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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 333-31929
EchoStar DBS Corporation
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1328967
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
90 Inverness Circle East
Englewood, Colorado 80112
(Address of principal executive offices) (Zip code)
(303) 799-8222
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
As of August 14, 1997, Registrant's outstanding common stock consisted of
1,000 shares of Common Stock, $0.01 par value.
The Registrant meets the conditions set forth in General Instructions
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 (Unaudited)..................... 1
Condensed Consolidated Statements of Operations -
Three and six months ended
June 30, 1996 and 1997 (Unaudited).................................. 2
Condensed Consolidated Statements of Cash Flows -
Three and six months ended
June 30, 1996 and 1997 (Unaudited) ................................. 3
Notes to Condensed Consolidated Financial Statements(Unaudited)...... 4
Item 2.Management's Narrative Analysis of Results of Operations........... 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 12
Item 2. Changes in Securities .......................................... *
Item 3. Defaults Upon Senior Securities ............................... *
Item 4. Submission of Matters to a Vote of Security Holders ............ *
Item 5. Other Information ............................................. None
Item 6. Exhibits and Reports on Form 8-K ............................... 12
DISH NetworkSM is a service mark of EchoStar Communications
Corporation and Subsidiaries.
- ----------
* This item has been omitted pursuant to the reduced disclosure
format as set forth in General Instructions (H)(1)(a) and (b)
of Form 10-Q.
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, June 30,
1996 1997
-----------------------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents ...................... $ 38,438 $ 181,931
Marketable investment securities ............... 18,807 4,952
Trade accounts receivable, net of allowance
for uncollectible accounts of $1,494 and
$1,834, respectively ......................... 13,483 29,480
Inventories .................................... 72,767 63,043
Income tax refund receivable ................... 4,830 145
Subscriber acquisition costs, net .............. 68,129 68,356
Other current assets ........................... 15,031 7,479
---------------------------
Total current assets ............................. 231,485 355,386
Restricted Cash and Marketable Investment Securities:
1996 Notes escrow .............................. 47,491 --
Satellite escrow ............................... -- 112,086
Interest escrow ................................ -- 109,084
Other .......................................... 31,450 8,445
---------------------------
Total restricted cash and marketable
investment securities........................... 78,941 229,615
Property and equipment, net ...................... 528,577 540,583
FCC authorizations, net .......................... 72,500 76,471
Advances to affiliates, net ...................... 68,607 113,170
Deferred tax assets .............................. 79,663 79,663
Other noncurrent assets .......................... 25,770 38,895
---------------------------
Total assets ................................ $ 1,085,543 $ 1,433,783
============================
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable ......................... $ 41,228 $ 49,850
Deferred revenue - DISH Network subscriber
promotions.................................... 97,959 115,785
Deferred revenue - DISH Network ................ 4,407 5,209
Deferred revenue - C-band ...................... 734 588
Accrued expenses and other current
liabilities................................... 30,125 47,548
Deferred tax liabilities ....................... 12,674 12,309
Current portion of long-term debt .............. 11,334 11,832
---------------------------
Total current liabilities ........................ 198,461 243,121
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue .... 5,949 7,366
1994 Notes ..................................... 437,127 467,210
1996 Notes ..................................... 386,165 411,256
1997 Notes ..................................... -- 375,000
Mortgage and other notes payable, net of
current portion ............................. 51,428 45,379
Note payable to ECC ............................ 12,000 12,000
Other long-term liabilities .................... 1,088 5,551
---------------------------
Total long-term obligations, net of
current portion ................................ 893,757 1,323,762
---------------------------
Total liabilities ........................... 1,092,218 1,566,883
Commitments and Contingencies (Note 6)
Stockholder's Equity:
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding............ -- --
Additional paid-in capital ..................... 108,839 108,839
Unrealized holding gains (losses) on
available-for-sale securities, net of
deferred taxes................................ ( 12) ( 12)
Accumulated deficit ............................ (115,502) (241,927)
---------------------------
Total stockholder's equity ....................... (6,675) (133,100)
---------------------------
Total liabilities and stockholder's equity... $ 1,085,543 $ 1,433,783
===========================
1
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Six Months Ended
Ended June 30, June 30,
--------------------- ----------------------
1996 1997 1996 1997
---- ---- ---- ----
Revenue:
DTH products and
technical services ....... $ 60,458 $ 22,071 $ 97,199 $ 33,660
DISH Network promotions -
subscription television
