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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 333-3980
ECHOSTAR SATELLITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1337871
(State or other jurisdiction of (I.R.S. Employer
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
----- -----
AS OF AUGUST 14, 1997, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 1,000 SHARES OF COMMON STOCK, $0.01 PAR VALUE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH
THE REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1997 (Unaudited)................. 1
Condensed Consolidated Statements of Operations -
Three and six months ended June 30, 1996 and 1997 (Unaudited)... 2
Condensed Consolidated Statements of Cash Flows -
Three and six months ended June 30, 1996 and 1997 (Unaudited)... 3
Notes to Condensed Consolidated Financial Statements (Unaudited).. 4
Item 2. Management's Narrative Analysis of Results of Operations.......... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities............................................. *
Item 3. Defaults Upon Senior Securities................................... *
Item 4. Submission of Matters to a Vote of Security Holders............... *
Item 5. Other Information.............................................. None
Item 6. Exhibits and Reports on Form 8-K.................................. 11
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION AND
SUBSIDIARIES.
- -------------------------------------
* This item has been omitted pursuant to the reduced disclosure format as
set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q.
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 38,428 $ 35,572
Marketable investment securities.................... 18,807 4,952
Trade accounts receivable, net of allowance
for uncollectible accounts of $1,494
and $1,834 respectively............................ 13,483 29,480
Inventories......................................... 72,767 63,043
Income tax refund receivable........................ 4,830 145
Subscriber acquisition costs, net................... 68,129 68,356
Other current assets................................ 15,031 7,159
---------- ----------
Total current assets.................................. 231,475 208,707
Restricted Cash and
Marketable Investment Securities:
1996 Notes escrow................................... 47,491 --
Other............................................... 31,450 8,445
---------- ----------
Total restricted cash and
marketable investment securities..................... 78,941 8,445
Property and equipment, net........................... 499,989 493,310
Advances to affiliates, net........................... 144,893 211,565
Deferred tax assets................................... 79,670 79,670
Other noncurrent assets............................... 38,123 38,652
---------- ----------
Total assets...................................... $1,073,091 $1,040,349
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable.............................. $ 40,793 $ 49,850
Deferred programming and product revenue
-- DISH Network subscriber promotions.............. 97,959 115,785
Deferred revenue - DISH Network..................... 4,407 5,209
Deferred revenue - C-band........................... 734 588
Accrued expenses and other current liabilities...... 29,180 39,238
Deferred tax liabilities............................ 12,674 12,309
Current portion of long-term obligations............ 11,334 11,832
---------- ----------
Total current liabilities............................. 197,081 234,811
Long-term obligations, net of current portion:
Long-term deferred signal carriage revenue.......... 5,949 7,366
1994 Notes.......................................... 437,127 467,210
1996 Notes.......................................... 386,165 411,256
Mortgage and other notes payable,
excluding current portion.......................... 51,428 45,379
Other long-term liabilities......................... 1,088 5,551
---------- ----------
Total long-term obligations,
net of current portion............................... 881,757 936,762
---------- ----------
Total liabilities................................. 1,078,838 1,171,573
Commitments and Contingencies (Note 4)
Stockholder's Equity:
Common Stock, $.01 par value,
1,000 shares authorized,
issued and outstanding............................. -- --
Additional paid-in capital.......................... 108,838 108,838
Unrealized holding losses on
available-for-sale securities,
net of deferred taxes.............................. ( 11) ( 12)
Accumulated deficit................................. ( 114,574) (240,050)
---------- ----------
Total stockholder's equity (deficit).................. ( 5,747) (131,224)
---------- ----------
Total liabilities and stockholder's equity........ $1,073,091 $1,040,349
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
DTH products and technical services.................... $ 60,458 $ 22,071 $ 97,199 $ 33,660
DISH Network promotions - subscription television
services and products................................. -- 43,672 -- 75,825
DISH Network subscription television services.......... 5,582 32,189 6,046 57,588
C-band programming..................................... 3,194 1,916 6,643 4,079
Loan origination and participation income.............. 120 127 492 285
-------- -------- -------- --------
Total revenue............................................ 69,354 99,975 110,380 171,437
EXPENSES:
DTH products and technical services.................... 57,528 18,109 90,278 27,333
DISH Network programming............................... 1,664 25,834 1,769 45,259
C-band programming..................................... 2,880 1,545 6,058 3,308
Selling, general and administrative.................... 18,527 33,794 29,098 64,690
