year period, which
is equal to the length of the programming package available under the
EchoStar Promotion. As EchoStar's DISH Network-SM- subscriber base matures
and EchoStar develops a history of renewal rates, this amortization period
may be adjusted to reflect the expected average minimum life of a subscriber.
Amortization of subscriber acquisition costs for the three and nine months
ended September 30, 1996 was approximately $3.3 million and $3.4 million,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Cost includes interest capitalized on the EchoStar DBS System
during construction at EchoStar's effective borrowing rate. The major
components of property and equipment were as follows (in thousands).
9
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ESTIMATED
USEFUL LIFE DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
----------- ------------ -------------
Construction in progress................ -- $303,174 $281,353
EchoStar I satellite.................... 12 -- 201,607
Furniture, fixtures and equipment....... 2-12 35,127 65,320
Buildings and improvements.............. 7-40 21,006 25,729
Tooling and other....................... 2 2,039 4,382
Land.................................... -- 1,613 2,295
Vehicles................................ 7 1,310 1,324
-------- --------
Total property and equipment.......... 364,269 582,010
Less-Accumulated depreciation....... (10,269) (26,767)
-------- --------
Net property and equipment.......... $354,000 $555,243
-------- --------
-------- --------
Construction in progress includes capitalized costs related to the
construction, insurance and launch of EchoStar II, which was launched in
September 1996 and became fully operational in November 1996 and EchoStar IV,
which is currently scheduled for launch prior to the end of 1998. Construction
in progress for EchoStar III includes costs related to that launch, which is
scheduled prior to the end of 1997. Construction in progress consisted of the
following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Progress amounts for satellite construction, launch, launch
insurance, capitalized interest, launch and in-orbit
tracking, telemetry and control services:
EchoStar I.................................................... $193,629 $ --
EchoStar II................................................... 88,634 225,948
EchoStar III.................................................. 20,801 28,168
EchoStar IV................................................... -- 27,237
Other........................................................... 110 --
-------- --------
$303,174 $281,353
-------- --------
-------- --------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Long-term notes receivable from DBSC and accrued interest............. $16,000 $ 38,220
Deferred tax assets, net.............................................. 12,109 37,036
FCC authorizations, net of amortization............................... 11,309 15,994
ESBC Notes deferred debt issuance costs, net of amortization.......... -- 12,240
Deposit on FCC authorization.......................................... -- 11,459
Dish Notes deferred debt issuance costs, net of amortization.......... 10,622 9,692
SSET convertible subordinated debentures and accrued interest......... 9,610 4,776
Investment in DBSC.................................................... 4,111 4,049
DBSI convertible subordinated debentures.............................. 1,000 4,000
Other, net............................................................ 897 1,005
------- --------
$65,658 $138,471
------- --------
------- --------
10
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of September 30, 1996, EchoStar owned approximately 40% of the
outstanding common stock of Direct Broadcasting Satellite Corporation, a
Delaware Corporation ("DBSC"). DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5DEG. WL and eleven DBS frequencies at 175DEG.
WL (the "DBS Rights"). EchoStar intends to merge DBSC with Direct Broadcasting
Satellite Corporation, a Colorado Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). As a result of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. The DBSC Merger has
been approved by a majority of DBSC's shareholders and the FCC. EchoStar is in
the process of registering shares of its Class A Common Stock which are expected
to be issued in connection with the DBSC Merger. On October 25, 1996, EchoStar
filed Amendment No. 3 to a Registration Statement on Form S-4 under the
Securities Act covering 658,000 shares of EchoStar Class A Common Stock.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization begins at the time the related satellite
becomes operational, or capitalized costs are written off at the time efforts to
provide services are abandoned. FCC authorization costs are amortized over 12
years, the expected useful life of the related satellite. The deposit on FCC
authorization represents a deposit paid by EchoStar to the FCC in January 1996,
for the 148 Frequencies plus capitalized interest thereon. The balance of $41.8
million due the FCC for the purchase of the frequencies will be drawn from the
ESBC Escrow Account, and is payable to the FCC five days after EchoStar receives
FCC approval for use of the orbital slot, which is expected to occur in the
fourth quarter of 1996.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists principally of prepayments
received from subscribers to the DISH Network-SM- which are recognized in the
period the related multi-month subscriptions to DISH Network-SM- programming
which are recognized as revenue in the period the programming is provided.
EchoStar likewise similarly defers prepayments received from subscribers to
C-band programming sold by EchoStar as an authorized distributor.
EchoStar also receives advance payments from certain programming
providers for carriage on the DISH Network-SM- which are deferred and recognized
as revenue on a straight-line basis over the contract term.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying
income statements includes: (i) amortization of original issue discount on
the Dish Notes and the ESBC Notes; (ii) interest expense on contractor
financing of EchoStar I; (iii) interest expense on corporate mortgage
indebtedness; and (iv) discounts on accounts receivable for EchoStar Receiver
Systems and DISH Network-SM- programming which have been sold without credit
recourse to third party financing groups.
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average
number of shares of common stock issued and outstanding. Common stock
equivalents (warrants and employee stock options) were excluded for the three
and nine months ended September 30, 1995 and 1996 because they were not dilutive
to loss per share amounts. Net loss has been adjusted for cumulative dividends
on the 8% Series A Cumulative Preferred Stock.
(3) LONG-TERM DEBT
DISH NOTES
During June 1994, Dish, Ltd. completed the Dish Notes Offering of
624,000 units consisting of $624.0 million aggregate principal amount of the
Dish Notes and 3,744,000 Warrants. The Dish Notes Offering resulted in net
11
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
proceeds to Dish, Ltd. of approximately $323.3 million. Substantially all of
the Warrants issued in connection with the Dish Notes Offering have been
exercised. Interest on the Dish Notes currently is not payable in cash but
accrues through June 1, 1999, with the Dish Notes accreting to $624.0 million
by that date. Thereafter, interest on the Dish Notes will be payable in cash
semi-annually on June 1 and December 1 of each year, commencing December 1,
1999. At September 30, 1996, the Dish Notes were reflected in the
accompanying financial statements at $422.8 million, net of unamortized
discount of $201.2 million.
ESBC NOTES
During March 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount of the ESBC Notes. The ESBC Notes
Offering resulted in net proceeds to ESBC of approximately $337.0 million.
Interest on the ESBC Notes currently is not payable in cash but accrues through
March 15, 2000, with the ESBC Notes accreting to $580.0 million by that date.
Thereafter, interest on the ESBC Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At
September 30, 1996, the ESBC Notes were reflected in the accompanying financial
statements at $372.6 million, net of unamortized discount of $207.4 million.
(4) BANK CREDIT FACILITY
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
exceptDish, Ltd., other than EchoStar Satellite Corporation (the "Borrowers"),
were parties to an agreement with Bank of America Illinois, which provided a
revolving credit facility (the "Credit Facility") for working capital advances
and for letters of credit necessary for inventory purchases and satellite
construction payments. The Credit Facility expired in May 1996 and EchoStar does
not currently intend to arrange a replacement credit facility.