services and products..... -- 43,672 -- 75,825
DISH Network subscription
television services....... 5,582 32,189 6,046 57,588
C-band programming ......... 3,194 1,916 6,643 4,079
Loan origination and
participation income ..... 120 127 492 285
------------------- ---------------------
Total revenue ................ 69,354 99,975 110,380 171,437
Expenses:
DTH products and
technical services........ 57,528 18,109 90,278 27,333
DISH Network programming ... 1,664 25,834 1,769 45,259
C-band programming ......... 2,880 1,545 6,058 3,308
Selling, general and
administrative............ 18,444 33,794 29,098 64,690
Subscriber promotion
subsidies................. -- 18,313 -- 31,090
Amortization of subscriber
acquisition costs ........ 92 33,228 92 61,290
Depreciation and
amortization ............. 6,334 12,655 9,664 25,298
-----------------------------------------------
Total expenses ............... 86,942 143,478 136,959 258,268
-----------------------------------------------
Operating loss ............... (17,588) (43,503) (26,579) (86,831)
Other Income (Expense):
Interest income ............ 5,873 1,445 7,851 3,094
Interest expense, net of
amounts capitalized....... (20,247) (22,278) (26,144) (42,368)
Other ...................... ( 136) ( 114) ( 137) ( 276)
-----------------------------------------------
Total other income(expense) (14,510) (20,947) (18,430) (39,550)
-----------------------------------------------
Loss before income taxes ..... (32,098) (64,450) (45,009) (126,381)
Income tax (provision)
benefit, net ............... 10,964 (25) 16,088 (44)
------------------------------------------------
Net loss ..................... $ (21,134) $ (64,475) $ (28,921) $(126,425)
===============================================
2
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
------------------------------
1996 1997
---- ----
Cash Flows From Operating Activities:
Net loss ...................................... $ (28,491) $( 126,425)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization ............... 9,664 25,298
Amortization of subscriber acquisition costs. 92 61,290
Deferred income tax benefit ................. (11,099) (365)
Amortization of debt discount and deferred
financing costs............................ 24,530 38,731
Change in reserve for excess and
obsolete inventory......................... 634 1,987
Change in long-term deferred signal
carriage revenue........................... 4,163 1,417
Other, net .................................. 503 4,463
Changes in current assets and current
liabilities, net ............................ (12,518) (18,013)
----------------------
Net cash flows used in operating activities ...... (12,522) (11,617)
Cash Flows From Investing Activities:
Purchases of marketable investment
securities .................................. (44,782) (4,706)
Sales of marketable investment securities ..... -- 18,561
Purchases of restricted marketable
investment securities ....................... (9,800) (1,995)
Advances to affiliates, net ................... ( 30,547) (34,385)
Purchases of property and equipment ........... ( 5,485) (18,453)
Offering proceeds and investment earnings
placed in escrow............................. (181,778) (221,654)
Funds released from escrow accounts and
restricted cash - other ..................... 71,545 72,975
Expenditures for satellite systems under
construction ................................ (62,016) (11,225)
Investment in convertible subordinated
debentures from SSET......................... -- (500)
Other ......................................... (25) (457)
----------------------
Net cash flows used in investing activities...... (262,888) (201,839)
Cash Flows From Financing Activities:
Proceeds from issuance of Common Stock ........ 1 --
Net proceeds from issuance of 1996 Notes ...... 337,043 --
Net proceeds from issuance of 1997 Notes ...... -- 362,500
Repayments of mortgage indebtedness and
notes payable ............................... (1,082) (5,551)
----------------------
Net cash flows provided by financial
activities................................... 335,962 356,949
----------------------
Net increase in cash and cash equivalents ........ 60,552 143,493
Cash and cash equivalents,
beginning of period ........................... 13,949 38,438
-----------------------
Cash and cash equivalents, end of period ......... $ 74,501 $ 181,931
======================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of amounts
capitalized .................................. $ 544 $ 2,352
Cash paid for income taxes ..................... -- --
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 --
3
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Organization and Business Activities
Principal Business
EchoStar DBS Corporation and subsidiaries ("DBS Corp" or the "Company"), is
a wholly-owned subsidiary of EchoStar Communications Corporation ("EchoStar"), a
publicly-traded company on the Nasdaq National Market. The Company is primarily
engaged in the operation of a direct broadcast satellite ("DBS") subscription
television service (the "DISH Network"), which commenced operations in March
1996. The DISH Network currently provides approximately 120 channels of digital
video programming and over 30 channels of CD quality audio programming to
consumers throughout the continental United States. In addition to the DISH
Network, the Company designs, manufactures, distributes and installs satellite
direct-to-home ("DTH") products, and distributes domestic DTH programming. The
Company's primary business objective is to become one of the leading providers
of subscription television and other satellite-delivered services in the United
States. The Company had approximately 590,000 subscribers to DISH Network
programming as of June 30, 1997.
