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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _________________.
Commission file number 333-3980
ECHOSTAR SATELLITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-1337871
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
90 Inverness Circle East
Englewood, Colorado 80112
(Address of principal executive offices) (Zip code)
(303) 799-8222
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
As of November 10, 1997, Registrant's outstanding common stock consisted
of 1,000 of Common Stock, $0.01 par value.
The Registrant meets the conditions set forth in General Instructions
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with
the reduced disclosure format.
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TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and September 30, 1997 (Unaudited)......... 1
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 1996
and 1997 (Unaudited)........................................ 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1997 (Unaudited).... 3
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................. 4
Item 2 Management's Narrative Analysis of Results of Operations...... 10
PART II -- OTHER INFORMATION
Item 1 Legal Proceedings............................................. 17
Item 2 Changes in Securities......................................... *
Item 3 Defaults Upon Senior Securities............................... *
Item 4 Submission of Matters to a Vote of Security Holders........... *
Item 5 Other Information............................................. None
Item 6 Exhibits and Reports on Form 8-K............................... 17
DISH NetworkSM is a service mark of EchoStar Communications
Corporation and Subsidiaries.
- ---------------------------
* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instructions (H)(1)(a) and (b) of Form 10-Q.
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................. $38,428 $ 23,473
Marketable investment securities........... 18,807 3,252
Trade accounts receivable, net of allowance
for uncollectible accounts of $1,494 and
$1,803, respectively...................... 13,483 54,458
Inventories................................ 72,767 23,050
Subscriber acquisition costs, net.......... 68,129 43,199
Other current assets....................... 19,861 8,586
---------- -----------
Total current assets........................ 231,475 156,018
Restricted Cash and Marketable Investment
Securities:
1996 Notes escrow.......................... 47,491 --
Other...................................... 31,450 2,245
---------- -----------
Total restricted cash and marketable
investment securities.................... 78,941 2,245
Property and equipment, net................ 499,989 490,313
Advances to affiliates, net................ 144,893 188,425
Deferred tax assets........................ 79,670 79,670
Other noncurrent assets.................... 38,123 38,014
---------- -----------
Total assets............................. $1,073,091 $954,685
---------- -----------
---------- -----------
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities:
Trade accounts payable.................... $40,793 $ 36,703
Deferred revenue.......................... 103,100 104,750
Accrued programming....................... 9,463 16,452
Accrued expenses and other current
liabilities.............................. 19,717 50,064
Deferred tax liabilities.................. 12,674 12,309
Current portion of long-term obligations.. 11,334 12,072
---------- -----------
Total current liabilities.................. 197,081 232,350
Long-term obligations, net of current
portion:
Long-term deferred satellite services
revenue.................................. 5,949 7,039
1994 Notes................................ 437,127 483,339
1996 Notes................................ 386,165 424,431
Mortgage and other notes payable, excluding
current portion.......................... 51,428 42,277
Other long-term liabilities............... 1,088 9,282
---------- -----------
Total long-term obligations, net of current
portion.................................. 881,757 966,368
---------- -----------
Total liabilities....................... 1,078,838 1,198,718
Commitments and Contingencies (Note 6)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding....... -- --
Additional paid-in capital................ 108,838 108,838
Unrealized holding losses on
available-for-sale securities, net of
deferred taxes........................... (11) --
Accumulated deficit........................ (114,574) (352,871)
---------- -----------
Total stockholder's equity (deficit)....... (5,747) (244,033)
---------- -----------
Total liabilities and stockholder's equity
(deficit)................................ $1,073,091 $ 954,685
---------- -----------
---------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
(RESTATED, NOTE 1) (RESTATED, NOTE 1)
<S> <C> <C> <C> <C>
Revenue:
DISH Network:
Subscription television services.............................. $ 13,235 $ 82,078 $ 17,482 $ 192,986
Other......................................................... 1,223 12,969 3,310 32,942
---------- ----------- ---------- -----------
Total DISH Network............................................. 14,458 95,047 20,792 225,928
DTH equipment sales and integration services................... 9,973 21,975 72,694 37,410
Satellite services............................................. 1,994 3,669 3,819 7,879
Other.......................................................... 2,406 3,765 9,158 8,906
---------- ----------- ---------- -----------
Total revenue................................................... 28,831 124,456 106,463 280,123
Costs and Expenses:
DISH Network Operating Expenses:
Subscriber-related expenses................................... 7,009 42,732 9,270 97,262
Call center and other......................................... 4,395 10,754 6,831 23,140
Satellite and transmission.................................... 1,384 3,442 2,882 9,676
---------- ----------- ---------- -----------
Total DISH Network operating expenses.......................... 12,788 56,928 18,983 130,078
Cost of sales--DTH equipment and integration services......... 9,466 11,690 72,955 25,998
DISH Network Marketing:
Subscriber promotion subsidies................................ 6,000 67,466 6,000 98,556
Advertising and other......................................... 3,946 16,786 11,459 24,096
---------- ----------- ---------- -----------
Total DISH Network marketing expenses.......................... 9,946 84,252 17,459 122,652
General and administrative..................................... 12,985 15,831 30,252 45,881
Amortization of subscriber acquisition costs................... 3,368 34,035 3,460 95,325
Depreciation and amortization.................................. 7,879 12,922 17,543 38,220
---------- ----------- ---------- -----------
Total costs and expenses........................................ 56,432 215,658 160,652 458,154
---------- ----------- ---------- -----------
Operating loss.................................................. (27,601) (91,202) (54,189) (178,031)
Other Income (Expense):
Interest income................................................ 4,259 937 12,089 3,727
Interest expense, net of amounts capitalized................... (18,265) (22,465) (44,049) (63,681)
Other.......................................................... 127 (73) 79 (248)
---------- ----------- ---------- -----------
Total other income (expense).................................... (13,879) (21,601) (31,881) (60,202)
---------- ----------- ---------- -----------
Loss before income taxes........................................ (41,480) (112,803) (86,070) (238,233)
Income tax benefit (provision), net............................. 14,954 (20) 31,050 (64)
---------- ----------- ---------- -----------
