<PAGE>
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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 JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-3980
ECHOSTAR SATELLITE BROADCASTING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1337871
(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 AUGUST 13, 1996, REGISTRANT'S OUTSTANDING VOTING 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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<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements:
Balance Sheets as of December 31, 1995
and June 30, 1996 (Unaudited).............................. 1
Statements of Income for the three months and six months
ended June 30, 1995 and 1996 (Unaudited)................... 2
Statements of Cash Flows for the six months
ended June 30, 1995 and 1996 (Unaudited) .................. 3
Condensed Notes to Financial Statements (Unaudited).......... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 24
</TABLE>
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 13,949 $ 74,501
Marketable investment securities................................................... 210 44,991
Trade accounts receivable, net..................................................... 9,115 18,449
Advances to affiliates............................................................. 1,320 34,428
Inventories, net................................................................... 38,769 48,386
Income tax receivable.............................................................. 3,870 7,446
Deferred tax assets................................................................ 1,834 1,789
Other current assets............................................................... 12,791 16,326
--------- --------
Total current assets........................................................... 81,858 246,316
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow.................................................................. 73,291 22,928
1996 Notes escrow.................................................................. -- 160,389
Other.............................................................................. 26,400 36,200
PROPERTY AND EQUIPMENT, net.......................................................... 333,199 390,358
OTHER NONCURRENT ASSETS.............................................................. 44,547 71,999
--------- --------
Total assets................................................................... $ 559,295 $928,190
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable............................................................. $ 19,063 $ 17,211
Deferred programming revenue - DISH Network-SM-.................................... -- 13,188
Deferred programming revenue - C-band.............................................. 5,563 5,037
Accrued expenses and other current liabilities..................................... 21,335 13,010
Notes payable and current portion of long-term debt................................ 4,782 4,782
--------- ---------
Total current liabilities...................................................... 50,743 53,228
LONG-TERM DEFERRED PROGRAMMING REVENUE - DISH Network-SM-............................ -- 4,163
1994 NOTES, net...................................................................... 382,218 408,449
1996 NOTES, net...................................................................... -- 361,742
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current portion.................. 33,444 36,337
--------- --------
Total liabilities.............................................................. 466,405 863,919
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (Note 1):
Preferred Stock, 20,000,000 and no shares authorized, 1,616,681 and no shares of
Series A Cumulative Preferred Stock issued and outstanding,
including accrued dividends of $1,555,000 and $0, respectively.................. 16,607 --
Class A Common Stock, $.01 par value, 200,000,000 and no shares authorized,
6,470,599 and no shares issued and outstanding, respectively.................... 65 --
Class B Common Stock, $.01 par value, 100,000,000 and no shares authorized,
29,804,401 and no shares issued and outstanding, respectively................... 298 --
Common Stock, $.01 par value, none and 1,000 shares authorized
issued and outstanding, respectively............................................ -- --
Additional paid-in capital........................................................ 89,495 106,466
Unrealized holding gains on available-for-sale securities, net of deferred taxes.. 251 122
Retained earnings (deficit)....................................................... (13,826) (42,317)
--------- --------
Total stockholder's equity.................................................... 92,890 64,271
--------- --------
Total liabilities and stockholder's equity.................................... $559,295 $928,190
--------- --------
--------- --------
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
1
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
DTH products and technical services.................. $ 34,865 $ 60,458 $ 71,142 $ 97,199
Programming revenue - DISH Network-SM-............... -- 5,582 -- 6,046
Programming revenue - C-band......................... 3,817 3,194 7,688 6,643
Loan origination and participation income............ 570 120 835 492
-------- -------- -------- --------
Total revenue.................................... 39,252 69,354 79,665 110,380
-------- -------- -------- --------
EXPENSES:
DTH products and technical services.................. 27,371 57,528 56,816 90,278
Programming - DISH Network-SM-....................... -- 1,664 -- 1,769
Programming - C-band................................. 3,392 2,880 6,824 6,058
Selling, general and administrative.................. 7,315 18,527 15,186 29,098
Depreciation and amortization........................ 406 6,426 769 9,756
-------- -------- -------- --------
Total expenses................................... 38,484 87,025 79,595 136,959
-------- -------- -------- --------
OPERATING INCOME (LOSS)................................ 768 (17,671) 70 (26,579)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income...................................... 2,963 5,856 6,601 7,830
Interest expense, net of amounts capitalized......... (6,327) (19,990) (12,890) (25,774)
Other, net........................................... (68) (63) (40) (64)
-------- -------- -------- --------
Total other income (expense)..................... (3,432) (14,197) (6,329) (18,008)
-------- -------- -------- --------
NET LOSS BEFORE INCOME TAXES........................... (2,664) (31,868) (6,259) (44,587)
BENEFIT FOR INCOME TAXES............................... 851 11,031 2,206 16,096
-------- -------- -------- --------
NET LOSS............................................... $ (1,813) $(20,837) $ (4,053) $(28,491)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
2
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $ (4,053) $(28,491)
Adjustments to reconcile net loss to net cash flows from operating activities--
Depreciation and amortization.................................................. 769 9,756
Provision for doubtful accounts................................................ -- 66
Benefit for deferred taxes..................................................... (4,624) (11,099)
Amortization of deferred debt issuance costs on 1994 and 1996 Notes............ 630 1,038
Amortization of discount on 1994 and 1996 Notes, net of amounts capitalized.... 12,030 23,492
Equity in (earnings) losses of joint venture................................... (23) --
Change in reserve for excess and obsolete inventory............................ 383 634
Change in long-term deferred programming revenue............................... -- 4,163
Other, net..................................................................... (417) 503
Changes in working capital items --
Trade accounts receivable.................................................... 1,405 (9,400)
Advances to affiliates....................................................... -- (30,547)
Inventories.................................................................. (8,799) (10,251)
Income tax receivable........................................................ -- (3,576)
Other current assets......................................................... (24) (3,535)
Liability under cash management program...................................... (57) --
Trade accounts payable....................................................... (3,879) (1,852)
Deferred programming revenue................................................. 218 12,662
Accrued expenses and other current liabilities............................... 326 6,675
-------- --------
Net cash flows from operating activities................................... (6,115) (39,762)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.................................... (16,711) (44,782)
Sales of marketable investment securities........................................ 40,679 --
Purchases of restricted marketable securities.................................... (15,000) (15,500)
Funds released from restricted cash and marketable securities - other............ -- 5,700
Purchases of property and equipment.............................................. (1,170) (5,485)
Proceeds from sale of property and equipment..................................... 27 --
Offering proceeds and investment earnings placed in escrow....................... (4,967) (181,778)
Refund of launch payment placed in escrow........................................ -- (4,500)
Funds released from escrow accounts.............................................. 29,760 76,045
Investment in SSET............................................................... (284) --
Expenditures for satellite systems under construction............................ (30,310) (62,016)
Subscriber acquisition costs..................................................... -- (3,307)
Expenditures for FCC authorizations.............................................. -- (25)
-------- --------
Net cash flows from investing activities................................... 2,024 (235,648)
-------- --------
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1996
------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable...................... $ (114) $ (1,082)
Proceeds from issuance of Common Stock.................................... -- 1
Net proceeds from issuance of 1996 Notes.................................. -- 337,043
------- --------
Net cash flows from financing activities.............................. (114) 335,962
------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................ (4,205) 60,552
CASH AND CASH EQUIVALENTS, beginning of period.............................. 17,506 13,949
------- --------
CASH AND CASH EQUIVALENTS, end of period.................................... $13,301 $ 74,501
------- --------
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........................ $ 233 $ 544
Cash paid for income taxes................................................ 658 --
Cumulative Series A Preferred Stock dividends............................. 602 --
Satellite launch payment for EchoStar II applied to EchoStar I launch..... -- 15,000
Increase in note payable for deferred satellite construction payments..... -- 3,167
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESB") is a
wholly owned subsidiary of EchoStar Communications Corporation ("EchoStar").