Recent Developments
1997 Notes Offering
On June 25, 1997, DBS Corp consummated an offering (the "1997 Notes
Offering") of 12.5% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997
Notes Offering resulted in net proceeds to the Company of approximately $362.5
million. Interest on the 1997 Notes is payable semi-annually on January 1 and
July 1 of each year, commencing January 1, 1998. Approximately $109.0 million of
the net proceeds of the 1997 Notes Offering were placed in an escrow account to
fund the first five semi-annual interest payments (through January 1, 2000). The
1997 Notes were issued in a private placement pursuant to Rule 144A of the
Securities Act of 1933, as amended. DBS Corp agreed to exchange the privately
issued notes for publicly registered notes and on July 23, 1997 filed a
registration statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission. Upon the effectiveness of the Registration
Statement, the Company will make an offer to exchange the 1997 Notes for
publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Prior to
consummation of the 1997 Notes Offering, EchoStar contributed (the
"Contribution") all of the outstanding capital stock of its wholly-owned
subsidiary EchoStar Satellite Broadcasting Corporation ("ESBC") to DBS Corp. As
a result of the Contribution, ESBC is a wholly-owned subsidiary of DBS Corp.
News Corporation Litigation
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110 degrees West Longitude ("WL") purchased by
MCI Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has asserted
numerous counterclaims against EchoStar and its Chairman and Chief Executive
Officer, Charles W. Ergen. While EchoStar is confident of its position and
believes it will ultimately prevail, the litigation process could continue for
many years and there can be no assurance concerning the outcome of the
litigation.
4
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. All significant intercompany accounts and transactions have
been eliminated in consolidation. Operating results for the three and six months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar, ESBC and all direct and
indirect wholly-owned subsidiaries thereof. The Company's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report on
Form 10-Q for the six months ended June 30, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and June 30, 1997 principally consisted of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
Income Taxes
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that the tax benefit of net operating losses ("NOLs") for
financial reporting purposes be recorded as an asset and that deferred tax
assets and liabilities are recorded for the estimated future tax effects of
temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets. To the extent that
management assesses the realization of deferred tax assets to be less than "more
likely than not," a valuation reserve is established. The Company has fully
reserved the 1997 additions to its deferred tax assets.
3.Restricted Cash and Marketable Investment Securities
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying condensed consolidated balance
sheets, represent cash restricted by the indenture associated with the 1997
Notes and the remaining restricted cash proceeds from the 1996 Notes Offering,
plus investment earnings, less amounts expended to date. A portion of the
proceeds from the 1997 Notes Offering are held in two separate escrow accounts
(the "Interest Escrow" and the "Satellite Escrow") as required by the related
indenture. Restricted cash and marketable investment securities are invested in
certain permitted debt and other marketable investment securities until
disbursed for the express purposes identified in the respective indentures.
Other restricted cash includes balances totaling $5.7 million at December
31, 1996 and June 30, 1997, respectively, which was restricted to satisfy
certain covenants in the 1994 Notes Indenture regarding launch insurance for
EchoStar II. In addition, as of December 31, 1996, $15.0 million was held in
escrow relating to a non-performing manufacturer of DBS receivers (see Note 6).
5
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
Also, as of December 31, 1996, $10.0 million was on deposit in a separate escrow
account established, pursuant to an additional DBS receiver manufacturing
agreement, to provide for the Company's future payment obligations. The $15.0
million and $10.0 million deposits were both released from these escrow accounts
in May 1997.