Net loss........................................................ $ (26,526) $ (112,823) $ (55,020) $ (238,297)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................................................ $ (55,020) $ (238,297)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization.......................................................... 17,543 38,220
Amortization of subscriber acquisition costs........................................... 3,460 95,325
Deferred income tax benefit............................................................ (26,247) (365)
Amortization of debt discount and deferred financing costs............................. 41,988 60,009
Change in reserve for excess and obsolete inventory.................................... 2,579 2,230
Change in other long-term obligations.................................................. 7,126 9,284
Other, net............................................................................. (1,056) --
Changes in current assets and current liabilities, net.................................. 10,104 (17,712)
---------- -----------
Net cash flows provided by (used in) operating activities................................ 477 (51,306)
Cash Flows From Investing Activities:
Purchases of marketable investment securities........................................... (54,106) (5,006)
Sales of marketable investment securities............................................... 12,361 20,572
Purchases of restricted marketable investment securities................................ (20,761) (1,495)
Advances to affiliates, net............................................................. (58,950) (18,268)
Purchases of property and equipment..................................................... (8,597) (28,295)
Expenditures for satellite systems under construction................................... (136,403) --
Offering proceeds and investment earnings placed in escrow.............................. (191,941) --
Funds released from escrow accounts and restricted cash--other.......................... 134,968 78,191
Other................................................................................... 5,202 (935)
---------- -----------
Net cash flows (used in) provided by investing activities................................ (318,227) 44,764
Cash Flows From Financing Activities:
Net proceeds from issuance of 1996 Notes................................................ 336,994 --
Proceeds from issuance of common stock.................................................. 1 --
Repayments of mortgage indebtedness and notes payable................................... (4,207) (8,413)
---------- -----------
Net cash flows provided by (used in) financing activities................................ 332,788 (8,413)
---------- -----------
Net increase (decrease) in cash and cash equivalents..................................... 15,038 (14,955)
Cash and cash equivalents, beginning of period........................................... 13,949 38,428
---------- -----------
Cash and cash equivalents, end of period................................................. $ 28,987 $ 23,473
---------- -----------
---------- -----------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest, net of amounts capitalized...................................... $ 11,192 $ 3,529
Cash paid for income taxes.............................................................. -- --
Capitalized interest.................................................................... 22,853 25,264
Satellite launch payment for EchoStar II applied to EchoStar I launch................... 15,000 --
Note payable issued for deferred satellite construction payments for EchoStar II........ 28,000 --
Increase in note payable for deferred satellite construction payments for EchoStar I.... 3,167 --
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC" or
the "Company") is an indirect, wholly-owned subsidiary of EchoStar
Communications Corporation ("ECC" and together with its subsidiaries,
"EchoStar"), a publicly-traded company on the Nasdaq National Market. The
operations of EchoStar include three interrelated business units: (i) a DBS
subscription television service in the United States (the "DISH Network");
(ii) the design, manufacture, distribution and sale of DBS set-top boxes,
antennae and other digital equipment for the DISH Network ("EchoStar Receiver
Systems"), and the design, manufacture and distribution of similar equipment
for direct-to-home ("DTH") projects of others internationally, together with
the provision of uplink center design and construction oversight and other
project integration services for international DTH ventures ("Technology");
and (iii) the turn-key delivery of video, audio and data, primarily from
EchoStar satellites, to customers for business television and other satellite
users. These services include uplink, satellite transponder space, sales and
installation of ground segment equipment, and billing services ("Satellite
Services"). The Company had approximately 350,000 and 820,000 DISH Network
subscribers as of December 31, 1996 and September 30, 1997, respectively.
EchoStar's C-band DTH products, programming and related services businesses
are no longer material to its operations and EchoStar expects revenues from
its C-band lines of business to continue to decline.
RECENT DEVELOPMENTS
The Company launched its third DBS satellite ("EchoStar III") on October
5, 1997. Commencing in January 1998, the Company expects to use EchoStar III
to retransmit local network programming from approximately ten of the largest
cities in the eastern and central time zones (assuming receipt of any
required retransmission consents and copyright licenses and/or congressional
or regulatory action necessary to extend and clarify the scope of the
statutory compulsory license to cover local satellite retransmission of
network-affiliated station signals), and to provide subscribers with
additional sports, foreign language, cultural, business, educational and
other niche programming. As technology advances and demand increases, the
Company also expects to use EchoStar III to provide popular Internet and
other computer data at high transmission speeds and to offer subscribers
HDTV. While all testing of EchoStar III to date indicates the satellite is
functioning properly, the ultimate success of the launch and in-orbit
operation of EchoStar III will not be established until approximately
December 1997.
ECHOSTAR PROMOTIONS AND REVISION OF ACCOUNTING POLICY
During August 1996, EchoStar introduced a promotion (the "1996
Promotion") which permits independent retailers to offer a standard EchoStar
Receiver System to consumers for a suggested retail price of $199 (as
compared to the original average retail price prior to August 1996 of
approximately $499), conditioned upon the consumer's prepaid one-year
subscription to the DISH Network's America's Top 50 CD programming package
for approximately $300. Total transaction proceeds to EchoStar are less than
its aggregate costs (equipment, programming and other) for the initial
prepaid subscription period, are initially deferred, and recognized as
revenue over the related prepaid subscription term (normally one year). The
excess of EchoStar's aggregate costs over proceeds received is expensed
("subscriber promotion subsidies") upon shipment of the equipment. Remaining
costs are deferred and reflected in the accompanying consolidated balance
sheets as subscriber acquisition costs and amortized over the prepaid
subscription term of the subscriber. Programming costs are expensed as
service is provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, this accounting results in revenue recognition over
the initial period of service equal to the sum of programming costs and
amortization of subscriber acquisition costs.
