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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 MARCH 31, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip code)
(303) 799-8222
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF MAY 9, 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 March 31, 1997 (Unaudited) . . . . . . 1
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1997 (Unaudited) . . . 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1997 (Unaudited) . . . 3
Notes to Condensed Consolidated Financial Statements
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Narrative Analysis of Results of Operations. . . . 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 14
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. . . . . . . . . . . . . . . . 14
- ---------------
* 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, MARCH 31,
1996 1997
----------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,428 $ 30,079
Marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,807 3,528
Trade accounts receivable, net of allowance for uncollectible accounts of $1,494 and $1,642
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,483 31,158
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,767 57,043
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,830 4,391
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,129 80,945
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,031 13,848
----------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,475 220,992
Restricted Cash and Marketable Investment Securities:
ESBC Notes escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,491 17,907
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,450 33,445
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,989 499,039
Advances to affiliates, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,893 182,797
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,670 79,670
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,123 38,877
----------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,073,091 $1,072,727
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,793 $ 41,662
Deferred revenue - DISH Network-SM- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,366 130,351
Deferred revenue - C-band . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 682
Accrued expenses and other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 29,180 34,645
Deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,674 12,674
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,334 11,334
----------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,081 231,348
Long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,949 6,682
Dish Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,127 451,907
ESBC Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,165 398,399
Mortgage and other notes payable, excluding current portion. . . . . . . . . . . . . . . . . . . . 51,428 48,298
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088 3,445
----------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,078,838 1,140,079
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) (176,178)
----------------------------
Total stockholder's equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,747) ( 67,352)
----------------------------
Total liabilities and stockholder's equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,073,091 $1,072,727
----------------------------
----------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1997
----------------------------
<S> <C> <C>
Revenue:
DTH products and technical services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,741 $11,589
DISH Network-SM- promotions - subscription television services and products . . . . . . . . . -- 32,153
DISH Network-SM- subscription television services . . . . . . . . . . . . . . . . . . . . . . 464 25,399
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,449 2,163
Loan origination and participation income . . . . . . . . . . . . . . . . . . . . . . . . . . 372 158
----------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,026 71,462
Expenses:
DTH products and technical services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,750 9,224
DISH Network-SM- programming. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 19,425
C-band programming. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,178 1,763
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,571 30,896
Subscriber promotion subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,777
Amortization of subscriber acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . -- 28,062
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,330 12,643
----------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,934 114,790
----------------------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8,908) ( 43,328)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,974 1,649
Interest expense, net of amounts capitalized. . . . . . . . . . . . . . . . . . . . . . . . . ( 5,784) ( 19,846)
Minority interest in loss of consolidated joint venture and other . . . . . . . . . . . . . . ( 1) ( 60)
----------------------------
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,811) ( 18,257)
----------------------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,719) ( 61,585)
Income tax (provision) benefit, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,065 ( 19)
----------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 7,654) $( 61,604)
----------------------------
----------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 1997
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 7,654) $(61,604)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,330 12,643
Amortization of subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . . . . -- 28,062
Deferred income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,013) --
Amortization of debt discount and deferred financing costs . . . . . . . . . . . . . . . . 5,347 18,542
Change in reserve for excess and obsolete inventory. . . . . . . . . . . . . . . . . . . . 227 ( 2,302)
Change in long-term deferred signal carriage revenue . . . . . . . . . . . . . . . . . . . 3,790 733
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 170) 2,232
Changes in current assets and current liabilities, net. . . . . . . . . . . . . . . . . . . . ( 1,995) ( 4,685)
----------------------------