4.Inventories
Inventories consist of the following (in thousands):
December 31, June 30,
1996 1997
-----------------------
(Unaudited)
EchoStar Receiver Systems .................. $ 32,799 $ 46,499
DBS receiver components .................... 15,736 15,201
Consigned DBS receiver components .......... 23,525 2,681
Finished goods - International ............. 3,491 4,181
Finished goods - C-band .................... 600 359
Spare parts and other ...................... 2,279 1,771
Reserve for excess and obsolete inventory .. (5,663) (7,649)
------------------------
$ 72,767 $ 63,043
========================
5.1997 Notes
On June 25, 1997, DBS Corp completed the 1997 Notes Offering consisting of
$375.0 million aggregate principal amount of the 1997 Notes. The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $362.5 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12.5 million). The 1997 Notes bear interest at a rate of 12 1/2%,
computed semi-annually. Interest on the 1997 Notes will be payable in cash
semi-annually on January 1 and July 1 of each year, with the first interest
payment due January 1, 1998. Approximately $109.0 million of the net proceeds of
the 1997 Notes Offering were placed in the Interest Escrow account to fund the
first five semi-annual interest payments (through January 1, 2000).
Approximately $112.0 million of the net proceeds of the 1997 Notes Offering were
placed in the Satellite Escrow account to fund the construction launch and
insurance of EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes
mature on July 1, 2002.
The 1997 Notes rank pari passu in right of payment with all senior
indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis
by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of certain
events, will be guaranteed by ESBC and Dish, Ltd. and certain other subsidiaries
of DBS Corp and EchoStar. The 1997 Notes are secured by liens on the capital
stock of DBS Corp, EchoStar IV, and certain other assets of DBS Corp and
EchoStar. Although the 1997 Notes are titled "Senior:" (i) DBS Corp has not
issued, and does not have any plans to issue, any significant indebtedness to
which the 1997 Notes would be senior; and (ii) the 1997 Notes are effectively
subordinated to all liabilities of ECC (except liabilities to general
creditors). In addition, the ability of Dish, Ltd. to make distributions to DBS
Corp is severely limited by the terms of an indenture to which it is subject,
and the cash flow generated by the assets and operations of DBS Corp's
subsidiaries will only be available to satisfy DBS Corp's obligations on the
1997 Notes to the extent that such subsidiaries are able to make distributions,
directly or indirectly, to DBS Corp.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's
option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to
redemption, at the option of DBS Corp, in whole or in part, at redemption prices
decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or
after July 1, 2002, together with accrued and unpaid interest thereon to the
redemption date.
The 1997 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of DBS Corp to: (i) incur additional
indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of certain
asset sales; (iv) create, incur or assume liens; (v) create dividend and other
payment restrictions with respect to DBS Corp's subsidiaries; (vi) merge,
ECHOSTAR DBS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, DBS Corp may pay dividends
on its equity securities only if: (1) no default is continuing under the 1997
Notes Indenture; and (2) after giving effect to such dividend and the incurrence
of any indebtedness (the proceeds of which are used to finance the dividend),
DBS Corps's ratio of total indebtedness to cash flow (calculated in accordance
with the 1997 Notes Indenture) would not exceed 6.0 to 1.0. Moreover, the
aggregate amount of such dividends generally may not exceed the sum of the
difference of cumulative consolidated cash flow (calculated in accordance with
the 1997 Notes Indenture) minus 150% of consolidated interest expense of DBS
Corp (calculated in accordance with the 1997 Notes Indenture) plus an amount
equal to 100% of the aggregate net cash proceeds received by DBS Corp and its
subsidiaries from the issuance or sale of equity interests of DBS Corp or
EchoStar (other than equity interests sold to a subsidiary of DBS Corp or
EchoStar, since June 25, 1997).
In the event of a change of control, as defined in the 1997 Notes
Indenture, DBS Corp will be required to make an offer to repurchase all of the
1997 Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon, to the date of
repurchase.
6.Commitments and Contingencies
Purchase Commitments
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of June 30, 1997, remaining commitments total approximately
$141.7 million and the total of all outstanding purchase order commitments with
domestic and foreign suppliers was $148.1 million. All of the purchases related
to these commitments are expected to be made during 1997. The Company expects to
finance these purchases from unrestricted cash and additional cash flows
generated from sales of DISH Network programming and related DBS inventory. The
Company expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments. In
addition to the above, EchoStar will expend $192.6 million between June 30, 1997
and the first quarter of 1998 to complete the construction phase (including
applicable insurance) and launch of its third DBS satellite ("EchoStar III") and
EchoStar IV.