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1995 1996 1995 1996
-------- -------- -------- -------
Current (provision) benefit
Federal........................ $ (939) $ (262) $(2,551) $ 4,204
State.......................... (215) (668) (586) 298
Foreign........................ (216) (67) (667) (187)
------- ------- ------- -------
(1,370) (997) (3,804) 4,315
------- ------- ------- -------
Deferred benefit
Federal........................ 1,594 12,691 5,410 23,792
State.......................... 291 1,256 1,099 1,689
------- ------- ------- -------
1,885 13,947 6,509 25,481
------- ------- ------- -------
Total benefit................ $ 515 $12,950 $ 2,705 $29,796
------- ------- ------- -------
------- ------- ------- -------
EchoStar's deferred tax assets (approximately $39.5 million at September
30, 1996) relate principally to temporary differences for amortization of
original issue discount on the Dish Notes and ESBC Notes, net operating loss
carryforwards, temporary differences for depreciation of property and equipment
and various accrued expenses which are not deductible until paid. No valuation
allowance has been provided because EchoStar currently believes it is more
likely than not that these deferred tax assets will ultimately be realized. If
future operating results differ materially and adversely from EchoStar's current
expectations, its judgment regarding the need for a valuation allowance may
change.
12
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Lockheed Martin Corporation ("Martin") for
the construction and delivery of high powered DBS satellites and for related
services. Martin constructed both EchoStar I and EchoStar II and is in the
construction phase on EchoStar III and EchoStar IV. The construction contract
for EchoStar III contains a provision whereby, beginning August 1, 1997,
includes a PER DIEM penalty of $3,333, to a maximum of $100,000, is payable
if EchoStar III is not delivered by July 31, 1997. Beginning September 1,
1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in
the aggregate. The contract for EchoStar IV contains a provision whereby,
beginning February 16, 1998, includes a PER DIEM penalty of $50,000, to a
maximum of $5.0 million in the aggregate, is payable if EchoStar IV is not
delivered by February 15, 1998. The contract also contains a provision
whereby Martin is entitled to an early delivery incentive payment of $50,000
for each day before February 15, 1998 the satellite is delivered to the
launch site of Baikonur, Kazakhstan, up to a maximum of $5.0 million in the
aggregate. This contract also contains an option provision which allows
EchoStar to commence the construction phase of a fifth DBS satellite
("EchoStar V").
EchoStar is utilizing $28.0 million of contractor financing for EchoStar
II. The contractor financing for EchoStar II bears interest at 8.25% and is
payable in equal monthly principal and interest installments are due over five
years following launch. Contractor financing of $15.0 million each will be used
for EchoStar III and EchoStar IV. Interest on the contractor financing for
EchoStar III and EchoStar IV will range between 7.75% and 8.25% and principal
and interest payments are, with equal monthly installments due over five years
following the launch of the respective satellite.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining costprice is payable in installments in accordance with the
payment schedule set forth in the Lockheed Contract, which requires that
substantially all payments be made to Lockheed prior to the launch.
In July 1996, EchoStar and Martin amended the contracts for the
construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar issued a corporate
guarantee covering all obligations to Martin with respect to the contractor
financing for EchoStar I and EchoStar II. In consideration for the receipt of
the corporate guarantee by EchoStar, Martin has agreed to eliminate the letter
of credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debt and the market value of EchoStar's Class A Common Stock. This
transaction has been approved by EchoStar's board of directors with EchoStar's
principal stockholder abstaining from the vote. Additionally, EchoStar will
issue a corporate guarantee covering all obligations to Martin with respect to
the contractor financing for EchoStar III and EchoStar IV.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic,
a territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
In connection with the satellite contracts discussed above and other
related commitments, in the fourth quarter of 1996 EchoStar expects to expend:
(i) approximately $3.9 million for contractor financing on EchoStar I and
EchoStar II; (ii) approximately $19.0 million in connection with the launch of
EchoStar III; (iii) approximately $37.0 million for construction of EchoStar III
and EchoStar IV; and (iv) approximately $41.8 million for the purchase of the
148 Frequencies. Funds for these expenditures are expected to come from the ESBC
Notes Escrow Account and available cash and marketable investment securities.
Beyond 1996, EchoStar will expend approximately $68.7 million
13
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
on contractor financing debt related to EchoStar I and EchoStar II.
Additionally, EchoStar has committed to expend approximately an additional
$260 million to build, launch and support EchoStar III and EchoStar IV in
1997 and beyond. In order to continue to build, launch and support EchoStar
III and EchoStar IV beyond the first quarter of 1997, EchoStar will need
additional capital. Even if EchoStar terminates the construction contracts
with Martin for the construction of EchoStar III and EchoStar IV, EchoStar
will still need additional capital as a result of termination penalties
contained in the contracts. There can be no assurances that additional
capital will be available, or, if available, that it will be available on
terms favorable to EchoStar.
PURCHASE COMMITMENTS
EchoStar has entered into agreements with various manufacturers to purchase
DBS receivers and related components manufactured based on EchoStar's supplied
specifications. As of September 30, 1996 the remaining commitments total
approximately $148.7 million. As described previously, EchoStar has agreements
with two manufacturers to supply DBS receivers for EchoStar. Only one of the
manufacturers has produced a receiver acceptable to EchoStar. Since EchoStar has
given the non-performing manufacturer notice of its intent to terminate the
contract and has filed suit against that manufacturer, EchoStar has not included
amounts due under the contract in EchoStar's purchase commitments. At September
30, 1996, the total of all outstanding purchase order commitments with domestic
and foreign suppliers was approximately $150.0 million. All but approximately
$19.2 million of the purchases related to these commitments are expected to be
made during 1996 and the remainder are expected to be made during 1997.
EchoStar expects to finance these purchases from available cash, marketable
investment securities and sales of its DISH Network-SM- programming.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to 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 EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the ESBC Notes
Indenture), the ESBC Notes will be guaranteed by Dish, Ltd., which guarantee
will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd. On and
after the date upon which the DBSC Merger is consummated, the ESBC Notes will be
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $277,000 and $134,000 as of December 31, 1995 and September 30,
1996, respectively. Summarized consolidated financial information for Dish, Ltd.
is as follows (in thousands).
14
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1995 1996 1995 1996
---- ---- ----- ----
Income Statement Data --
Revenue ........................................ $43,606 $ 55,507 $123,271 $165,887
Expenses ....................................... 43,265 77,069 122,860 214,010
------- -------- -------- --------
Operating income (loss) ........................ 341 (21,562) 411 (48,123)
Other income (expense), net .................... (2,111) (7,970) (8,440) (19,846)
------- -------- -------- --------
Net loss before income taxes ................... (1,770) (29,532) (8,029) (67,969)
Benefit for income taxes ....................... 854 11,391 3,060 25,340
------- -------- -------- --------
Net loss ................................... $ (916) $(18,141) $ (4,969) $(42,629)
------- -------- -------- --------
------- -------- -------- --------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Balance Sheet Data --
Current assets ......................................... $ 81,858 $146,940
Property and equipment, net ............................ 333,199 495,055
Other noncurrent assets ................................ 144,238 102,359
-------- --------
Total assets ....................................... $559,295 $744,354
-------- --------
-------- --------
Current liabilities .................................... $ 50,743 $210,509
Long-term liabilities .................................. 415,662 483,846
Stockholder's equity ................................... 92,890 49,999
-------- --------
Total liabilities and stockholder's equity ......... $559,295 $744,354
-------- --------
-------- --------
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
EchoStar currently operates four related businesses: (i) operation of the
DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of DTH products worldwide; (iii)
domestic distribution of DTH programming; and (iv) consumer financing of
EchoStar's domestic products and services. During March 1996 EchoStar began
broadcasting and selling programming packages available from the DISH
Network-SM-. EchoStar expects to derive its future revenue principally from
fees from subscribers toperiodic subscription fees for DISH Network-SM-
programming and, to a lesser extent, from the sale of equipment. The growth
of DBS service and equipment sales has had and will continue to have a
material negative impact on EchoStar's domestic sales of C-band DTH products;
however this negative impact has been more than offset for the nine months
ended September 30, 1996 by sales of EchoStar Receiver Systems. As sales of
EchoStar DBS programming and receivers increase, EchoStar expects the decline
in its sales of domestic C-band DTH products to continue at an accelerated
rate.