Subscriber promotion subsidies......................... -- 18,313 -- 31,090
Amortization of subscriber acquisition costs........... 92 3,228 92 1,290
Depreciation and amortization.......................... 6,334 12,655 9,664 25,298
-------- -------- -------- --------
Total expenses........................................... 87,025 143,478 136,959 258,268
-------- -------- -------- --------
Operating loss........................................... (17,671) (43,503) (26,579) (86,831)
Other Income (Expense):
Interest income........................................ 5,856 1,141 7,830 2,790
Interest expense, net of amounts capitalized........... (19,990) (21,370) (25,774) (41,216)
Other.................................................. (63) (115) (64) (175)
-------- -------- -------- --------
Total other income (expense)............................. (14,197) (20,344) (18,008) (38,601)
-------- -------- -------- --------
Loss before income taxes................................. (31,868) (63,847) (44,587) (125,432)
Income tax (provision) benefit, net...................... 11,031 (25) 16,096 (44)
-------- -------- -------- --------
Net loss................................................. $(20,837) $ (63,872) $(28,491) $(125,476)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1997
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (28,491) $(125,476)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization........................................................ 9,664 25,298
Amortization of subscriber acquisition costs......................................... 92 61,290
Deferred income tax benefit.......................................................... (11,099) (365)
Amortization of debt discount and deferred financing costs........................... 24,530 38,698
Change in reserve for excess and obsolete inventory.................................. 634 1,987
Change in long-term deferred signal carriage revenue................................. 4,163 1,417
Other, net........................................................................... 503 4,463
Changes in current assets and current liabilities, net................................. (12,518) (19,623)
---------- ---------
Net cash flows used in operating activities.............................................. (12,522) (12,311)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities.......................................... (44,782) (4,706)
Sales of marketable investment securities.............................................. -- 18,560
Purchases of restricted marketable investment securities............................... (9,800) (1,995)
Advances to affiliates, net............................................................ (30,547) (50,040)
Purchases of property and equipment.................................................... (5,485) (18,453)
Offering proceeds and investment earnings placed in escrow............................. (181,778) (484)
Funds released from escrow accounts and restricted cash -- other....................... 71,545 72,975
Expenditures for satellite systems under construction.................................. (62,016) --
Investment in convertible subordinated debentures from SSET............................ -- (500)
Other.................................................................................. (25) (351)
---------- ---------
Net cash flows provided by (used in) investing activities................................ (262,888) 15,006
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock................................................. 1 --
Net proceeds from issuance of 1996 Notes............................................... 337,043 --
Repayments of mortgage indebtedness and notes payable.................................. (1,082) (5,551)
---------- ---------
Net cash flows provided by (used in) financing activities................................ 335,962 (5,551)
---------- ---------
Net increase (decrease) in cash and cash equivalents..................................... 60,552 (2,856)
Cash and cash equivalents, beginning of period........................................... 13,949 38,428
---------- ---------
Cash and cash equivalents, end of period................................................. $ 74,501 $ 35,572
---------- ---------
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized..................................... $ 544 $ 2,352
Cash paid for income taxes............................................................. -- --
Satellite launch payment for EchoStar II applied to EchoStar I launch.................. 15,000 --
Increase in note payable for deferred satellite construction payments for EchoStar I... 3,167 --
</TABLE>
3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC" or
the "Company"), is an indirect, wholly-owned subsidiary of EchoStar
Communications Corporation ("EchoStar"), a publicly-traded company on the
Nasdaq National Market. The Company is primarily engaged in the operation of
a direct broadcast satellite ("DBS") subscription television service (the
"DISH Network"), which commenced operations in March 1996. The DISH Network
currently provides approximately 120 channels of digital video programming
and over 30 channels of CD quality audio programming to consumers throughout
the continental United States. In addition to the DISH Network, the Company
designs, manufactures, distributes and installs satellite direct-to-home
("DTH") products, and distributes domestic DTH programming. The Company's
primary business objective is to become one of the leading providers of
subscription television and other satellite-delivered services in the United
States. The Company had approximately 590,000 subscribers to DISH Network
programming as of June 30, 1997.
