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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) 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)
Registrant's telephone number, including area code: (303) 799-8222
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
--------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) 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 (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
As of March 17, 1997, Registrant's outstanding voting stock consisted of
1,000 shares of Common Stock, $0.01 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(J)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS ANNUAL REPORT ON
FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
None.
--------------------------
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TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 3
Item 3. Legal Proceedings 3
Item 4. Submission of Matters to a Vote of Security Holders *
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5
Item 6. Selected Financial Data *
Item 7. Management's Narrative Analysis of the Results of Operations 6
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure 8
PART III
Item 10. Directors and Executive Officers of Registrant *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions *
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 9
Signatures 13
Index to Financial Statement and Report of Independent Public Accountants F-1
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* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instructions (J)(1)(a) and (b) of Form 10-K.
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PART I
ITEM 1. BUSINESS
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, INCLUDING THE ASKYB TRANSACTION (AS
DEFINED HEREIN); THE ABILITY 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 THAT 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.
BRIEF DESCRIPTION OF BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC" or
"the Company"), is a wholly-owned subsidiary of EchoStar Communications
Corporation ("EchoStar" or "ECC"). EchoStar's Class A Common Stock trades on
the Nasdaq Stock Market under the symbol "DISH." ESBC, through its indirect
subsidiaries, currently is one of only three DBS companies in the United
States with the capacity to provide comprehensive nationwide DBS programming
service. ESBC's DBS service (the "DISH Network-SM-") commenced operations in
March 1996 after the successful launch of its first satellite ("EchoStar I")
in December 1995. EchoStar launched its second satellite ("EchoStar II") on
September 10, 1996. EchoStar II significantly increased the channel capacity
and programming offerings of the DISH Network-SM- when it became fully
operational in November 1996. The Company currently provides approximately
120 channels of near laser disc quality digital video programming and over 30
channels of CD quality audio programming to the entire continental United
States ("CONUS"). In addition to its DISH Network-SM- business, ESBC is
engaged in the design, manufacture, distribution and installation of various
satellite direct-to-home ("DTH") products, and domestic distribution of 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.
On February 24, 1997, EchoStar announced the formation of a DBS alliance
(the "ASkyB Transaction") with The News Corporation Limited ("News").
Pursuant to a binding letter agreement, American Sky Broadcasting, LLC, an
entity controlled by News ("ASkyB"), will contribute to EchoStar, or to an
entity in which EchoStar would have an equity interest, or make available for
EchoStar's use, cash, satellites and other DBS assets. These assets are
expected to have a total value of approximately $1.7 billion including an FCC
license purchased during 1996 for approximately $682.5 million. In return,
ASkyB will acquire an approximate 50% equity interest in EchoStar. As a
result of its contributions to ASkyB, MCI Communications Corporation ("MCI")
will have an approximate 19.9% interest in ASkyB. Four DBS satellites are
currently under construction for use by ASkyB. ASkyB also is constructing a
digital broadcast center in Gilbert, Arizona, which, upon completion, will
provide EchoStar with fully redundant digital broadcast center operations.
Assuming consummation of the ASkyB Transaction, EchoStar's business plan
would contemplate the eventual deployment of a total of seven DBS satellites.
The Company anticipates that more than 200 channels of digital video and
audio programming would be available for purchase by most continental U.S.
television households. The Company is planning, subject to obtaining
necessary regulatory and other approvals, to use the remaining portion of its
DBS capacity to provide local programming
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to major population centers within the continental United States. The
eventual use of the eighth DBS satellite has not been determined. While
definitive agreements are expected to be executed in the near future, in the
absence of definitive agreements, the letter agreement will continue as a
binding commitment between the parties. Consummation of the ASkyB
Transaction is subject only to certain regulatory and other approvals and
consents. While EchoStar and News intend to consummate the ASkyB Transaction,
there can be no assurance that necessary regulatory or other approvals or
consents will be obtained or that the transaction will be consummated.
In March 1996, ESBC completed an offering (the "ESBC Notes Offering") of
13 1/8% Senior Secured Discount Notes due 2004 (the "ESBC Notes"), which
resulted in net proceeds to the Company of approximately $337.0 million. In
connection with the ESBC Notes Offering, EchoStar contributed all of the
outstanding capital stock of its wholly-owned subsidiary, Dish, Ltd., to
ESBC. This transaction was accounted for as a reorganization of entities
under common control whereby Dish, Ltd. was treated as the predecessor to
ESBC. ESBC is subject to all, and EchoStar is subject to certain of, the
terms and conditions of the indenture related to the ESBC Notes (the "ESBC
Notes Indenture"). As a result of the above transactions, ESBC is a
wholly-owned direct subsidiary of EchoStar; Dish, Ltd. is a wholly-owned
direct subsidiary of ESBC. Substantially all of EchoStar's operating
activities are conducted by subsidiaries of Dish, Ltd.
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 Annual Report on Form 10-K to EchoStar's Annual Report on
Form 10-K for the year ended December 31, 1996.
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ITEM 2. PROPERTIES
The following table sets forth certain information concerning the
Company's material properties.
APPROXIMATE OWNED
SQUARE OR
DESCRIPTION/USE LOCATION FOOTAGE LEASED
- -------------------------- -------- ----------- ------
Corporate Headquarters and
Warehouse Distribution Center Englewood, Colorado 155,000 Owned
Office and Distribution Center Sacramento, California 78,500 Owned
Digital Broadcast Center Cheyenne, Wyoming 55,000 Owned
European Headquarters and Almelo, The Netherlands 53,800 Owned
Warehouse
ITEM 3.LEGAL PROCEEDINGS
On July 29, 1996, EAC, DNCC, ESC and Echosphere Corporation
(collectively, "EchoStar Credit"), filed a civil action against Associates
Investment Corporation ("Associates") which is currently pending in the United
States District Court in the District of Colorado. EchoStar Credit alleges
that Associates, among other things, breached its contract with EchoStar
Credit pursuant to which Associates agreed to finance the purchase of EchoStar
Receiver Systems by consumers. EchoStar Credit alleges that Associates'
refusal to finance certain prospective consumers has resulted in the loss of
prospective customers to EchoStar's competitors. In addition, EchoStar Credit
alleges that the loss of sales due to Associate's action forced EchoStar to
lower the price on its products. Associate's filed counterclaims against EAC
for fraud and breach of contract. Associates seeks approximately $10.0 million
by way of its counterclaims. EAC intends to vigorously defend against such
counterclaims. A trial date has not yet been set. It is too early in the
litigation to make an assessment of the probable outcome.
On September 26, 1996, 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 seeks 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. ESC intends to vigorously defend the
counterclaims. A trial date has not yet been set nor has discovery commenced.
The Company believes, but can give no assurance that, ESC will be able to
recover most, if not all, of the amounts deposited with Sagem and held in
escrow.
Certain purchasers of C-band and DISH Network-SM- systems have filed
actions in various state courts in Alabama naming EchoStar, EAC or Echosphere
Corporation as a defendant and seeking actual and punitive damages. At least
ten actions have been filed. EchoStar believes additional actions may be
filed. Plaintiffs' attorneys also may attempt to certify a class and/or add
additional plaintiffs to the existing actions and seek greater damages. To
date, a trial date (March 2, 1998) has been established for only one of the
aforementioned actions. The actions filed to date also name as defendants the
dealer and its employees who sold the equipment and the EAC financing source,
which owns the consumer loans, made to the purchasers. Four of the actions
involve EAC and Household Retail Services, Inc. ("HRSI") and six claims
involve EAC and Bank One Dayton, N.A. EchoStar denies liability and intends
to vigorously defend against the claims, which include allegations of fraud
and lending law violations. While the actual damages claimed are not
material, EchoStar is aware that juries in Alabama have recently issued a
number of verdicts awarding substantial punitive damages on actual damage
claims of less than $10,000.
EAC and HRSI entered into a Merchandise Financing Agreement in 1989 (the
"Merchant Agreement") pursuant to which HRSI acted as a consumer financing
source for the purchase of, among other things, satellite systems distributed
by Echosphere Corporation, a subsidiary of EchoStar to consumers through EAC
dealers. HRSI terminated the Merchant Agreement as of December 31, 1994.
During February 1995, EAC and Echosphere (the
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"EAC Parties") filed suit against HRSI. The case is pending in U.S. District
Court in Colorado (the "HRSI Litigation"). The EAC Parties have alleged,
among other things, breach of contract, breach of fiduciary duty, fraud and
wanton and willful conduct by HRSI in connection with termination of the
Merchant Agreement and related matters. The EAC parties are seeking damages
in excess of $10 million. HRSI's counterclaims have been dismissed with
prejudice. Summary judgment motions have been pending on all remaining issues
since May 1996. A trial date has not been set.
On March 4, 1997, Feature Film Services ("Feature Films") filed a civil
action against EchoStar in the U.S. District Court in the District of Chicago.
Feature Films alleges that EchoStar has infringed against one of its patents.
EchoStar believes that strong defenses against such claims are available and
intends to vigorously defend against such claims. While no assurance can be
given, EchoStar believes that indemnification from a vendor may be available in
the event of an unfavorable outcome, and that a licensing agreement could be
reached with Feature Films at reasonable terms.
EchoStar is a party to certain other legal proceedings arising in the
ordinary course of its business. EchoStar does not believe that any of these
proceedings will have a material adverse affect on EchoStar's financial
position or results of operations.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 17, 1997, all 1,000 authorized, issued and outstanding shares
of the Company's Common Stock were held by EchoStar. There is currently no
established trading market for the Company's Common Stock.
ESBC has never declared or paid any cash dividends on its common stock
and does not expect to declare dividends in the foreseeable future. Payment of
any future dividends will depend upon the earnings and capital requirements of
ESBC, ESBC's debt facilities, and other factors the Board of Directors
considers appropriate. The Company currently intends to retain its earnings,
if any, to support future growth and expansion. The Company's ability to
declare dividends is affected by covenants in its debt facilities that
prohibit ESBC from declaring dividends and its subsidiaries from transferring
funds in the form of cash dividends, loans or advances to EchoStar.
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Total revenue for 1996 was $209.7 million, an increase of $45.8
million, or 28%, as compared to total revenue for 1995 of $163.9 million. The
increase in total revenue in 1996 was primarily attributable to the
introduction of EchoStar'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 December 31, 1996, the
Company had approximately 350,000 DISH Network-SM- subscribers.
The increase in total revenue in 1996 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 1996; this decline is expected to continue for the
foreseeable future and had been expected by EchoStar as described below.
Consistent with the increases in total revenue during 1996, EchoStar
experienced a corresponding increase in trade accounts receivable at December
31, 1996. The Company expects this trend to continue as the number of DISH
Network-SM- subscribers increases, and as EchoStar develops additional channels
of distribution for DISH Network-SM- equipment.
Revenue from domestic sales of DTH products and technical services
increased $5.3 million, or 6%, to $98.9 million during 1996. Domestically,
the Company sold approximately 518,000 satellite receivers in 1996, an
increase of 295% as compared to approximately 131,000 receivers sold in 1995.
Of the total number of satellite receivers sold during 1996, approximately
474,000 were EchoStar Receiver Systems. Although there was a significant
increase in the number of satellite receivers sold in 1996 as compared to
1995, overall revenue did not increase proportionately as a result of the
revenue recognition policy applied to DBS satellite receivers sold under the
EchoStar Promotion, combined with decreasing sales of, and lower prices
charged for, C-band products. Included in the number of DTH satellite
receivers sold 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 19,000 units during 1996, as compared to
67,000 units sold in 1995. Revenues generated from the sale of competitor DBS
receivers aggregated $8.0 million during 1996, compared to $34.0 million in
1995. No revenue will be generated from the sale of competitor DBS receivers
in 1997.