4
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accompanying statements of operations for the three and nine months
ended September 30, 1996, have been restated. The original accounting
followed by the Company for promotional package sales of service and
equipment did not recognize an immediate charge for the subscriber subsidy,
as described above. The Company implemented this accounting policy during the
fourth quarter of 1996. The restatement had no material effect on any periods
prior to June 30, 1996. As a result of this restatement, ESBC's operating
loss increased from $21.6 million to $27.6 million, an increase of $6.0
million, principally due to the immediate expensing of subscriber promotion
subsidies and its net loss increased $4.3 million (from $22.5 million to
$26.5 million). For the nine months ended September 30, 1996, ESBC's
operating loss increased $6.0 million (from $48.2 million to $54.2 million),
principally due to the immediate expensing of subscriber promotion subsidies,
and its net loss increased by $4.0 million from $51.0 million to $55.0
million.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Article 10 of
Regulation S-X for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996. Certain prior year amounts have been reclassified to conform with the
current year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and ESBC and all direct
and indirect wholly-owned subsidiaries thereof. The Company's management
refers readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with original
maturities of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and September 30, 1997 principally consisted of money
market funds, corporate notes and commercial paper; such balances are stated
at cost which equates to market value.
5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
Proceeds from sales made pursuant to the 1996 Promotion attributable to
DISH Network subscription television services are included within the caption
"DISH Network -- Subscription Television Services" in the accompanying
statements of operations. The portion of the proceeds from sales made
pursuant to the 1996 Promotion deemed attributable to EchoStar Receiver
Systems is included within the caption "DISH Network -- Other" in the
accompanying statements of operations. The following summarizes revenues
recognized pursuant to the 1996 Promotion:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1996 1997 1996 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Subscription television services....................................... $ 3,346 $ 36,162 $ 3,346 $ 93,459
EchoStar Receiver Systems.............................................. 1,057 11,508 1,057 30,036
--------- --------- --------- ----------
Total................................................................ $ 4,403 $ 47,670 $ 4,403 $ 123,495
--------- --------- --------- ----------
--------- --------- --------- ----------
</TABLE>
During June 1997, the 1996 Promotion was enhanced to permit independent
retailers to offer a standard EchoStar Receiver System to consumers for a
suggested retail price of $199 without an extended subscription commitment
(the "1997 Promotion"). Net transaction costs associated with the 1997
Promotion are expensed as incurred (reported as a component of subscriber
promotion subsidies) in the accompanying statements of operations. Since
introduction of the 1997 Promotion, the majority of new subscriber
activations have resulted therefrom.
INCOME TAXES
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," requires that the tax benefit of net operating losses ("NOLs")
for financial reporting purposes be recorded as an asset and that deferred
tax assets and liabilities are recorded for the estimated future tax effects
of temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets. To the extent that
management assesses the realization of deferred tax assets to be less than
"more likely than not," a valuation reserve is established. EchoStar has
fully reserved the 1997 additions to its deferred tax assets.
3. RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
Other restricted cash includes $5.7 million at December 31, 1996, which
was restricted to satisfy certain covenants in the indenture associated with
a 1994 offering of 12 7/8% Senior Secured Discount Notes due 2004 (the "1994
Notes") pertaining to launch insurance for EchoStar II. These covenant
requirements were satisfied during September 1997. In addition, as of
December 31, 1996, a total of $25.0 million was held in two escrow accounts
for the benefit of EchoStar Receiver System manufacturers. These deposits
were released from their respective escrow accounts during May 1997.