EchoStar generally bills for DISH Network-SM- programming periodically in
advance and recognizes revenue as service is provided. Revenue from the DISH
Network-SM- is a function of the number of subscribers,DISH Network-SM- revenue
is a function of: (i) the number of subscribers; (ii) the mix of programming
packages selected by subscribers and the rates charged subscribers, transaction
fees for; (iii) the rates charged subscribers; (iv) revenue from ancillary
programming activities (such as Pay-Per-View) and; and (v) revenue from
satellite usage time agreements. DBS programming costs are generally based
upon the number of subscribers to each programming offering; however, certain
programmers pay EchoStar for carriage of their signals. In August 1996,
EchoStar introduced. Since August 1996, EchoStar has introduced several
marketing promotions, the most significant of which is a nationwide marketing
promotion (the "EchoStar Promotion") which offers a standard EchoStar
Receiver System to consumers for $199 (as compared to the original average
retail price in March 1996 of approximately $499), conditioned upon the
consumer's prepaid purchase of one year of America's Top 40 CD-SM-
programming package (America's Top 50 CD-SM- programming package effective
November 1, 1996) for approximately $300. The EchoStar Promotion has
significantly increased the affordability of EchoStar Receiver Systems for
consumers. The primary purposes of the EchoStar Promotion are to rapidly
build a subscriber base, to expand retail distribution of EchoStar's products
and to build consumer awareness of the DISH Network-SM- brand. This promotion
is consistent with and emphasizes EchoStar's long-term business strategy
which focuses on generating the majority of its future revenue through sales
of DISH Network-SM- programming to a substantial subscriber base. The
EchoStar Promotion has successfully accelerated the development of EchoStar's
DBS subscriber base. The EchoStar Promotion requires significant investment
by EchoStar to acquire subscribers, EchoStar believes the investment is fully
recoverable from the DBS programming revenues expected to be generated.
EchoStar receivers process only DISH Network-SM- signals because of the
proprietary encryption technology employed. Further, because of high consumer
satisfaction ratings, EchoStar anticipates very high service renewal rates,
resulting in minimum subscriber lives of at Consequently, the satellite
receivers and other reception equipment can not be utilized with competitors'
DBS systems, and unlike the cellular phone industry, subscribers can not
seamlessly migrate to alternative DBS providers. Further, based on high DBS
industry consumer satisfaction ratings, initial feedback from consumers and
dealers and low EchoStar subscriber turnover rates, EchoStar anticipates high
service renewal rates. As a result, EchoStar believes it will be able to
recover its average investment per subscriber over a period of less than
three years. However, as renewal data least three years. Initially,
however for subscribers to the DISH Network-SM- is not yet available, among
other things, EchoStar has elected to amortize its subscriber acquisition
costs over a one year period, which. This amortization period is equal to the
term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. In addition, EchoStar's
experience to date is that a majority of subscribers buy additional majority
of DISH Network-SM- subscribers have purchased premium and Pay-Per-View
programming for incremental amounts above the prepaid minimum required by
the EchoStar Promotion, which reduces the time necessary to recover the
average investment per subscriber. EchoStar's present marketing strategy is
based on current and anticipated competitive conditions which may change, and
such changes could be adverse to EchoStar. Future changes in marketing
strategy may include additional promotions, including promotions geared
toward further increasing the affordability of EchoStar Receiver Systems and
related accessories, which, among other things, which could increase
EchoStar's investment in its subscriber base.
16
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
REVENUE. Total revenue for the three and nine months ended September 30,
1996 was $57.0 million and $172.0 million, respectively, an increase of $13.4
million, or 31%, and $48.8 million, or 40%, respectively, as compared to total
revenue for the three and nine months ended September 30, 1995 of $43.6 million
and $123.3 million, respectively. Revenue from domestic sales of DTH products
for the three and nine months ended September 30, 1996 was $29.1 million and
$104.0 million, respectively, an increase of $3.3 million, or 13%, and $38.3
million, or 58%, respectively, as compared to the same periods in 1995. The
increase in domestic revenue was primarily due to $22.3 million and $74.0
million in revenue from the sale of EchoStar Receiver Systems during the three
and nine months ended September 30, 1996, respectively. There were no EchoStar
Receiver System sales during the comparable periods in 1995. The increases in
domestic revenue were offset by a decrease of $5.7 million, or 48%, and $14.1
million, or 44%, in revenue from sales of C-band satellite receivers and related
accessories, during the three and nine months ended September 30, 1996,
respectively, as compared to the same periods in 1995. Additionally, domestic
revenue generated from satellite receivers sold for a competitor's DBS system
("Competitor DBS Receivers") decreased approximately $10.2 million, or 100%, and
$15.0 million, or 65%, for the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995. There was no revenue and
$8.0 million of revenue from Competitor DBS Receiver sales for the three and
nine months ended September 30, 1996, respectively, as compared to $10.2 million
and $23.0 million for the same periods in 1995. The increases in domestic
revenue were also partially offset by a decrease of $3.0 million, or 82%, and
$6.6 million, or 63%, in revenue from sales of non-proprietary descrambler
modules, during the three and nine months ended September 30, 1996, as compared
to the same periods in 1995. The domestic market for C-band DTH products
continued to decline during the three and nine months ended September 30, 1996,
and this decline will continue to accelerate with the growth of DBS service and
equipment sales. Consistent with the increases in revenue noted above, EchoStar
has experienced a corresponding increase in trade accounts receivable at
September 30, 1996, and expects this trend to continue as EchoStar develops
additional channels of equipment distribution.
Domestically, EchoStar sold approximately 160,000 and 315,000 satellite
receivers in the three and nine months ended September 30, 1996, respectively,
an increase of 321% and 246%, respectively, as compared to approximately 38,000
and 91,000 satellite receivers, respectively, for the same periods in 1995. Of
the total number of satellite receivers sold for the three and nine months ended
September 30, 1996, approximately 154,000 and 274,000, respectively, were
EchoStar Receiver Systems. EchoStar Receiver System revenue represented
approximately 39% and 43%, respectively, of total revenue for the three and nine
months ended September 30, 1996. Although there was a significant increase in
the number of satellite receivers sold in 1996 as compared to 1995, overall
revenue did not increase proportionately as a result of the revenue recognition
policy being applied to satellite receivers sold under the EchoStar Promotion
combined with an approximate 26% reduction in the average selling price of C-
band satellite receivers. During the promotional period, EchoStar is recognizing
substantially less DTH product revenue and expense related to EchoStar Receiver
Systems sold pursuant to the EchoStar Promotion. Currently, EchoStar has chosen
to reduce the retail price of EchoStar's proprietary DBS reception equipment
at less than cost if they when consumers subscribe to and prepay for DISH
Network-SM- programming service for a minimum of one year. Transaction
proceeds to EchoStar applicable to the DISH Network-SM- programming (a
minimum of $300 per subscriber) are deferred and recognized as revenue over
the period of service. The remaining transaction proceeds are recognized as
equipment revenue on shipment and an equal amount is charged to expense.