Net cash flows used in operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 138) ( 6,379)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . ( 2) --
Sales of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . -- 15,279
Purchases of restricted marketable investment securities. . . . . . . . . . . . . . . . . . . ( 15,500) ( 1,995)
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (29,891)
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,715) (11,364)
Offering proceeds and investment earnings placed in escrow. . . . . . . . . . . . . . . . . . (178,452) ( 416)
Funds released from escrow accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,785 30,000
Expenditures for satellite systems under construction . . . . . . . . . . . . . . . . . . . . ( 7,928) --
Investment in convertible subordinated debentures from SSET . . . . . . . . . . . . . . . . . -- ( 500)
Expenditures for FCC authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 370) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 47
----------------------------
Net cash flows provided by (used in) investing activities. . . . . . . . . . . . . . . . . . . . . (187,182) 1,160
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 --
Net proceeds from issuance of ESBC Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . 337,043 --
Repayments of mortgage indebtedness and notes payable . . . . . . . . . . . . . . . . . . . . ( 1,022) ( 3,130)
----------------------------
Net cash flows provided by (used in) financing activities. . . . . . . . . . . . . . . . . . . . . 336,022 ( 3,130)
----------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . 148,702 ( 8,349)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . 13,949 38,428
----------------------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 162,651 $ 30,079
----------------------------
----------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized. . . . . . . . . . . . . . . . . . . . . . $ 354 $ 612
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Satellite launch payment for EchoStar II applied to EchoStar I launch . . . . . . . . . . . . 15,000 --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<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 a wholly-owned subsidiary of EchoStar Communications Corporation
("EchoStar"), a publicly-traded company on the Nasdaq National Market. ESBC is
primarily engaged in the operation of a direct broadcast satellite ("DBS")
subscription television service (the "DISH Network-SM-"), which commenced
operations in March 1996. The DISH Network-SM- currently provides approximately
120 channels of near laser disc quality digital video programming and over 30
channels of near CD quality audio programming to consumers throughout the
continental United States. In addition to its DISH Network-SM- subscription
television service, the Company designs, manufactures, distributes and installs
satellite direct-to-home ("DTH") products and distributes DTH programming
domestically. 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 479,600
subscribers to DISH Network-SM- services as of March 31, 1997.
RECENT DEVELOPMENTS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "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
license for 28 frequencies at 110DEG. West Longitude ("WL") awarded to MCI
Communications Corporation ("MCI") during a Federal Communications Commission
("FCC") auction during 1996. Subsequently, the parties discussed, and agreed
upon, potentially mutually agreeable changes to the structure of the
transactions. However, during late April 1997, substantial disagreements arose
between the parties regarding their obligations under the Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States 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 Agreement to lend $200 million to EchoStar without
interest and upon such other terms as the Court orders. No assurance can be
given that the Court will grant EchoStar's request for expedited relief.
Further, while EchoStar believes that the Court should grant its request
requiring News to loan EchoStar the $200 million, and is very confident of its
position, no assurance can be given that the Court will grant that request.
On May 9, 1997, as a result of numerous material breaches of the Agreement
by News, EchoStar filed a First Amended Complaint significantly expanding the
scope of the litigation, seeking specific performance of the Agreement, and
damages, including lost profits that were expected as a result of the
transactions contemplated by the Agreement, which could exceed $5 billion.
While EchoStar is confident of its position and believes it will ultimately
prevail in the litigation, there can be no assurance that EchoStar will
prevail, of the amount of damages EchoStar will collect if it prevails, or that
timely relief will be granted.
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 months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended 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.
5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar, ESBC and all direct and
indirect wholly-owned subsidiaries thereof. The Company's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report on
Form 10-Q for the three months ended March 31, 1997.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of ESBC's DBS business has dramatically changed its
operating results and financial position when compared to its historical
results. Annual interest expense on the Company's long-term notes, and
depreciation of satellites and related assets are each of a magnitude that
exceeds historical levels of income before income taxes. Consequently, ESBC
continues to report significant net losses and expects such net losses to
continue through at least 1999. ESBC requires additional capital to fully
implement its business plan. There can be no assurance that necessary funds
will be available or, if available, that they will be available on terms
acceptable to ESBC. A further increase in subscriber acquisition costs, or
significant delays or launch failures would significantly and adversely affect
ESBC's operating results and financial condition.
The Company is currently dependent on one manufacturing source for its
receivers. This manufacturer presently manufactures receivers in sufficient
quantities to meet currently expected demand. If the Company's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, the Company's liquidity and results of operations
would be adversely affected.