ESB was formed in January 1996 for the purpose of completing a private offering
(the "1996 Notes Offering"), pursuant to Rule 144A of the Securities Act of
1933, as amended (the "Securities Act"), of 13 1/8% Senior Secured Discount
Notes due 2004 (the "1996 Notes"), resulting in net proceeds of approximately
$337.0 million. The 1996 Notes Offering was consummated in March 1996. In
connection with the 1996 Notes Offering, EchoStar contributed all of the
outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB.
This transaction has been accounted for as a reorganization of entities under
common control. Accordingly, Dish, Ltd. has been treated as the predecessor to
ESB and the historical financial statements of ESB are those of Dish, Ltd. ESB
is subject to all, and EchoStar is subject to certain of, the terms and
conditions of the Indenture related to the 1996 Notes (the "1996 Notes
Indenture"). On April 24, 1996, ESB filed a Registration Statement on Form S-1
under the Securities Act to exchange the 1996 Notes for publicly registered
notes. The Registration Statement was declared effective by the Securities and
Exchange Commission on June 28, 1996. As of August 1, 1996, all of the
outstanding privately placed notes had been exchanged for the new publicly
registered notes. Unless otherwise stated herein, or the context otherwise
requires, references herein to the 1996 Notes shall include the original
privately placed notes and the publicly registered notes that were exchanged for
the privately placed notes.
ESB successfully launched its first direct broadcast satellite ("DBS"),
EchoStar I, in December 1995 and, on March 4, 1996, began broadcasting its DBS
programming (the "DISH Network-SM-") to the entire continental United States. As
of August 1, 1996, ESB had over 100,000 subscribers to DISH Network-SM-
programming. The DISH Network-SM- currently includes over 100 channels of high
quality digital video and audio programming and will expand to approximately 200
digital video and audio channels following the successful launch of a second DBS
satellite, DirectSat I ("EchoStar II"), currently scheduled in September 1996.
In addition to its DBS business, ESB is engaged in the design,
manufacture, distribution and installation of satellite direct to home
("DTH") products and domestic distribution of DTH programming. In the first
quarter of 1996, EchoStar formed a wholly owned subsidiary, Dish Network
Credit Corporation ("DNCC"), for the purpose of providing consumer financing
for EchoStar's domestic DTH products and services. At that time, ESB's
subsidiary that previously provided these services ceased new loan
origination activities. In future periods ESB's revenue from loan
origination and participation income will decline.
Proceeds from the 1996 Notes Offering will be used for: (i) continued
development, marketing and distribution of the DISH Network-SM-; (ii) EchoStar's
purchase of DBS frequencies at 148DEG. WL; (iii) partial funding of the
construction, launch and insurance of DBSC I ("EchoStar III") and EchoStar IV;
(iv) additional launch costs of EchoStar II; and (v) other general corporate
purposes. The additional frequencies were acquired by EchoStar at a public
auction held by the Federal Communications Commission ("FCC") in January 1996
(the "FCC Auction").
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 June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior
Secured Discount Notes due 2004 (the "1994 Notes") and Warrants (collectively,
the "1994 Notes Offering"), resulting in net proceeds of approximately $323.3
million. As of June 30, 1996, substantially all of the Warrants issued in
connection with the 1994 Notes Offering had been exercised. Dish, Ltd. and most
of its subsidiaries are subject to the terms and conditions of the Indenture
related to the 1994 Notes (the "1994 Notes Indenture").
EchoStar presently owns approximately 40% of the outstanding common stock
of Direct Broadcasting Satellite 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 ("New DBSC"), a
5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
wholly owned subsidiary of EchoStar (the "DBSC Merger"). The DBSC Merger has
been approved by DBSC shareholders but will not be consummated until the FCC
has approved the DBSC Merger. Although no assurances can be given, EchoStar
expects the FCC to issue an order with respect to the DBSC Merger in the near
future. Assuming FCC approval of the DBSC Merger, EchoStar will hold, through
New DBSC, DBSC's DBS Rights. On July 11, 1996, EchoStar filed Amendment No. 1
to a Registration Statement on Form S-4 under the Securities Act covering
658,000 shares of EchoStar Class A Common Stock that are intended to be
issued in connection with the DBSC Merger.
The accompanying consolidated financial statements include only the
accounts of ESB and its subsidiaries and exclude all accounts of ESB's parent,
EchoStar.
Unless otherwise stated herein, or the context otherwise requires,
references herein to ESB shall include ESB and all of its direct and indirect
subsidiaries, and EchoStar shall include EchoStar, ESB and all of their direct
and indirect wholly owned subsidiaries.
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 six months ended June 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 Dish,
Ltd.'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.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial position
when compared to its historical results. As of June 30, 1996, EchoStar expects
to invest in the future approximately an additional $500 million to build,
launch and support EchoStar I, EchoStar II, EchoStar III and EchoStar IV (Note
6), assuming receipt of all required FCC licenses and permits. EchoStar
consummated the 1994 Notes Offering, the 1996 Notes Offering and the Equity
Offering to partially satisfy these capital requirements. Annual interest
expense on the 1994 and 1996 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 1997.
EchoStar's plans also include the construction and launch of two fixed service
satellites, additional DBS, Ku-band and KuX-band satellites, and marketing to
promote its DBS products and services.
Beginning in June 1996, ESB began marketing a special promotion in a
limited number of markets pursuant to which consumers were able to purchase a
discounted EchoStar Receiver System under the condition the consumer commits
to subscribe and prepay for DISH Network-SM- programming service for a
minimum of one year. The primary purposes of the promotion were to expand
retail distribution, build awareness of the DISH Network-SM- brand and rapidly
build a subscriber base. Due to positive retailer and consumer results, among
other factors, effective August 1, 1996, ESB began a nationwide rollout of
the promotion. While this promotion will significantly increase ESB's
investment in its subscriber base, ESB believes that the increase in
subscribers to its DISH Network-SM- and the corresponding increase in DBS
programming revenue in future periods, resulting from this promotion, will be
more than sufficient to recover the investment in subscriber acquisition
costs.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar expects
negative stockholders' equity to result before December 31, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the 1994 and 1996 Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii)
amortization expense of the subscriber acquisition costs (Note 2); and (iv)
increases in selling, general and administrative expenses to support the DISH
Network-SM-. Although the negative equity position has significant implications,
including, but not limited to, non-compliance with NASDAQ listing criteria,
which could result in delisting, EchoStar believes this event will not
6
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
materially affect the implementation and execution of its business strategy.