EchoStar's investment in each subscriber is equal to the cost of the
equipment, less any remaining non-programming transaction proceeds to
EchoStar, measures EchoStar's investment in each new subscriber. This amount
is deferred and is being amortized over a one year period, which is equal to
the term of the prepaid programming package under the EchoStar Promotion. As
EchoStar's DISH Network-SM- subscriber base matures and EchoStar develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. This promotion is
consistent with and emphasizes EchoStar's long-term business strategy which
focuses on generating the majority of its future revenue through sales of
DISH Network-SM- programming to a substantial subscriber base.
Also included in the number of satellite receivers sold for the nine months
ended September 30, 1996 are approximately 19,000 Competitor DBS Receivers as
compared to 40,000, for the same period in 1995. During the nine months ended
September 30, 1996, the Competitor DBS Receivers were sold at an approximate 25%
reduction in the average selling price as compared to the nine months ended
September 30, 1995. Competitor DBS Receiver revenue represented approximately 5%
of total revenue for the nine months ended September 30, 1996. EchoStar's
agreement to
17
distribute Competitor DBS Receiver systems terminated on December 31, 1995
and during the first half of 1996, EchoStar sold all of its remaining
inventory of Competitor DBS Receivers. The elimination of Competitor DBS
Receiver inventory has been more than offset by a substantial increase in
inventory of EchoStar Receiver Systems and related components, the sale of
which has more than offset the elimination of revenue derived from the sale
of Competitor DBS Receivers.
DISH Network-SM- programming revenue was $15.3 million and $21.3 million
for the three and nine months ended September 30, 1996, respectively. Since
EchoStar did not begin broadcasting and selling programming packages
available on the DISH Network-SM- service until March 1996, there was no DISH
Network-SM- programming revenue generated during the comparable periods in
1995. DISH Network-SM- programming revenue represented 27% and 12% of total
revenue for the three and nine months ended September 30, 1996, respectively.
In future periods, EchoStar expects these percentages to continue to increase
as EchoStar expands its DISH Network-SM- subscriber base. EchoStar had
approximately 190,000 and 250,000 subscribers to DISH Network-SM- programming
as of September 30, 1996 and November 11, 1996, respectively.
C-band programming revenue was $2.9 million and $9.5 million for the three
and nine months ended September 30, 1996, respectively, a decrease of $906,000,
or 24%, and $2.0 million, or 17%, compared to the same periods in 1995. The
decrease is attributable to the industry-wide decline in domestic C-band
equipment sales and the related decline in domestic C-band programming revenue.
This decline in C-band equipment sales and the related programming revenue is
expected to continue and accelerate for the foreseeable future. The decline in
C-band DTH programming revenue in 1996 has been more than offset by sales of
DISH Network-SM- programming.
Loan origination and participation income for the three and nine months
ended September 30, 1996 was $1.7 million and $6.8 million, respectively, an
increase of $1.3 million, or 288%, and $5.5 million, or 434%, respectively,
compared to the same periods in 1995. The increase in loan origination and
participation income for the three and nine months ended September 30, 1996 was
primarily due to increased financed volume, including the financing of EchoStar
Receiver Systems.
Revenue from international sales of DTH products for the three and nine
months ended September 30, 1996 was $8.0 million and $30.3 million,
respectively, a decrease of $5.5 million, or 41%, and $14.5 million, or 32%,
respectively, as compared to the same periods in 1995. The decrease is directly
attributable to a decrease in the number of analog satellite receivers sold
combined with decreasing margins on products sold. Internationally, EchoStar
sold approximately 53,000 and 180,000 analog satellite receivers during the
three and nine months ended September 30, 1996, a decrease of 34% and 31%,
respectively, compared to approximately 80,000 and 261,000 units sold during the
same periods in 1995. Overall, EchoStar's international markets for analog DTH
products declined during the three and nine months ended September 30, 1996 as
anticipation for new international digital services continuesd to increase. This
international decline in demand for analog satellite receivers is similar to the
decline which has occurred in the United States and was expected by EchoStar. To
offset this anticipated decline in demand for analog satellite receivers,
EchoStar has been negotiating with digital service providers to distribute their
proprietary receivers in EchoStar's international markets. While EchoStar is
actively pursuing these distribution opportunities, no assurance can be given
that such negotiations will be successful.
OPERATING EXPENSES. Costs of DTH products sold were $35.3 million and
$125.5 million for the three and nine months ended September 30, 1996,
respectively, an increase of $4.5 million, or 14%, and $37.9 million, or 43%,
respectively, as compared to the same periods in 1995. The increase in DTH
operating expenses for 1996 resulted primarily from the increase in sales of
EchoStar Receiver Systems. Operating expenses for DTH products as a percentage
of DTH product revenue were 95% and 93% for the three and nine months ended
September 30, 1996, respectively, compared to 78% and 79% for the same periods
in 1995, respectively. This increase is principally attributable to the
accounting treatment applied to satellite receivers sold under the EchoStar
Promotion combined with an approximate 26% reduction in the average worldwide
selling price of C-band satellite receivers and a 25% reduction in the average
selling price of Competitor DBS Receivers, as described above.
The costs of DISH Network-SM- programming were $6.1 million and $7.9
million for the three and nine months ended September 30, 1996, respectively.
Since EchoStar did not begin broadcasting and selling DISH Network-SM-
programming packages until March 4, 1996, there were no DISH Network-SM-
programming expenses incurred during the comparable periods in 1995.
18
The costs of C-band programming were $2.6 million and $8.6 million for the
three and nine months ended September 30, 1996, respectively, a decrease of
$900,000, or 26%, and $1.7 million, or 16%, respectively, as compared to the
same periods in 1995. This decrease is mainly attributable to the decrease in C-
band programming revenue. C-band programming expenses as a percentage of C-band
programming revenue for the three and nine months ended September 30, 1996 were
89% and 91%, respectively, as compared to 92% and 90%, respectively for each of
the same periods in 1995. Although there was a decrease in C-band programming
revenue, gross profit margins earned on C-band programming remained relatively
consistent. As previously discussed, the domestic market for C-band DTH
products has continued to decline with the growth of DBS service and equipment
sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23.7 million and $53.6 million for the three and
nine months ended September 30, 1996, respectively, an increase of $15.5
million, or 187%, and $30.1 million, or 128%, respectively, as compared to the
same periods in 1995. Selling, general and administrative expenses as a
percentage of total revenue increased to 42% and 31%, respectively, for the
three and nine months ended September 30, 1996, as compared to 19% for each of
the same periods in 1995. This increase was principally due to: (i) increased
personnel in all areas of the organization to support the DISH Network-SM-;
(ii) marketing and advertising prior to and in conjunction with the
introduction of DISH Network-SM- service (iii) costs related to the Digital
Broadcast Center, which commenced operations in the third quarter of 1995;
and (iv) costs associated with operation of the DISH Network-SM- Call Center
and related services which have been out-sourceds and subscription management
related services. In future periods, EchoStar believes that although total
selling, general and administrative expenses will continue to increase, the
increase as a percentage of future revenue will decrease as subscribers are
added and additional revenue from sales of DISH Network-SM- programming is
recognized.