In accordance with its Agreement with News, as described above, EchoStar
had expected to meet its short- and medium-term capital needs through financial
commitments from News. As a result of the failure by News to honor its
obligations under the Agreement, EchoStar does not currently have adequate
capital to continue its contemplated business plan beyond the second quarter of
1997. EchoStar has had preliminary discussions with a number of investment
banking firms to investigate alternatives to meet its short- and medium-term
needs. EchoStar also intends to speak with major vendors about possible vendor
financing, and with other potential strategic partners who had indicated
interest in transactions with EchoStar prior to execution of the Agreement with
News. While there can be no assurance, EchoStar believes that it can arrange
transactions to meet its short- and medium-term obligations without material
changes to its business plan. No assurance can be given that any such
arrangements will be made, or that if made they will be on terms favorable to
EchoStar. EchoStar intends to seek recovery from News for any costs of
financing in excess of the costs of the financing committed to by News under the
Agreement.
2. SIGNIFICANT ACCOUNTING POLICIES
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 March 31, 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
6
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
the realization of deferred tax assets to be less than "more likely than not," a
valuation reserve is established. The Company has reserved the first quarter
addition to its deferred tax assets.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31,
1996 1997
-------------------------
EchoStar Receiver Systems. . . . . . . . $ 32,799 $ 35,210
Consigned DBS receiver components. . . . 23,525 11,680
DBS receiver components. . . . . . . . . 15,736 11,965
Finished goods - C-band. . . . . . . . . 600 512
Finished goods - International . . . . . 3,491 1,924
Spare parts and other. . . . . . . . . . 2,279 3,717
Reserve for excess and obsolete
inventory . . . . . . . . . . . . . . . ( 5,663) ( 7,965)
-------------------------
$ 72,767 $ 57,043
-------------------------
-------------------------
4. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
EchoStar's supplied specifications and necessary to receive DBS programming
offered by the Company. As of March 31, 1997, remaining commitments total
approximately $133.0 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $136.2 million. All of the
purchases related to these commitments are expected to be made during 1997. The
Company expects to finance these purchases from available cash and cash flows
generated from sales of DISH Network-SM- programming and related DBS inventory.
The Company expects that its 1997 purchase of DBS satellite receivers and
related components will significantly exceed its existing contractual
commitments.
OTHER RISKS AND CONTINGENCIES
As previously discussed, on February 24, 1997, EchoStar and News announced
the 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 license for 28 frequencies
at 110DEG. WL awarded to MCI during an FCC auction during 1996. Subsequently,
the parties discussed, and agreed upon, potentially mutually agreeable changes
to the structure of the transactions. However, during late April 1997,
substantial disagreements arose between the parties regarding their obligations
under the Agreement.
On May 8, 1997 EchoStar filed a Complaint with the Court, Civil Action No.
97-960, requesting that the Court confirm EchoStar's position, and declare that
News is obligated pursuant to the Agreement to lend $200 million to EchoStar
without interest and upon such other terms as the Court orders. No assurance
can be given that the Court will grant EchoStar's request for expedited relief.
Further, while EchoStar believes that the Court should grant its request
requiring News to loan EchoStar the $200 million, and is very confident of its
position, no assurance can be given that the Court will grant that request.
On May 9, 1997, as a result of numerous material breaches of the Agreement
by News, EchoStar filed a First Amended Complaint significantly expanding the
scope of the litigation, seeking specific performance of the Agreement, and
damages, including lost profits that were expected as a result of the
transactions contemplated by the Agreement, which could exceed $5 billion.
While EchoStar is confident of its position and believes it will ultimately
prevail in the litigation, there can be no assurance that EchoStar will prevail,
of the amount of damages EchoStar will collect if it prevails, or that timely
relief will be granted.
7
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
On September 26, 1996, EchoStar Satellite Corporation ("ESC") filed suit
against Sagem, S.A., ("Sagem") a French corporation, in connection with a
manufacturing agreement entered into in April 1995. Sagem, Inc., a wholly owned
subsidiary of Sagem, was added as a party to the litigation in a subsequent
amendment. Under the agreements between the parties, Sagem and Sagem, Inc. were
to provide 560,000 digital satellite receivers to ESC throughout 1995 and 1996.
Sagem and Sagem, Inc. failed to deliver any production receivers to ESC. ESC
thereafter terminated the agreements between the parties. ESC brought claims
against Sagem and Sagem, Inc. for breach of contract and declaratory relief.