Revenue from international sales of DTH products for the year ended
December 31, 1996 was $37.5 million, a decrease of $15.8 million, or 30%, as
compared to 1995. This decrease was directly attributable to a decrease in the
number of analog satellite receivers sold, combined with decreased prices on
products sold. Internationally, EchoStar sold approximately 239,000 analog
satellite receivers in 1996, a decrease of 28%, compared to approximately
331,000 units sold in 1995. Overall, EchoStar's international markets for
analog DTH products declined in 1996 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,
EchoStar has been negotiating with digital service providers to distribute
their proprietary receivers in EchoStar'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 service revenue totaled $11.9 million in 1996, a
decrease of $3.3 million, or 22%, compared to 1995. 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 in 1996 was $789,000, a
decrease of $959,000 or 55%, compared to 1995. The decrease in loan
origination and participation income during 1996 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 Echo Acceptance Corporation ("EAC"), a subsidiary of
Dish, Ltd. DNCC is not a subsidiary of ESBC. The introduction of 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.
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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 in
1996 aggregated $188.3 million, an increase of $58.1 million, or 45% compared
to 1995. 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 increased $6.7 million,
or 6%, to $123.5 million during 1996. These expenses include the costs of
EchoStar Receiver Systems and related components sold prior to commencement
of the EchoStar Promotion. Subscriber promotion subsidies aggregated $35.2
million during 1996 and represent expenses associated with the EchoStar
Promotion. DISH Network-SM- programming expenses totaled $19.1 million for
the year ended December 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 EchoStar is able to realize
volume discounts from programming providers.
C-band programming expenses totaled $10.5 million during the year ended
December 31, 1996, a decrease of $3.0 million, or 22%, as compared to 1995.
This decrease is consistent with the decrease in C-band programming revenue.
Gross margins realized on C-band programming sales remained relatively
constant. 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 $86.9 million in 1996, an increase
of $48.4 million or 126%, as compared to 1995. Such expenses as a percentage
of total revenue increased to 41% in 1996 as compared to 24% in 1995. 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 (EchoStar's number of employees doubled during 1996 as compared to
1995); (ii) marketing and advertising expenses associated with the launch and
ongoing operation of the DISH Network-SM-; (iii) increased expenses related
to the Digital Broadcast Center, which commenced operations in the third
quarter of 1995; and (iv) increased expenses associated with operation of
DISH Network-SM- call centers and subscription management related services.
In future periods, EchoStar 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 year ended December 31, 1996, including the amortization of subscriber
acquisition costs, aggregated $43.4 million, an increase of $40.3 million, as
compared to 1995. The increase in depreciation and amortization expenses
resulted from depreciation expenses associated with the Digital Broadcast
Center, EchoStar I and EchoStar II (placed in service during the fourth
quarter of 1995, 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 $46.7 million in
1996, an increase of $36.2 million, as compared to 1995. The increase in other
expense in 1996 resulted primarily from an increase in interest expense
associated with the issuance of the ESBC Notes. This increase in interest
expense was partially offset by an increase in interest income attributable to
increases in invested balances as a result of the investment of proceeds
received from the issuance of the ESBC Notes. Interest capitalized relating to
development of the EchoStar DBS System during 1996 was $19.8 million (compared
to $25.0 million during 1995).
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INCOME TAX BENEFIT. The increase in the income tax benefit of $48.7
million (from $6.2 million in 1995 to $54.9 million in 1996) principally
resulted from the increase in EchoStar's loss before income taxes. EchoStar's
net deferred tax assets (approximately $67.0 million at December 31, 1996)
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. No valuation allowance has been
provided because EchoStar currently believes it is more likely than not that
these deferred tax assets will ultimately be realized. If future operating
results differ materially and adversely from EchoStar's current expectations,
its judgment regarding the need for a valuation allowance may change.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment Of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121") which requires impairment losses to be recognized for
long-lived assets used in operations when indications of impairment are
present and the future undiscounted cash flows are not sufficient to recover
the assets carrying amount. EchoStar adopted SFAS No. 121 in the first quarter
of 1996. The adoption of SFAS No. 121 did not have a material effect on
EchoStar's financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair-value based method of accounting for employee
stock options or similar equity instruments. It also allows an entity to elect
to continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but
requires pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. EchoStar elected to
continue to apply APB No. 25 for expense recognition purposes. The pro forma
disclosures required by SFAS No. 123 are included in EchoStar's consolidated
financial statements incorporated by reference herein.
INFLATION
Inflation has not materially affected the Company's operations during the
past three years. The Company believes that its ability to increase charges
for its products and services in future periods will depend primarily on
competitive pressures. The Company does not have any material backlog of its
products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, which are included in
this report on pages F-1 through F-29, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS
PAGE
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Report of Independent Public Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS
2.1 Amended and Restated Agreement for Exchange of Stock and Merger,
dated as of May 31, 1995, by and among EchoStar Communications
Corporation, a Nevada corporation formed in April 1995 ("EchoStar"),
Charles W. Ergen and EchoStar (incorporated by reference to Exhibit
2.2 to the Registration Statement on Form S-1, Registration
No. 33-91276).
2.2 Plan and Agreement of Merger made as of December 21, 1995 by and
among EchoStar, Direct Broadcasting Satellite Corporation, a
Colorado Corporation ("MergerCo") and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC") (incorporated by
reference to Exhibit 2.3 to the Registration Statement on Form S-4,
Registration No. 333-03584).
2.3 Merger Trigger Agreement entered into as of December 21, 1995 by and
among EchoStar, MergerCo and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC") (incorporated by
reference to Exhibit 2.3 to the Registration Statement on Form S-4,
Registration No. 333-03584).
3.1(a) Amended and Restated Articles of Incorporation of EchoStar
(incorporated by reference to Exhibit 3.1(a) to the Registration
Statement on Form S-1, Registration No. 33-91276).
3.1(b) Bylaws of EchoStar (incorporated by reference to Exhibit 3.1(b) to
the Registration Statement on Form S-1, Registration No. 33-91276).
4.1 Indenture of Trust between Dish, Ltd. and First Trust National
Association ("First Trust"), as Trustee (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-1 of Dish,
Ltd., Registration No. 33-76450).
4.2 Warrant Agreement between EchoStar and First Trust, as Warrant Agent
(incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No. 33-76450).
4.3 Security Agreement in favor of First Trust, as Trustee under the
Indenture of Trust between Dish, Ltd. and First Trust, as Trustee
Exhibit 4.1 (incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
9
<PAGE>
4.4 Escrow and Disbursement Agreement between Dish, Ltd. and First Trust
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No. 33-76450).
4.5 Pledge Agreement in favor of First Trust, as Trustee under the
Indenture of Trust between Dish, Ltd. and First Trust, as Trustee
(incorporated by reference to Exhibit 4.5 to the Registration
Statement on Form S-1 of Dish, Ltd., Registration No. 33-76450).
4.6 Intercreditor Agreement among First Trust, Continental Bank, N.A.
and Martin Marietta Corporation ("Martin Marietta") (incorporated by
reference to Exhibit 4.6 to the Registration Statement on Form S-1
of Dish, Ltd., Registration No. 33-76450).
4.7 Series A Preferred Stock Certificate of Designation of EchoStar
(incorporated by reference to Exhibit 4.7 to the Registration
Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.8 Registration Rights Agreement by and between EchoStar and Charles W.
Ergen (incorporated by reference to Exhibit 4.8 to the Registration
Statement on Form S-1 of EchoStar, Registration No. 33-91276).
4.9 Indenture of Trust between ESBC and First Trust, as Trustee
(incorporated by reference to Exhibit 4.9 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1995,
Commission File No. 0-26176).
4.10 Security Agreement of ESBC in favor of First Trust, as Trustee under
the Indenture of Trust between ESBC and First Trust (incorporated by
reference to Exhibit 4.10 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1995, Commission File
No. 0-26176).
4.11 Escrow and Disbursement Agreement between ESBC and First Trust
(incorporated by reference to Exhibit 4.11 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1995.
Commission File No. 0-26176).
4.12 Pledge Agreement of ESBC in favor of First Trust, as Trustee under
the Indenture of Trust between ESBC and First Trust (incorporated by
reference to Exhibit 4.12 to the Annual Report on Form 10-K of
EchoStar for the year ended December 31, 1995, Commission File No.
0-26176).
4.13 Pledge Agreement of EchoStar in favor of First Trust, as Trustee
under the Indenture of Trust between ESBC and First Trust
(incorporated by reference to Exhibit 4.13 to the Annual Report on
Form 10-K of EchoStar for the year ended December 31, 1995,
Commission File No. 0-26176).
4.14 Registration Rights Agreement by and between the ESBC, EchoStar,
Dish, Ltd., New DBSC and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 4.14 to the Annual
Report on Form 10-K of EchoStar for the year ended December 31,
1995, Commission File No. 0-26176).
10.1(a) Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin Marietta
Corporation as successor to General Electric EchoStar, Astro-Space
Division ("General Electric") (incorporated by reference to Exhibit
10.1(a) to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
10.1(b) First Amendment to the Satellite Construction Contract, dated as of
October 2, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by reference to Exhibit 10.1(b) to
the Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
10.1(c) Second Amendment to the Satellite Construction Contract, dated as of
October 30, 1992, between ESC and Martin Marietta as successor to
General Electric (incorporated by reference to Exhibit 10.1(c) to
the Registration Statement on Form S-1 of Dish, Ltd., Ltd.
Registration No. 33-76450).
10
<PAGE>
10.1(d) Third Amendment to the Satellite Construction Contract, dated as of
April 1, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(d)to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-76450).
10.1(e) Fourth Amendment to the Satellite Construction Contract, dated as of
August 19, 1993, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(e)to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-76450).
10.1(f) Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-81234).
10.1(g) Sixth Amendment to the Satellite Construction Contract, dated as of
June 7, 1994, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(g) to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-81234).
10.1(h) Eighth Amendment to the Satellite Construction Contract, dated as of
July 18, 1996, between ESC and Martin Marietta (incorporated by
reference to Exhibit 10.1(h) to the Form 10-Q of EchoStar as of
June 30, 1996, Commission File No. 0-26176).
10.2 Master Purchase and License Agreement, dated as of August 12, 1986,
between Houston Tracker Systems, Inc. ("HTS") and Cable/Home
Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
10.3 Master Purchase and License Agreement, dated as of June 18, 1986,
between Echosphere and Cable/Home Communications Corp. (a subsidiary
of General Instruments Corporation) (incorporated by reference to
Exhibit 10.5 to the Registration Statement on Form S-1 of Dish,
Ltd., Registration No. 33-76450).
10.4 Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation ("EAC") and Household Retail
Services, Inc. (incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
10.5 Key Employee Bonus Plan, dated as of January 1, 1994 (incorporated
by reference to Exhibit 10.7 to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-76450).*
10.6 Consulting Agreement, dated as of February 17, 1994, between ESC
and Telesat Canada (incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-76450).
10.7 Form of Satellite Launch Insurance Declarations (incorporated by
reference to Exhibit 10.10 to the Registration Statement on Form
S-1 of Dish, Ltd., Registration No. 33-81234).
10.8 Dish, Ltd. 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of Dish,
Ltd., Registration No. 33-76450).*
10.9 Form of Tracking, Telemetry and Control Contract between AT&T Corp.
and ESC (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form S-1 of Dish, Ltd., Registration
No. 33-81234).
10.10 Manufacturing Agreement, dated as of March 22, 1995, between HTS
and SCI Technology (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Ltd., Commission
File No. 33-81234).
- --------------------------
* Constitutes a management contract or compensatory plan or arrangement.
11
<PAGE>
10.11 Manufacturing Agreement dated as of April 14, 1995 by and between
ESC and Sagem Group (incorporated by reference to Exhibit 10.13 to
the Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
10.12 Statement of Work, dated January 31, 1995 from EchoStar Satellite
Corporation Inc. to Divicom Inc. (incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-1, Registration
No. 33-91276).
10.13 Launch Services Contract, dated as of June 2, 1995, by and between
EchoStar Satellite Corporation and Lockheed-Khrunichev-Energia
International, Inc. (incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-1, Registration No. 33-91276).
10.14 EchoStar 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.16 to the Registration Statement on Form S-1, Registration
No. 33-91276).*
10.15(a) Eighth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Mariett
Corporation (incorporated by reference to Exhibit 10.17(a) to the
Form 10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.15(b) Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin Marietta
Corporation (incorporated by reference to Exhibit 10.15 to the
Registration Statement of Form S-4, Registration No. 333-03584).