RECENT DEVELOPMENTS
1997 NOTES OFFERING
On June 25, 1997, EchoStar DBS Corporation ("DBS Corp"), a wholly-owned
subsidiary of EchoStar, consummated an offering (the "1997 Notes Offering") of
12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997 Notes
Offering resulted in net proceeds to the Company of approximately $362.5
million. Interest on the 1997 Notes is payable semi-annually on January 1 and
July 1 of each year, commencing January 1, 1998. Approximately $109.0 million
of the net proceeds of the 1997 Notes Offering were placed in an escrow account
to fund the first five semi-annual interest payments (through January 1, 2000).
The 1997 Notes were issued in a private placement pursuant to Rule 144A of the
Securities Act of 1933, as amended. DBS Corp agreed to exchange the privately
issued notes for publicly registered notes and on July 23, 1997 filed a
registration statement on Form S-4 (the "Registration Statement") with the
Securities and Exchange Commission. Upon the effectiveness of the Registration
Statement, DBS Corp will make an offer to exchange the 1997 Notes for publicly
registered notes with substantially identical terms (including principal amount,
interest rate, maturity, security and ranking). Prior to consummation of the
1997 Notes Offering, EchoStar contributed (the "Contribution") all of the
outstanding capital stock of ESBC to DBS Corp. As a result of the Contribution,
ESBC is a wholly-owned subsidiary of DBS Corp.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude ("WL") purchased by MCI
Communications Corporation ("MCI") for over $682 million at a Federal
Communications Commission ("FCC") auction. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under the
News Agreement.
During May 1997, EchoStar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has asserted
numerous counterclaims against EchoStar and its Chairman and Chief Executive
Officer, Charles W. Ergen. While EchoStar is confident of its position and
believes it will ultimately prevail, the litigation process could continue for
many years and there can be no assurance concerning the outcome of the
litigation.
4
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ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three and six months ended June 30,
1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar, DBS Corp, ESBC and all
direct and indirect wholly-owned subsidiaries thereof. The Company's
management refers readers of this Quarterly Report on Form 10-Q to EchoStar's
Quarterly Report on Form 10-Q for the three and six months ended June 30,
1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and June 30, 1997 principally consisted of money market funds,
corporate notes and commercial paper; such balances are stated at cost which
equates to market value.
INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," requires that the tax benefit of net operating losses ("NOLs")
for financial reporting purposes be recorded as an asset and that deferred
tax assets and liabilities are recorded for the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets. To the extent that
management assesses the realization of deferred tax assets to be less than
"more likely than not," a valuation reserve is established. The Company has
fully reserved the 1997 additions to its deferred tax assets.
5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1996 1997
--------- --------
(UNAUDITED)
EchoStar Receiver Systems.................. $ 32,799 $ 46,499
DBS receiver components.................... 15,736 15,201
Consigned DBS receiver components.......... 23,525 2,681
Finished goods - International............. 3,491 4,181
Finished goods - C-band.................... 600 359
Spare parts and other...................... 2,279 1,771
Reserve for excess and obsolete inventory.. (5,663) (7,649)
--------- --------
$ 72,767 $ 63,043
--------- --------
--------- --------
4. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of June 30, 1997, remaining commitments total approximately
$141.7 million and the total of all outstanding purchase order commitments with
domestic and foreign suppliers was $148.1 million. All of the purchases related
to these commitments are expected to be made during 1997. The Company expects
to finance these purchases from unrestricted cash and additional cash flows
generated from sales of DISH Network programming and related DBS inventory. The
Company expects that its 1997 purchases of DBS satellite receivers and related
components will significantly exceed its existing contractual commitments. In
addition to the above, EchoStar will expend $192.6 million between June 30, 1997
and the first quarter of 1998 to complete the construction phase (including
applicable insurance) and launch of its third DBS satellite ("EchoStar III") and
its fourth DBS satellite ("EchoStar IV").
OTHER RISKS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position or results of operations of the Company.
6
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT
ARE NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE
COMPANY TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM
ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE
THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS
TO FINANCE THE COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE,
DIRECT BROADCAST SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND
OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS;
INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES;
THE INABILITY OF THE COMPANY TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER
APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY OF THE COMPANY TO
OBTAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION
("FCC"); GENERAL BUSINESS AND ECONOMIC CONDITIONS AND OTHER RISK FACTORS
DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ADDITION TO STATEMENTS, WHICH
EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS ARE URGED TO
CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS,"
"PLANS," "ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN AND FORWARD-LOOKING. ALL
CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL
RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION,
INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996.