ESC sought return of a $10.0 million down payment made to Sagem, $15.0 million
placed in escrow with Bank of America, a $373,000 prepayment made to Sagem, Inc.
for finished goods, contractual late fees, lost profits, interest, attorneys'
fees, costs, and expenses. Sagem and Sagem, Inc. filed counterclaims seeking
damages of approximately $25.0 million. On April 25, 1997, ESC and Sagem
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 Bank of America. ESC and Sagem have released all
claims against each other.
The Company is subject to various 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.
5. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
DISH NOTES
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except certain de minimis domestic and foreign subsidiaries.
Dish, Ltd. is a wholly-owned subsidiary of ESBC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $166,000 and $103,000 as of December 31, 1996 and March 31, 1997,
respectively. Summarized consolidated financial information for Dish, Ltd.,
including the subsidiary guarantors, is as follows (in thousands):
DECEMBER 31, MARCH 31,
1996 1997
------------------------
BALANCE SHEET DATA:
Current assets. . . . . . . . . . . . $ 198,981 $ 190,105
Property and equipment, net . . . . . 499,989 499,039
Other noncurrent assets . . . . . . . 131,995 134,685
------------------------
Total assets. . . . . . . . . . . . . $ 830,965 $ 823,829
------------------------
------------------------
Current liabilities . . . . . . . . . $ 197,081 $ 231,338
Long-term liabilities . . . . . . . . 630,421 647,277
Stockholder's equity. . . . . . . . . 3,463 (54,786)
------------------------
Total liabilities and
stockholder's equity . . . . . . . . $ 830,965 $ 823,829
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1997
------------------------
STATEMENT OF OPERATIONS DATA:
Revenue . . . . . . . . . . . . . . . $ 41,026 $ 71,462
Expenses. . . . . . . . . . . . . . . 49,934 114,766
------------------------
Operating loss. . . . . . . . . . . . ( 8,908) (43,304)
Other income (expense). . . . . . . . ( 3,234) (14,925)
------------------------
Net loss before income taxes. . . . . (12,142) (58,229)
(Provision for) benefit from
income taxes . . . . . . . . . . . . 4,852 ( 19)
------------------------
Net loss. . . . . . . . . . . . . . . $ ( 7,290) $ (58,248)
------------------------
------------------------
8
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
ESBC NOTES
The ESBC Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the ESBC Notes
Indenture), the ESBC Notes will be guaranteed by Dish, Ltd., which guarantee
will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd.
From January 8, 1997, the date which the merger of Direct Broadcasting
Satellite Corporation ("DBSC") into a direct, wholly-owned subsidiary of
EchoStar ("New DBSC") was consummated, the ESBC Notes are guaranteed by New
DBSC, which guarantee ranks PARI PASSU with all senior unsecured indebtedness of
New DBSC. New DBSC's principal assets include a DBS satellite under
construction ("EchoStar III"), an FCC conditional construction permit, and
specific orbital slot assignments for certain DBS frequencies. The DBSC merger
was accounted for as a purchase and the excess (approximately $16.6 million) of
the purchase price over the fair value of DBSC's tangible assets was allocated
to New DBSC's FCC authorizations, which are included in other noncurrent assets
below. Summarized financial information as of, and for the periods ended March
31, 1997, for New DBSC, ESBC and pro forma combined financial information for
New DBSC and ESBC is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
NEW DBSC ESBC ELIMINATIONS PRO FORMA
COMBINED
-----------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEETS DATA:
Current assets . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 220,992 $ -- $ 221,000
Property and equipment, net. . . . . . . . . . . . . . . . 58,012 499,039 -- 557,051
Advances to New DBSC . . . . . . . . . . . . . . . . . . . -- 30,000 (30,000) --
Advances to other affiliates . . . . . . . . . . . . . . . -- 152,797 -- 152,797
Other noncurrent assets. . . . . . . . . . . . . . . . . . 17,493 169,899 -- 187,392
-----------------------------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $75,513 $1,072,727 $(30,000) $1,118,240
-----------------------------------------------------
-----------------------------------------------------
Current liabilities. . . . . . . . . . . . . . . . . . . . $ 5,565 $ 231,348 $ -- $ 236,913
Advances from EchoStar . . . . . . . . . . . . . . . . . . 21,000 -- -- 21,000
Advances from ESBC . . . . . . . . . . . . . . . . . . . . 30,000 -- (30,000) --
Other long-term liabilities . . . . . . . . . . . . . . . 3,977 908,731 -- 912,708