10.15(c) Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin Marietta
Corporation (incorporated by reference to Exhibit 10.17(b) to
Form 10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.16 Satellite Construction Contract, dated as of July 18, 1996, between
EchoStar DBS Corporation and Lockheed Martin Corporation
(incorporated by reference to Exhibit 10.17(b) to Form 10-Q of
EchoStar as of June 30, 1996, Commission File No. 0-26176).
10.17 Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta Corporation, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.15 to the Registration
Statement of Form S-4, Registration No. 333-03584).
10.18 Right and License Agreement by and among Houston Tracker Systems,
Inc. and Asia Broadcasting and Communications Network, Ltd., dated
December 19, 1996, (incorporated by reference to Exhibit 10.18 to
EchoStar's Annual Report of Form 10-K for the year ended December 31,
1996).
10.19 Agreement between Houston Tracker Systems, Inc. and EchoStar
Satellite Corporation and ExpressVu Inc., dated January 8, 1997,
(Incorporated by reference to Exhibit 10.15 to EchoStar's Annual
Report on Form 10-K for the year ended December 31, 1996).
23 Consent of Independent Public Accountants.
24 Powers of Attorney authorizing signature of Charles W. Ergen, R.
Scott Zimmer, James DeFranco, Alan M. Angelich and Raymond L.
Friedlob.
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
- --------------------------
* Constitutes a management contract or compensatory plan or arrangement.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, ESBC 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
Vice President, Chief Operating Officer
and Chief Financial Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
ESBC and in the capacities and on the dates indicated:
Signature Title Date
- --------- ------ ----
* Chief Executive Officer and Director March 28, 1997
- ------------------------- (PRINCIPAL EXECUTIVE OFFICER)
Charles W. Ergen
/s/STEVEN B. SCHAVER Vice President, Chief Operating March 28, 1997
- ------------------------- Officer and Chief Financial Officer
Steven B. Schaver (PRINCIPAL FINANCIAL OFFICER)
/s/JOHN R. HAGER Controller March 28, 1997
- ------------------------- (PRINCIPAL ACCOUNTING OFFICER)
John R. Hager
* Director March 28, 1997
- -------------------------
James DeFranco
* Director March 28, 1997
- -------------------------
R. Scott Zimmer
* Director March 28, 1997
- -------------------------
Alan M. Angelich
* Director March 28, 1997
- -------------------------
Raymond L. Friedlob
* By: /s/ STEVEN B. SCHAVER
- -----------------------------
Steven B. Schaver
Attorney-in-Fact
13
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December, 1994, 1995 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Satellite Broadcasting Corporation:
We have audited the accompanying consolidated balance sheets of EchoStar
Satellite Broadcasting Corporation (a Colorado corporation) and subsidiaries,
as described in Note 1, as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EchoStar Satellite Broadcasting Corporation and subsidiaries as of December
31, 1995 and 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 14, 1997
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
DECEMBER 31,
-----------------------
ASSETS 1995 1996
-----------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,949 $ 38,428
Marketable investment securities 210 18,807
Trade accounts receivable, net
of allowance for uncollectible
accounts of $1,106 and $1,494,
respectively 9,115 13,483
Inventories, net 38,769 72,767
Income tax refund receivable 3,870 4,830
Deferred tax assets 1,834 --
Subscriber acquisition costs, net -- 68,129
Other current assets 12,791 15,031
-----------------------
Total current assets 80,538 231,475
Restricted Cash and Marketable Investment Securities:
Dish Notes escrow 73,291 --
ESBC Notes escrow -- 47,491
Other 26,400 31,450
Property and equipment, net 333,199 499,989
Advances to affiliates, net 1,320 144,893
Deferred tax assets 12,109 79,670
Other noncurrent assets 32,438 38,123
-----------------------
Total assets $559,295 $1,073,091
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable $ 19,063 $ 40,793
Deferred programming and product
revenue - DISH Network-SM- subscriber
promotions -- 97,959
Deferred programming revenue - DISH Network-SM- -- 4,407
Deferred programming revenue - C-band 584 734
Accrued expenses and other current liabilities 26,314 29,180
Deferred tax liabilities -- 12,674
Current portion of long-term debt 4,782 11,334
-----------------------
Total current liabilities 50,743 197,081
Long-term deferred signal carriage revenue -- 5,949
Dish Notes 382,218 437,127
ESBC Notes -- 386,165
Mortgage and other notes payable, excluding
current portion 33,444 51,428
Other long-term liabilities -- 1,088
-----------------------
Total liabilities 466,405 1,078,838
COMMITMENTS AND CONTINGENCIES (NOTE 11)
Stockholder's Equity (Notes 2 and 9):
Preferred Stock, 20,000,000 and no shares
authorized, 1,616,681 and no shares of
8% Series A Cumulative Preferred Stock
issued and outstanding, including
accrued dividends of $1,555,000 and $0,
respectively 16,607 --
Class A Common Stock, $.01 par value,
200,000,000 and no shares authorized,
6,470,599 and no shares issued and
outstanding, respectively 65 --
Class B Common Stock, $.01 par value,
100,000,000 and no shares authorized,
29,804,401 and no shares issued and
outstanding, respectively 298 --
Common Stock, $.01 par value, none and
1,000 shares authorized, issued and
outstanding, respectively -- --
Additional paid-in capital 89,495 108,838
Unrealized holding gains (losses) on
available-for-sale securities, net of
deferred taxes 251 (11)
Accumulated deficit (13,826) (114,574)
-----------------------
Total stockholder's equity 92,890 (5,747)
-----------------------
Total liabilities and stockholder's equity $559,295 $1,073,091
-----------------------
-----------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
DTH products and technical services $172,753 $146,910 $ 136,377
DISH Network-SM- promotions - subscription television services and products -- -- 22,746
DISH Network-SM- subscription television services -- -- 37,898
C-band programming 14,540 15,232 11,921
Loan origination and participation income 3,690 1,748 789
-------- -------- ---------
Total revenue 190,983 163,890 209,731
Expenses:
DTH products and technical services 133,635 116,758 123,505
DISH Network-SM- programming -- -- 19,079
C-band programming 11,670 13,520 10,510
Selling, general and administrative 30,219 38,504 86,894
Subscriber promotion subsidies -- -- 35,239
Amortization of subscriber acquisition costs -- -- 15,991
Depreciation and amortization 2,243 3,114 27,378
-------- -------- ---------
Total expenses 177,767 171,896 318,596
-------- -------- ---------
Operating income (loss) 13,216 (8,006) (108,865)
Other Income (Expense):
Interest income 8,420 12,545 15,089
Interest expense, net of amounts capitalized (21,408) (23,985) (61,487)
Minority interest in loss of consolidated joint venture and other 261 894 (345)
-------- -------- ---------
Total other income (expense) (12,727) (10,546) (46,743)
-------- -------- ---------
Net income (loss) before income taxes 489 (18,552) (155,608)
Income tax (provision) benefit, net (399) 6,191 54,860
-------- -------- ---------
Net income (loss) $ 90 $(12,361) $(100,748)
-------- -------- ---------
-------- -------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
<TABLE>
ACCUMULATED
DEFICIT
AND
SHARES OF UNREALIZED
COMMON COMMON ADDITIONAL HOLDING
STOCK PREFERRED COMMON STOCK PAID-IN GAINS
OUTSTANDING STOCK STOCK WARRANTS CAPITAL (LOSSES) TOTAL
--------------- --------- ------ -------- ---------- ----------- ----------
(Notes 1 and 9)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 32,221 $ -- $ 322 $ -- $ 49,378 $ -- $ 49,700
Issuance of Class A Common Stock:
For acquisition of DirectSat, Inc. 999 -- 11 -- 8,989 -- 9,000
For cash 324 -- 3 -- 3,830 -- 3,833
Issuance of 1,616,681 shares of 8%
Series A Cumulative Preferred Stock -- 15,052 -- -- -- -- 15,052
Issuance of Common Stock
Warrants -- -- -- 26,133 -- -- 26,133
Series A Cumulative Preferred Stock
dividends -- 939 -- -- -- (939) --
Net income -- -- -- -- -- 90 90
------- -------- ----- -------- --------- --------- ----------
Balance, December 31, 1994 33,544 15,991 336 26,133 62,197 (849) 103,808
8% Series A Cumulative Preferred Stock
dividends -- 616 -- -- -- (616) --
Exercise of Common Stock Warrants 2,731 -- 26 (25,419) 25,393 -- --
Common Stock Warrants exchanged for
ECC Warrants -- -- -- (714) 714 -- --
Launch bonuses funded by isuance of
ECC's Class A Common Stock -- -- -- -- 1,192 -- 1,192
Unrealized holding gains on available-
for-sale securities, net -- -- -- -- -- 251 251
Net loss -- -- -- -- -- (12,361) (12,361)
------- -------- ----- -------- --------- --------- ----------
Balance, December 31, 1995 36,275 16,607 362 -- 89,496 (13,575) 92,890
Issuance of Common Stock (Note 1) 1 -- -- -- 1 -- 1
Reorganization of entities under
common control (Note 1) (36,275) (16,607) (362) -- 16,969 -- --
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options -- -- -- -- 2,372 -- 2,372
Unrealized holding losses on available-
for-sale securities, net -- -- -- -- -- (262) (262)
Net loss (100,748) (100,748)
------- -------- ----- -------- --------- --------- ----------
Balance, December 31, 1996 1 $ -- $ -- $ -- $ 108,838 $(114,585) $ (5,747)
------- -------- ----- -------- --------- --------- ----------
------- -------- ----- -------- --------- --------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
-----------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 90 $ (12,361) $(100,748)
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Depreciation and amortization 2,243 3,114 27,378
Amortization of subscriber acquisition costs -- -- 15,991
Deferred income tax benefit (7,330) (4,825) (50,522)
Amortization of debt discount and deferred
financing costs 20,662 23,528 61,695
Employee benefits funded by issuance of
Class A Common Stock -- 1,192 --
Change in reserve for excess and obsolete
inventory 502 1,212 2,866
Change in long-term deferred signal carriage
revenue -- -- 5,949
Change in accrued interest on convertible
subordinated debentures from SSET (279) (860) (484)
Other, net (37) 276 1,020
Changes in current assets and current liabilities,
net (see Note 2) 8,354 (33,164) 13,560
-----------------------------------
Net cash flows provided by (used in) operating
activities 24,205 (21,888) (23,295)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities (15,100) (3,004) (138,328)
Sales of marketable investment securities 4,439 33,816 119,730
Purchases of restricted marketable investment
securities (11,400) (15,000) (21,100)
Funds released from restricted cash and
marketable investment securities - other -- -- 16,050
Advances to affiliates, net -- -- (132,669)
Purchases of property and equipment (3,507) (4,048) (45,822)
Offering proceeds and investment earnings
placed in escrow (329,831) (9,589) (193,972)
Funds released from escrow accounts 144,400 122,149 219,352
Investment in SSET (8,750) -- --
Payments received on convertible subordinated
debentures from SSET -- -- 6,445
Investment in DBSC (4,210) 4,210 --
Expenditures for satellite systems under
construction (115,752) (109,507) (112,075)
Expenditures for FCC authorizations (159) (458) (123)
Other 1,305 -- --
-----------------------------------
Net cash flows provided by (used in) operating
activities (338,565) 18,569 (282,512)
CASH FLOWS FROM FINANCING ACTIVITIES:
Minority investor investment in and loan to
consolidated joint venture 1,000 -- --
Net proceeds from issuance of Dish Notes and
Common Stock Warrants 323,325 -- --
Net proceeds from issuance of Class A Common
Stock 3,833 -- --
Proceeds from issuance of Common Stock -- -- 1
Net proceeds from issuance of ESBC Notes -- -- 336,916
Expenditures from escrow for offering costs (837) -- --
Proceeds from refinancing of mortgage
indebtedness 4,200 -- --
Repayments of mortgage indebtedness and notes
payable (3,435) (238) (6,631)
Loans from stockholder, net 4,000 -- --
Repayment of loans from stockholders (4,075) -- --
Dividends paid (3,000) -- --
-----------------------------------
Net cash flows provided by (used in) financing
activities 325,011 (238) 330,286
-----------------------------------
Net increase (decrease) in cash and cash
equivalents 10,651 (3,557) 24,479
Cash and cash equivalents, beginning of year 6,855 17,506 13,949
-----------------------------------
Cash and cash equivalents, end of year $ 17,506 $ 13,949 $ 38,428
-----------------------------------
-----------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC"),
is a wholly-owned subsidiary of EchoStar Communications Corporation ("ECC")
and, together with its subsidiaries ("EchoStar"), a publicly traded company
on the Nasdaq National Market. ESBC, through its indirect subsidiaries
currently is one of only three direct broadcast satellite ("DBS") companies
in the United States with the capacity to provide comprehensive nationwide
DBS programming service. The Company's DBS service (the "DISH Network-SM-")
commenced operations in March 1996 after the successful launch of its first
satellite ("EchoStar I"). The Company launched its second satellite ("EchoStar
II") on September 10, 1996. EchoStar II significantly increased the channel
capacity and programming offerings of the DISH Network-SM- when it became fully
operational in November 1996. The Company currently provides approximately
120 channels of near laser disc quality digital video programming and over 30
channels of CD quality audio programming to the entire continental United
States ("CONUS"). In addition to its DISH Network-SM- business, the Company is
engaged in the design, manufacture, distribution and installation of
satellite direct-to-home ("DTH") products and domestic distribution of 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 350,000 subscribers to DISH
NetworkSM programming as of December 31, 1996.