While EchoStar believes it will be able to obtain a waiver from NASDAQ and
remain listed, no assurance can be given NASDAQ will grant a waiver. 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 funds to complete its full complement of satellites. There can be
no assurance that necessary funds will be available or, if available, that
they will be available on terms favorable to EchoStar. Management believes,
however, but can give no assurance, that demand for its DBS products and DISH
Network-SM- programming and EchoStar's ability to satisfy this demand will
result in sufficient cash flow which, together with other sources of capital,
will be sufficient to satisfy future planned expenditures. Significant delays
or launch failures may have significant adverse consequences to EchoStar's
operating results and financial condition.
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.
This Form 10-Q of ESB 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.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
ESB 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 June 30, 1996 consist of money market funds, corporate notes and commercial
paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
ESB 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 Securities in Escrow Accounts as
reflected on the accompanying balance sheets represent the remaining net
proceeds received from the 1994 Notes Offerings, and a portion of the
proceeds from the 1996 Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and launch
of the DISH Network-SM-. These proceeds are held in separate escrow accounts
(the "1994 Escrow Account" and the "1996 Escrow Account", respectively) for
the benefit of the holders of the 1994 and 1996 Notes and are invested in
certain debt and other marketable securities, as permitted by the respective
Indentures, until disbursed for the express purposes identified in the 1994
Notes Offering Prospectus and the 1996 Notes Offering Prospectus, as the case
may be.
Other Restricted Cash includes $11.4 million and $5.7 million at December
31, 1995 and June 30, 1996, respectively, to satisfy certain covenants regarding
launch insurance required by the 1994 Notes Indenture. ESB is required to
maintain launch insurance and Restricted Cash totaling $225.0 million for
EchoStar II. ESB has obtained
7
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$219.3 million of launch insurance for EchoStar II, and, together with the
cash segregated and reserved on the accompanying balance sheet as of June 30,
1996, has satisfied its launch insurance obligations under the 1994 Notes
Indenture. In addition, as of June 30, 1996, $15.0 million was in an escrow
account established pursuant to a DBS satellite receiver manufacturing
contract for payment to the manufacturer as certain milestones are reached
and $15.5 million was in an escrow account for the purpose of cash
collateralizing certain standby letters of credit (Note 4). The major
components of Restricted Cash and Marketable Securities are as follows (in
thousands):
<TABLE>
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------- -------------------------------
UNREALIZED
UNREALIZED HOLDING
AMORTIZED HOLDING MARKET AMORTIZED GAIN MARKET
COST GAIN VALUE COST (LOSS) VALUE
--------- ---------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper......... $66,214 $ -- $66,214 $111,705 $ -- $111,705
Government bonds......... 32,904 420 33,324 97,138 229 97,367
Corporate notes.......... -- -- -- 9,108 (25) 9,083
Accrued interest......... 153 -- 153 1,362 -- 1,362
------- ---- ------- -------- ---- --------
$99,271 $420 $99,691 $219,313 $204 $219,517
------- ---- ------- -------- ---- --------
------- ---- ------- -------- ---- --------
</TABLE>
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 ESB's specifications. ESB 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, JUNE 30,
1995 1996
------- -------
DISH Network-SM- DBS Receivers................ $ -- $19,911
DBS receiver components....................... 9,615 12,844
Consigned DBS receiver components............. -- 8,784
Finished goods - C-band....................... 11,161 3,819
Finished goods - International................ 9,297 4,234
Competitor DBS Receivers...................... 9,404 --
Spare parts................................... 2,089 2,225
Reserve for excess and obsolete inventory..... (2,797) (3,431)
------- -------
$38,769 $48,386
------- -------
------- -------
8
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 ESB's effective borrowing rate. The major components of property
and equipment were as follows (in thousands):
<TABLE>
ESTIMATED
USEFUL LIFE DECEMBER 31, JUNE 30,
(IN YEARS) 1995 1996
----------- ------------ --------
<S> <C> <C> <C>
Construction in progress.............. -- $282,373 $128,437
EchoStar I satellite.................. 12 -- 201,672
Furniture, fixtures and equipment..... 2-12 35,127 51,895
Buildings and improvements............ 7-40 21,006 21,409
Tooling and other..................... 2 2,039 3,913
Land.................................. -- 1,613 1,613
Vehicles.............................. 7 1,310 1,325
-------- --------
Total property and equipment........ 343,468 410,264
Less-Accumulated depreciation..... (10,269) (19,906)
-------- --------
Net property and equipment........ $333,199 $390,358
-------- --------
-------- --------
</TABLE>
Construction in progress primarily includes capitalized costs related to
the construction and launch of EchoStar II, which is currently scheduled for
launch in September 1996. Construction in progress consisted of the following
(in thousands):
<TABLE>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
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................................................ 88,634 126,541
-------- --------
Other........................................................ 110 1,896
-------- --------
$282,373 $128,437
-------- --------
-------- --------
</TABLE>
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
<TABLE>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Deferred tax assets, net........................................ $12,109 $23,332
FCC authorizations, net of amortization......................... 11,309 12,072
1996 Notes deferred debt issuance costs, net of amortization.... -- 12,597
1994 Notes deferred debt issuance costs, net of amortization.... 10,622 9,991
SSET convertible subordinated debentures and accrued interest... 9,610 9,919
Subscriber acquisition costs, net of amortization............... -- 3,215
Other, net...................................................... 897 873
------- -------
$44,547 $71,999
------- -------
------- -------
</TABLE>
9
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization periods for FCC authorization costs are
determined at the time the services related to the applicable FCC authorization
commences, or capitalized costs are written off at the time efforts to provide
services are abandoned. FCC authorization costs are expected to have a useful
life of approximately 12 years.
SUBSCRIBER ACQUISITION COSTS
For the purpose of attracting subscribers to the DISH Network-SM-, ESB has
sponsored certain sales promotions through independent consumer electronics and
satellite retailers. ESB effectively sells its proprietary DBS reception
equipment to these retailers at less than cost under the condition consumers
commit to subscribe and prepay for DISH Network-SM- programming service for a
minimum of one year. The subscriber acquisition costs recorded represent the
difference between the direct costs of the hardware and the revenue generated
from the sales of the hardware. These costs have been deferred and are being
amortized over the expected minimum life of the subscriber, currently estimated
to be three years. Any unamortized investment with respect to subscribers who
discontinue DISH Network-SM- service after one year but before the end of three
years, will be fully amortized to expense at that time. ESB believes subscriber
acquisition costs will be recovered through future revenue generated from sales
of DISH Network-SM- programming. Amortization expense of subscriber acquisition
costs for the three and six months ended June 30, 1996 was approximately
$92,000.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of advance payments received from
programming providers and subscribers for satellite television programming to be
provided in future periods. The revenue is recognized on a straight-line basis
over the period the programming is provided.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying income
statements includes: (i) amortization of original issue discount on the 1994
Notes and the 1996 Notes; (ii) interest expense on contractor financing of
EchoStar I; and (iii) interest expense on corporate mortgage debt.