Stockholder's equity . . . . . . . . . . . . . . . . . . . 14,971 ( 67,352) -- ( 52,381)
-----------------------------------------------------
Total liabilities and stockholder's equity . . . . . . . . $75,513 $1,072,727 $(30,000) $1,118,240
-----------------------------------------------------
-----------------------------------------------------
<CAPTION>
PRO FORMA
NEW DBSC ESBC COMBINED
----------------------------------------------
FOR THE PERIOD
FROM
JANUARY 8, 1997 THREE MONTHS THREE MONTHS
THROUGH ENDED ENDED
MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1997
----------------------------------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 71,462 $ 71,462
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 114,790 114,792
----------------------------------------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2) ( 43,328) ( 43,330)
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,351) ( 18,257) ( 19,608)
----------------------------------------------
Net loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . (1,353) ( 61,585) ( 62,938)
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . -- ( 19) ( 19)
----------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,353) $( 61,604) $( 62,957)
----------------------------------------------
----------------------------------------------
</TABLE>
9
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS DATA:
PRO FORMA
NEW DBSC ESBC COMBINED
------------------------------------------------------------------
FOR THE PERIOD
FROM
JANUARY 8, 1997 THREE MONTHS THREE MONTHS
THROUGH ENDED ENDED
MARCH 31, 1997 MARCH 31, 1997 ELIMINATIONS MARCH 31, 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . $( 1,353) $(61,604) $ -- $(62,957)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . -- 12,643 -- 12,643
Amortization of subscriber acquisition costs . . . . . . . -- 28,062 -- 28,062
Amortization of debt discount and deferred
financing costs . . . . . . . . . . . . . . . . . . . . . -- 18,542 -- 18,542
Change in reserve for excess and obsolete inventory. . . . -- ( 2,302) -- ( 2,302)
Change in long-term deferred signal carriage revenue . . . -- 733 -- 733
Interest expense on long-term notes payable to EchoStar. . 1,351 -- -- 1,351
Other, net . . . . . . . . . . . . . . . . . . . . . . . . -- 2,232 -- 2,232
Changes in current assets and current liabilities, net. . . . 1 ( 4,685) -- ( 4,684)
-----------------------------------------------------------------
Net cash flows used in operating activities. . . . . . . . . . . ( 1) ( 6,379) -- ( 6,380)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable investment securities . . . . . . . . . . -- 15,279 -- 15,279
Purchases of restricted marketable investment securities. . . -- ( 1,995) -- ( 1,995)
Advances from ESBC, net . . . . . . . . . . . . . . . . . . . 5 ,000 -- (5,000) --
Advances to affiliates, net . . . . . . . . . . . . . . . . . -- (29,891) 5,000 (24,891)
Purchases of property and equipment . . . . . . . . . . . . . -- (11,364) -- (11,364)
Investment earnings placed in escrow. . . . . . . . . . . . . -- ( 416) -- ( 416)
Investment in convertible subordinated
debentures from SSET . . . . . . . . . . . . . . . . . . . . -- ( 500) -- ( 500)
Funds released from escrow accounts . . . . . . . . . . . . . -- 30,000 -- 30,000
Expenditures for satellite systems under construction . . . . (5,000) -- -- ( 5,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 47 -- 47
-----------------------------------------------------------------
Net cash flows provided by (used in) investing activities. . . . -- 1,160 -- 1,160
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable . . . . -- ( 3,130) -- ( 3,130)
-----------------------------------------------------------------
Net cash flows provided by (used in) financing activities. . . . -- ( 3,130) -- ( 3,130)
-----------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . . ( 1) ( 8,349) -- ( 8,350)
Cash and cash equivalents, beginning of period . . . . . . . . . 1 38,428 -- 38,429
-----------------------------------------------------------------
Cash and cash equivalents, end of period . . . . . . . . . . . . $ -- $ 30,079 -- $ 30,079
-----------------------------------------------------------------
-----------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized. . . . . . $ -- $ 612 $ -- $ 612
Cash paid for income taxes. . . . . . . . . . . . . . . . . . -- -- -- --
The DBSC merger purchase price was allocated as follows:
EchoStar III . . . . . . . . . . . . . . . . . . . . . . . 51,241 -- -- 51,241
FCC authorizations . . . . . . . . . . . . . . . . . . . . 16,648 -- -- 16,648
Accounts payable and accrued expenses. . . . . . . . . . . 500 -- -- 500
Notes payable to EchoStar and subsidiaries . . . . . . . . 46,000 -- -- 46,000