Other Risks and Contingencies
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
7
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf, that are
not statements of historical fact, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause the actual results of the Company to be
materially different from the historical results of or from any future results
expressed or implied by such forward-looking statements. Among the factors that
could cause actual results to differ materially are the following: the
unavailability of sufficient capital on satisfactory terms to finance the
Company's business plan; increased competition from cable, direct broadcast
satellite ("DBS"), other satellite system operators, and other providers of
subscription television services; the introduction of new technologies and
competitors into the subscription television business; increased subscriber
acquisition costs and subscriber promotion subsidies; the inability of the
Company to obtain necessary shareholder and bond-holder approval of any
strategic transactions; the inability of the Company to obtain necessary
authorizations from the Federal Communications Commission ("FCC"); general
business and economic conditions and other risk factors described from time to
time in the Company's reports filed with the Securities and Exchange Commission
("SEC"). In addition to statements, which explicitly describe such risks and
uncertainties, readers are urged to consider statements labeled with the terms
"believes," "belief," "expects," "plans," "anticipates," or "intends" to be
uncertain and forward-looking. All cautionary statements made herein should be
read as being applicable to all related forward-looking statements wherever they
appear. In this connection, investors should consider the risks described
herein.
Three Months Ended June 30, 1997 Compared to the Three Months Ended June 30,
1996.
Revenue. Total revenue for the three months ended June 30, 1997 was $100.0
million, an increase of $30.6 million, or 44%, as compared to total revenue for
the three months ended June 30, 1996 of $69.4 million. The increase in total
revenue in 1997 was primarily attributable to DISH Network subscriber growth. As
of June 30, 1997, the Company had approximately 590,000 DISH Network subscribers
compared to approximately 70,000 at June 30, 1996. The Company expects this
trend to continue as it adds additional DISH Network subscribers.
The increase in total revenue for the three months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. As was anticipated, domestic and
international demand for C-band DTH products continued to decline during the
second quarter of 1997; this decline is expected to continue for the foreseeable
future. Consistent with the increases in total revenue during the three months
ended June 30,1997, the Company experienced a corresponding increase in trade
accounts receivable at June 30, 1997. The Company expects this trend to continue
as the number of DISH Network subscribers increases, and as the Company develops
additional channels of distribution for DISH Network equipment.
Revenue from domestic sales of DTH products and technical services
decreased $46.8 million, or 92%, to $4.1 million during the three months ended
June 30, 1997. Domestically, the Company sold approximately 174,000 satellite
receivers during the three months ended June 30, 1997, as compared to
approximately 110,000 receivers sold during the comparable period in 1996. Of
the total number of satellite receivers sold during the three months ended June
30, 1997, approximately 173,000 were EchoStar Receiver Systems. Although there
was a significant increase in the number of satellite receivers sold in the
second quarter of 1997 as compared to same quarter in 1996, overall revenue from
domestic sales of DTH products decreased as a result of decreased prices charged
for DBS receivers combined with the revenue recognition policy applied to DBS
satellite receivers sold under the Company's promotions.
Revenue from international sales of analog DTH products for the three
months ended June 30, 1997 was $6.1 million, a decrease of $3.5 million, or 36%,
as compared to the same period in 1996. This decrease was principally
attributable to a decrease in the number of analog satellite receivers sold,
combined with decreased prices on products sold. Internationally, the Company
sold approximately 38,000 analog satellite receivers in the three months ended
June 30, 1997, a decrease of 25%, compared to approximately 51,000 units sold
during the comparable period of 1996. Overall, international demand for the
Company's analog DTH products continued to decline in the second quarter of 1997
as a result of consumer anticipation of new international digital services. This
international decline in demand for analog satellite receivers, which was
expected by the Company, is similar to the decline which has occurred in the
United States.
8
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
To expand its presence in international markets, the Company has entered
into distribution and consulting agreements with international digital service
providers. In January 1997, the Company entered into an agreement (the
"ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority owned
subsidiary of BEC, Inc. ("Bell Canada"). The first phase of this agreement
includes an initial order for 62,000 satellite receivers, and primary uplink
integration payments, which combined are expected to exceed $40.0 million.