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish, Ltd. completed the 1994 Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the 1994 Notes
and 3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. As of June 30, 1996, substantially
all of the Warrants issued in connection with the 1994 Notes Offering had been
exercised. Interest on the 1994 Notes currently is not payable in cash but
accrues through June 1, 1999, with the 1994 Notes accreting to $624.0 million by
that date. Thereafter, interest on the 1994 Notes will be payable in cash semi-
annually on June 1 and December 1 of each year, commencing December 1, 1999. At
June 30, 1996, the 1994 Notes were reflected in the accompanying financial
statements at $408.4 million, net of unamortized discount of $215.6 million.
1996 NOTES
On March 25, 1996, ESB completed the 1996 Notes Offering consisting of
$580.0 million aggregate principal amount of the 1996 Notes. The 1996 Notes
Offering resulted in net proceeds to ESB of approximately $337.0 million.
Interest on the 1996 Notes currently is not payable in cash but accrues through
March 15, 2000, with the 1996 Notes accreting to $580.0 million by that date.
Thereafter, interest on the 1996 Notes will be payable in cash semi-annually on
10
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
March 15 and September 15 of each year, commencing September 15, 2000. At
June 30, 1996, the 1996 Notes were reflected in the accompanying financial
statements at $361.7 million, net of unamortized discount of $218.3 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
From May 1994 to May 1996, the principal subsidiaries of EchoStar, 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.
The Credit Facility expired in May 1996 and EchoStar does not currently intend
to arrange a replacement credit facility. Instead, EchoStar is using available
cash to collateralize its letter of credit obligations, which historically was
the only significant use of the Credit Facility. At June 30, 1996, EchoStar had
cash collateralized $15.5 million of certain standby letters of credit for trade
purchases which is included in restricted cash and marketable securities in the
accompanying financial statements (Note 2).
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1996 1995 1996
------ ------ ------- -------
Current (provision) benefit
Federal.................... $ (831) $ 2,441 $(1,598) $ 4,412
State...................... (175) 502 (369) 705
Foreign.................... (274) 2 (451) (120)
------ ------ ------- -------
(1,280) 2,945 (2,418) 4,997
------ ------ ------- -------
Deferred benefit
Federal.................... 1,766 7,700 3,816 10,464
State...................... 365 386 808 635
------ ------ ------- -------
2,131 8,086 4,624 11,099
------ ------ ------- -------
Total benefit............ $ 851 $11,031 $ 2,206 $16,096
------ ------ ------- -------
------ ------ ------- -------
ESB's deferred tax assets (approximately $25.1 million at June 30, 1996)
relate principally to temporary differences for amortization of original issue
discount on the 1994 and 1996 Notes, net operating loss carryforwards and
various accrued expenses which are not deductible until paid. No valuation
allowance has been provided because ESB currently believes it is more likely
than not that these deferred assets will ultimately be realized. If future
operating results differ materially and adversely from ESB's current
expectations, its judgment regarding the need for a valuation allowance may
change.
(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 has completed construction of 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, 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.
EchoStar has entered into a contract with Martin to begin the construction
phase of EchoStar's fourth DBS satellite ("EchoStar IV"). This contract contains
an option provision which allows EchoStar to instruct Martin to begin the
construction phase of a fifth DBS satellite ("EchoStar V"). The contract for
EchoStar IV also contains a provision
11
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
whereby, beginning February 16, 1998, 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.
Contractor financing of $28.0 million will be used for EchoStar II.
Contractor financing of $15.0 million will be used for both EchoStar III and
EchoStar IV. Interest on the contractor financing will range between 7.75% and
8.25% and principal payments are payable in equal monthly installments over five
years following the launch of the respective satellite.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch EchoStar II from Korou, French Guiana (the "Arianespace Contract").
The launch is currently scheduled for September 1996 on a dedicated Ariane 42P
launch vehicle. The Arianespace Contract contains provisions entitling either
party to delay the launch in limited circumstances, subject to the payment of
penalties in some cases. As of June 30, 1996, EchoStar has paid Arianespace
approximately $43.4 million pursuant to the Arianespace Contract. All remaining
payments are payable monthly and will be due prior to the launch. Subsequent to
June 30, 1996, an additional payment relating to the launch totaling $17.4
million was made to Arianespace.
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 cost 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.
Subsequent to June 30, 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 will issue 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.
PURCHASE COMMITMENTS
ESB has entered into agreements with various manufacturers to purchase DBS
satellite receivers and related components manufactured based on ESB's supplied
specifications. As of June 30, 1996 the remaining commitments total
approximately $402.4 million. At June 30, 1996, the total of all outstanding
purchase order commitments with domestic and foreign suppliers was approximately
$419.2 million. All but approximately $189.2 million of the purchases related to
these commitments are expected to be made during 1996 and the remainder is
expected to be made
12
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "1994 Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The 1996 Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the 1996 Notes
Indenture), the 1996 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 1996 Notes will be
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC. If the DBSC Merger is not consummated, New
DBSC will not be required to guarantee the 1996 Notes. There can be no assurance
that the DBSC Merger will be approved by the FCC or that it will be consummated
(Note 2).
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the 1994 Notes Guarantors by
approximately $277,000 and $180,000 as of December 31, 1995 and June 30, 1996,
respectively. Summarized consolidated financial information for Dish, Ltd. is as
follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1995 1996 1995 1996
------- -------- ------- --------
Income Statement Data --
Revenue........................ $39,252 $ 69,354 $79,665 $110,380
Expenses....................... 38,484 87,007 79,595 136,941
------- -------- ------- --------
Operating income (loss)........ 768 (17,653) 70 (26,561)
Other income (expense), net.... (3,432) (8,642) (6,329) (11,876)
------- -------- ------- --------
Net loss before income taxes... (2,664) (26,295) (6,259) (38,437)
Benefit for income taxes....... 851 9,097 2,206 13,949
------- -------- ------- --------
Net loss.................... $(1,813) $(17,198) $(4,053) $(24,488)
------- -------- ------- --------
------- -------- ------- --------
DECEMBER 31, JUNE 30,
1995 1996
---------- --------
Balance Sheet Data --
Current assets.................................. $ 81,858 $ 92,162
Property and equipment, net..................... 333,199 390,358
Other noncurrent assets......................... 144,238 116,398
-------- --------
Total assets................................. $559,295 $598,918
-------- --------
-------- --------
Current liabilities............................. $ 50,743 $ 81,723
Long-term liabilities........................... 415,662 448,949
Stockholder's equity............................ 92,890 68,246
-------- --------
Total liabilities and stockholder's equity... $559,295 $598,918
-------- --------
-------- --------
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ESB currently operates three related businesses: (i) operation of the DISH
Network-SM- and continued development of the EchoStar DBS System; (ii) design,
manufacture, marketing, installation and distribution of DTH products worldwide;
and (iii) domestic distribution of DTH programming. The growth of DBS service
and equipment sales has had and will continue to have a material negative impact
on ESB's domestic sales of C-band DTH products; however this negative impact has
been more than offset for the six months ended June 30, 1996 by sales of
EchoStar Receiver Systems. During March 1996 ESB began broadcasting and selling
programming packages available from the DISH Network-SM-. ESB expects to derive
its revenue principally from monthly fees from subscribers to DISH Network-SM-
programming and, to a lesser extent, from the sale of EchoStar Receiver Systems.