As more fully described in Note 17, on February 24, 1997, EchoStar
announced the formation of a DBS alliance (the "ASkyB Transaction") with The
News Corporation Limited ("News"). Pursuant to a binding letter agreement,
American Sky Broadcasting, LLC, an entity controlled by News ("ASkyB"), will
contribute to EchoStar, or to an entity in which EchoStar would have an
equity interest, or make available for EchoStar's use, cash, satellites and
other DBS assets. These assets are expected to have a total value of
approximately $1.7 billion. In return, ASkyB will acquire an approximate 50%
equity interest in EchoStar. As a result of its contributions to ASkyB, MCI
Communications Corporation ("MCI") will have an approximate 19.9% interest in
ASkyB. Consummation of the ASkyB Transaction is subject only to certain
regulatory and other approvals and consents. While EchoStar and News intend
to consummate the ASkyB Transaction, there can be no assurance that necessary
regulatory or other approvals or consents will be obtained or that the
transaction will be consummated.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd., formerly known as EchoStar
Communications Corporation (together with its subsidiaries, "Dish, Ltd."). The
principal reorganized entities included EchoStar Satellite Corporation ("ESC"),
which holds licenses for certain DBS frequencies and is the operator of the DISH
NetworkSM, and Echosphere Corporation and Houston Tracker Systems, Inc. ("HTS"),
which are primarily engaged in the design, assembly, marketing and worldwide
distribution of direct to home ("DTH") satellite television products. The
reorganized group also includes other less significant domestic enterprises and
several foreign entities involved in related activities outside the United
States.
During 1994, Dish, Ltd. merged one of its subsidiaries with DirectSat
Corporation ("DirectSat"), an approximately 80% owned subsidiary of SSE Telecom,
Inc. ("SSET") at that time. DirectSat stockholders received an approximate 3%
equity interest in Dish, Ltd. in exchange for all of DirectSat's outstanding
stock. DirectSat's principal assets are a conditional satellite construction
permit and frequency assignments for ten DBS frequencies.
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due 2004 (the "Dish Notes," see Note 6) and Common Stock Warrants
(the "Warrants") (collectively, the "Dish Notes Offering"), resulting in net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the Dish Notes
(the "Dish Notes Indenture").
F-7
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
In April 1995, a new company, EchoStar Communications Corporation (same
name as the original name of Dish, Ltd.), was formed to conduct an initial
public offering ("IPO") of its Class A Common Stock and to become the parent
of Dish, Ltd. as described below. The new company is described below as
"ECC." Elsewhere in these footnotes, unless otherwise indicated, "EchoStar"
or the "Company" refers to ECC and its subsidiaries, including ESBC and Dish,
Ltd. The assets of ECC are not subject to the Dish Notes Indenture. Separate
parent company only financial information for ESBC and ECC is supplementally
provided in Note 16. As described in Note 6, the Dish Notes Indenture places
significant restrictions on the payment of dividends or other transfers by
Dish, Ltd. to ECC.
In June 1995, ECC completed its IPO, which resulted in net proceeds to the
Company of approximately $62.9 million. Concurrently, Charles W. Ergen,
President and Chief Executive Officer of both ECC and Dish, Ltd., exchanged all
of his then outstanding shares of Class B Common Stock and 8% Series A
Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC (the "Exchange")
in the ratio of 0.75 shares of ECC for each share of Dish, Ltd. capital stock
(the "Exchange Ratio"). All employee stock options of Dish, Ltd. were also
assumed by ECC, adjusted for the Exchange Ratio. In December 1995, ECC merged
Dish, Ltd. with a wholly-owned subsidiary of ECC (the "Merger") and all
outstanding shares of Dish, Ltd. Class A Common Stock and 8% Series A Cumulative
Preferred Stock (other than those held by ECC) were automatically converted into
the right to receive like shares of ECC in accordance with the Exchange Ratio.
Also effective with the Merger, all outstanding Warrants for the purchase of
Dish, Ltd. Class A Common Stock automatically became exercisable for shares of
ECC's Class A Common Stock, adjusted for the Exchange Ratio. As a result of the
Exchange and Merger, ECC owns all outstanding shares of Dish, Ltd. capital
stock.
In March 1996, ESBC completed an offering (the "ESBC Notes Offering") of
13 1/8% Senior Secured Discount Notes due 2004, which resulted in net proceeds
to the Company of approximately $337.0 million. In connection with the ESBC
Notes Offering, ECC contributed all of the outstanding capital stock of
Dish, Ltd. to ESBC. This transaction was accounted for as a reorganization of
entities under common control whereby Dish, Ltd. was treated as the predecessor
to ESBC. ESBC is subject to all, and ECC is subject to certain of, the
terms and conditions of the Indenture related to the ESBC Notes (the "ESBC Notes
Indenture"). As a result of the above transactions, ESBC is a wholly-owned
direct subsidiary of EchoStar; Dish, Ltd. is a wholly-owned, direct subsidiary
of ESBC. Substantially all of EchoStar's operating activities are conducted by
subsidiaries of Dish, Ltd.
The following summarizes the Company's organizational structure for
EchoStar and its significant subsidiaries as described above:
<TABLE>
Legal Entity Referred to Herein As Ownership
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar Satellite Broadcasting Corporation ESBC Wholly-owned by ECC
Dish, Ltd. Dish, Ltd. Wholly-owned by ESBC
EchoStar Satellite Corporation ESC Wholly-owned by Dish, Ltd.
Echosphere Corporation EchoCorp Wholly-owned by Dish, Ltd.
Houston Tracker Systems, Inc. HTS Wholly-owned by Dish, Ltd.
EchoStar International Corporation EIC Wholly-owned by Dish, Ltd.
</TABLE>
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed the
Company's operating results and financial position when compared to its
historical results. EchoStar consummated the Dish Notes Offering, the ESBC Notes
Offering and the IPO to partially satisfy the capital requirements for the
construction, launch and operation of its first four DBS satellites (EchoStar I,
EchoStar II, EchoStar III, and EchoStar IV.) Annual interest expense on the Dish
and ESBC Notes, and depreciation of the investment in the satellites and related
assets are each of a magnitude that exceeds historical levels of income before
income taxes. Consequently, beginning in 1995 the Company reported
F-8
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
significant net losses and expects such net losses to continue through at least
1999. As of December 31, 1996, the Company expects to invest approximately an
additional $344 million to fund contractor financing obligations with respect to
its first four satellites and to complete the construction phase and launch of
EchoStar III and EchoStar IV (see Note 11). Upon consummation of the ASkyB
Transaction, EchoStar will acquire various DBS assets and assume future
obligations necessary to complete construction and deployment of such assets.
DBS assets to be acquired in connection with the ASkyB Transaction include,
among other assets, four DBS satellites and a digital broadcast center located
in Gilbert, Arizona, all of which are currently under construction. EchoStar's
plans also include the financing, construction and launch of two fixed service
satellites, additional DBS satellites, and Ku-band and KuX-band satellites,
assuming receipt of all required FCC licenses and permits.
As previously described, EchoStar expects that its net losses will continue
as it builds its subscription television business such that, prior to
consummation of the ASkyB Transaction, negative stockholders' equity will result
during the second quarter of 1997 unless it receives additional equity
financing from News (see Note 17) or other sources. EchoStar's expected net
losses will result primarily from: (i) the amortization of original issue
discount associated with the Dish Notes and the ESBC Notes; (ii) increases in
depreciation expense attributable to the Company's satellites and other fixed
assets; (iii) amortization of subscriber acquisition costs; (iv) subscriber
promotion subsidies; and (v) increases in SG&A expenses to support the DISH
Network-SM-. Although a negative equity position has significant
implications, including, but not limited to, non-compliance with Nasdaq
National Market listing criteria, EchoStar believes that such event will not
materially affect the implementation and execution of its business strategy.
When EchoStar ceases to satisfy Nasdaq's National Market listing criteria,
EchoStar's Class A Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If an
exception is not granted, trading in EchoStar Class A Common Stock would
thereafter be conducted in the over-the-counter market. Consequently, it may
be more difficult to dispose of, or to obtain accurate quotations for,
EchoStar Class A Common Stock. Accordingly, delisting may result in a decline
in the trading market for EchoStar's Class A Common Stock, which could, among
other things, potentially depress EchoStar's stock and bond prices and impair
EchoStar's ability to obtain additional financing.
As a result of the factors discussed above, EchoStar requires additional
capital to complete the construction and launch of EchoStar III and EchoStar IV
and 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 EchoStar. Further increases in subscriber acquisition costs,
inadequate supplies of DBS receivers, or significant delays or launch failures
would significantly and adversely affect EchoStar's operating results and
financial condition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements for 1995 and 1996 prior to the incorporation of
ESBC present the consolidation of Dish, Ltd. and its subsidiaries as the
predecessor to ESBC and exclude all accounts of ESBC's parent, ECC.
Effective June 1993, the Company acquired a 51% joint venture interest in
FlexTracker Sdn. Bhd. ("FlexTracker"), a Malaysian limited liability company. A
Singapore electronics manufacturing company owned the 49% minority interest.
FlexTracker manufactured integrated and stand-alone receivers and positioners
exclusively for the Company. In December 1994, the Company terminated the
FlexTracker joint venture and effectively sold its interest in the joint
venture's net assets to the Singapore company for $1.8 million. The Company's
share of FlexTracker's losses for 1994 amounted to approximately $1.3 million,
and an additional loss of $492,000 was recognized in 1994 upon the sale of the
Company's interest in FlexTracker. FlexTracker's financial statements were
consolidated in the accompanying consolidated financial statements from the date
of acquisition through the date of disposition.
The Company accounts for investments in 50% or less owned entities using
the equity method. At December 31, 1995 and 1996, these investments were not
material to the consolidated financial statements.
F-9
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period end translation) or realized
(upon settlement of the transaction). Net transaction gains (losses) during
1994, 1995 and 1996 were not material to the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1995 and 1996 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which equates to market
value.