REVENUE. Total revenue for the three months ended June 30, 1997 was
$100.0 million, an increase of $30.6 million, or 44%, as compared to total
revenue for the three months ended June 30, 1996 of $69.4 million. The
increase in total revenue in 1997 was primarily attributable to DISH Network
subscriber growth. As of June 30, 1997, the Company had approximately 590,000
DISH Network subscribers compared to approximately 70,000 at June 30, 1996.
The Company expects this trend to continue as it adds additional DISH Network
subscribers.
The increase in total revenue for the three months ended June 30, 1997
was partially offset by a decrease in international and domestic sales of
C-band satellite receivers and equipment. As was anticipated, domestic and
international demand for C-band DTH products continued to decline during the
second quarter of 1997; this decline is expected to continue for the
foreseeable future. Consistent with the increases in total revenue during the
three months ended June 30,1997, the Company experienced a corresponding
increase in trade accounts receivable at June 30, 1997. The Company expects
this trend to continue as the number of DISH Network subscribers increases,
and as the Company develops additional channels of distribution for DISH
Network equipment.
Revenue from domestic sales of DTH products and technical services
decreased $46.8 million, or 92%, to $4.1 million during the three months
ended June 30, 1997. Domestically, the Company sold approximately 174,000
satellite receivers during the three months ended June 30, 1997, as compared
to approximately 110,000 receivers sold during the comparable period in 1996.
Of the total number of satellite receivers sold during the three months ended
June 30, 1997, approximately 173,000 were EchoStar Receiver Systems. Although
there was a significant increase in the number of satellite receivers sold in
the second quarter of 1997 as compared to same quarter in 1996, overall
revenue from domestic sales of DTH products decreased as a result of
decreased prices charged for DBS receivers combined with the revenue
recognition policy applied to DBS satellite receivers sold under the
Company's promotions.
Revenue from international sales of analog DTH products for the three
months ended June 30, 1997 was $6.1 million, a decrease of $3.5 million, or
36%, as compared to the same period in 1996. This decrease was principally
attributable to a decrease in the number of analog satellite receivers sold,
combined with decreased prices on products sold. Internationally, the Company
sold approximately 38,000 analog satellite receivers in the three months
ended June 30, 1997, a decrease of 25%, compared to approximately 51,000
units sold during the comparable period of 1996. Overall, international
demand for the Company's analog DTH products continued to decline in the
second quarter of 1997 as a result of consumer anticipation of new
international digital services. This
7
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS--CONTINUED
international decline in demand for analog satellite receivers, which was
expected by the Company, is similar to the decline which has occurred in the
United States.
To expand its presence in international markets, the Company has entered
into distribution and consulting agreements with international digital
service providers. In January 1997, the Company entered into an agreement
(the "ExpressVu Agreement") with ExpressVu, Inc. ("ExpressVu") a majority
owned subsidiary of BEC, Inc. ("Bell Canada"). The first phase of this
agreement includes an initial order for 62,000 satellite receivers, and
primary uplink integration payments, which combined are expected to exceed
$40.0 million. Pursuant to the ExpressVu Agreement, the Company is assisting
ExpressVu with the construction of a digital broadcast center for use in
conjunction with ExpressVu's planned DTH service and will act as a
distributor of satellite receivers and related equipment for ExpressVu's
Canadian DTH service. Among other things, the Company has agreed not to
provide DTH service in Canada and ExpressVu has agreed not to provide DTH
service, including DBS service, in the U.S. The Company recognized revenues
of approximately $11.9 million related to the ExpressVu Agreement during the
three months ended June 30, 1997 (included within the "DTH products and
technical services" caption in the Company's statements of operations).
Additionally, in June 1997, Distribuidora de Television Digital S.A.
("Telefonica"), a DBS joint venture in Spain, selected the Company to supply
digital set-top boxes for its satellite television service scheduled to
launch in September 1997. Revenues from Telefonica's initial order of 100,000
digital set-top boxes are expected to approximate $40.0 million. The Company
expects to begin delivery of set-top boxes to Telefonica in September 1997
and to fulfill approximately one-half of the contract during the remainder of
1997. The Company expects to fulfill the remainder of the contract during
early 1998. While the Company continues to actively pursue other similar
distribution opportunities, no assurance can be given that any such
additional negotiations will be successful. Further, the Company's future
revenue from the sale of DBS equipment and receivers in international markets
depends largely on the success of the DBS operator in that country, which, in
turn, depends on other factors, such as the level of consumer acceptance of
DBS products and the intensity of competition for international subscription
television subscribers. No assurance can be given regarding the level of
expected future revenues which could be generated from the Company's
alliances with these, and potentially other, foreign DBS operators.