6
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
EchoStar Receiver Systems........................................................... $ 32,799 $ 12,157
DBS receiver components............................................................. 15,736 11,347
Consigned DBS receiver components................................................... 23,525 1,988
Finished goods -- International..................................................... 3,491 3,220
Finished goods -- C-band............................................................ 600 4
Spare parts and other............................................................... 2,279 2,227
Reserve for excess and obsolete inventory........................................... (5,663) (7,893)
---------- ---------
$ 72,767 $ 23,050
---------- ---------
---------- ---------
</TABLE>
5. RECLASSIFICATIONS TO THE STATEMENTS OF OPERATIONS
Beginning with this Quarterly Report, the Company has revised its
statements of operations to reflect them in a manner that management believes
will help investors to more easily follow its operations as they expand and
change moving forward. If the Company had presented its statements of
operations for the quarterly periods ended March 31, 1997 and June 30, 1997
in this revised format, the statements of operations would have appeared as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------
MARCH 31, 1997 JUNE 30, 1997 JUNE 30, 1997
-------------- ------------- -----------------
<S> <C> <C> <C>
Revenue:
DISH Network:
Subscription television services............................. $ 48,050 $ 62,858 $ 110,908
Other........................................................ 8,206 11,767 19,973
---------- ----------- -----------
Total DISH Network............................................ 56,256 74,625 130,881
DTH equipment sales and integration services.................. 1,958 13,477 15,435
Satellite services............................................ 2,165 2,045 4,210
Other......................................................... 2,580 2,561 5,141
---------- ----------- -----------
Total revenue.................................................. 62,959 92,708 155,667
Costs and Expenses:
DISH Network Operating Expenses:
Subscriber-related expenses.................................. 23,040 31,491 54,531
Call center and other........................................ 6,445 5,941 12,386
Satellite and transmission................................... 2,785 3,449 6,234
---------- ----------- -----------
Total DISH Network operating expenses......................... 32,270 40,881 73,151
Cost of sales -- DTH equipment and integration services....... 2,228 12,079 14,307
DISH Network Marketing:
Subscriber promotion subsidies............................... 12,777 18,313 31,090
Advertising and other........................................ 3,276 4,034 7,310
---------- ----------- -----------
Total DISH Network marketing expenses......................... 16,053 22,347 38,400
General and administrative.................................... 15,031 15,021 30,052
Amortization of subscriber acquisition costs.................. 28,062 33,228 61,290
Depreciation and amortization................................. 12,643 12,655 25,298
---------- ----------- -----------
Total costs and expenses....................................... 106,287 136,211 242,498
---------- ----------- -----------
Operating loss................................................. $ (43,328) $ (43,503) $ (86,831)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
7
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER REVENUE
In 1995, the Company began focusing substantial resources on development
of the DISH Network. Consequently, and coincident with the introduction of
DBS subscription television services, revenues associated with the sale of
C-band equipment and programming have decreased significantly. This trend is
expected to continue for the foreseeable future. For the above reasons, the
Company has reported the net result of C-band operations as "other revenue"
in the accompanying statements of operations. "Other revenue" consists of the
following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDEDSEPTEMBER 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
C-band equipment sales................................................ $ 11,756 $ 7,090 $ 43,850 $ 22,190
C-band programming.................................................... 2,879 1,750 9,518 5,831
Other revenue......................................................... 88 1,996 253 3,346
--------- --------- --------- ---------
Total revenue.......................................................... 14,723 10,836 53,621 31,367
Costs and Expenses:
Cost of C-band equipment sold......................................... (9,142) (5,204) (34,578) (16,337)
C-band programming.................................................... (2,636) (1,429) (8,746) (4,842)
Other................................................................. (539) (438) (1,139) (1,282)
--------- --------- --------- ---------
Total costs and expenses............................................... (12,317) (7,071) (44,463) (22,461)
--------- --------- --------- ---------
--------- --------- --------- ---------
Other revenue........................................................ $ 2,406 $ 3,765 $ 9,158 $ 8,906
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into agreements with various manufacturers to
purchase DBS satellite receivers and related components manufactured to its
specifications. As of September 30, 1997, these commitments totaled
approximately $205.4 million and the total of all outstanding purchase order
commitments with domestic and foreign suppliers was $206.1 million. All of
the purchases related to these commitments are expected to be made during
1997. The Company expects to finance these purchases from unrestricted cash
and additional cash flows generated from sales of DISH Network programming
and related DBS inventory. In addition to the above, EchoStar will expend
$93.4 million between October 1, 1997 and the second quarter of 1998 related
to the construction, launch and insurance of EchoStar IV.
NEWS CORPORATION LITIGATION
On February 24, 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110-Registered Trademark- West Longitude
("WL") purchased by MCI Communications Corporation ("MCI") for over $682
million at a Federal Communications Commission ("FCC") auction during 1996.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
During May 1997, Echostar initiated litigation alleging, among other
things, breach of contract, failure to act in good faith, and other causes of
action. News has denied all of EchoStar's material allegations and has
asserted numerous counterclaims against EchoStar and its Chairman and Chief
Executive Officer, Charles W. Ergen. The case has been set for a five week
trial commencing in June 1998. While EchoStar is confident of its position
and believes it will ultimately prevail, the litigation process could
continue for many years and there can be no assurance concerning the outcome
of the litigation. An adverse decision could have a material adverse effect
on EchoStar's financial position and results of operations.
8
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER RISKS AND CONTINGENCIES
The Company is subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to these actions
will not materially affect the financial position or results of operations of
the Company.
8. SUBSEQUENT EVENTS
On October 2, 1997, ECC consummated an offering (the "Series B Preferred
Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock
due 2004, par value $0.01 per share (including any additional shares of such
stock issued from time to time in lieu of cash dividends, the "Series B
Preferred Stock"). The Series B Preferred Offering resulted in net proceeds
to EchoStar of approximately $193.0 million. The Series B Preferred Stock was
issued in a private placement pursuant to Rule 144A of the Securities Act.
On November 4, 1997, ECC consummated an offering (the "Series C Preferred
Offering") of 2.3 million shares of 6 3/4% Series C Cumulative Convertible
Preferred Stock. The Series C Preferred Offering, after exercise by the
underwriters of the 15% over-allotment option, resulted in net proceeds to
EchoStar of approximately $96.5 million.
Also on November 4, 1997, ECC consummated an offering of 3.1 million
shares of its Class A Common Stock (the "Common Stock Offering"). The Common
Stock Offering resulted in net proceeds to EchoStar of approximately $57.7
million.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by the Company or by officers,
directors or employees of the Company acting on the Company's behalf, that
are not statements of historical fact, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the actual results of the
Company to be materially different from the historical results of or from any
future results expressed or implied by such forward-looking statements. Among
the factors that could cause actual results to differ materially are the
following: the unavailability of sufficient capital on satisfactory terms to
finance the Company's business plan; increased competition from cable, direct
broadcast satellite ("DBS"), other satellite system operators, and other
providers of subscription television services; the introduction of new
technologies and competitors into the subscription television business;
increased subscriber acquisition costs and subscriber promotion subsidies;
the inability of the Company to obtain necessary shareholder and bond-holder
approval of any strategic transactions; the inability of the Company to
obtain necessary authorizations from the Federal Communications Commission
("FCC"); general business and economic conditions and other risk factors
described from time to time in the Company's reports filed with the
Securities and Exchange Commission ("SEC"). In addition to statements, which
explicitly describe such risks and uncertainties, readers are urged to
consider statements labeled with the terms "believes," "belief," "expects,"
"plans," "anticipates," or "intends" to be uncertain and forward-looking. All
cautionary statements made herein should be read as being applicable to all
related forward-looking statements wherever they appear. In this connection,
investors should consider the risks described herein.