Research and development costs totaled $1.6 million and $4.2 million for
the three and nine months ended September 30, 1996, respectively, as compared to
$1.5 million and $4.0 million for the same periods in 1995. The increase was
principally due to research and development costs related to digital DBS
receivers for domestic and international markets, principally offset by a
reduction in research related to C-band receivers for domestic and international
markets. EchoStar expenses research and development costs as incurred and
includes these costs in selling, general and administrative expenses.
EBITDA. As expected, EchoStar incurred operating losses for the three and
nine months ended September 30, 1996. EBITDA for the three and nine months ended
September 30, 1996 was a negative $10.6 million and a negative $23.6 million,
respectively, a decrease of $11.7 million and $25.5 million, respectively,
compared to the same periods in 1995. The decrease resulted from the factors
affecting revenue and expenses discussed above. EBITDA represents earnings
before interest income, interest expense net of other income, income taxes,
depreciation and amortization. EBITDA is commonly used in the telecommunications
industry to analyze companies on the basis of operating performance, leverage
and liquidity. EBITDA is not intended to represent cash flows for the period,
nor has it been presented as an alternative to operating income as an indicator
of operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. EchoStar expects to continue to report operating
losses through at least 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the three
and nine months ended September 30, 1996 was $10.3 million and $20.0 million,
respectively, an increase of $9.5 million and $18.5 million, respectively, as
compared to the same periods in 1995. The overall increase primarily resulted
from depreciation on EchoStar I and the Digital Broadcast Center which were
placed in service during the first quarter of 1996 and the fourth quarter of
1995, respectively, and the amortization of subscriber acquisition costs.
Amortization of subscriber acquisition costs for the three and nine months ended
September 30, 1996 was approximately $3.3 million and $3.4 million,
respectively. As a result of the EchoStar Promotion, in future periods,
amortization expense will be of a magnitude which significantly exceeds
historical levels.
OTHER INCOME AND EXPENSE. Other expense, net for the three and nine months
ended September 30, 1996 was $14.6 million and $38.5 million, respectively, an
increase of $13.4 million and $31.0 million, respectively, as compared to the
same periods in 1995. The increase in other expense for the three and nine month
periods ending September 30, 1996 resulted primarily from an increase in
interest expense resulting from the issuance of the ESBC Notes. The increase has
been partially offset by an increase in interest income attributable to
increases in the balances of the ESBC Escrow Account, cash and marketable
investment securities accounts as a result of proceeds received from the
issuance of the ESBC Notes.
INCOME TAX BENEFIT. Income tax benefit for the three and nine months ended
September 30, 1996 was $13.0 million and $29.8 million, respectively, compared
to income tax benefit of $515,000 and $2.7 million during the same
19
periods in 1995. This increase is principally the result of changes in
components of income and expenses discussed above during the three and nine
months ended September 30, 1996. EchoStar's deferred tax assets
(approximately $39.5 million at September 30, 1996) relate principally to
temporary differences for amortization of original issue discount on the Dish
Notes and ESBC Notes, net operating loss carryforwards and various accrued
expenses which are not deductible until paid. No valuation allowance has been
provided because EchoStar currently believes it is more likely than not that
these deferred tax assets will ultimately be realized. If future operating
results differ materially and adversely from EchoStar's current expectations,
its judgment regarding the need for a valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled approximately $38.5 million for the
nine months ended September 30, 1996, as compared to $10.3 million used by
operations for the same period in 1995. The cash provided by operations for
the nine months ended September 30, 1996 was mainly a result of an increase
in deferred programming revenue related to the EchoStar Promotion, partially
offset by increases in accounts receivable, inventory and other current
assets. The cash provided by operations was invested in subscriber
acquisition costs.
From May 1994 to May 1996, the principal subsidiaries of Dish, Ltd., except
EchoStar Satellite Corporation ("ESC") (the "Borrowers"), were parties to an
agreement with Bank of America Illinois, which provided a revolving credit
facility (the "Credit Facility") for working capital advances and for letters of
credit necessary for inventory purchases and satellite construction payments.
EchoStar does not currently intend to arrange a replacement credit facility.
During June 1994, EchoStar issued 624,000 units consisting of $624.0
million principal amount of the Dish Notes and 3,744,000 Warrants (representing
2,808,000 shares of EchoStar Class A Common Stock) for aggregate net proceeds of
approximately $323.3 million, which were placed in the Dish Notes Escrow
Account. As of September 30, 1996, substantially all of the Warrants issued in
connection with the Dish Notes Offering had been exercised. Through September
30, 1996, $353.6 million had been withdrawn from the Dish Notes Escrow Account.
At September 30, 1996, approximately $328.7 million of these proceeds had been
applied to development and construction of the EchoStar DBS System and
approximately $24.9 million had been applied to other permitted uses. During
the third quarter of 1996, all remaining funds were disbursed from the Dish
Notes Escrow Account.
In March 1996, ESBC consummated a private placement of the ESBC Notes which
were subsequently registered with the Securities and Exchange Commission. ESBC
was formed in January 1996 for the purpose of the ESBC Notes Offering. In
connection with the ESBC Notes Offering, EchoStar has contributed all of the
outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to ESBC.
ESBC issued $580.0 million principal amount of the ESBC Notes for aggregate net
proceeds of approximately $337.0 million of which $177.3 million was placed in
the ESBC Notes Escrow Account and the remaining $159.7 million was placed in
cash and cash equivalents or marketable investment securities. Through September
30, 1996, $46.3 million had been withdrawn from the ESBC Notes Escrow Account
for development and construction of EchoStar III and EchoStar IV. As of
September 30, 1996, approximately $135.4 million remained in the ESBC Escrow
Account, which included investment earnings. Subsequent to September 30, 1996,
an additional $25.5 million has been withdrawn from the ESBC Notes Escrow
Account. Total cash on hand and marketable investment securities at September
30, 1996 were approximately $73.2 million. EchoStar guarantees the ESBC Notes on
a subordinated basis.
EchoStar's Equity Offering in June 1995 resulted in net proceeds of
approximately $63.0 million. EchoStar's assets at September 30, 1996 included
assets purchased with those proceeds. Substantially all of the proceeds from the
Equity Offering were used: (i) to secure launches for EchoStar III and EchoStar
IV; (ii) to support, through loans to DBSC, construction of EchoStar III; (iii)
to purchase, for $4.0 million, convertible subordinated secured debentures from
DBS Industries, Inc.; and (iv) for general corporate purposes, including the
down payment for the 148 Frequencies purchased at the FCC Auction in January
1996, which will be reimbursed with the proceeds of the ESBC Notes Offering at
the time the final payment for the frequencies is made to the FCC.