C-band programming revenue totaled $1.9 million for the three months
ended June 30, 1997, a decrease of $1.3 million, or 40%, compared to the
three months ended June 30, 1996. This decrease was primarily attributable to
the industry-wide decline in demand for domestic C-band programming services.
C-band programming revenue is expected to continue to decrease for the
foreseeable future.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the three
months ended June 30, 1997 aggregated $63.8 million, an increase of $1.7
million, or 3% compared to the same period in 1996. DTH products and technical
services expenses decreased $39.4 million, or 69%, to $18.1 million for the
three months ended June 30, 1997. These expenses include the costs of C-band
systems and the costs of EchoStar Receiver Systems and related components sold
prior to commencement of the Company's promotions. Subscriber promotion
subsidies aggregated $18.3 million for the three months ended June 30, 1997 and
represent expenses associated with the Company's various promotions. DISH
Network programming expenses totaled $25.8 million for the three months ended
June 30, 1997 as compared to $1.7 million for the comparable period in 1996.
The Company expects that DISH Network programming expenses will continue to
increase in future periods in proportion to increases in the number of DISH
Network subscribers. Such expenses, relative to related revenues, will vary
based on the services subscribed to by DISH Network customers, the number and
types of pay-per-view events purchased by subscribers, and the extent to which
the Company is able to realize volume discounts from programming providers.
C-band programming expenses totaled $1.5 million for the three months
ended June 30, 1997, a decrease of $1.3 million, or 46%, as compared to the
same period in 1996. This decrease is consistent with the decrease in C-band
programming revenue. As previously described, demand for C-band DTH products
continued to decrease as a result of the introduction and widespread consumer
acceptance of DBS products and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses totaled $33.8 million for the three months
ended June 30, 1997, an increase of $15.3 million as compared to the same period
in 1996. SG&A expenses as a percentage of total revenue increased to 34% for
the three months ended June 30, 1997 as compared to 27% for the same period in
1996. The increase in SG&A expenses was principally attributable to
8
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS--CONTINUED
increased personnel expenses to support the growth of DISH Network service
and increased expenses associated with the operation of the Company's digital
broadcast center and DBS satellites (collectively the "EchoStar DBS System").
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization
of subscriber acquisition costs) ("EBITDA") was $2.4 million for the three
months ended June 30, 1997, an improvement of $13.6 million, compared to
negative EBITDA of $11.2 million during the same period of 1996. This
improvement in EBITDA resulted from the factors affecting revenue and
expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended June 30, 1997 (including amortization of
subscriber acquisition costs of $92,000 and $33.2 million for the three
months ended June 30, 1996 and June 30, 1997, respectively), aggregated $45.9
million, an increase of $39.5 million, as compared to the same period 1996.
The increase in depreciation and amortization expenses principally resulted
from amortization of subscriber acquisition costs and depreciation expense
associated with the Company's second DBS satellite, EchoStar II (placed in
service during the fourth quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $20.3 million for
the three months ended June 30, 1997, an increase of $6.1 million, as
compared to the same period 1996. The increase in other income and expense in
the second quarter of 1997 resulted primarily from a decrease interest income
of approximately $4.7 million as a result of a decrease in invested balances.
Additionally, interest expense increased $1.4 million as compared to the same
period of 1996 as a result of the continued accretion of the 1994 Notes and
1996 Notes. The Company capitalized interest of approximately $8.6 million
during the three months ended June 30, 1997, compared to approximately $5.5
million during the three months ended June 30, 1996.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $11.1
million (from $11.0 million for the three months ended June 30, 1996 to an
income tax provision of $25,000 for the three months ended June 30, 1997)
principally resulted from the Company's decision to fully reserve the second
quarter addition to its net deferred tax asset. The Company's net deferred
tax assets (approximately $67.4 million at June 30, 1997) relate to temporary
differences for amortization of original issue discount on the 1994 Notes and
1996 Notes, net operating loss carryforwards, and various accrued expenses
which are not deductible until paid. If future operating results differ
materially and adversely from the Company's current expectations, its
judgment regarding the magnitude of its reserve may change.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996.