OVERVIEW
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC" or
the "Company") is an indirect, wholly-owned subsidiary of EchoStar
Communications Corporation ("ECC and together with its subsidiaries,
"EchoStar"), a publicly-traded company on the Nasdaq National Market. The
operations of EchoStar include three interrelated business units: (i) a
direct broadcast satellite ("DBS") subscription television service in the
United States (the "DISH Network"); (ii) the design, manufacture,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar Receiver Systems"), and the design,
manufacture and distribution of similar equipment for direct-to-home ("DTH")
projects of others internationally, together with the provision of uplink
center design and construction oversight and other project integration
services for international DTH ventures ("Technology"); and (iii) the
turn-key delivery of video, audio and data, primarily from EchoStar
satellites, to customers for business television and other satellite users.
These services include uplink, satellite transponder space, sales and
installation of ground segment equipment, and billing services ("Satellite
Services"). EchoStar's C-band DTH products, programming and related services
businesses are no longer material to its operations and EchoStar expects
revenues from its C-band lines of business to continue to decline.
EchoStar's Technology and Satellite Services businesses result from
development of the DISH Network, and EchoStar's revenues are, and will
continue to be, derived principally from subscription fees for DISH Network
programming. While there can be no assurance, EchoStar believes that revenue
from its Technology and Satellite Services businesses may increase in the
future assuming, among other things, the successful launch of EchoStar's
third and fourth DBS satellites ("EchoStar III" and "EchoStar IV,"
respectively). Further, those businesses are expected to continue to support
and create revenue opportunities for the DISH Network. For example, the
design of digital set-top equipment for international DTH customers is
performed by the same employees who design EchoStar Receiver Systems.
Consequently, international Technology projects may result in improvements in
design and economies of scale in the production of EchoStar Receiver Systems
for the DISH Network. Further, since Satellite Services customers have DISH
Network set-top equipment in their homes and businesses, they are more likely
than the general population to subscribe to DISH Network programming.
EchoStar III was launched on October 5, 1997. Commencing in January 1998,
the Company expects to use EchoStar III to retransmit local network
programming from approximately ten of the largest cities in the eastern and
central time zones (assuming receipt of any required retransmission consents
and copyright licenses and/or congressional or regulatory action necessary to
extend and clarify the scope of the statutory compulsory license to cover
local satellite retransmission of network-affiliated station signals), and to
provide subscribers with additional sports, foreign language, cultural,
business, educational and other niche programming. As technology advances and
demand increases, the Company also expects to use EchoStar III to provide
popular Internet and other computer
10
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
data at high transmission speeds and to offer subscribers HDTV. While all
testing of EchoStar III to date indicates the satellite is functioning
properly, the ultimate success of the launch and in- orbit operation of
EchoStar III will not be established until approximately December 1997.
KEY OPERATING AND FINANCIAL STATISTICS. As of September 30, 1997,
EchoStar had approximately 820,000 DISH Network subscribers compared to
approximately 190,000 subscribers at September 30, 1996. During the three and
nine months ended September 30, 1997, EchoStar added approximately 230,000
and 470,000 DISH Network subscribers, respectively. While EchoStar's factory
manufacturing capacity is adequate to meet demand, subscriber activations
during the third quarter exceeded EchoStar's expectations. As a result of
stronger than expected sales and because certain components of EchoStar
Receiver Systems must be ordered as much as 120 days in advance, certain
models of EchoStar Receiver Systems will have limited availability during the
fourth quarter and EchoStar expects that its fourth quarter subscriber growth
will be limited to approximately the same number of subscribers added during
the third quarter. EchoStar believes that it has ordered, or can timely
order, sufficient quantities of components to meet reasonably expected demand
during 1998.
During the three and nine months ended September 30, 1997, subscriber
churn approximated 1.2% per month. EchoStar's subscriber acquisition costs,
inclusive of advertising expenses, for the three and nine months ended
September 30, 1997 approximated $300 and $350, respectively.
ECHOSTAR MARKETING PROMOTIONS. During August 1996, EchoStar introduced a
promotion (the "1996 Promotion") which permitted independent retailers to
offer a standard EchoStar Receiver System to consumers for a suggested retail
price of $199 (as compared to the original average retail price prior to
August 1996 of approximately $499), conditioned upon the consumer's prepaid
one-year subscription to the DISH Network's America's Top 50 CD programming
package for approximately $300. Total transaction proceeds to EchoStar are
less than its aggregate costs (equipment, programming and other) for the
initial prepaid subscription period, are initially deferred, and recognized
as revenue over the related prepaid subscription period (normally one year).
During the period from August 1996 through May 1997, substantially all new
subscriber activations resulted from the 1996 Promotion.
During June 1997, the 1996 Promotion was enhanced to permit independent
retailers to offer a standard EchoStar Receiver System to consumers for a
suggested retail price of $199 without an extended subscription commitment
(the "1997 Promotion"). Net transaction costs associated with the 1997
Promotion are expensed as incurred (reported as a component of subscriber
promotion subsidies) in the accompanying statements of operations. Since
introduction of the 1997 Promotion, the majority of new subscriber
activations have resulted therefrom.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996.