As sales of EchoStar DBS programming and receivers increase, ESB expects the
decline in its sales of domestic C-band DTH products to continue at an
accelerated rate.
ESB generally bills for DISH Network-SM- programming periodically in
advance and recognizes revenue as service is provided. Revenue is a function
of the number of subscribers, the mix of programming packages selected and
the rates charged, and transaction fees for ancillary programming activities
and satellite usage time agreements. DBS programming costs will generally be
based upon the number of subscribers to each programming offering. From time
to time ESB may engage in promotional activities that include discounted
rates for limited periods, which will result in lower average revenue per
subscriber for the applicable periods. Beginning in June 1996, ESB began
marketing a special promotion in a limited number of markets pursuant to
which consumers were able to purchase a discounted EchoStar Receiver System
under the condition the consumer commits to subscribe and prepay for DISH
Network-SM- programming service for a minimum of one year. Under this
promotion the consumer is able to purchase the discounted EchoStar Receiver
System and prepay the annual programming package for as low as $499. The
primary purposes of the promotion were to expand retail distribution, build
awareness of the DISH Network-SM- brand and rapidly build a subscriber base.
Due to positive retailer and consumer results, among other factors, effective
August 1, 1996, ESB began a nationwide rollout of the promotion. While this
promotion will significantly increase ESB's investment in its subscriber
base, ESB believes that the increase in subscribers to its DISH Network-SM-
and the corresponding increase in DBS programming revenue in future periods,
resulting from this promotion, will be more than sufficient to recover the
investment in subscriber acquisition costs.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1995
REVENUE. Total revenue for the three and six months ended June 30, 1996
was $69.4 million and $110.4 million, respectively, an increase of $30.1
million, or 77%, and $30.7 million, or 39%, respectively, as compared to
total revenue for the three and six months ended June 30, 1995 of $39.3
million and $79.7 million, respectively. Revenue from domestic sales of DTH
products for the three and six months ended June 30, 1996 was $50.9 million
and $74.9 million, respectively, an increase of $31.5 million, or 163%, and
$35.0 million, or 88%, respectively, as compared to the same periods in 1995.
The increase in domestic revenue was primarily due to $43.5 million and $51.7
million in revenue from the sale of EchoStar Receiver Systems during the
three and six months ended June 30, 1996, respectively. There were no
EchoStar Receiver System sales during the comparable periods in 1995. The
increases in domestic revenue were principally offset by a decrease of $4.7
million, or 50%, and $9.6 million, or 50%, in revenue from sales of C-band
satellite receivers and related accessories, during the three and six months
ended June 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
$5.8 million, or 98%, and $4.8 million, or 37%, for the three and six months
ended June 30, 1996, respectively, compared to the same periods in 1995.
Revenue from Competitor DBS Receiver sales was $114,000 and $8.0 million for
the three and six months ended June 30, 1996, respectively, as compared to
$5.9 million and $12.8 million for the same periods in 1995.
14
<PAGE>
The increases in domestic revenue were also partially offset by a decrease of
$2.4 million, or 61%, and $3.6 million, or 53%, in revenue from sales of
non-proprietary descrambler modules, during the three and six months ended
June 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 six months
ended June 30, 1996, and this decline will continue with the growth of DBS
service and equipment sales. Consistent with the increases in revenue noted
above, ESB has experienced a corresponding increase in trade accounts
receivable at June 30, 1996, and expects this trend to continue with the
nationwide rollout of the promotion discussed above.
Domestically, ESB sold approximately 110,000 and 155,000 satellite
receivers in the three and six months ended June 30, 1996, respectively, an
increase of 323% and 193%, respectively, as compared to approximately 26,000
and 53,000 satellite receivers, respectively, for the same periods in 1995.
Although there was an increase in the number of satellite receivers sold in
1996 as compared to 1995, overall revenue did not increase proportionately as
a result of a substantial shift in product mix to lower priced DBS receivers
and related accessories, and an approximate 15% reduction in the average
selling price of C-band satellite receivers. Included in the number of
satellite receivers sold for the three and six months ended June 30, 1996 are
approximately 103,000 and 120,000, respectively, EchoStar Receiver Systems.
EchoStar Receiver System revenue represented approximately 63% and 47%,
respectively, of total revenue for the three and six months ended June 30,
1996.
Also included in the number of satellite receivers sold for the three
and six months ended June 30, 1996 are approximately 300 and 19,000,
respectively, Competitor DBS Receivers as compared to 10,000 and 21,000,
respectively, for the same periods in 1995. During the six months ended June
30, 1996, the Competitor DBS Receivers were sold at an approximate 28%
reduction in the average selling price as compared to the six months ended
June 30, 1995. Competitor DBS Receiver revenue represented less than 1% and
approximately 7% of total revenue for the three and six months ended June 30,
1996, respectively. ESB's agreement to distribute Competitor DBS Receiver
systems terminated on December 31, 1995 and during the first half of 1996,
ESB sold all of its existing 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.
In future periods, domestic DTH product revenue will be primarily
generated from the sale of EchoStar Receiver Systems and, to a lesser extent,
sales of C-band DTH products and related accessories. Beginning in June 1996,
ESB began marketing a special promotion in a limited number of markets
pursuant to which consumers were able to purchase a discounted EchoStar
Receiver System under the condition the consumer commits to subscribe and
prepay for DISH Network-SM- programming service for a minimum of one year. The
primary purposes of the promotion were to expand retail distribution, build
awareness of the DISH Network-SM- brand and rapidly build a subscriber base.
Due to positive retailer and consumer results, among other factors, effective
August 1, 1996, ESB began a nationwide rollout of the promotion. During the
promotional period, ESB will not recognize any DTH product revenue or expense
related to EchoStar Receiver Systems sold pursuant to this promotion.
Instead, ESB will capitalize the difference between the direct costs of the
EchoStar Receiver System and the related revenue generated from these sales.
This difference will be deferred and will be amortized over the expected
minimum life of the subscriber. ESB believes that the revenue generated from
sales of DISH Network-SM- programming in future periods, resulting from this
promotion, will more than offset the investment in subscriber acquisition
costs.
DISH Network-SM- programming revenue was $5.6 million and $6.0 million
for the three and six months ended June 30, 1996, respectively. Since ESB 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. As of
August 1, 1996, ESB had over 100,000 subscribers to DISH Network-SM-
programming.