Accrued interest due EchoStar and subsidiaries . . . . . . 3,369 -- -- 3,369
Other notes payable. . . . . . . . . . . . . . . . . . . . 500 -- -- 500
Additional paid in capital . . . . . . . . . . . . . . . . 17,520 -- -- 17,520
</TABLE>
10
<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
AVAILABILITY 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 ABILITY OF THE COMPANY
TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER APPROVAL OF ANY STRATEGIC
TRANSACTIONS, THE ABILITY OF THE COMPANY TO OBTAIN NECESSARY AUTHORIZATIONS FROM
THE FEDERAL COMMUNICATIONS COMMISSION; 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. 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 MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
REVENUE. Total revenue for the three months ended March 31, 1997 was $71.5
million, an increase of $30.5 million, or 74%, as compared to total revenue for
the three months ended March 31, 1996 of $41.0 million. The increase in total
revenue in 1997 was primarily attributable to the introduction of the Company's
DISH Network-SM- service during March 1996. In the future, the Company expects
to derive its revenue principally from DISH Network-SM- subscription television
services. As of March 31, 1997, the Company had approximately 479,600 DISH
Network-SM- subscribers.
The increase in total revenue for the three months ended March 31, 1997 was
partially offset by a decrease in international and domestic sales of C-band
satellite receivers and equipment. The domestic and international markets for
C-band DTH products continued to decline during 1997; this decline is expected
to continue for the foreseeable future and had been expected by the Company as
described below. Consistent with the increases in total revenue during the
three months ended March 31,1997, the Company experienced a corresponding
increase in trade accounts receivable at March 31, 1997. The Company expects
this trend to continue as the number of DISH Network-SM- subscribers increases,
and as the Company develops additional channels of distribution for DISH
Network-SM- equipment.
Revenue from domestic sales of DTH products and technical services
decreased $19.3 million, or 81%, to $4.7 million during the three months ended
March 31, 1997. Domestically, the Company sold approximately 173,000 satellite
receivers in the three months ended March 31, 1997, as compared to approximately
45,000 receivers sold in the comparable period in 1996. Of the total number of
satellite receivers sold during the three months ended March 31, 1997,
approximately 171,000 were EchoStar Receiver Systems. Although there was a
significant increase in the number of satellite receivers sold in the first
quarter of 1997 as compared to same period in 1996, overall revenue from
domestic sales of DTH products decreased as a result of the revenue recognition
policy applied to DBS satellite receivers sold under the Company's promotions,
combined with decreasing sales of, and lower prices charged for, C-band
products. Included in the number of DTH satellite receivers sold in the first
quarter of 1996 are sales of a competitor's DBS receiver manufactured and
supplied by a third-party manufacturer. Such sales, which ceased during the
second quarter of 1996, coincident with the launch of DISH Network-SM- service,
totaled approximately 18,000 units during the three months ended March 31, 1996.
Revenues generated from the sale of competitor DBS receivers aggregated
approximately $7.7 million during the three months ended March 31, 1996. No
revenue has been or will be generated from the sale of competitor DBS receivers
in 1997.
11
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
Revenue from international sales of DTH products for the three months ended
March 31, 1997 was $6.9 million, a decrease of $5.8 million, or 46%, 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 53,000 analog satellite receivers in the three months ended
March 31, 1997, a decrease of 30%, compared to approximately 76,000 units sold
in the comparable period in 1996. Overall, the Company's international markets
for analog DTH products continued to decline in the first quarter of 1997 as
consumer anticipation of new international digital services continued to
increase. This international decline in demand for analog satellite receivers,
which was expected by the Company, is similar to the decline which has occurred
in the United States. To offset the anticipated decline in demand for analog
satellite receivers, the Company has been negotiating with digital service
providers to distribute their proprietary receivers in the Company's
international markets. While the Company is actively pursuing these
distribution opportunities, no assurance can be given that such negotiations
will be successful.