Pursuant to the ExpressVu Agreement, the Company is assisting ExpressVu with the
construction of a digital broadcast center for use in conjunction with
ExpressVu's planned DTH service and will act as a distributor of satellite
receivers and related equipment for ExpressVu's Canadian DTH service. Among
other things, the Company has agreed not to provide DTH service in Canada and
ExpressVu has agreed not to provide DTH service, including DBS service, in the
U.S. The Company recognized revenues of approximately $11.9 million related to
the ExpressVu Agreement during the three months ended June 30, 1997 (included
within the "DTH products and technical services" caption in the Company's
statements of operations). Additionally, in June 1997, Distribuidora de
Television Digital S.A. ("Telefonica"), a DBS joint venture in Spain, selected
the Company to supply digital set-top boxes for its satellite television service
scheduled to launch in September 1997. Revenues from Telefonica's initial order
of 100,000 digital set- top boxes are expected to approximate $40.0 million. The
Company expects to begin delivery of set-top boxes to Telefonica in September
1997 and to fulfill approximately one-half of the contract during the remainder
of 1997. The Company expects to fulfill the remainder of the contract during
early 1998. While the Company continues to actively pursue other similar
distribution opportunities, no assurance can be given that any such additional
negotiations will be successful. Further, the Company's future revenue from the
sale of DBS equipment and receivers in international markets depends largely on
the success of the DBS operator in that country, which, in turn, depends on
other factors, such as the level of consumer acceptance of DBS products and the
intensity of competition for international subscription television subscribers.
No assurance can be given regarding the level of expected future revenues which
could be generated from the Company's alliances with these, and potentially
other, foreign DBS operators.
C-band programming revenue totaled $1.9 million for the three months ended
June 30, 1997, a decrease of $1.3 million, or 40%, compared to the three months
ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services. C-band
programming revenue is expected to continue to decrease for the foreseeable
future.
DTH and DISH Network Expenses. DTH and DISH Network expenses for the three
months ended June 30, 1997 aggregated $63.8 million, an increase of $1.7
million, or 3% compared to the same period in 1996. DTH products and technical
services expenses decreased $39.4 million, or 69%, to $18.1 million for the
three months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $18.3 million for the three months ended June 30, 1997 and
represent expenses associated with the Company's various promotions. DISH
Network programming expenses totaled $25.8 million for the three months ended
June 30, 1997 as compared to $1.7 million for the comparable period in 1996. The
Company expects that DISH Network programming expenses will continue to increase
in future periods in proportion to increases in the number of DISH Network
subscribers. Such expenses, relative to related revenues, will vary based on the
services subscribed to by DISH Network customers, the number and types of
pay-per-view events purchased by subscribers, and the extent to which the
Company is able to realize volume discounts from programming providers.
C-band programming expenses totaled $1.5 million for the three months ended
June 30, 1997, a decrease of $1.3 million, or 46%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
programming revenue. As previously described, demand for C-band DTH products
continued to decrease as a result of the introduction and widespread consumer
acceptance of DBS products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses totaled $33.8 million for the three months
ended June 30, 1997, an increase of $15.4 million as compared to the same period
in 1996. SG&A expenses as a percentage of total revenue increased to 34% for the
three months ended June 30, 1997 as compared to 27% for the same period in 1996.
The increase in SG&A expenses was principally attributable to increased
personnel expenses to support the growth of DISH Network service and increased
expenses associated with the operation of EchoStar's digital broadcast center
and DBS satellites (collectively the "EchoStar DBS System").
9
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
Earnings Before Interest, Taxes, Depreciation and Amortization. Earnings
before interest, taxes, depreciation and amortization (including amortization of
subscriber acquisition costs) ("EBITDA") was $2.4 million for the three months
ended June 30, 1997, an improvement of $13.5 million, compared to negative
EBITDA of $11.2 million during the same period of 1996. This improvement in
EBITDA resulted from the factors affecting revenue and expenses discussed above.
Depreciation and Amortization. Depreciation and amortization expenses for
the three months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $33.2 million for the three months ended June
30, 1996 and June 30, 1997, respectively), aggregated $45.9 million, an increase
of $39.5 million, as compared to the same period 1996. The increase in
depreciation and amortization expenses principally resulted from amortization of
subscriber acquisition costs and depreciation expense associated with the
Company's second DBS satellite, EchoStar II (placed in service during the fourth
quarter of 1996).