C-band programming revenue was $3.2 million and $6.6 million for the
three and six months ended June 30, 1996, respectively, a decrease of
$623,000, or 16%, and $1.0 million, or 14%, 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
15
<PAGE>
C-band DTH programming revenue. This decline in C-band equipment sales and
the related programming revenue is expected to continue for the foreseeable
future. The expected 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 six months
ended June 30, 1996 was $120,000 and $492,000, respectively, a decrease of
$450,000, or 79%, and $343,000, or 41%, respectively, compared to the same
periods in 1995. The decrease in loan origination and participation income
for the three and six months ended June 30, 1996 was primarily due to the
formation of DNCC, a wholly owned subsidiary of EchoStar, in the first
quarter of 1996. EchoStar formed DNCC to provide consumer financing of
EchoStar's domestic DTH products and services. Concurrent with the formation
of DNCC, ESB's subsidiary which previously provided these services ceased new
loan origination activities. In future periods, revenue from loan origination
and participation income will continue to decline.
Revenue from international sales of DTH products for the three and six
months ended June 30, 1996 was $9.5 million and $22.3 million, respectively,
a decrease of $6.0 million, or 39%, and $8.9 million, or 29%, 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, ESB sold
approximately 51,000 and 126,000 analog satellite receivers during the three
and six months ended June 30, 1996, a decrease of 46% and 30%, respectively,
compared to approximately 94,000 and 181,000 units sold during the same
periods in 1995. Overall, ESB's international markets for analog DTH products
declined during the three and six months ended June 30, 1996 as anticipation
for new international digital services continues 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 ESB.
To offset this anticipated decline in demand for analog satellite receivers,
ESB has been negotiating with digital service providers to distribute their
proprietary receivers in ESB's international markets. While ESB 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 $57.5 million and
$90.3 million for the three and six months ended June 30, 1996, respectively,
an increase of $30.2 million, or 110%, and $33.5 million, or 59%,
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
DTH products. Operating expenses for DTH products as a percentage of DTH
product revenue were 95% and 93% for the three and six months ended June 30,
1996, respectively, compared to 79% and 80% for the same periods in 1995,
respectively. This increase was principally the result of declining sales
prices of C-band DTH products and Competitor DBS Receivers as described
above, during the three and six months ended June 30, 1996 as compared to the
same periods in 1995.
In future periods, the costs of domestic DTH product sold will be
primarily related to the sale of EchoStar Receiver Systems and, to a lesser
extent, sales of C-band DTH products and related accessories. Beginning in
June 1996, ESB began marketing a special promotion in a limited number of
markets pursuant to which consumers were able to purchase a discounted
EchoStar Receiver System under the condition the consumer commits to
subscribe and prepay for DISH Network-SM- programming service for a minimum
of one year. The primary purposes of the promotion were to expand retail
distribution, build awareness of the DISH Network-SM- brand and rapidly build
a subscriber base. Due to positive retailer and consumer results, among other
factors, effective August 1, 1996, ESB began a nationwide rollout of the
promotion. During the promotional period, ESB will not recognize any DTH
revenue or expense related to EchoStar Receiver Systems sold pursuant to this
promotion. Instead, ESB will capitalize the difference between the direct
costs of the EchoStar Receiver System and the related revenue generated from
these sales. This difference will be deferred and will be amortized over the
expected minimum life of the subscriber.
The costs of DISH Network-SM- programming were $1.7 million and $1.8
million for the three and six months ended June 30, 1996, respectively. Since
ESB did not begin broadcasting and selling programming packages available on
the DISH Network-SM- service until March 4, 1996, there were no DISH
Network-SM- programming expenses incurred during the comparable periods in
1995. DISH Network-SM- programming costs as a percentage of DISH Network-SM-
programming revenue were 30% and 29% for the three and six months ended June
30, 1996, respectively.
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The costs of C-band programming were $2.9 million and $6.1 million for
the three and six months ended June 30, 1996, respectively, a decrease of
$512,000, or 15%, and $766,000, or 11%, 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 six months ended June 30, 1996
were 90% and 91%, respectively, as compared to 89%, for each of the same
periods in 1995. The increase in C-band programming expenses as a percentage
of C-band programming revenue was principally the result of declining sales
prices of C-band programming. 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 $18.5 million and $29.1 million for the three
and six months ended June 30, 1996, respectively, an increase of $11.2
million, or 153%, and $13.9 million, or 92%, respectively, as compared to the
same periods in 1995. Selling, general and administrative expenses as a
percentage of total revenue increased to 27% and 26% for the three and six
months ended June 30, 1996, respectively, as compared to 19% for each of the
same periods in 1995. This increase was principally due to: (i) marketing and
advertising prior to and in conjunction with the introduction of DISH
Network-SM- service; (ii) increased personnel in all areas of the
organization to support the DISH Network-SM-; (iii) costs related to the
Digital Broadcast Center, which commenced operations in the third quarter of
1995; and (iv) costs associated with operating the DISH Network-SM- Call
Center and related services which have been outsourced. In future periods,
ESB believes that although selling, general and administrative expenses will
continue to increase, such increase as a percentage of future revenue will
decrease as subscribers are added and additional revenue from sales of DISH
Network-SM- programming is generated.
Research and development costs totaled $1.4 million and $2.6 million for
the three and six months ended June 30, 1996, respectively, as compared to
$1.2 million and $2.5 million for the same periods in 1995. The increase was
principally due to increased research and development costs necessary to
provide digital DBS satellite receivers to domestic and international
markets, principally offset by a reduction research necessary to provide
C-band receivers to domestic and international markets.
EBITDA. As expected, ESB incurred operating losses for the three and six
months ended June 30, 1996. EBITDA for the three and six months ended June
30, 1996 was a negative $11.2 million and a negative $16.8 million,
respectively, a decrease of $12.4 million and $17.7 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. ESB
expects to continue to report operating losses in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation for the three and six months
ended June 30, 1996 was $6.4 million and $9.8 million, respectively, an
increase of $6.0 million and $9.0 million, respectively, as compared to
$406,000 and $769,000 for the three and six months ended June 30, 1995. The
overall increase primarily resulted from depreciation on the Digital
Broadcast Center and EchoStar I which were placed in service during the
fourth quarter of 1995 and the first quarter of 1996, respectively, and the
amortization of subscriber acquisition costs discussed below.
Also included within deprecation and amortization is amortization of
subscriber acquisition costs. For the purpose of attracting subscribers to
the DISH Network-SM-, ESB has sponsored certain sales promotions through
independent consumer electronics and satellite retailers. ESB effectively
sells its proprietary DBS reception equipment to these retailers at less than
cost under the condition consumers commit to subscribe and prepay for DISH
Network-SM- programming service for a minimum of one year. The subscriber
acquisition costs recorded represent the difference between the direct costs
of the hardware and the revenue generated from the sales of the hardware.
These costs have been deferred and are being amortized over the expected
minimum life of the subscriber, currently estimated to be three
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years. Any unamortized investment with respect to subscribers who discontinue
DISH Network-SM- service after one year but before the end of three years,
will be fully amortized to expense at that time. ESB believes subscriber
acquisition costs will be recovered through future revenue generated from
sales of DISH Network-SM- programming. Amortization expense of subscriber
acquisition costs for the three and six months ended June 30, 1996 was
approximately $92,000. In future periods, with the nationwide rollout of this
promotion, amortization expense is expected to be of a magnitude which
significantly exceeds historical levels, even if the promotional period is
terminated in the near future.