STATEMENTS OF CASH FLOWS DATA
The following summarizes the changes in the Company's current assets and
current liabilities:
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
--------------------------
Trade accounts receivable $ 372 $(1,536) $(4,368)
Inventories 3,049 (19,654) (36,864)
Income tax refund receivable -- (3,870) (960)
Subscriber acquisition costs -- -- (84,120)
Other current assets (183) (10,218) (2,240)
Trade accounts payable 2,648 4,111 21,730
Deferred revenue - DISH
Network-SM- subscriber promotions -- -- 97,959
Deferred programming revenue 564 (1,009) 4,557
Accrued expenses and other current liabilities 1,670 (988) 17,866
Other, net 234 -- --
--------------------------
Net increase (decrease) in current assets
and current liabilities $8,354 $(33,164) $13,560
--------------------------
--------------------------
F-10
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The following presents the Company's supplemental cash flow statement
disclosure:
<TABLE>
YEARS ENDED DECEMBER 31,
1994 1995 1996
-------------------------
<S> <C> <C> <C>
Cash paid for interest, net of amounts capitalized $ 436 $ 461 $ 3,007
Cash paid for income taxes 7,140 3,203 --
8% Series A Cumulative Preferred Stock dividends 938 617 --
Accrued satellite contract costs -- 15,000 --
Satellite launch payment for EchoStar II applied to EchoStar I launch -- -- 15,000
Exchange of note payable to stockholder, and interest thereon, for 8% Series A
Cumulative Preferred Stock 15,052 -- --
Issuance of Class A Common Stock to acquire investment in DirectSat Corporation 9,000 -- --
Property and equipment acquired under capital leases 934 -- --
Note payable issued for deferred satellite construction payments for EchoStar I -- 32,833 3,167
Note payable issued for deferred satellite construction payments for EchoStar II -- -- 28,000
Employee Savings Plan contribution and launch bonuses funded by issuance of
Class A Common Stock -- 1,192 --
</TABLE>
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
At December 31, 1995 and 1996, the Company has classified all marketable
investment securities as available for sale. Accordingly, these investments are
reflected at market value based on quoted market prices. Related unrealized
gains and losses are reported as a separate component of stockholders' equity,
net of related deferred income taxes of $153,000 and $6,000 at December 31, 1995
and 1996, respectively. The specific identification method is used to determine
cost in computing realized gains and losses. The major components of marketable
investment securities as of December 31, 1995 and 1996 are as follows (in
thousands):
<TABLE>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------ ---------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
--------- ---------- ------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper $ -- $ -- $ -- $16,065 $ -- $16,065
Government bonds 38 -- 38 2,540 -- 2,540
Mutual funds 188 (16) 172 219 (17) 202
---- ---- ---- ------- ----- -------
$226 $(16) $210 $18,824 $(17) $18,807
---- ---- ---- ------- ----- -------
---- ---- ---- ------- ----- -------
</TABLE>
Restricted Cash and Marketable Investment Securities in Escrow Accounts as
reflected in the accompanying consolidated balance sheets represent the
remaining net proceeds received from the Dish Notes Offering, and a portion of
the proceeds from the ESBC Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and continued
growth of the DISH Network-SM-. These proceeds are held in separate escrow
accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") as required
by the respective indentures, and invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the respective indentures.
Other Restricted Cash includes balances totaling $11.4 million and $5.7
million at December 31, 1995 and 1996 respectively, which were restricted to
satisfy certain covenants in the Dish Notes Indenture regarding launch insurance
for EchoStar I and EchoStar II. In addition, as of each of December 31, 1995 and
1996, $15.0 million was held in escrow relating to a non-performing manufacturer
of DBS receivers (see Note 3). As of December 31, 1996, $10.0 million was on
deposit in a separate escrow account established pursuant to an additional DBS
receiver manufacturing agreement, to provide for EchoStar's future payment
obligations. The major components of Restricted Cash and Marketable Investment
Securities are as follows (in thousands):
F-11
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
<TABLE>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------ ---------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN (LOSS) VALUE COST GAIN (LOSS) VALUE
--------- ---------- ------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper $66,214 $ -- $66,214 $77,569 $ -- $77,569
Government bonds 32,904 420 33,324 368 -- 368
Certificates of deposit -- -- -- 750 -- 750
Accrued interest 153 -- 153 254 -- 254
------- ----- ------- ------- ----- -------
$99,271 $ 420 $99,691 $78,941 $ -- $78,941
------- ----- ------- ------- ----- -------
------- ----- ------- ------- ----- -------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. the Company
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. Inventories consist of the following (in thousands):
DECEMBER 31,
---------------------
1995 1996
--------- ---------
EchoStar Receiver Systems $ -- $ 32,799
Consigned DBS receiver components -- 23,525
DBS receiver components 9,615 15,736
Finished goods - C-band 11,161 600
Finished goods - International 9,297 3,491
Competitor DBS receivers 9,404 --
Spare parts 2,089 2,279
Reserve for excess and obsolete inventory (2,797) (5,663)
-------- --------
$ 38,769 $ 72,767
-------- --------
-------- --------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $5.7 million, $25.0 million and $19.8 million during the years
ended December 31, 1994, 1995 and 1996, respectively. Depreciation is recorded
on a straight-line basis for financial reporting purposes. Repair and
maintenance costs are charged to expense when incurred. Renewals and betterments
are capitalized.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the straight-
line method over a period of 40 years. Such amortization commences at the time
the related satellite becomes operational; capitalized costs are written off at
the time efforts to provide services are abandoned. FCC authorizations include
interest capitalized of $1.3 million and $1.1 million during the years ended
December 31, 1995 and 1996, respectively. The merger with DirectSat described in
Note 1 was accounted for as a purchase. DirectSat's assets were valued at $9.0
million by the Company at the time of the merger and are included in FCC
authorizations (see Note 5).
F-12
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION
Revenue from sales of DTH products is recognized upon shipment to
customers. Revenue from the provision of DISH Network-SM- service and C-band
programming service to subscribers is recognized as revenue in the period such
programming is provided.
SUBSCRIBER PROMOTION SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DISH
NETWORK-SM- SUBSCRIPTION TELEVISION SERVICES AND PRODUCTS
Total transaction proceeds to the Company from DISH Network-SM- programming
and equipment sold as a package under EchoStar promotions are initially deferred
and recognized as revenue over the related service period (normally one year),
commencing upon authorization of each new subscriber. The excess of the
Company's aggregate cost of the equipment, programming and other expenses for
the initial prepaid subscription period for DISH Network-SM- service over
proceeds received is expensed upon shipment of the equipment. Remaining costs,
less programming costs and the amount expensed upon shipment as per above, are
capitalized and reflected in the accompanying balance sheets as subscriber
acquisition costs. Such costs are amortized over the related prepaid
subscription term of the customer. Programming costs are expensed as service is
provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of
programming costs and amortization of subscriber acquisition costs.
DISH Network-SM- programming and equipment which were not sold as a
package under EchoStar promotions are separately presented in the
accompanying consolidated statements of operations.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the Dish Notes Offering and the ESBC Notes Offering
were deferred (Note 5) and are being amortized to interest expense over their
respective terms. The original issue discounts related to the Dish Notes and the
ESBC Notes (Note 6) are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the Dish Notes and the ESBC
Notes.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of prepayments received from
multiple-month subscriptions to DISH Network-SM- programming. Such amounts are
recognized as revenue in the period the programming is provided to the
subscriber. Similarly, the Company defers prepayments received from subscribers
to C-band programming sold by the Company as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments
from certain programming providers for carriage of their programming content on
the DISH Network-SM-. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
DECEMBER 31,
-------------------
1995 1996
------- -------
Accrued expenses $ 3,850 $18,954
Accrued satellite contract costs 15,000 --
Accrued programming 4,979 9,463
Reserve for warranty costs 1,013 763
Other 1,472 --
------- -------
$26,314 $29,180
------- -------
------- -------
F-13
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company's C-Band proprietary products are under warranty against
defects in material and workmanship for a period of one year from the date of
original retail purchase. The reserve for warranty costs is based upon
historical units sold and expected repair costs. The Company does not have a
warranty reserve for its DBS products because the warranty is provided by the
contract manufacturer.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $2.3 million,
$1.9 million and $16.5 million for the years ended December 31, 1994, 1995 and
1996, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which are expensed as incurred, totaled
$5.9 million, $5.0 million and $6.0 million for the years ended December 31,
1994, 1995 and 1996, respectively.
RECLASSIFICATIONS
Certain amounts from the prior years consolidated financial statements
have been reclassified to conform with the 1996 presentation.
3. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
DECEMBER 31,
-----------------
1995 1996
------- -------
Deposits held by non-performing manufacturer $10,000 $10,000
Other 2,791 5,031
------- -------
$12,791 $15,031
------- -------
------- -------
The Company has agreements with two manufacturers to supply DBS receivers
for the Company. To date, only one of the manufacturers has produced receivers
acceptable to the Company. The Company previously deposited $10.0 million with
the non-performing manufacturer and has an additional $15.0 million on deposit
in an escrow account as security for its payment obligations under that
contract. the Company has given the non-performing manufacturer notice of its
intent to terminate the contract and has filed suit against that manufacturer.
Consequently, the Company is currently dependent on one manufacturing source for
its receivers. Since the Company has given the non-performing manufacturer
notice of its intent to terminate the contract, the Company has not considered
amounts due under the contract in the Company's future purchase commitments. The
performing 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. Management believes, but can give no assurance, that Echostar will be
able to recover most, if not all, amounts deposited with the non-performing
manufacturer or held in escrow.
F-14
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
LIFE DECEMBER 31,
--------- -------------------
(IN YEARS) 1995 1996
---------- -------- --------
EchoStar I 12 $ -- $201,607
EchoStar II 12 -- 228,694
Furniture, fixtures and equipment 2-12 35,127 72,932
Buildings and improvements 7-40 21,006 21,649
Tooling and other 2 2,039 3,253
Land -- 1,613 1,613
Vehicles 7 1,310 1,323
Construction in progress -- 282,373 4,137
-------- --------
Total property and equipment 343,468 535,208
Accumulated depreciation (10,269) (35,219)
-------- --------
Property and equipment, net $333,199 $499,989
-------- --------
-------- --------
Construction in progress consists of the following (in thousands):
<TABLE>
DECEMBER 31,
-----------------
1995 1996
-------- -------
<S> <C> <C>
Progress amounts for satellite construction, launch,
launch insurance, capitalized interest, and launch
and in-orbit tracking, telemetry and control services:
EchoStar I $193,629 $ --
EchoStar II 88,634 --
Other 110 4,137
-------- -------
$282,373 $ 4,137
-------- -------
-------- -------
</TABLE>
5. OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following (in thousands):
<TABLE>
DECEMBER 31,
-----------------
1995 1996
-------- -------
<S> <C> <C>
Deferred debt issuance costs $10,622 $21,284
FCC authorizations 11,309 12,351
SSET convertible subordinated debentures and accrued
interest 9,610 3,649
Other, net 897 839
-------- -------
$32,438 $38,123
-------- -------
-------- -------
</TABLE>
In 1994, the Company purchased $8.75 million of SSET's 6.5% convertible
subordinated debentures. During 1996, the Company received $6.4 million of
payments from SSET ($5.2 million principal and $1.2 million interest) related to
these convertible debentures. As of December 31, 1996, the debentures, if
converted, would represent approximately 5% of SSET's common stock, based on the
number of shares of SSET common stock outstanding at December 31, 1996.
Management estimates that the fair value of the SSET debentures approximates
their carrying value in the accompanying financial statements based on current
interest rates and the conversion features contained in the debentures. SSET is
a reporting company under the Securities Exchange Act of 1934 and is engaged in
the manufacture and sale of satellite telecommunications equipment. In March
1994, SSET sold to the Company for $1.25 million an approximate 6% ownership
interest in the stock of Direct Broadcasting Satellite Corporation ("DBSC") and
certain notes and accounts receivable from DBSC.
F-15
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG-TERM DEBT
DISH NOTES
On June 7, 1994, Dish, Ltd. issued the Dish Notes which mature on June 1,
2004. The Dish Notes issuance resulted in net proceeds to Dish, Ltd. of
$323.3 million (including amounts attributable to the issuance of the Warrants
(see Note 9) and after payment of underwriting discount and other issuance costs
aggregating approximately $12.6 million).