C-band programming revenue totaled $2.2 million for the three months ended
March 31, 1997, a decrease of $1.3 million, or 37%, compared to the three months
ended March 31, 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.
Loan origination and participation income was $158,000 for the three
months ended March 31, 1997, a decrease of $214,000 compared to the same
period in 1996. The decrease in loan origination and participation income
during the first quarter of 1997 was primarily due to the commencement of
operations of Dish Network Credit Corporation ("DNCC") in 1996. DNCC
provides financing for consumer loans and leases, which in prior years was
performed by EAC, a subsidiary of Dish, Ltd. DNCC is not a subsidiary of
ESBC. The introduction of the DISH Network-SM- has increased the number of
consumer loans and leases funded, but since DNCC is the responsible entity,
this increase is not reflected in ESBC's statements of operations.
Historically, EchoStar has maintained agreements with third-party finance
companies to make consumer credit available to EchoStar customers. These
financing plans provide consumers the opportunity to lease or finance their
EchoStar Receiver Systems, including installation costs and certain DISH
Network-SM- programming packages, on competitive terms. Consumer financing
provided by third parties is generally non-recourse to EchoStar. The
third-party finance company that provides the program utilized by EchoStar
has notified EchoStar that it does not intend to renew the agreement, which
expires during 1997. EchoStar is currently negotiating similar agreements
with other third-party finance companies. There can be no assurance that
EchoStar will be successful in these negotiations, or if successful, that any
such new agreements will commence prior to the termination of the existing
agreement. In the event that EchoStar is unsuccessful in executing a new
agreement with a third-party finance company during 1997, DISH
Network-SM-subscriber growth may be adversely affected.
DTH AND DISH NETWORK-SM- EXPENSES. DTH and DISH Network-SM- expenses
(excluding amortization of subscriber acquisition costs) for the three months
ended March 31, 1997 aggregated $43.2 million, an increase of $7.2 million,
or 20% compared to the same period in 1996. This increase is directly
attributable to the introduction of DISH Network-SM- service in March 1996,
partially offset by decreases in other DTH expenses. DTH products and
technical services expense decreased $23.5 million, or 72%, to $9.2 million
during the three months ended March 31, 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 EchoStar's promotions.
Subscriber promotion subsidies aggregated $12.8 million for the three months
ended March 31, 1997 and represent net expenses associated with the Company's
various promotions. DISH Network-SM-programming expenses totaled $19.4
million for the three months ended March 31, 1996. The Company expects that
DISH Network-SM- programming expenses will increase in future periods in
proportion to increases in the number of DISH Network-SM- subscribers. Such
expenses, relative to related revenues, will vary based on the services
subscribed to by DISH Network-SM- 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 $1.8 million for the three months ended
March 31, 1997, a decrease of $1.4 million, or 45%, as compared to the same
period in 1996. This decrease is consistent with the decrease in
12
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
C-band programming revenue. As previously described, domestic demand for C-band
DTH products has 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 $30.9 million for the three months
ended March 31, 1996, an increase of $20.3 million as compared to the same
period in 1996. SG&A expenses as a percentage of total revenue increased to
43% for the three months ended March 31, 1997 as compared to 26% for the same
period in 1996. The increase in SG&A expenses was principally attributable
to: (i) increased personnel expenses as a result of introduction of DISH
Network-SM-service in March 1996; (ii) marketing and advertising expenses
associated with the launch and ongoing operation of the DISH Network-SM-; and
(iii) increased expenses associated with operation of DISH Network-SM- call
centers and subscriber management related services. In future periods, the
Company expects that SG&A expenses as a percentage of total revenue will
decrease as subscribers are added.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the three months ended March 31, 1997, including the amortization of subscriber
acquisition costs, aggregated $40.7 million, an increase of $37.4 million, as
compared to the same period 1996. The increase in depreciation and amortization
expenses resulted from depreciation expenses associated with EchoStar I and
EchoStar II (placed in service during the first quarter of 1996, and the fourth
quarter of 1996, respectively), and amortization of subscriber acquisition
costs.