Other Income and Expense. Other expense, net totaled $20.9 million for the
three months ended June 30, 1997, an increase of $6.4 million, as compared to
the same period 1996. The increase in other income and expense in the second
quarter of 1997 resulted primarily from a decrease interest income of
approximately $4.4 million as a result of a decrease in invested balances.
Additionally, interest expense increased $2.0 million as compared to the same
period of 1996 as a result of the continued accretion of the 1994 Notes and 1996
Notes. The Company capitalized interest of approximately $8.6 million during the
three months ended June 30, 1997, compared to approximately $5.5 million during
the three months ended June 30, 1996.
Income Tax Benefit. The decrease in the income tax benefit of $11.0 million
(from $11.0 million for the three months ended June 30, 1996 to an income tax
provision of $25,000 for the three months ended June 30, 1997) principally
resulted from the Company's decision to fully reserve the second quarter
addition to its net deferred tax asset. The Company's net deferred tax assets
(approximately $67.4 million at June 30, 1997) relate to temporary differences
for amortization of original issue discount on the 1994 Notes and 1996 Notes,
net operating loss carryforwards, and various accrued expenses which are not
deductible until paid. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
magnitude of its reserve may change.
Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996.
Revenue. Total revenue for the six months ended June 30, 1997 was $171.4
million, an increase of $61.0 million, or 55%, as compared to total revenue for
the six months ended June 30, 1996 of $110.4 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of the Company's
DISH Network service during March 1996, combined with significant DISH Network
subscriber growth since the launch of service.
The increase in total revenue for the six months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. The domestic and international demand for
C-band DTH products continued to decline during the first half of 1997.
Revenue from domestic sales of DTH products and technical services
decreased $66.2 million, or 88%, to $8.8 million for the six months ended June
30, 1997. Domestically, the Company sold approximately 348,000 satellite
receivers during the six months ended June 30, 1997, as compared to
approximately 155,000 receivers sold during the comparable period of 1996. Of
the total number of satellite receivers sold during the six months ended June
30, 1997, approximately 345,000 were EchoStar Receiver Systems. Although there
was a significant increase in the number of satellite receivers sold during the
six months ended June 30, 1997 as compared to same period in 1996, overall
revenue from domestic sales of DTH products decreased as a result of decreased
prices charged for DBS satellite receivers combined with the revenue recognition
policy applied to DBS satellite receivers sold under the Company's promotions.
Revenue from international sales of analog DTH products for the six months
ended June 30, 1997 totaled $13.0 million, a decrease of $9.3 million, or 42%,
as compared to the same period in 1996. This decrease was directly attributable
to a decrease in the number of analog satellite receivers sold, combined with
decreased prices on products sold. Internationally, the Company sold
approximately 91,000 analog satellite receivers during the six months ended June
30, 1997, a decrease of 28%, compared to approximately 126,000 units sold in the
10
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
comparable period in 1996. As previously described, the Company also recognized
revenues totaling $11.9 million during the six months ended June 30, 1997
related to the ExpressVu Agreement.
C-band programming revenue totaled $4.1 million for the six months ended
June 30, 1997, a decrease of $2.6 million, or 39%, compared to the six months
ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services.
DTH and DISH Network Expenses. DTH and DISH Network expenses for the six
months ended June 30, 1997 aggregated $107.0 million, an increase of $8.9
million, or 9% compared to the same period in 1996. DTH products and technical
services expense decreased $62.9 million, or 70%, to $27.3 million during the
six months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $31.1 million for the six months ended June 30, 1997. DISH
Network programming expenses totaled $45.3 million for the six months ended June
30, 1997 as compared to $1.8 million for the comparable period in 1996. This
increase is directly attributable to the increase in DISH Network subscribers at
June 30, 1997 compared to June 30, 1996.
C-band programming expenses totaled $3.3 million for the six months ended
June 30, 1997, a decrease of $2.8 million, or 45%, as compared to the same
period in 1996. This decrease is consistent with the decrease in C-band
programming revenue.