The Dish Notes bear interest at a rate of 12 7/8%, computed on a semi-
annual bond equivalent basis. Interest on the Dish Notes will not be payable in
cash prior to June 1, 1999, with the Dish Notes accreting to a principal value
at stated maturity of $624.0 million by that date. Commencing December 1, 1999,
interest on the Dish Notes will be payable in cash on December 1 and June 1 of
each year.
The Dish Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd., subject to the terms of an Intercreditor
Agreement between Dish, Ltd., certain of its principal subsidiaries, and certain
creditors thereof. The Dish Notes are secured by liens on certain assets of
Dish, Ltd., including EchoStar I and EchoStar II and all other components of the
EchoStar DBS System owned by Dish, Ltd. and its subsidiaries. The Dish Notes are
further guaranteed by each material direct subsidiary of Dish, Ltd. (see
Note 12). Although the Dish Notes are titled "Senior," Dish, Ltd. has not
issued, and does not have any current arrangements to issue, any significant
indebtedness to which the Dish Notes would be senior; however, the ESBC notes
sold in March 1996 by ESBC, are effectively subordinated to the Dish Notes and
all other liabilities of Dish, Ltd. and its subsidiaries. Furthermore, at
December 31, 1995 and 1996, the Dish Notes were effectively subordinated to
approximately $5.4 million and $5.1 million of mortgage indebtedness,
respectively, with respect to certain assets of Dish, Ltd.'s subsidiaries, not
including the EchoStar DBS System, and rank PARI PASSU with the security
interest of approximately $30.0 million of contractor financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the Dish Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the Dish Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999 to 100% of
principal value at stated maturity on or after June 1, 2002 together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002 and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the original
aggregate principal amount of Dish Notes at a redemption price equal to 100% of
principal value at stated maturity thereof, together with accrued and unpaid
interest thereon to the redemption date. The remaining principal of the Dish
Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the Dish Notes Indenture, Dish, Ltd. will be
required to make an offer to each holder of Dish Notes to repurchase all or any
part of such holder's Dish Notes at a purchase price equal to 101% of the
accreted value thereof on the date of purchase, if prior to June 1, 1999, or
101% of the aggregate principal amount thereof, together with accrued and unpaid
interest thereon to the date of purchase, if on or after June 1, 1999.
The Dish Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) apply the proceeds of certain asset sales; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to Dish,
Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In addition, Dish, Ltd., may pay dividends on its equity securities only if (1)
no default is continuing under the Dish Notes Indenture; and (2) after giving
effect to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow
(calculated in accordance with the Dish Notes Indenture) would not exceed 4.0 to
1.0. Moreover, the aggregate amount of such dividends generally may not exceed
the sum of 50% of Dish, Ltd.'s consolidated net income (calculated in accordance
with the Dish Notes Indenture) from the date of issuance of the Dish Notes, plus
100% of the aggregate net proceeds to Dish, Ltd. from the issuance and sale of
certain equity interests of Dish, Ltd. (including common stock).
F-16
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. LONG-TERM DEBT - CONTINUED
ESBC NOTES
On March 25, 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount at stated maturity of the ESBC Notes.
The ESBC Notes Offering resulted in net proceeds to ESBC of approximately
$336.9 million (after payment of underwriting discount and other issuance costs
aggregating approximately $13.1 million). The ESBC Notes bear interest at a rate
of 13 1/8%, computed on a semi-annual bond equivalent basis. Interest on the
ESBC Notes will not be payable in cash prior to March 15, 2000, with the ESBC
Notes accreting to a principal amount at stated maturity of $580.0 million by
that date. Commencing September 15, 2000, interest on the ESBC Notes will be
payable in cash on September 15 and March 15 of each year. The ESBC Notes mature
on March 15, 2004.
The ESBC Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The ESBC Notes are guaranteed on a subordinated basis by
ESBC's parent, EchoStar, and are secured by liens on certain assets of ESBC,
EchoStar and certain of EchoStar's subsidiaries, including all of the
outstanding capital stock of Dish, Ltd., which currently owns substantially all
of EchoStar's operating subsidiaries. Although the ESBC Notes are titled
"Senior," (i) ESBC has not issued, and does not have any current arrangements to
issue, any significant indebtedness to which the ESBC Notes would be senior; and
(ii) the ESBC notes are effectively subordinated to all liabilities of ECC
(except liabilities to general creditors) and its other subsidiaries (except
liabilities of ESBC), including liabilities to general creditors. As of
December 31, 1996, the liabilities of EchoStar and its subsidiaries, exclusive
of the ESBC Notes, aggregated approximately $694.0 million. In addition, net
cash flows generated by the assets and operations of ESBC's subsidiaries will be
available to satisfy the obligations of the ESBC Notes only at any time after
payment of all amounts due and payable at such time under the Dish Notes.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the ESBC Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the ESBC Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000 to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire principal
balance of the ESBC Notes will mature on March 15, 2004.
The ESBC Notes Indenture contains restrictive covenants that, among other
things, impose limitations on ESBC with respect to its ability to: (i) incur
additional indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of
certain asset sales; (iv) create, incur or assume liens; (v) create dividend and
other payment restrictions with respect to ESBC's subsidiaries; (vi) merge,
consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii)
enter into transactions with affiliates. In addition, ESBC may pay dividends on
its equity securities only if (1) no default is continuing under the ESBC Notes
Indenture; and (2) after giving effect to such dividend, ESBC's ratio of total
indebtedness to cash flow (calculated in accordance with the ESBC Notes
Indenture) would not exceed 5.0 to 1.0 Moreover, the aggregate amount of such
dividends generally may not exceed the sum of 50% of ESBC's consolidated net
income (calculated in accordance with the ESBC Notes Indenture) from the date of
issuance of the ESBC Notes, plus 100% of the aggregate net cash proceeds
received by ESBC and its subsidiaries from the issue or sale of certain equity
interests of EchoStar (including common stock).
In the event of a change of control, as described in the ESBC Notes
Indenture, ESBC will be required to make an offer to each holder of ESBC Notes
to repurchase all of such holder's ESBC Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
F-17
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - CONTINUED
6. LONG-TERM DEBT - CONTINUED
OTHER LONG-TERM DEBT
In addition to the Dish Notes and ESBC Notes, other long-term debt consists
of the following (in thousands, except monthly payment data):
<TABLE>
DECEMBER 31,
-------------------
1995 1996
------- --------
<S> <C> <C>
8.25% note payable for deferred satellite contract payments for EchoStar I
due in equal monthly installments of $722,027, including interest,
through February 2001 $32,833 $ 30,463
8.25% note payable for deferred satellite contract payments for EchoStar II
due in equal monthly installments of $561,577, including interest,
through November 2001 -- 27,161
8.0% mortgage note payable due in equal monthly installments of $41,635,
including interest, through May 2008; secured by land and office building
with a net book value of approximately $4.1 million 3,909 3,715
10.5% mortgage note payable due in equal monthly installments of $9,442,
including interest, through November 1998; final payment of $854,000 due
November 1998, secured by land and warehouse building with a net book value
of approximately $886,000 910 892
9.9375% mortgage note payable due in equal quarterly principal installments
of $10,625 plus interest through April 2009, secured by land and office
building with a net book value of approximately $802,000 574 531
------- --------
Total long-term debt, excluding the Dish Notes and ESBC Notes 38,226 62,762
Less current portion (4,782) (11,334)
------- --------
Long-term debt, excluding current portion $33,444 $ 51,428
------- --------
------- --------
</TABLE>
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1996 are summarized as follows (in thousands):
<TABLE>
DEFERRED
SATELLITE MORTGAGE
DISH ESBC CONTRACT NOTES
NOTES NOTES PAYMENTS PAYABLE TOTAL
--------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
1997 $ -- $ -- $11,061 $ 273 $ 11,334
1998 -- -- 12,009 1,141 13,150
1999 -- -- 13,038 289 13,327
2000 -- -- 14,156 309 14,465
2001 -- -- 7,360 331 7,691
Thereafter 624,000 580,000 -- 2,795 1,206,795
Unamortized discount (186,873) (193,835) -- -- (380,708)
--------- --------- ------- ------ ----------
Total $ 437,127 $ 386,165 $57,624 $5,138 $ 886,054
--------- --------- ------- ------ ----------
--------- --------- ------- ------ ----------
</TABLE>
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1996 (dollars in thousands). Fair values for the
Company's Dish Notes and ESBC Notes are based on quoted market prices. The fair
value of the Company's Deferred Satellite Contract Payments and mortgage notes
payable are estimated
F-18
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - CONTINUED
6. LONG-TERM DEBT - CONTINUED
using discounted cash flow analyses. The interest rates assumed in such
discounted cash flow analyses reflect interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality.
BOOK VALUE FAIR VALUE
---------- ----------
Dish Notes $437,127 $ 526,282
ESBC Notes 386,165 435,986
Deferred satellite contract payments 57,624 56,471
Mortgage notes payable 5,138 5,138
-------- ----------
$886,054 $1,023,877
-------- ----------
-------- ----------
DEFERRED SATELLITE CONTRACT PAYMENTS
The majority of the purchase price for the satellites is required to be
paid in progress payments, with the remainder payable in the form of non-
contingent payments which are deferred until after the respective satellites are
in orbit (the "Deferred Payments"). Interest rates on the Deferred Payments
range between 7.75% and 8.25% (to be determined 90 days prior to the launch of
the each satellite) and payments are made over a period of five years after the
delivery and launch of each such satellite. The Company utilized $36.0 million
and $28.0 million of contractor financing for EchoStar I and EchoStar II,
respectively. The deferred payments with respect to EchoStar I and EchoStar II
are secured by substantially all assets of Dish, Ltd. and its subsidiaries
(subject to certain restrictions) and a corporate guarantee of ECC.
BANK CREDIT FACILITY
From May 1994 to May 1996, certain of EchoStar's subsidiaries maintained a
revolving credit facility (the "Credit Facility") with a bank for the purposes
of funding working capital advances and meeting letter of credit requirements
associated with certain inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996. EchoStar currently does not intend to
arrange a replacement credit facility.
7. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------ -------
Current (provision) benefit:
Federal $(5,951) $1,711 $ 4,596
State (853) (44) (49)
Foreign (925) (301) (209)
------- ------ -------
(7,729) 1,366 4,338
------- ------ -------
Deferred benefit:
Federal 6,342 4,440 48,050
State 988 385 2,472
------- ------ -------
7,330 4,825 50,522
------- ------ -------
Total benefit (provision) $ (399) $6,191 $54,860
------- ------ -------
------- ------ -------
As of December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $77.9 million. The
NOLs expire beginning in year 2011. The use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. SFAS No. 109 requires
that the tax benefit of NOLs for financial reporting purposes be recorded as an
asset. 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.
F-19
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. INCOME TAXES - CONTINUED
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1995 and 1996 are as follows (in thousands):
DECEMBER 31,
-------------------
1995 1996
-------------------
Current deferred tax assets:
Accrued royalties $ -- $ 3,029
Inventory reserves and cost methods 834 1,811
Accrued expenses -- 1,414
Allowance for doubtful accounts 456 674
Reserve for warranty costs 385 284
Other 312 57
-------------------
Total current deferred tax assets 1,987 7,269
Current deferred tax liabilities:
Unrealized holding gain on marketable
investment securities (153) (6)
Subscriber acquisition costs -- (19,937)
-------------------
Total current deferred tax liabilities (153) (19,943)
-------------------
Net current deferred tax assets (liabilities) 1,834 (12,674)
Noncurrent deferred tax assets:
Net operating loss carryforwards -- 77,910
Amortization of original issue discount on
Dish and ESBC Notes 15,439 34,912
Other 7 3,458
-------------------
Total noncurrent deferred tax assets 15,446 116,280
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax (2,351) (17,683)
Depreciation (986) (18,927)
-------------------
Total noncurrent deferred tax liabilities (3,337) (36,610)
-------------------
Noncurrent net deferred tax assets 12,109 79,670
-------------------
Net deferred tax assets $13,943 $ 66,996
-------------------
-------------------
No valuation reserve has been provided for the above deferred tax assets
because the Company currently believes it is more likely than not that these
assets will be realized. If future operating results differ materially and
adversely from the Company's current expectations, its judgment regarding the
need for a valuation allowance may change.