OTHER INCOME AND EXPENSE. Other expense for the three and six months
ended June 30, 1996 was $14.2 million and $18.0 million, respectively, an
increase of $10.8 million, or 314%, and $11.7 million, or 185%, respectively,
as compared to the same periods in 1995. The increase in other expense for
the three and six month periods ending June 30, 1996 resulted primarily from
an increase in interest expense resulting from the issuance of the 1996
Notes. The increase was partially offset by an increase in interest income
attributable to an increase in the balance of the escrow, cash and marketable
securities account as a result of proceeds received from the issuance of the
1996 Notes.
PROVISION FOR INCOME TAXES. Income tax benefit for the three and six
months ended June 30, 1996 was $11.0 million and $16.1 million, respectively,
compared to income tax benefit of $851,000 and $2.2 million during the same
periods in 1995. This increase is principally the result of changes in
components of income and expenses discussed above during the three and six
months ended June 30, 1996. ESB's deferred tax assets (approximately $25.1
million at June 30, 1996) relate principally to temporary differences for
amortization of original issue discount on the 1994 and 1996 Notes, net
operating loss carryforwards and various accrued expenses which are not
deductible until paid. No valuation allowance has been provided because ESB
currently believes it is more likely than not that these deferred assets will
ultimately be realized. If future operating results differ materially and
adversely from ESB's current expectations, its judgment regarding the need
for a valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
ESB used approximately $39.8 million for the six months ended June 30,
1996, as compared to $6.1 million used by operations for the same period in
1995. The cash required for operations for the six months ended June 30, 1996
was mainly a result of: (i) increases in trade accounts receivable related to
increased sales of EchoStar Receiver Systems; (ii) increases in amounts due
from affiliates; (iii) increases in DBS receiver inventory; and (iv)
increases in other current assets including prepaid in-orbit insurance on
EchoStar I, all partially offset by increases in deferred programming
revenue. As ESB builds its DISH Network-SM- subscriber base, negative
operating cash flow should be offset by an increase in revenue attributable
to DISH Network-SM- programming. In the event subscriptions to DISH
Network-SM- programming do not meet anticipated levels or the investment in
subscriber acquisition costs continues to increase beyond planned levels,
negative operating cash flow may continue for a longer period of time and
could increase.
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
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. Instead, EchoStar is using available cash to
collateralize its letter of credit obligations, which historically was the
only significant use of the Credit Facility. At June 30, 1996, EchoStar had
cash collateralized $15.5 million of certain standby letters of credit for
trade purchases which is included in restricted cash and marketable
securities in the accompanying financial statements.
During June 1994, Dish, Ltd. issued 624,000 units consisting of $624.0
million principal amount of the 1994 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 1994 Escrow Account. As of June 30, 1996, substantially all of the
Warrants issued in connection with the 1994 Notes Offering had been
exercised. Through June
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30, 1996, $322.9 million had been withdrawn from the 1994 Escrow Account. At
June 30, 1996, approximately $298.0 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. As of
June 30, 1996, approximately $22.9 million remained in the 1994 Escrow
Account, which included investment earnings, and was withdrawn on August 12,
1996 to partially fund insurance costs related to the launch of EchoStar II.
In March 1996, ESB consummated a private placement of the 1996 Notes. On
April 24, 1996, ESB filed a Registration Statement on Form S-1 under the
Securities Act to exchange the 1996 Notes for publicly registered notes which
was declared effective by the Securities and Exchange Commission on June 28,
1996. As of August 1, 1996, all of the outstanding privately placed notes had
been exchanged for the new publicly registered notes. ESB was formed in
January 1996 for the purpose of the 1996 Notes Offering. In connection with
the 1996 Notes Offering EchoStar has contributed all of the outstanding
capital stock of its wholly owned subsidiary, Dish, Ltd., to ESB. ESB issued
580,000 notes consisting of $580.0 million principal amount of the 1996 Notes
for aggregate net proceeds of approximately $337.0 million of which $177.3
million was placed in the 1996 Escrow Account and the remaining $159.7
million is either included in cash and cash equivalents or marketable
investment securities in the accompanying balance sheet at June 30, 1996, or
has been expended for purposes described in the 1996 Notes Offering
Prospectus. Through June 30, 1996, $19.3 million had been withdrawn from the
1996 Escrow Account for development and construction of EchoStar III and
EchoStar IV. As of June 30, 1996, approximately $160.4 million remained in
the 1996 Escrow Account, which included investment earnings. Subsequent to
June 30, 1996, an additional $5.0 million has been withdrawn from the 1996
Notes Escrow Account. Total cash on hand and marketable investment securities
at June 30, 1996 were approximately $119.5 million. EchoStar guarantees the
1996 Notes on a subordinated basis.
EchoStar anticipates expending an additional $60 million in working
capital during the second half of 1996, including the 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 do not meet anticipated levels; (ii) actual expenses
exceed present estimates; or (iii) investment in subscriber acquisition costs
continues to increase beyond planned levels. In addition to the working
capital requirements discussed above, during the second half of 1996,
EchoStar expects to expend: (i) approximately $43.4 million in connection
with the launch of EchoStar II (which was partially funded with the remaining
balance of the 1994 Escrow Account subsequent to June 30, 1996); (ii)
approximately $30.7 million for launch insurance on EchoStar II; (iii)
approximately $8.3 million for in-orbit payments to Martin on EchoStar I and
EchoStar II; (iv) approximately $38.0 million in connection with the launch
of EchoStar III; (v) approximately $45.0 million for construction of EchoStar
III and EchoStar IV; and (vi) approximately $41.8 million for the purchase of
DBS frequencies at 148DEG. WL, which is due to the FCC five days after
EchoStar receives FCC approval for use of these frequencies. Funds for these
expenditures are expected to come from the 1996 Notes Escrow Account and
available cash and marketable investment securities. Beyond 1997, EchoStar
will expend approximately $68.1 million on contractor financing debt related
to EchoStar I and EchoStar II. Additionally, EchoStar has committed to expend
approximately $225 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.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar
expects negative stockholders' equity to result before December 31, 1997.
Although the negative equity position has significant implications,
including, but not limited to, non-compliance with NASDAQ listing criteria,
which could result in delisting, EchoStar believes this event will not
materially affect the implementation and execution of its business strategy.
While EchoStar believes it will be able to obtain a waiver from NASDAQ and
remain listed, no assurance can be given NASDAQ will grant a waiver.
Delisting would result in a decline in EchoStar's common stock trading market
which could potentially depress stock and bond prices, among other things.
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EchoStar has entered into a contract with Martin to begin the construction
phase of EchoStar's fourth DBS satellite ("EchoStar IV"). This contract also
contains an option provision which allows EchoStar to instruct Martin to begin
the construction phase of a fifth DBS satellite ("EchoStar V"). Contractor
financing of $15.0 million will be used for construction of EchoStar IV.
Concurrent with execution of this contract, EchoStar waived all penalties due
from Martin for the late delivery of EchoStar I and EchoStar II.