REVENUE. Total revenue for the six months ended June 30, 1997 was $171.4
million, an increase of $61.0 million, or 55%, as compared to total revenue
for the six months ended June 30, 1996 of $110.4 million. The increase in
total revenue in 1997 was primarily attributable to the introduction of the
Company's DISH Network service during March 1996, combined with significant
DISH Network subscriber growth since the launch of service.
The increase in total revenue for the six months ended June 30, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. The domestic and international demand for
C-band DTH products continued to decline during the first half of 1997.
Revenue from domestic sales of DTH products and technical services
decreased $66.2 million, or 88%, to $8.8 million for the six months ended
June 30, 1997. Domestically, the Company sold approximately 348,000 satellite
receivers during the six months ended June 30, 1997, as compared to
approximately 155,000 receivers sold during the comparable period of 1996. Of
the total number of satellite receivers sold during the six months ended June
30, 1997, approximately 345,000 were EchoStar Receiver Systems. Although
there was a significant increase in the number of satellite receivers sold
during the six months ended June 30, 1997 as compared to same period in 1996,
overall revenue from domestic sales of DTH products decreased as a result of
decreased prices charged for DBS satellite receivers combined with the
revenue recognition policy applied to DBS satellite receivers sold under the
Company's promotions.
9
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS--CONTINUED
Revenue from international sales of analog DTH products for the six
months ended June 30, 1997 totaled $13.0 million, a decrease of $9.3 million,
or 42%, as compared to the same period in 1996. This decrease was directly
attributable to a decrease in the number of analog satellite receivers sold,
combined with decreased prices on products sold. Internationally, the Company
sold approximately 91,000 analog satellite receivers during the six months
ended June 30, 1997, a decrease of 28%, compared to approximately 126,000
units sold in the comparable period in 1996. As previously described, the
Company also recognized revenues totaling $11.9 million during the six months
ended June 30, 1997 related to the ExpressVu Agreement.
C-band programming revenue totaled $4.1 million for the six months ended
June 30, 1997, a decrease of $2.6 million, or 39%, compared to the six months
ended June 30, 1996. This decrease was primarily attributable to the
industry-wide decline in demand for domestic C-band programming services.
DTH AND DISH NETWORK EXPENSES. DTH and DISH Network expenses for the six
months ended June 30, 1997 aggregated $107.0 million, an increase of $8.9
million, or 9% compared to the same period in 1996. DTH products and
technical services expense decreased $62.9 million, or 70%, to $27.3 million
during the six months ended June 30, 1997. These expenses include the costs
of C-band systems and the costs of EchoStar Receiver Systems and related
components sold prior to commencement of the Company's promotions. Subscriber
promotion subsidies aggregated $31.1 million for the six months ended June
30, 1997. DISH Network programming expenses totaled $45.3 million for the six
months ended June 30, 1997 as compared to $1.8 million for the comparable
period in 1996. This increase is directly attributable to the increase in
DISH Network subscribers at June 30, 1997 compared to June 30, 1996.
C-band programming expenses totaled $3.3 million for the six months
ended June 30, 1997, a decrease of $2.8 million, or 45%, as compared to the
same period in 1996. This decrease is consistent with the decrease in C-band
programming revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses totaled
$64.7 million for the six months ended June 30, 1997, an increase of $35.6
million as compared to the same period in 1996. SG&A expenses as a percentage
of total revenue increased to 38% for the six months ended June 30, 1997 as
compared to 26% for the same period in 1996. The increase in SG&A expenses
was principally attributable to increased personnel expenses to support the
growth of DISH Network service and increased expenses associated with the
operation of the EchoStar DBS System. In future periods, the Company expects
that SG&A expenses as a percentage of total revenue will decrease as
subscribers are added.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
was negative $243,000 for the six months ended June 30, 1997, an improvement
of $16.6 million, compared to negative EBITDA of $16.8 million for the same
period in 1996. This improvement in negative EBITDA resulted from the factors
affecting revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1997 (including amortization of subscriber
acquisition costs of $92,000 and $61.3 million for the six months ended June
30, 1996 and June 30, 1997, respectively) aggregated $86.6 million, an
increase of $76.8 million, as compared to the same period 1996. The increase
in depreciation and amortization expenses primarily was attributable to
amortization of subscriber acquisition costs and depreciation expense
associated with EchoStar II.