OTHER INCOME AND EXPENSE. Other expense, net totaled $18.3 million for the
three months ended March 31, 1997, an increase of $14.5 million, as compared to
the same period 1996. The increase in other expense in the first quarter of
1997 resulted primarily from an increase in interest expense associated with the
issuance of the ESBC Notes.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $5.1 million
(from $5.1 million for the three months ended March 31, 1996 to an income tax
provision of $19,000 for the three months ended March 31, 1997) principally
resulted from the Company's decision to fully reserve the first quarter addition
to its net deferred tax asset. The Company's net deferred tax assets
(approximately $67.0 million at March 31, 1997) relate to temporary differences
for amortization of original issue discount on the Dish and ESBC 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 allowance may change.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "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
license for 28 frequencies at 110DEG. West Longitude awarded to MCI
Communications Corporation during a Federal Communications Commission auction
during 1996. Subsequently, the parties discussed, and agreed upon, potentially
mutually agreeable changes to the structure of the transactions. However,
during late April 1997, substantial disagreements arose between the parties
regarding their obligations under the Agreement.
On May 8, 1997 EchoStar filed a Complaint in the United States 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 Agreement to lend $200 million to EchoStar without
interest and upon such other terms as the Court orders. No assurance can be
given that the Court will grant EchoStar's request for expedited relief.
Further, while EchoStar believes that the Court should grant its request
requiring News to loan EchoStar the $200 million, and is very confident of its
position, no assurance can be given that the Court will grant that request.
On May 9, 1997, as a result of numerous material breaches of the Agreement
by News, EchoStar filed a First Amended Complaint significantly expanding the
scope of the litigation, seeking specific performance of the Agreement, and
damages, including lost profits that were expected as a result of the
transactions contemplated by the Agreement, which could exceed $5 billion.
While EchoStar is confident of its position and believes it will ultimately
prevail in the litigation, there can be no assurance that EchoStar will prevail,
of the amount of damages EchoStar will collect if it prevails, or that timely
relief will be granted.
On September 26, 1996, EchoStar Satellite Corporation ("ESC") filed suit
against Sagem, S.A., ("Sagem") a French corporation, in connection with a
manufacturing agreement entered into in April 1995. Sagem, Inc., a wholly owned
subsidiary of Sagem, was added as a party to the litigation in a subsequent
amendment. Under the agreements between the parties, Sagem and Sagem, Inc. were
to provide 560,000 digital satellite receivers to ESC throughout 1995 and 1996.
Sagem and Sagem, Inc. failed to deliver any production receivers to ESC. ESC
thereafter terminated the agreements between the parties. ESC brought claims
against Sagem and Sagem, Inc. for breach of contract and declaratory relief.
ESC sought return of a $10.0 million down payment made to Sagem, $15.0 million
placed in escrow with Bank of America, a $373,000 prepayment made to Sagem, Inc.
for finished goods, contractual late fees, lost profits, interest, attorneys'
fees, costs, and expenses. Sagem and Sagem, Inc. filed counterclaims seeking
damages of approximately $25.0 million. On April 25, 1997, ESC and Sagem
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 Bank of America. 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 for ESBC during the first quarter of
1997.
14
<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
Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: May 14, 1997
<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 March 31, 1997 and the related consolidated
statements of operations and cash flows for the three months ended March 31,
1997 and is qualified in its entirety by reference to those financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,079
<SECURITIES> 3,528
<RECEIVABLES> 32,800
<ALLOWANCES> (1,642)
<INVENTORY> 57,043
<CURRENT-ASSETS> 220,992
<PP&E> 546,572
<DEPRECIATION> (47,533)
<TOTAL-ASSETS> 1,072,727
<CURRENT-LIABILITIES> 231,348
<BONDS> 898,604
0
0
<COMMON> 0
<OTHER-SE> (67,352)
<TOTAL-LIABILITY-AND-EQUITY> 1,072,727
<SALES> 71,304<F1>
<TOTAL-REVENUES> 71,462
<CGS> 30,412<F2>
<TOTAL-COSTS> 114,790
<OTHER-EXPENSES> (18,257)
<LOSS-PROVISION> 609
<INTEREST-EXPENSE> (19,846)<F3>
<INCOME-PRETAX> (61,585)
<INCOME-TAX> (19)
<INCOME-CONTINUING> (61,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,604)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes sales of programming.
<F2>Includes the cost of providing programming.
<F3>Net of amounts capitalized.
</FN>
</TABLE>