EchoStar anticipates expending an additional $35 million in working capital
during the fourth quarter of 1996, including investment in subscriber
acquisition costs. This cash requirement could increase if any of the following
occur, among other things: (i) subscriptions to DISH Network-SM- programming
differ from anticipated levels; (ii) actual expenses exceed present estimates;
or (iii) investment in subscriber acquisition costs continue to increase beyond
planned levels. In addition to the working capital requirements discussed above,
during the fourth quarter of 1996,
20
EchoStar expects to expend: (i) approximately $3.9 million for contractor
financing on EchoStar I and EchoStar II; (ii) approximately $19.0 million in
connection with the launch of EchoStar III; (iii) approximately $37.0 million
for construction of EchoStar III and EchoStar IV; and (iv) approximately
$41.8 million for the purchase of the 148 Frequencies. Funds for these
expenditures are expected to come from the ESBC Notes Escrow Account and
available cash and marketable investment securities. Beyond 1996, EchoStar
will expend approximately $68.7 million to repay contractor financing debt
related to EchoStar I and EchoStar II. Additionally, EchoStar has committed
to expend approximately an additional $260 million to build, launch and
support EchoStar III and EchoStar IV in 1997 and beyond. In order to continue
to build, launch and support EchoStar III and EchoStar IV beyond the first
quarter of 1997, EchoStar will need additional capital. Even if EchoStar
terminates the construction contracts with Martin for the construction of
EchoStar III and EchoStar IV, EchoStar will still need additional capital as
a result of termination penalties contained in the contracts. There can be no
assurances that additional capital will be available, or, if available, that
it will be available on terms favorable to EchoStar.
As a result of the factors discussed above, EchoStar will need to raise
additional capital to complete the construction and launch of EchoStar III and
EchoStar IV. There can be no assurance that necessary funds will be available
or, if available, that they will be available on terms favorable to EchoStar. In
anticipation of its future capital requirements and in order to fully implement
its business strategy, EchoStar regularly examines, and is currently examining,
opportunities to expand its DBS business, technology base and product lines
through means such as licenses, joint ventures, strategic alliances, strategic
investments and acquisitions of assets or ongoing businesses. Currently,
EchoStar has not made a commitment to any new strategic transaction. At any
time, however, EchoStar may agree to enter into a new strategic transaction.
Should EchoStar agree to enter into a new strategic transaction, there can be no
assurance as to the terms or timing of the transaction, whether the transaction
will be consummated or whether the transaction would improve EchoStar's
financial condition, results of operations, business or prospects in any
material manner. Further increases in the investment in subscriber acquisition
costs, inadequate supplies of DBS receivers or significant delays or launch
failures would significantly and adversely affect EchoStar's operating results
and financial condition.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar expects
negative stockholders' equity will result before December 31, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the Dish Notes and ESBC Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii)
amortization of subscriber acquisition costs; and (iv) increases in selling,
general and administrative expenses to support the DISH Network-SM-. Although a
negative equity position has significant implications, including, but not
limited to, non-compliance with NASDAQ National Market listing criteria,
EchoStar believes this event will not materially affect the implementation and
execution of its business strategy. When EchoStar ceases to satisfy NASDAQ's
National Market listing criteria, EchoStar's Common Stock will be subject to
being delisted unless an exception is granted by the National Association of
Securities Dealers. If an exception were not granted, trading in EchoStar Common
Stock would thereafter be conducted in the over-the-counter market.
Consequently, it an investor may find itwould be more difficult to dispose of,
or to obtain accurate quotations as to the price of, the EchoStar Common Stock.
Delisting would result in a decline in EchoStar's Common Stock trading market
which could potentially depress stock and bond prices, among other things.
EchoStar has entered into a contract with Martin to begin the construction
phase of EchoStar IV. This contract also allows EchoStar to begin the
construction phase of EchoStar V. Concurrent with execution of this contract,
EchoStar waived all penalties due from Martin for the late delivery of EchoStar
I and EchoStar II.
In July 1996, EchoStar and Martin amended the contracts for the
construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar issued a corporate
guarantee covering all obligations to Martin with respect to the contractor
financing for EchoStar I and EchoStar II. In consideration for the receipt of
the corporate guarantee by EchoStar, Martin has agreed to eliminate the letter
of credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debt and the market value of EchoStar's Class A Common Stock. This
transaction has been approved by EchoStar's board of directors with EchoStar's
principal stockholder abstaining from the vote. Additionally, EchoStar will
issue a corporate guarantee covering all obligations to Martin with respect to
the contractor financing for EchoStar III and EchoStar IV.
21
In addition to the commitments described above, EchoStar has entered into
agreements with various manufacturers to purchase DBS receivers and related
components manufactured based on EchoStar's supplied specifications. As of
September 30, 1996 the remaining commitments total approximately $148.7 million.
As described previously, EchoStar has agreements with two manufacturers to
supply DBS receivers for EchoStar. Only one of the manufacturers has produced a
receiver acceptable to EchoStar. Since EchoStar has given the non-performing
manufacturer notice of its intent to terminate the contract, EchoStar has not
included amounts due under the contract in EchoStar's purchase commitments. At
September 30, 1996, the total of all outstanding purchase order commitments with
domestic and foreign suppliers was approximately $150.0 million. All but
approximately $19.2 million of the purchases related to these commitments are
expected to be made during 1996 and the remainder is expected to be made during
1997. EchoStar expects to finance these purchases from available cash,
marketable investment securities and sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $849.2 million of long-term
debt (including the Dish Notes and ESBC Notes, deferred satellite contract
payments on EchoStar I and EchoStar II and mortgage indebtedness) as of December
31, 1995 and September 30, 1996, respectively. In addition, because interest on
the Dish Notes is not payable currently in cash but accrues through June 1,
1999, the Dish Notes will accrete by $201.2 million through that date.
Similarly, because interest on the ESBC Notes is not payable in cash but accrues
through March 15, 2000, the ESBC Notes will accrete by $207.4 million through
that date. For EchoStar II, EchoStar is utilizing $28.0 million of contractor
financing ror EchoStar II. The financing bears interest at 8.25% and
equal monthly principal and interest installments are due over the next five
years. Contractor financing of $15.0 million will be used for both EchoStar III
and EchoStar IV. Interest on the contractor financing for EchoStar III and
EchoStar IV will range between 7.75% and 8.25%, with equal monthly installments
due over five years following the launch of the respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The Dish Notes and ESBC Notes Indentures impose various restrictions on the
transfer of funds among EchoStar and its subsidiaries. Although the ESBC Notes
are collateralized by the stock of Dish, Ltd., various assets expected to form
an integral part of the EchoStar DBS System (and not otherwise encumbered by the
Dish Notes Indenture), and guarantees of EchoStar and certain of its other
subsidiaries, ESBC's ability to fund interest and principal payments on the ESBC
Notes will depend on successful operation and the acquisition of an adequate
number of subscribers to the DISH Network-SM- and ESBC having access to
available cash flows generated by the DISH Network-SM-, which in turn, will
depend on EchoStar's success in attracting subscribers to the DISH Network-SM-.
If cash available to ESBC is not sufficient to service the ESBC Notes, EchoStar
would be required to obtain cash from other sources such as issuance of equity
securities, new borrowings or asset sales. There can be no assurance that those
alternative sources would be available, or available on favorable terms, or
sufficient to meet debt service requirements on the ESBC Notes.