OTHER INCOME AND EXPENSE. Other expense, net totaled $38.6 million for
the six months ended June 30, 1997, an increase of $20.6 million, as compared
to the same period 1996. The increase in other expense in the first half of
1997 resulted primarily from an increase in interest expense associated with
the March 1996 issuance of the 1996 Notes combined with the continued
accretion of the 1994 Notes. Additionally, interest income decreased $5.0
million as a result of a decrease in invested balances. The Company
capitalized $16.6 million and $14.4 million of interest in the six months
ended June 30, 1997 and 1996, respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $16.1
million (from $16.1 million for the six months ended June 30, 1996 to an
income tax provision of $44,000 for the six months ended June 30, 1997)
principally resulted from the Company's decision to fully reserve the 1997
additions to its net deferred tax asset.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar Communications Corporation ("EchoStar")
and The News Corporation Limited ("News") announced an agreement (the "News
Agreement") pursuant to which, among other things, News agreed to acquire
approximately 50% of the outstanding capital stock of EchoStar. News also
agreed to make available for use by EchoStar the DBS permit for 28
frequencies at 110DEG. West Longitude ("WL") purchased by MCI Communications
Corporation ("MCI") for over $682 million following a 1996 Federal
Communications Commission ("FCC") auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court
for the District of Colorado (the "Court"), Civil Action No. 97-960,
requesting that the Court confirm EchoStar's position and declare that News
is obligated pursuant to the News Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure
to act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based
on, among other things, a jointly prepared a ten-year business plan showing
expected profits for EchoStar in excess of $10 billion based on consummation
of the transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in
the First Amended Complaint and asserts twenty defenses, including bad faith,
misconduct and failure to disclose material information on the part of
EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary American Sky
Broadcasting LLC ("AskyB") assert that EchoStar and Ergen breached their
agreements with News and failed to act and negotiate with News in good faith.
EchoStar has responded to News' answer and denied the allegations in their
counterclaims. EchoStar also has asserted various affirmative defenses.
EchoStar intends to diligently defend against the counterclaims. The parties
are now in discovery. The case has been set for a five week trial commencing
June 1, 1998, but that date could be postponed. The litigation process could
continue for many years and there can be no assurance concerning the outcome
of the litigation. An adverse decision could have a material adverse effect
on EchoStar's financial position and results of operations.
On April 25, 1997, EchoStar Satellite Corporation ("ESC") and Sagem,
S.A. ("Sagem"), a French Corporation, executed a settlement and release
agreement under which Sagem agreed to return the $10.0 million down payment
made to Sagem and agreed to release the $15.0 million placed in escrow with a
bank in connection with a manufacturing agreement entered into in April 1995.
ESC and Sagem have released all claims against each other.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter of 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR SATELLITE BROADCASTING CORPORATION
By: /s/ STEVEN B. SCHAVER
-----------------------------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
By: /s/ JOHN R. HAGER
-----------------------------------------------------
John R. Hager
Treasurer and Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying financial statements of EchoStar Satellite Broadcasting Corporation
for the six months ended June 30, 1997 and is qualified in its entirety by
reference to those financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 35,572
<SECURITIES> 4,952
<RECEIVABLES> 31,314
<ALLOWANCES> 1,834
<INVENTORY> 63,043
<CURRENT-ASSETS> 208,707
<PP&E> 553,462
<DEPRECIATION> 60,152
<TOTAL-ASSETS> 1,040,349
<CURRENT-LIABILITIES> 234,811
<BONDS> 923,845
0
0
<COMMON> 0
<OTHER-SE> (131,224)
<TOTAL-LIABILITY-AND-EQUITY> 1,040,349
<SALES> 171,152<F1>
<TOTAL-REVENUES> 171,437
<CGS> 75,900<F2>
<TOTAL-COSTS> 258,268
<OTHER-EXPENSES> 38,601
<LOSS-PROVISION> 2,214
<INTEREST-EXPENSE> 41,216
<INCOME-PRETAX> (125,432)
<INCOME-TAX> 44<F3>
<INCOME-CONTINUING> (125,476)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (125,476)
<EPS-PRIMARY> (125,476)
<EPS-DILUTED> (125,476)
<FN>
<F1>Includes sales of programming.
<F2>Includes costs of programming
<F3>Net of amounts capitalized.
</FN>
</TABLE>