Selling, General and Administrative Expenses. SG&A expenses totaled $64.7
million for the six months ended June 30, 1997, an increase of $35.6 million as
compared to the same period in 1996. SG&A expenses as a percentage of total
revenue increased to 38% for the six months ended June 30, 1997 as compared to
26% for the same period in 1996. The increase in SG&A expenses was principally
attributable to increased personnel expenses to support the growth of DISH
Network service and increased expenses associated with the operation of the
EchoStar DBS System. In future periods, the Company expects that SG&A expenses
as a percentage of total revenue will decrease as subscribers are added.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA was
negative $243,000 for the six months ended June 30, 1997, an improvement of
$16.6 million, compared to negative EBITDA of $16.8 million for the same period
in 1996. This improvement in negative EBITDA resulted from the factors affecting
revenue and expenses discussed above.
Depreciation and Amortization. Depreciation and amortization expenses for
the six months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $61.3 million for the six months ended June 30,
1996 and June 30, 1997, respectively) aggregated $86.6 million, an increase of
$76.8 million, as compared to the same period 1996. The increase in depreciation
and amortization expenses primarily was attributable to amortization of
subscriber acquisition costs and depreciation expense associated with EchoStar
II.
Other Income and Expense. Other expense, net totaled $39.6 million for the
six months ended June 30, 1997, an increase of $21.1 million, as compared to the
same period 1996. The increase in other expense in the first half of 1997
resulted primarily from an increase in interest expense associated with the
March 1996 issuance of the 1996 Notes and 1997 Notes combined with the continued
accretion of the 1994 Notes. Additionally, interest income decreased $4.8
million as a result of a decrease in invested balances. The Company capitalized
$16.6 million and $14.4 million of interest in the six months ended June 30,
1997 and 1996, respectively.
Income Tax Benefit. The decrease in the income tax benefit of $16.1 million
(from $16.1 million for the six months ended June 30, 1996 to an income tax
provision of $44,000 for the six months ended June 30, 1997) principally
resulted from the Company's decision to fully reserve the 1997 additions to its
net deferred tax asset.
11
PART II - OTHER INFORMATION
Item 3. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar Communications Corporation ("EchoStar") and
The News Corporation Limited ("News") announced an agreement (the "News
Agreement") pursuant to which, among other things, News agreed to acquire
approximately 50% of the outstanding capital stock of EchoStar. News also agreed
to make available for use by EchoStar the DBS permit for 28 frequencies at 110
West Longitude ("WL") purchased by MCI Communications Corporation ("MCI") for
over $682 million following a 1996 Federal Communications Commission ("FCC")
auction. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting that
the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without interest
and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure to
act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based on,
among other things, a jointly prepared a ten-year business plan showing expected
profits for EchoStar in excess of $10 billion based on consummation of the
transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts twenty defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting LLC ("AskyB")
assert that EchoStar and Ergen breached their agreements with News and failed to
act and negotiate with News in good faith. EchoStar has responded to News'
answer and denied the allegations in their counterclaims. EchoStar also has
asserted various affirmative defenses. EchoStar intends to diligently defend
against the counterclaims. The parties are now in discovery. The case has been
set for a five week trial commencing June 1, 1998, but that date could be
postponed. The litigation process could continue for many years and there can be
no assurance concerning the outcome of the litigation. An adverse decision could
have a material adverse effect on EchoStar's financial position and results of
operations.
On April 25, 1997, EchoStar Satellite Corporation ("ESC") and Sagem, S.A.
("Sagem"), a French Corporation, executed a settlement and release agreement
under which Sagem agreed to return the $10.0 million down payment made to Sagem
and agreed to release the $15.0 million placed in escrow with a bank in
connection with a manufacturing agreement entered into in April 1995. ESC and
Sagem have released all claims against each other.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1997.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR DBS CORPORATION
By: /s/ Steven B. Schaver
-------------------------
Steven B. Schaver
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ John R. Hager
---------------------
John R. Hager
Treasurer and Controller
(Principal Accounting Officer)
Date: August 14, 1997
_______________________________
5
1,000
U.S.
6-MOS
DEC-31-1997
JAN-01-1997
JUN-30-1997
1
181,931
4,952
31,314
1,834
63,043
355,386
600,735
60,152
1,433,783
243,121
1,310,845
0
0
0
(133,100)
1,433,783
171,437
171,437
75,900
258,268
39,550
2,214
42,368
(126,425)
44
(126,425)
0
0
0
(126,425)
(.00)
(.00)
INCLUDES SALES OF PROGRAMMING
INCLUDES COSTS OF PROGRAMMING
NET OF AMOUNTS CAPITALIZED