OTHER
DISH NOTES AND ESBC NOTES
Three DBS orbital locations licensed by the FCC are generally recognized as
capable of providing satellite service to the entire continental United States
("CONUS"). EchoStar has the right to utilize at least 21 DBS frequencies at one
of those CONUS slots. In the event the number of frequencies EchoStar has the
right to use at a CONUS orbital location is reduced to less than 21, then ESBC
will be required to make an offer to repurchase all of the outstanding ESBC
Notes, and Dish, Ltd. will be required to make an offer to repurchase one half
of the outstanding Dish Notes. In the event the number of frequencies EchoStar
has the right to use at a full CONUS orbital location falls below 11, then Dish,
Ltd. will be required to make an offer to repurchase all of the outstanding Dish
Notes, rather than only half. Additionally, in the event that EchoStar DBS
Corporation, a wholly owned subsidiary of EchoStar, fails to obtain
authorization from the FCC for frequencies purchased at the FCC Auction in
January 1996, or in the event that such authorization is revoked or rescinded,
ESBC will be required under the ESBC Notes Indenture to repurchase up to $52.3
million of principal amount of the ESBC Notes.
22
If the DBSC Merger or similar transaction does not occur on or before
March 1, 1997, ESBC will be required to repurchase at least $83.0 million
principal amount of the ESBC Notes. Further, in the event that EchoStar
incurs more than $7.8 million in expenses (as defined in the ESBC Notes
Indenture) in connection with the DBSC Merger, ESBC will be required to apply
an amount equal to such expenses minus $7.8 million to an offer to repurchase
the maximum principal amount of the ESBC Notes that may be purchased out of
such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its current
business plan could not be fully implemented. Further, EchoStar's short-term
liquidity would be adversely affected in the event of: (i) significant delay in
the delivery of certain products and equipment necessary for operation of the
EchoStar DBS System; (ii) shortfalls in estimated levels of future operating
cash flows; or (iii) unanticipated expenses in connection with development of
the EchoStar DBS System.
RECEIVER MANUFACTURERS
EchoStar has agreements with two manufacturers to supply DBS receivers for
EchoStar. Only one of the manufacturers has produced a receiver acceptable to
EchoStar. EchoStar previously deposited $10.0 million with the non-performing
manufacturer and has an additional $15.0 million in an escrow account as
security for EchoStar's payment obligations under that contract. EchoStar has
given this non-performing manufacturer notice of its intent to terminate the
contract and has filed suit against that manufacturer. Consequently, EchoStar is
currently dependent on one manufacturing source for its receivers. Since
EchoStar has given the non-performing manufacturer notice of its intent to
terminate the contract, EchoStar has not included amounts due under the contract
in EchoStar's future purchase commitments. The performing manufacturer is
presently manufacturing receivers in sufficient quantities to meet currently
expected demand. If EchoStar's sole manufacturer is unable for any reason to
produce receivers in a quantity sufficient to meet demand, EchoStar's liquidity
and results of operations would be adversely affected. There can be no assurance
EchoStar will be able to recover any amounts deposited with the non-performing
manufacturer or held in escrow.
FORWARD LOOKING STATEMENTS
This Form 10-Q of EchoStar contains statements which constitute forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as amended. Those statements
appear in a number of places in the Form 10-Q and include statements regarding
the intent, belief or current expectations of EchoStar with respect to, among
other things: (i) EchoStar's financing plans; (ii) trends affecting EchoStar's
financial conditions or results of operations; (iii) EchoStar's growth strategy;
(iv) EchoStar's anticipated results of future operations; and (v) regulatory
matters affecting EchoStar. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward looking statements as a result of various
factors.
IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the past
three years. EchoStar believes that its ability to increase charges for products
and services in future periods will depend primarily on competitive pressures.
EchoStar does not have any material backlog of its products.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
EchoStar is a party to certain legal proceedings arising in the
ordinary course of its business. EchoStar does not believe that any of these
proceedings will have a material adverse affect on EchoStar's financial
position or results of operations.
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1* Amended and Restated Agreement for Exchange of Stock and Merger,
dated as of May 31, 1995, by and among EchoStar Communications
Corporation, a Nevada corporation formed in April 1995
("EchoStar"), Charles W. Ergen and EchoStar (incorporated herein
by reference to Exhibit 2.2 to the Registration Statement Form
S-1, Registration No. 33-91276).
2.2* Agreement regarding purchase of debentures between Dish, Ltd.
(formerly EchoStar Communications Corporation, a Nevada
corporation formed in December 1993 ("Dish")), SSE Telecom, Inc.
("SSET"), dated March 14, 1994, including Plan and Agreement of
Merger, by and among Dish, DirectSat Merger Corporation,
DirectSat Corporation and SSET (incorporated herein by reference
to Exhibit 2.2 to the Registration Statement on Form S-1,
Registration No. 33-76450).
2.3* Plan and Agreement of Merger made as of December 21, 1995 by and
among EchoStar, Direct Broadcasting Satellite Corporation, a
Colorado Corporation ("MergerCo") and Direct Broadcasting
Satellite Corporation, a Delaware Corporation ("DBSC")
(incorporated herein by reference to Exhibit 2.3 to the
Registration Statement on Form S-4, Registration No. 333-03584).
2.4* Merger Trigger Agreement entered into as of December 21, 1995 by
and among EchoStar, MergerCo and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC") (incorporated
herein by reference to Exhibit 2.3 to the Registration Statement
on Form S-4, Registration No. 333-03584).
3.1(a)* Amended and Restated Articles of Incorporation of EchoStar
(incorporated herein by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1, Registration No. 33-91276).
3.1(b)* Bylaws of EchoStar (incorporated herein by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1, Registration
No. 33-91276).
4.1* Indenture of Trust between Dish and First Trust National
Association ("First Trust"), as Trustee (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.4* Escrow and Disbursement Agreement between Dish and First Trust
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 herein (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of EchoStar
(incorporated herein by reference to Exhibit 4.7 to the
Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
25
EXHIBIT NO. DESCRIPTION
----------- -----------
4.8* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated herein by reference to Exhibit
4.8 to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.9* Indenture of Trust between ESB and First Trust, as Trustee
(incorporated herein by reference to Exhibit 4.9 to the Annual
Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.10* Security Agreement of ESB in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein
by reference to Exhibit 4.10 to the Annual Report on Form 10-K
of Echostar, Commission File No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESB and First Trust
(incorporated herein by reference to Exhibit 4.11 to the Annual
Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.12* Pledge Agreement of ESB in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein
by reference to Exhibit 4.12 to the Annual Report on Form 10-K
of EchoStar, Commission File No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein by
reference to Exhibit 4.13 to the Annual Report on Form 10-K of
EchoStar, Commission File No. 0-26176).
4.14* Registration Rights Agreement by and between the Issuer,
EchoStar, Dish, New DBSC and Donald, Lufkin & Jenrette
Securities Corporation (incorporated herein by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar,
Commission File No. 0-26176).
10.1(a)* Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin
Marietta Corporation as successor to General Electric
EchoStar, Astro-Space Division ("General Electric")
(incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract, dated as
of October 2, 1992, between ESC and Martin Marietta as successor
to General Electric (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.1(c)* Second Amendment to the Satellite Construction Contract, dated
as of October 30, 1992, between ESC and Martin Marietta as
successor to General Electric (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Ltd.
Registration No. 33-76450).
10.1(d)* Third Amendment to the Satellite Construction Contract, dated
as of April 1, 1993, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract, dated
as of August 19, 1993, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated herein by
reference to the Registration Statement on Form S-8 of EchoStar,
Registration No. 33-81234).