Subsequent to June 30, 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 will issue 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.
In addition to the commitments described above, ESB has entered into
agreements to purchase DBS satellite receivers and related components for the
EchoStar DBS System. As of June 30, 1996 those purchase order commitments
totaled approximately $402.4 million. At June 30, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers was
approximately $419.2 million. All but approximately $189.2 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 commitments from available cash, marketable investment securities and
sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $806.5 million of long-term
debt (including the 1994 and 1996 Notes, deferred satellite contract payments on
EchoStar I and mortgage debt) as of December 31, 1995 and June 30, 1996,
respectively. In addition, because interest on the 1994 Notes is not payable
currently in cash but accrues through June 1, 1999, the 1994 Notes will accrete
by $215.6 million through that date. Similarly, because interest on the 1996
Notes is not payable in cash but accrues through March 15, 2000, the 1996 Notes
will accrete by $218.3 million through that date. Contractor financing of $28.0
million will be used for EchoStar II. Contractor financing of $15.0 million will
be used for both EchoStar III and EchoStar IV. Interest on the contractor
financing will range between 7.75% and 8.25% and principal payments are payable
in equal monthly installments over five years following the launch of the
respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The 1994 and 1996 Notes Indentures impose various restrictions on the
transfer of funds among EchoStar and its subsidiaries. Although the 1996 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
1994 Notes Indenture), and guarantees of EchoStar and certain of its other
subsidiaries, ESB's ability to fund interest and principal payments on the 1996
Notes will depend on successful operation and the acquisition of an adequate
number of subscribers to the DISH Network-SM- and ESB having access to available
cash flows generated by the DISH Network-SM-. If cash available to ESB is not
sufficient to service the 1996 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 1996 Notes.
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OTHER
1994 AND 1996 NOTES
EchoStar I was successfully launched by Great Wall in December 1995. In the
event of a launch failure of EchoStar II, Dish, Ltd. would first be required
under the 1994 Notes Indenture to make an offer to repurchase one-half of the
then accreted value of the 1994 Notes. In the event that EchoStar does not have
the right to use orbital slot authorizations granted by the FCC covering a
minimum of 21 transponders at a single full CONUS orbital slot, ESB and Dish,
Ltd. will be required to make an offer to repurchase all or a portion of the
outstanding 1996 Notes and 1994 Notes, respectively. 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, ESB will be required under the 1996 Notes Indenture to repurchase the
maximum principal amount of the 1996 Notes that may be purchased with the
proceeds of any refund received from the FCC up to $52.3 million.
If the DBSC Merger or similar transaction does not occur on or before March
1, 1997, ESB will be required to repurchase at least $83.0 million principal
amount of the 1996 Notes. Further, in the event that EchoStar incurs more than
$7.8 million in expenses (as defined in the 1996 Notes Indenture) in connection
with the DBSC Merger, ESB 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 1996 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
ESB has agreements with two manufacturers to supply DBS receivers for ESB.
To date, only one of the manufacturers has produced a receiver acceptable to
ESB. No assurances can be given that ESB's other manufacturer will be able to
produce an acceptable receiver in the future. Until the other manufacturer
produces a receiver acceptable to ESB, ESB is dependent on one manufacturing
source for its receivers. To date, ESB has paid the non-performing manufacturer
$10.0 million and has an additional $15.0 million in an escrow account as
security for ESB's payment obligations under that contract. If that manufacturer
does not produce an acceptable receiver in the near future, ESB may terminate
that contract, which would cause longer term dependence on a single
manufacturing source. If ESB's sole manufacturer is unable for any reason to
produce receivers in a quantity sufficient to meet demand, ESB's liquidity and
results of operations may be adversely affected. If the contract with ESB's
other manufacturer is terminated, there can be no assurance ESB would be able to
recover all amounts paid the manufacturer or otherwise held in escrow.
FORWARD LOOKING STATEMENTS
This Form 10-Q of ESB 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 ESB with respect to, among other
things: (i) ESB's financing plans; (ii) trends affecting ESB's financial
conditions or results of operations; (iii) ESB's growth strategy; (iv) ESB's
anticipated results of future operations; and (v) regulatory matters affecting
ESB. 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.
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EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). EchoStar
adopted SFAS No. 121 in the first quarter of 1996 and its adoption has not had a
material impact on EchoStar's financial position, results of operations or cash
flows.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. EchoStar intends to continue to
measure compensation cost under APB No. 25 and to comply with the pro forma
disclosure requirements. Therefore, this statement has had no impact on
EchoStar's results of operations.
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.
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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.
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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).
3.1(a)* Articles of incorporation of EchoStar Satellite Broadcasting
Corporation ("ESB") (incorporated herein by reference to
Exhibit 3.1(a) to the Registration Statement on Form S-1,
Registration No. 333-3980).
3.1(b)* Bylaws of ESB (incorporated herein by reference to Exhibit
3.1(f) to the Registration Statement on Form S-1, Registration
No. 333-3980).
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).
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).
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
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).
25
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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).
26
<PAGE>
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)* 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 Exhibit 10.18
to the Form 10-Q of EchoStar as of June 30, 1996, Commission
File No. 0-26176).
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 ESB during the period covered
by this Quarterly Report on Form 10-Q.
27
<PAGE>
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 Satellite Broadcasting Corporation
Date: August 13, 1996 / / STEVEN B. SCHAVER
------------------------------------------
Steven B. Schaver
Vice President and Chief Financial Officer
/ / STEVEN B. SCHAVER
------------------------------------------
Steven B. Schaver
Principal Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED BALANCE SHEET OF ECHOSTAR SATELLITE BROADCASTING
CORPORATION AND SUBSIDIARIES AS OF JUNE 30, 1996 AND THE RELATED CONSOLIDATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 74,501 74,501
<SECURITIES> 44,991 44,991
<RECEIVABLES> 19,297 19,297
<ALLOWANCES> (848) (848)
<INVENTORY> 48,386 48,386
<CURRENT-ASSETS> 246,316 246,316
<PP&E> 410,264 410,264
<DEPRECIATION> (19,906) (19,906)
<TOTAL-ASSETS> 928,190 928,190
<CURRENT-LIABILITIES> 53,228 53,228
<BONDS> 806,528 806,528
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 64,271 64,271
<TOTAL-LIABILITY-AND-EQUITY> 928,190 928,190
<SALES> 69,234<F1> 109,888<F1>
<TOTAL-REVENUES> 69,354 110,380
<CGS> 62,072<F2> 98,105<F2>
<TOTAL-COSTS> 87,025 136,959
<OTHER-EXPENSES> 14,197 18,008
<LOSS-PROVISION> (569) 41
<INTEREST-EXPENSE> 19,990<F3> 25,774<F3>
<INCOME-PRETAX> (31,868) (44,587)
<INCOME-TAX> 11,031 16,096
<INCOME-CONTINUING> (20,837) (28,491)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (20,837) (28,491)
<EPS-PRIMARY> (20,837) (28,491)
<EPS-DILUTED> (20,837) (28,491)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES THE COST OF PROVIDING PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