REVENUE. Total revenue for the three months ended September 30, 1997 was
$124.4 million, an increase of $95.6 million as compared to total revenue for
the three months ended September 30, 1996 of $28.8 million. The increase in
total revenue in 1997 was primarily attributable to DISH Network subscriber
growth. The Company expects this trend to continue as the number of DISH
Network subscribers increases, and as EchoStar develops its Technology and
Satellite Services businesses. Consistent with the increases in total revenue
during the three months ended September 30,1997, EchoStar experienced a
corresponding increase in trade accounts receivable at September 30, 1997.
DISH Network subscription television services revenue totaled $82.1
million for the three months ended September 30, 1997, an increase of $68.8
million compared to the three months ended September 30, 1996. This increase
was directly attributable to the increase in the number of DISH Network
subscribers as of September 30, 1997 as compared to September 30, 1996.
Average monthly revenue per subscriber approximated $39.50 for the three
months ended September 30, 1997 compared to approximately $34.50 for the same
period in 1996. The increase in monthly revenue per subscriber was primarily
due to additional channels added upon commencement of operations of
EchoStar's second DBS satellite ("EchoStar II") in November 1996. DISH
Network subscription
11
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
television services revenue consists primarily of revenue from basic, premium
and pay-per-view subscription television services.
Other DISH Network revenue totaled $13.0 million for the three months
ended September 30, 1997, an increase of $11.7 million compared to the three
months ended September 30, 1996. Other DISH Network revenue consists
primarily of the recognition of revenue related to EchoStar Receiver Systems
sold pursuant to the 1996 Promotion, DBS system installation revenue, and
loan origination and participation income. During the three months ended
September 30, 1997, EchoStar recognized approximately $11.5 million of
revenue relating to EchoStar Receiver Systems sold pursuant the 1996
Promotion, an increase of $10.4 million as compared to the three months ended
September 30, 1996. EchoStar expects revenue related to the 1996 Promotion to
decline at an accelerated rate in future periods and to end entirely in 1998,
one year following the last sale pursuant to the 1996 Promotion.
For the three months ended September 30, 1997, DTH equipment sales and
integration services was comprised primarily of revenue from set-top boxes
and other DTH equipment sold to international DBS service operators. For the
three months ended September 30, 1997, DTH equipment sales and integration
services totaled $22.0 million. EchoStar currently has agreements with two
international DBS service operators for the distribution of digital satellite
broadcasting equipment. EchoStar recognized revenues of approximately $18.5
million related to these agreements during the three months ended September
30, 1997. Approximately $17.0 million of this revenue related to the sale of
set- top boxes and other DTH equipment and approximately $1.5 million of
revenue related to the provision of integration services (revenue from uplink
center design and construction oversight and other project integration
services for international DTH ventures).
While EchoStar continues to actively pursue other similar distribution
and integration service opportunities, no assurance can be given that any
such additional negotiations will be successful. Although EchoStar expects
its Technology business may grow at an accelerated rate, EchoStar's future
revenue from the sale of DTH equipment and integration services in
international markets depends largely on the success of the DBS operator in
that country, which, in turn, depends on other factors, such as the level of
consumer acceptance of DBS products and the intensity of competition for
international subscription television subscribers. No assurance can be given
regarding the level of expected future revenues which may be generated from
EchoStar's alliances with foreign DTH operators.
For the three months ended September 30, 1996, DTH equipment sales and
integration services consisted primarily of EchoStar Receiver Systems and
related accessories sold prior to the August 1996 nationwide rollout of the
1996 Promotion. DTH equipment sales and integration services revenue for the
three months ended September 30, 1996 totaled $10.0 million.
Satellite services revenue totaled $3.7 million for the three months
ended September 30, 1997, an increase of $1.7 million, or 84%, compared to
the three months ended September 30, 1996. Satellite services revenue
primarily consists of signal carriage revenues from content providers and
business television service revenue for the broadcast of organization
specific telecasts. The increase in satellite services revenue was primarily
attributable to an increase in the number of content providers combined with
increased usage by EchoStar's business television customers.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$56.9 million for the three months ended September 30, 1997, an increase of
$44.1 million as compared to the same period in 1996. The increase in DISH
Network operating expenses was primarily attributable to the increase in the
number of DISH Network subscribers. Subscriber-related expenses totaled $42.7
million for the three months ended September 30, 1997, an increase of $35.7
million compared to the same period in the prior year. Such expenses, which
include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable
subscriber expenses, totaled 52% of subscription television services
revenues, compared to 53% of subscription television services revenues during
the same period in 1996. Satellite and transmission expenses are comprised
primarily of costs associated with the operation of EchoStar's digital
broadcast center and costs of maintaining in-orbit insurance on EchoStar's
DBS satellites. Satellite and transmission expenses increased $2.1 million
compared to the same period in 1996 primarily as a result of the September
1996 launch of EchoStar II.
12
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
Call center and other operating expenses consist primarily of costs incurred
in the operation of EchoStar's DISH Network call center and expenses
associated with subscriber equipment installation. Call Center and other
operating expenses totaled $10.8 million for the three months ended September
30, 1997, an increase of $6.4 million as compared to the same period in 1996.
The increase in call center and other operating expenses was directly
attributable to the increase in the number of DISH Network subscribers.
EchoStar expects DISH Network operating expenses to continue to increase in
the future as subscribers are added. However, as its DISH Network subscriber
base continues to expand, EchoStar expects that such costs as a percentage of
DISH Network revenue will decline.