26
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1(g)* Sixth Amendment to the Satellite Construction Contract, dated
as of June 7, 1994, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-8 of EchoStar, Registration No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract, dated
as of July 18, 1996, between ESC and Martin Marietta
(incorporated herein by reference to Exhibit 10.1(h) to the Form
10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.2* Satellite Launch Contract, dated as of September 27, 1993,
between ESC and the China Great Wall Industry Corporation
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.3* Distributor Agreement, dated as of July 30, 1993, between
Echosphere Corporation ("Echosphere") and Thomson Consumer
Electronics, Inc. (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.4* Master Purchase and License Agreement, dated as of August 12,
1986, between Houston Tracker Systems, Inc. ("HTS") and Cable/
Home Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.5* Master Purchase and License Agreement, dated as of June 18,
1986, between Echosphere and Cable/Home Communications Corp.
(a subsidiary of General Instruments Corporation) (incorporated
herein by reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.6* Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation ("EAC") and Household Retail
Services, Inc. (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.7* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.8* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.9* Form of Satellite Launch Insurance Declarations (incorporated
herein by reference to the Registration Statement on Form S-1
of Dish, Ltd. Registration No. 33-76450).
10.10* Dish, Ltd. 1994 Stock Incentive Plan (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Ltd., Registration No. 33-76450).
10.11* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated herein by reference to the
Registration Statement on Form S-8 of EchoStar, Registration
No. 33-81234).
10.12* Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology (incorporated herein by reference to
Exhibit 10.12 to the Registration Statement as Form S-1 of
Dish, Ltd., Commission File No. 33-81234).
10.13* Manufacturing Agreement dated as of April 14, 1995 by and
between ESC and Sagem Group (incorporated herein by reference
to Exhibit 10.13 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
27
EXHIBIT NO. DESCRIPTION
----------- -----------
10.14* Statement of Work, dated January 31, 1995 from EchoStar
Satellite Corporation Inc. to Divicom Inc. (incorporated herein
by reference to Exhibit 10.14 to the Registration Statement on
Form S-1, Registration No. 33-91276).
10.15* Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Satellite Corporation and Lockheed-Khrunichev-
Energia International, Inc. (incorporated herein by reference to
Exhibit 10.15 to the Registration Statement on Form S-1,
Registration No. 33-91276).
10.16* EchoStar 1995 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.16 to the Registration Statement on
Form S-1, Registration No. 33-91276).
10.17(a)* Eighth Amendment to Satellite Construction Contract, dated as
of February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated herein by reference to
Exhibit 10.17(a) to the Form 10-Q of EchoStar as of June 30,
1996, Commission File No. 0-26176).
10.17(b)* Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated herein by reference to
Exhibit 10.15 to the Registration Statement of Form S-4,
Registration No. 333-03584).
10.17(c)* Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin Marietta
Corporation incorporated herein by reference to Exhibit 10.17(b)
to the Form 10-Q of EchoStar as of June 30, 1996, Commission
File No. 0-26176).
10.18* Satellite Construction Contract, dated as of July 18, 1996,
between EchoStar DBS Corporation and Lockheed Martin
Corporation (incorporated herein by reference to the Form
10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.19* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta Corporation, dated as of May
31, 1995 (incorporated herein by reference to Exhibit 10.15 to
the Registration Statement of Form S-4, Registration No.
333-03584).
11 Computation of Earnings Per Share for the three and nine months
ended September 30, 1996.
27 Financial Data Schedule
- --------------
* Incorporated by reference pursuant to Rule 12D-32 under the Securities and
Exchange Act of 1934, as amended.
(b) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by EchoStar during the period
covered by this Quarterly Report on Form 10-Q.
28
SIGNATURES
Pursuant to the requirement 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 Communications Corporation
Date: November 13, 1996 /s/ STEVEN B. SCHAVER
-----------------------------------------
Steven B. Schaver
Vice President and Chief Financial Officer
/s/ STEVEN B. SCHAVER
-----------------------------------------
Steven B. Schaver
Principal Financial Officer
29
EXHIBIT 11
PAGE 1 OF 2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRIMARY EARNINGS PER SHARE CALCULATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- ------------
INCOME DATA:
Net loss................................. $ (360) $(22,518) $(4,387) $(52,293)
Preferred stock dividends................ (301) (301) (903) (903)
------- -------- ------- -------
Net loss attributable to common shares... $ (661) $(22,819) $(5,290) $(53,196)
------- -------- ------- -------
------- -------- ------- -------
COMMON AND COMMON EQUIVALENT SHARES:
Weighted average common shares .......... 37,544 40,456 34,965 40,455
Equivalent common shares from warrants... -- (a) -- (a) -- (a) -- (a)
Equivalent common shares from
stock options........................... -- (a) -- (a) -- (a) -- (a)
------- -------- ------- -------
Common and common equivalent shares...... 37,544 40,456 34,965 40,455
------- -------- ------- -------
------- -------- ------- -------
EARNINGS PER COMMON SHARE:
Net loss per common and common
equivalent shares....................... $ (.02) $ (.56) $ (.15) $ (1.31)
------- -------- ------- -------
------- -------- ------- -------
(a) Excludes common stock equivalents which are antidilutive.
EXHIBIT 11
PAGE 2 OF 2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FULLY DILUTED EARNINGS PER SHARE CALCULATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- ------------
INCOME DATA:
Net loss attributable to common shares... $ (661) $(22,819) $(5,290) $(53,196)
------- -------- ------- -------
------- -------- ------- -------
COMMON AND COMMON EQUIVALENT SHARES:
Weighted average common shares........... 37,544 40,456 34,965 40,455
Equivalent common shares from warrants... -- (a) -- (a) -- (a) -- (a)
Equivalent common shares from
stock options........................... -- (a) -- (a) -- (a) -- (a)
Weighted average common shares from
conversion of preferred stock........... -- (a) -- (a) -- (a) -- (a)
------- -------- ------- -------
Common and common equivalent shares...... 37,544 40,456 34,965 40,455
------- -------- ------- -------
------- -------- ------- -------
EARNINGS PER COMMON SHARE:
Net loss per common and common
equivalent shares....................... $ (.02) $ (.56) $ (.15) $ (1.31)
------- -------- ------- -------
------- -------- ------- -------
(a) Excludes common stock equivalents and convertible preferred stock which
are antidilutive.
5
1,000
3-MOS 9-MOS
DEC-31-1996 DEC-31-1996
SEP-30-1996 SEP-30-1996
31,079 31,079
42,122 42,122
20,075 20,075
(1,117) (1,117)
44,246 44,246
210,865 210,865
582,010 582,010
(26,767) (26,767)
1,081,489 1,081,489
119,068 119,068
849,189 849,189
18,098 18,098
0 0
408 408
87,458 87,458
1,081,489 1,081,489
55,323 165,211
57,038 172,079
43,935 142,040
77,936 215,613
14,570 38,505
521 587
19,996 53,180
(35,468) (82,089)
12,950 29,796
(22,518) (52,293)
0 0
0 0
0 0
(22,518) (52,293)
(.56) (1.31)
(.56) (1.31)
Includes sales of programming.
Includes the cost of providing programming.
Net of amounts capitalized.