The actual tax provisions for 1994, 1995 and 1996 are reconciled to the
amounts computed by applying the statutory federal tax rate to income before
taxes as follows (dollars in thousands).
<TABLE>
1994 1995 1996
----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate $(166) (34.0)% $6,493 35.0% $54,015 35.0%
State income taxes, net
of federal benefit (88) (18.0) 222 1.2 2,839 1.8
Tax exempt interest income 60 12.3 10 0.1 -- --
Research and development credits 156 31.9 31 0.2 -- --
Non-deductible interest expense (258) (52.7) (293) (1.7) (2,099) (1.4)
Other (103) (21.1) (272) (1.4) 105 (0.2)
----------------- ---------------- -----------------
Total (provision for) benefit
from income taxes $(399) (81.6)% $6,191 33.4% $54,860 35.2%
----------------- ---------------- -----------------
----------------- ---------------- -----------------
</TABLE>
F-20
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by the Company, subject to a maximum annual contribution by the
Company of $1,000 per employee. The Company may also make an annual
discretionary contribution to the plan with approval by the Company's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. The Company's total cash contributions to the
401(k) Plan totaled $170,000, $177,000 and $226,000 during 1994, 1995 and 1996,
respectively. Additionally, the Company contributed 55,000 shares of its Class A
Common Stock in each of 1995 and 1996 (fair value of approximately $1.1 million
and $935,000, respectively) to the 401(k) Plan as discretionary contributions.
9. STOCKHOLDER'S EQUITY
Effective March 10, 1994, the stockholders approved measures necessary to
increase the authorized capital stock of Dish, Ltd. to include 200 million
shares of Class A Common Stock, 100 million shares of Class B Common Stock, and
20 million shares of Series A Convertible Preferred Stock and determined to
split all outstanding shares of common stock on the basis of approximately 4,296
to 1.
All accrued dividends payable to Mr. Ergen on his Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Exchange ($1.4 million), and
all accrued dividends payable to the remaining holder of Dish, Ltd. 8% Series A
Cumulative Preferred Stock through the date of the Merger ($107,000), will
remain obligations of Dish, Ltd. (Note 1); however, no additional dividends will
accrue with respect to the Dish, Ltd. 8% Series A Cumulative Preferred Stock.
The Dish Notes Indenture places significant restrictions on the payment of those
dividends. Through December 31, 1996, additional accrued dividends payable to
Mr. Ergen by ECC on the ECC 8% Series A Cumulative Preferred Stock totaled $1.7
million.
10. STOCK COMPENSATION PLANS
The Company has two stock-based compensation plans, which are described
below. The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of the Company's employees stock options is equal
to the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting and Disclosure of Stock-Based
Compensation," ("SFAS No. 123") which established an alternative method of
expense recognition for stock-based compensation awards to employees based on
fair values. The Company elected to not adopt SFAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 and has been determined as if the Company had accounted
for its stock-based compensation plans using the fair value method prescribed by
that statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 1995 and 1996, respectively: risk-free interest rate of
6.12% and 6.80% for 1995 and 1996, respectively; dividend yields of 0.0% during
each period; volatility factors of the expected market price of the Company's
common stock of 62%, and a weighted-average expected life of the options of six
years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. All options
are initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The Company's pro
forma net loss was $12.8 million and $101.7 million for the years ended
December 31, 1995 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of
F-21
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK COMPENSATION PLANS - CONTINUED
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its stock-based compensation awards.
In April 1994, the Company adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. ECC assumed all outstanding options for the purchase of Dish,
Ltd. common stock effective with the Exchange and Merger and has reserved up to
10 million shares of its Class A Common Stock for granting awards under the
Stock Incentive Plan. Awards available under the Stock Incentive Plan include:
(i) common stock purchase options; (ii) stock appreciation rights; (iii)
restricted stock and restricted stock units; (iv) performance awards; (v)
dividend equivalents; and (vi) other stock-based awards. All options granted
through December 31, 1996 have included exercise prices not less than the fair
market value of the Shares at the date of grant and vest as determined by the
Company's Board of Directors, generally at the rate of 20% per year.
A summary of the Company's incentive stock option activity for the years
ended December 31, 1995 and 1996 is as follows:
<TABLE>
1995 1996
------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 744,872 $ 9.33 1,117,133 $12.23
Granted 419,772 17.13 138,790 27.02
Exercised (4,284) 9.33 (103,766) 10.24
Forfeited (43,227) 10.55 (126,884) 13.27
------------------------------------------------------------
Options outstanding at end of year 1,117,133 $12.23 1,025,273 14.27
------------------------------------------------------------
------------------------------------------------------------
Exercisable at end of year 142,474 $ 9.33 258,368 $11.31
------------------------------------------------------------
------------------------------------------------------------
Weighted-average fair value of
options granted $ 9.86 $16.96
</TABLE>
Exercise prices for options outstanding as December 31, 1996 are as
follows:
<TABLE>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED AS OF WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9.333 - $11.870 607,462 5.50 $ 9.48 203,757 $ 9.41
17.000 - 20.250 279,021 6.71 18.48 54,611 18.51
26.690 - 29.360 138,790 7.58 27.02 -- --
- -----------------------------------------------------------------------------------------------
$ 9.333 - $29.360 1,025,273 6.11 $14.27 258,368 $11.31
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
In March 1994, the Company entered into an employment agreement with one of
its executive officers. The officer was granted an option, containing certain
conditions to vesting, to purchase 322,208 shares of Class A Common Stock of the
Company for $1.0 million at any time prior to December 31, 1999, subject to
certain limitations. One-half of this option became exercisable on December 31,
1994 and the remainder became exercisable on December 31, 1995. The option was
not granted pursuant to the Stock Incentive Plan. During 1996, this option was
fully exercised.
Effective March 1995, the Company granted an additional option to a key
employee to purchase 33,000 shares of Class A Common Stock, which vests 50% in
March 1996 and 50% in March 1997. The exercise price for each share of Class A
Common Stock is $11.87 per share. The option was not granted pursuant to the
Stock Incentive Plan. In December 1996, the vested portion of this option was
exercised and the unvested portion of the option was canceled.
F-22
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
The Company has contracted with Martin for the construction and delivery
of high powered DBS satellites and for related services. Martin constructed
both EchoStar I and EchoStar II. In 1997 EchoStar expects to expend: (i)
approximately $16.7 million for contractor financing on EchoStar I, EchoStar
II, and EchoStar III; (ii) approximately $118.7 million in connection with
the launch and insurance of EchoStar III and EchoStar IV; and (iii)
approximately $50.0 million for construction of EchoStar III and EchoStar IV.
Funds for these expenditures are expected to come from the ESBC Notes Escrow
Account and available cash and marketable investment securities. Beyond 1997,
EchoStar will expend approximately $88.6 million to repay contractor
financing debt related to EchoStar I, EchoStar II, EchoStar III, and EchoStar
IV. Additionally, EchoStar has committed to expend approximately an
additional $69.7 million to construct and launch EchoStar IV in 1998. In
order to continue to build, launch and support EchoStar III and EchoStar IV
beyond the first quarter of 1997, EchoStar will need additional capital. Even
if EchoStar terminates the construction contracts with Lockheed Martin for
the construction of EchoStar III and EchoStar IV, EchoStar will still need
additional capital as a result of termination penalties contained in the
contracts. There can be no assurances that additional capital will be
available, or, if available, that it will be available on terms acceptable to
EchoStar.
The Company has filed applications with the Federal Communications
Commission ("FCC") for authorization to construct, launch and operate a domestic
fixed satellite service system ("FSS System") and a two satellite Ka-band
satellite system. No assurances can be given that the Company's applications
will be approved by the FCC or that, if approved, the Company will successfully
develop the FSS System or the Ka-band satellite system. The Company believes
that establishment of the FSS System or the Ka-band satellite system would
enhance its competitive position in the DTH industry. In the event the Company's
FSS or Ka-band satellite system applications are approved by the FCC, additional
debt or equity financing would be required. Financing alternatives related to
the FSS and Ka-band satellite systems are currently being pursued by the
Company. No assurances can be given that financing will be available, or that it
will be available on terms acceptable to the Company.
F-23
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
LEASES
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996, are as follows (in thousands):
Year ending December 31,
1997 $ 869
1998 492
1999 180
2000 21
2001 2
Thereafter --
------
Total minimum lease payments $1,564
------
------
Rental expense for operating leases aggregated $1.4 million, $1.2 million,
and $950,000 during the years ended December 31, 1994, 1995 and 1996,
respectively.
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured based on
Dish, Ltd. supplied specifications and necessary to receive DBS programming
offered by the Company. As of December 31, 1996, the remaining commitments total
approximately $82.9 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $85.9 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.
OTHER RISKS AND CONTINGENCIES
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.
12. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd., (collectively, the "Dish Notes
Guarantors") except certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by ECC 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 7, 1997, the date upon which the DBSC Merger was consummated,
the ESBC Notes are guaranteed by New DBSC, which guarantee will rank PARI
PASSU with all senior unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $277,000 and $166,000 as of December 31, 1995 and 1996,
respectively. Summarized consolidated financial information for Dish, Ltd. and
the subsidiary guarantors is as follows (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue $187,044 $163,228 $ 209,731
Expenses 174,164 171,646 318,437
-------- -------- ---------
Operating income (loss) 12,880 (8,418) (108,706)
Other income (expense) (12,707) (9,911) (32,349)
-------- -------- ---------
Net income (loss) before income taxes 173 (18,329) (141,055)
(Provision for) benefit from income
taxes (433) 6,182 49,518
-------- -------- ---------
Net income (loss) $ (260) $(12,147) $ (91,537)
-------- -------- ---------
-------- -------- ---------
F-24
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
12. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS - CONTINUED
DECEMBER 31,
-------------------
1995 1996
-------- --------
BALANCE SHEET DATA:
Current assets $ 81,959 $198,981
Property and equipment, net 333,160 499,989
Other noncurrent assets 143,866 131,995
-------- --------
Total assets $558,985 $830,965
-------- --------
-------- --------
Current liabilities $ 50,710 $197,081
Long-term liabilities 415,662 630,421
Stockholder's equity 92,613 3,463
-------- --------
Total liabilities and stockholder's equity $558,985 $830,965
-------- --------
-------- --------
Upon consummation of the merger with DirectSat, DirectSat became, by virtue
of the merger, a guarantor of the Dish Notes on a full, unconditional and joint
and several basis, in addition to the guarantees of the previous subsidiaries.
13. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells its products on a worldwide basis and has established
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1994, 1995 and 1996
and for the years then ended, is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- ------ ------------- -----
1994
- ----
Total revenue $137,233 $ 24,072 $ 29,678 $ 190,983
-------- -------- -------- ----------
-------- -------- -------- ----------
Export sales $ 7,188
--------
--------
Operating income $ 10,811 $ 1,244 $ 1,161 $ 13,216
-------- -------- -------- ----------
-------- -------- -------- ----------
Other income (expense), net $ (12,727)
----------
----------
Net income before income taxes $ 489
----------
----------
Identifiable assets $ 77,172 $ 6,397 $ 2,359 $ 85,928
-------- -------- -------- ----------
-------- -------- -------- ----------
Corporate assets $ 386,564
----------
----------
Total Assets $ 472,492
----------
----------
1995
- ----
Total revenue $ 110,629 $ 31,351 $ 21,910 $ 163,890
-------- -------- -------- ----------
-------- -------- -------- ----------
Export sales $ 6,317
--------
--------
Operating income (loss) $ (7,895) $ 146 $ (257) $ (8,006)
-------- -------- -------- ----------
-------- -------- -------- ----------
Other income (expense), net $ (9,260)
----------
----------
Net loss before income taxes $ (17,266)
----------
----------
Identifiable assets $ 63,136 $ 10,088 $ 3,788 $ 77,012
-------- -------- -------- ----------
-------- -------- -------- ----------
Corporate assets $ 482,283
----------
----------
Total Assets $ 559,295
----------
----------
1996
- ----
Total revenue $ 172,239 $ 26,984 $ 10,508 $ 209,731
-------- -------- -------- ----------
-------- -------- -------- ----------
Export sales $ 1,536
--------
--------
Operating loss $(106,695) $ (1,274) $ (896) $ (108,865)
-------- -------- -------- ----------
-------- -------- -------- ----------
Other income (expense), net $ (46,743)
----------
Net loss before income taxes $ (155,608)
----------
----------
Identifiable assets $ 836,596 $ 5,795 $ 1,871 $ 844,262
-------- -------- --------
-------- -------- --------
Corporate assets $ 228,829
----------
Total Assets $1,073,091
----------
----------
F-25
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1994,
1995 and 1996 are as follows (in thousands):
<TABLE>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
---------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Assets:
Allowance for doubtful accounts $ 346 $ 8 $ (168) $ 186
Loan loss reserve 50 75 (30) 95
Reserve for inventory 1,403 329 (147) 1,585
Liabilities:
Reserve for warranty costs 1,350 508 (458) 1,400
Other reserves 93 -- -- 93
Year ended December 31, 1995:
Assets:
Allowance for doubtful accounts $ 186 $1,160 $ (240) $1,106
Loan loss reserve 95 19 (36) 78
Reserve for inventory 1,585 1,511 (299) 2,797
Liabilities:
Reserve for warranty costs 1,400 562 (949) 1,013
Other reserves 93 -- (1) 92
Year ended December 31, 1996:
Assets:
Allowance for doubtful accounts $1,106 $2,340 $(1,952) $1,494
Loan loss reserve 78 157 (94) 141
Reserve for inventory 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs 1,013 (250) -- 763
Other reserves 92 (92) -- --
</TABLE>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows (in
thousands):
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------
Year Ended December 31, 1995:
Total revenue $40,413 $ 39,252 $ 43,606 $ 40,619
Operating income (loss) (698) 768 341 (8,417)
Net loss (2,240) (1,813) (916) (7,392)
Year Ended December 31, 1996
Total revenue $41,026 $ 69,354 $ 55,507 $ 43,844
Operating loss (8,908) (17,671) (21,599) (60,687)
Net loss (7,654) (20,837) (22,524) (49,733)
In the fourth quarter of 1995 and each quarter in 1996, the Company
incurred operating and net losses principally as a result of expenses incurred
related to development of the EchoStar DBS System.
F-26
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data for ESBC.
FOR THE PERIOD FROM
JANUARY 24, 1996
(INCEPTION) THROUGH
DECEMBER 31, 1996
-------------------
(In thousands)
Statement of Operations Data:
Equity in losses of Dish, Ltd. $ (91,537)
Interest and other expense (14,552)
---------
Net loss before income taxes (106,089)
Benefit from income taxes 5,342
---------
Net loss $(100,747)
---------
---------
DECEMBER 31,
1996
--------------
(In thousands)
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents $ 13,509
Marketable investment securities 18,565
Other current assets 419
--------
Total current assets 32,493
Restricted investment in Dish, Ltd. 3,463
ESBC Escrow 47,491
Advances to affiliates 279,711
Other non-current assets 17,260
--------
Total assets $380,418
--------
--------
Liabilities:
ESBC Notes $386,165
Stockholder's equity:
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding --
Additional paid-in capital 95,000
Accumulated deficit (100,747)
--------
Total stockholder's equity (5,747)
--------
Total liabilities and stockholder's equity $380,418
--------
--------
F-27
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION - CONTINUED
<TABLE>
FOR THE PERIOD FROM
JANUARY 24, 1996
(INCEPTION) THROUGH
DECEMBER 31, 1996
-------------------
(In thousands)
<S> <C>
CASH FLOWS DATA:
Cash flows from operating activities:
Net loss $(100,747)
Adjustments -
Equity in (earnings) losses of subsidiaries 91,537
Amortization of debt discount and deferred
financing costs 37,341
Income tax benefit (5,342)
Other (11)
Changes in other current assets (419)
---------
Net cash flows provided by operating activities 22,359
Cash flows from investing activities:
Advances to affiliates (279,711)
Offering proceeds and investment earnings placed in escrow (183,105)
Funds released from escrow 135,614
Net purchases of marketable equity securities (18,565)
---------
Net cash flows used by investing activities (345,767)
Cash flows from financing activities:
Net proceeds from issuance of ESBC Notes 336,916
Net proceeds from issuance of Common Stock 1
---------
Net cash flows provided by financing activities 336,917
---------
Net increase (decrease) in cash and cash equivalents 13,509
Cash and cash equivalents, beginning of period --
---------
Cash and cash equivalents, end of period $ 13,509
---------
---------
</TABLE>
F-28
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION - CONTINUED
The following financial information reflects the parent company only
condensed statements of operations data, condensed balance sheet data, and
condensed cash flows data for ECC, reflecting the assumed consummation of the
Exchange and Merger retroactive to January 1, 1993. The Exchange and Merger
described in Note 1 was accounted for as a reorganization of entities under
common control.
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
----------------------------------
STATEMENTS OF OPERATIONS DATA: (In thousands, except per share data)
Equity in earnings (losses) of
subsidiaries $ 90 $(12,361) $(100,853)
Other income -- 1,321 1,117
----------------------------------
Net income (loss) before
income taxes 90 (11,040) (99,736)
Provision for income taxes -- (446) (1,250)
----------------------------------
Net income (loss) $ 90 $(11,486) $(100,986)
----------------------------------
----------------------------------
Loss attributable to common shares $ (849) $(12,690) $(102,190)
----------------------------------
----------------------------------
Weighted average common shares
outstanding 32,442 35,562 40,548
----------------------------------
----------------------------------
Loss per common and common
equivalent share $(0.03) $ (0.36) $ (2.52)
----------------------------------
----------------------------------
DECEMBER 31,
-----------------------
1995 1996
-----------------------
BALANCE SHEET DATA: (In thousands)
Current assets:
Cash and cash equivalents $ 7,802 $ 814
Marketable investment securities 15,460 --
Advances to affiliates, net 19,545 --
Other current assets 191 1,349
-----------------------
Total current assets 42,998 2,163
Investments in subsidiaries:
Restricted (Note 12) 92,613 --
Unrestricted 280 --
-----------------------
Total investments in subsidiaries 92,893 --
Other non-current assets 21,111 70,054
-----------------------
Total assets $157,002 $ 72,217
-----------------------
-----------------------
Current liabilities $ 316 $ 1,304
Advances from affiliates, net -- 2,910
Investments in subsidiaries:
Restricted (Note 12) -- 6,731
Unrestricted -- 75
-----------------------
Total liabilities and investments in subsidiaries 316 11,020
Stockholders' equity:
Preferred Stock, 20,000,000 shares
authorized, 1,616,681 shares of 8%
Series A Cumulative Preferred Stock
issued and outstanding, including accrued
dividends of $2,143,000 and
$3,347,000, respectively 17,195 18,399
Class A Common Stock, $.01 par value,
200,000,000 shares authorized,
10,535,003 and 11,115,582 shares issued
and outstanding, respectively 105 111
Class B Common Stock, $.01 par value,
100,000,000 shares authorized,
29,804,401, shares issued and outstanding 298 298
Class C Common Stock, $.01 par value,
100,000,000 shares authorized, none
outstanding -- --
Common Stock Warrants 714 16
Additional paid-in capital 151,674 158,113
Unrealized holding gain (loss) on
available-for-sale securities, net 239 (11)
Accumulated deficit (13,539) (115,729)
-----------------------
Total stockholders' equity 156,686 61,197
-----------------------
Total liabilities and stockholders'
equity $157,002 $ 72,217
-----------------------
-----------------------
F-29
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. PARENT COMPANY ONLY FINANCIAL INFORMATION - CONTINUED
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
CASH FLOWS DATA: ---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 90 $(11,486) $(100,986)
Adjustments:
Equity in (earnings) losses of
subsidiaries (90) 12,361 100,853
Provision for deferred taxes -- -- 56
Changes in:
Other current assets -- (191) 1,158
Current liabilities -- 316 988
------------------------------
Net cash flows provided by operating
activities -- 1,000 2,069
Cash flows from investing activities:
Advances (to) from affiliates -- (19,545) 22,167
(Purchases) sales of marketable
investment securities, net -- (15,475) 15,460
Increase in noncurrent assets -- (21,111) (48,943)
------------------------------
Net cash flows used by investing activities -- (56,131) (11,316)
Cash flows from financing activities:
Stock options exercised -- -- 2,259
Net proceeds from IPO -- 62,933
------------------------------
Net cash flows provided by financing
activities -- 62,933 2,259
------------------------------
Net increase in cash and cash equivalents -- 7,802 (6,988)
Cash and cash equivalents, beginning of
year -- 7,802
------------------------------
Cash and cash equivalents, end of year $ -- $ 7,802 $ 814
------------------------------
------------------------------
F-30
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
17. SUBSEQUENT EVENTS
On February 24, 1997, EchoStar announced the formation of a DBS alliance
with News. Pursuant to a binding letter agreement, ASkyB will contribute to
EchoStar, or to an entity in which EchoStar would have an equity interest, or
make available for EchoStar's use, cash, satellites and other DBS assets.
These assets are expected to have a total value of approximately $1.7
billion, including an FCC license purchased during 1996 for approximately
$682.5 million. In return, ASkyB will acquire an approximate 50% equity
interest in EchoStar. As a result of its contributions to ASkyB, MCI will
have an approximate 19.9% interest in ASkyB. Four DBS satellites are
currently under construction for use by ASkyB. ASkyB also is constructing a
digital broadcast center in Gilbert, Arizona, which, upon completion, will
provide EchoStar with fully redundant digital broadcast center operations.
Prior to the closing of the ASkyB Transaction and pursuant to the terms
of the binding letter agreement, News has agreed to provide EchoStar with
interim financing, as needed, in an aggregate amount of up to $200.0 million.
This interim financing will be in the form of either purchases by News of
Echostar Class A Common Stock or non-interest bearing advances to EchoStar,
dependent upon when necessary regulatory approvals are obtained. Any interim
financing amounts received by EchoStar will be used for purposes of funding
its near-term working capital, capital expenditure and debt service
requirements. To the extent that News advances funds to EchoStar or purchases
shares as described above, the amount paid by News shall be credited against
News' total cash consideration and the number of shares purchased shall be
credited against the number of shares of EchoStar's Class A Common Stock to
be received by News at the closing.
While definitive agreements are expected to be executed in the near
future, in the absence of definitive agreements, the letter agreement will
continue as a binding commitment between the parties. Consummation of the
ASkyB Transaction is subject only to certain regulatory and other approvals
and consents. While EchoStar and News intend to consummate the ASkyB
Transaction, there can be no assurance that necessary regulatory or other
approvals or consents will be obtained or that the transaction will be
consummated.
F-31
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED BALANCE SHEET OF ECHOSTAR SATELLITE BROADCASTING
CORPORATION AND SUBSIDIARIES AS OF DEC. 31, 1996 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DEC. 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,428
<SECURITIES> 18,807
<RECEIVABLES> 14,977
<ALLOWANCES> (1,494)
<INVENTORY> 72,767
<CURRENT-ASSETS> 231,475
<PP&E> 535,208
<DEPRECIATION> (35,219)
<TOTAL-ASSETS> 1,073,091
<CURRENT-LIABILITIES> 197,081
<BONDS> 874,720
0
0
<COMMON> 0
<OTHER-SE> (5,747)
<TOTAL-LIABILITY-AND-EQUITY> 1,073,091
<SALES> 208,942<F1>
<TOTAL-REVENUES> 209,731
<CGS> 153,094<F2>
<TOTAL-COSTS> 153,094
<OTHER-EXPENSES> 165,502
<LOSS-PROVISION> 2,340
<INTEREST-EXPENSE> 61,487<F3>
<INCOME-PRETAX> (155,608)
<INCOME-TAX> 54,860
<INCOME-CONTINUING> (100,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100,748)
<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>