COST OF SALES -- DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- --DTH equipment and integration services totaled $11.7 million for the three
months ended September 30, 1997 (net of the reclassification of freight
expenses of $1.7 million incurred during the first six months of 1997
associated with shipment of EchoStar Receiver Systems), an increase of $2.2
million, or 23%, as compared to the same period in 1996. For the three months
ended September 30, 1997, cost of sales --DTH equipment and integration
services represents costs associated with set-top boxes and related
components sold to international DTH operators. For the three months ended
September 30, 1996, cost of sales -- DTH equipment and integration services
totaled $9.5 million and represent costs of EchoStar Receiver Systems sold
prior to the August 1996 rollout of the 1996 Promotion.
DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled
$84.3 million for the three months ended September 30, 1997, an increase of
$74.3 million as compared to the same period in 1996. The increase in DISH
Network marketing expenses was primarily attributable to the increase in
subscriber promotion subsidies. Subscriber promotion subsidies represent the
excess of transaction costs over transaction proceeds at the time of sale
associated with EchoStar's various promotions. Such costs totaled
approximately $67.5 million (including a $1.7 million reclassification of
freight expenses described above), an increase of $61.5 million as compared
to the same period in 1996. The increase in subscriber promotion subsidies
was primarily attributable to the commencement of the 1997 Promotion and an
increase in the number of EchoStar Receiver Systems sold during the three
months ended September 30, 1997 as compared to the same period in 1996.
Advertising and other expenses increased $12.8 million to $16.8 million
during the three months ended September 30, 1997 as a result of increased
marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $15.8 million for the three months ended September 30, 1997,
an increase of $2.8 million as compared to the same period in 1996. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of DISH Network. G&A expenses as a percentage
of total revenue decreased to 13% during the three months ended September 30,
1997 as compared to 45% during the same period in 1996. EchoStar expects that
its G&A expenses as a percent of total revenue will continue to decrease in
future periods.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
before interest, taxes, depreciation and amortization (including amortization
of subscriber acquisition costs) ("EBITDA") was negative $44.2 million for
the three months ended September 30, 1997 as compared to negative EBITDA of
$16.4 million during the same period of 1996. This decrease in EBITDA
resulted from the factors affecting revenue and expenses discussed above.
EchoStar believes that EDITDA results will improve in future periods as its
subscriber acquisition costs decrease and the number of DISH Network
subscribers increases. In the event that new subscriber activations exceed
expectations, EchoStar's EBITDA results would be negatively impacted (as a
result of the accounting treatment applied to the 1997 Promotion whereby net
subscriber acquisition costs are expensed upon subscriber activation).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended September 30, 1997 (including amortization of
subscriber acquisition costs of $3.4 million and $34.0 million for the three
months ended September 30, 1996 and September 30, 1997, respectively),
aggregated $47.0 million, an increase of $35.7 million, as compared to the
same period 1996. The increase in depreciation and amortization expenses
principally resulted from amortization of subscriber acquisition costs and
depreciation of EchoStar II (placed in service during the fourth quarter of
1996).
13
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME AND EXPENSE. Other expense, net totaled $21.6 million for
the three months ended September 30, 1997, an increase of $7.7 million as
compared to the same period during 1996. The increase in other expense in the
third quarter of 1997 resulted primarily from increases in interest expenses
associated with EchoStar's 12 7/8% Senior Secured Discount Notes due 2004
(the "1994 Notes") and its 13 1/8% Senior Secured Discount Notes due 2004
(the "1996 Notes") due to higher accreted balances thereon. These increases
in interest expenses were partially offset by increases in capitalized
interest. Capitalized interest (principally attributable to satellite
construction) approximated $8.6 million during the three months ended
September 30, 1997, compared to approximately $8.4 million during the three
months ended September 30, 1996.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $15.0
million (from $15.0 million for the three months ended September 30, 1996 to
an income tax provision of $20,000 for the three months ended September 30,
1997) principally resulted from EchoStar's decision to fully reserve the
third quarter addition to its net deferred tax asset. EchoStar's net deferred
tax assets (approximately $67.4 million at September 30, 1997) relate to
temporary differences for amortization of original issue discount on the 1994
Notes and 1996 Notes, net operating loss carryforwards, and various accrued
expenses which are not deductible until paid. If future operating results
differ materially and adversely from EchoStar's current expectations, its
judgment regarding the magnitude of its reserve may change.
Nine months ended September 30, 1997 Compared to the Nine months ended
September 30, 1996.
REVENUE. Total revenue for the nine months ended September 30, 1997 was
$280.1 million, an increase of $173.7 million, as compared to total revenue
for the nine months ended September 30, 1996 of $106.4 million. This increase
was primarily attributable to the increase in the number of DISH Network
subscribers.
DISH Network subscription television services revenue totaled $193.0
million for the nine months ended September 30, 1997, an increase of $175.5
million compared to the nine months ended September 30, 1996. This increase
resulted from operation of the DISH Network during the entirety of the nine
months ended September 30, 1997 (DISH Network operations commenced in March
1996) as well as from the increase in the number of DISH Network subscribers.
During the nine months ended September 30, 1997, EchoStar added 470,000 DISH
Network subscribers and average revenue per subscriber approximated $39.00.
Other DISH Network revenue totaled $32.9 million for the nine months
ended September 30, 1997, an increase of $29.6 million compared to the nine
months ended September 30, 1996. Other DISH Network revenue consists
primarily of the recognition of revenue related to EchoStar Receiver Systems
sold pursuant to the 1996 Promotion, DBS system installation revenue, and
loan origination and participation income. During the nine months ended
September 30, 1997, EchoStar recognized approximately $30.0 million of
revenue relating to EchoStar Receiver Systems sold pursuant the 1996
Promotion, an increase of $29.0 million as compared to the nine months ended
September 30, 1996. EchoStar expects revenue related to the 1996 Promotion to
decline at an accelerated rate in future periods and to end entirely in 1998,
one year following the last sale pursuant to the 1996 Promotion.
During the nine months ended September 30, 1997, DTH equipment sales and
integration services revenue was comprised primarily of revenue from the sale
of set-top boxes and other DTH equipment sold to international DBS service
operators. These revenues totaled $37.4 million of which approximately $17.0
million was related to the sale of set-top boxes and other DTH equipment.
EchoStar also recognized revenues of approximately $13.4 million relating to
the provision of integration services.
During the nine months ended September 30, 1996, DTH equipment sales and
integration services revenue resulted from the sale, prior to the August 1996
nationwide introduction of the 1996 Promotion, of EchoStar Receiver Systems.
DTH equipment sales totaled $72.7 million during the nine months ended
September 30, 1996.
14
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
Satellite services revenue totaled $7.9 million for the nine months ended
September 30, 1997, an increase of $4.1 million, or 106%, compared to the
same period in 1996. The increase in satellite services revenue primarily
resulted from operation of EchoStar I and EchoStar II during the entirety of
1997, an increase in the number of content providers, and increased usage by
EchoStar's business television customers.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$130.1 million for the nine months ended September 30, 1997, an increase of
$111.1 million as compared to the same period in 1996. The increase in DISH
Network operating expenses was primarily attributable to operation of the
DISH Network during the entirety of 1997 and the increase in the number of
DISH Network subscribers. Subscriber-related expenses totaled $97.3 million
for the nine months ended September 30, 1997, an increase of $88.0 million as
compared to the same period in the prior year. Such expenses as a percent of
subscription television services revenues were 50%, compared to 53% of
subscription television services revenues during the same period in 1996.
Satellite and transmission expenses increased $6.8 million compared to the
same period in 1996, primarily as a result of operation of the DISH Network
during the entirety of 1997 and the commencement of operation of EchoStar II.
Call center and other operating expenses totaled $23.1 million for the nine
months ended September 30, 1997, an increase of $16.3 million as compared to
the same period in 1996. The increase in these expenses was attributable to
operation of the DISH Network during the entirety of 1997 and from the
increase in the number of DISH Network subscribers.
COST OF SALES -- DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- --DTH equipment and integration services totaled $26.0 million for the nine
months ended September 30, 1997, a decrease of $47.0 million, or 64%,
compared to the same period in 1996. For the nine months ended September 30,
1997, cost of sales -- DTH equipment and integration services principally
consisted of costs associated with the sale of EchoStar Receiver Systems and
related components and the provision of integration services to international
DTH operators. During the nine months ended September 30, 1996, cost of sales
- -- DTH equipment and integration services represented costs of EchoStar
Receiver Systems and related components sold prior to the August 1996
nationwide rollout of the 1996 Promotion. As previously described, EchoStar
Receiver Systems sold pursuant to the 1996 Promotion are not included within
this caption on the accompanying statements of operations but are deferred
(i.e., subscriber acquisition costs) and amortized over the prepaid
subscription period.
DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled
$122.7 million for the nine months ended September 30, 1997, an increase of
$105.2 million as compared to the same period in 1996. The increase in DISH
Network marketing expenses was primarily the result of the increase in
subscriber promotion subsidies. Such costs totaled approximately $98.6
million, an increase of $92.6 million, compared to the same period in 1996.
The increase in subscriber promotion subsidies was primarily attributable to
the commencement of the 1997 Promotion. Advertising and other expenses
increased $12.6 million, or 110%, to $24.1 million during the nine months
ended September 30, 1997, principally due to the operation of the DISH
Network during the entirety of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $45.9 million
for the nine months ended September 30, 1997, an increase of $15.6 million as
compared to the same period in 1996. The increase in G&A expenses resulted
from increased personnel expenses to support the growth of DISH Network. G&A
expenses as a percentage of total revenue decreased to 16% for the nine
months ended September 30, 1997, compared to 28% during the same period in
1996.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
was negative $44.5 million for the nine months ended September 30, 1997,
compared to negative EBITDA of $33.2 million for the same period in 1996.
This decrease in EBITDA of $11.3 million resulted from the factors affecting
revenue and expenses discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the nine months ended September 30, 1997 (including amortization of
subscriber acquisition costs of $3.5 million and $95.3 million for the nine
months ended September 30, 1996 and September 30, 1997, respectively)
aggregated $133.5 million, an increase of $112.5 million, as compared to the
same period in 1996. The increase in depreciation and amortization expenses
resulted from amortization of subscriber acquisition costs and depreciation
of EchoStar II.
15
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME AND EXPENSE. Other expense, net totaled $60.2 million for
the nine months ended September 30, 1997, an increase of $28.3 million, as
compared to the same period 1996. The increase in other expense during the
nine months ended September 30, 1997 resulted from an increase in interest
expenses associated with the 1994 Notes and 1996 Notes. Additionally,
interest income decreased approximately $8.4 million as a result of a
decrease in invested balances. EchoStar capitalized $25.3 million and $22.9
million of interest during the nine months ended September 30, 1997 and 1996,
respectively.
INCOME TAX BENEFIT. The decrease in the income tax benefit of $31.1
million (from $31.1 million for the nine months ended September 30, 1996 to
an income tax provision of $64,000 for the nine months ended September 30,
1997) was the result of EchoStar's decision to fully reserve the 1997
additions to its net deferred tax asset.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), which supersedes Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements
for reporting earnings per share ("EPS") by requiring companies only to
report "basic" and "diluted" EPS. SFAS No. 128 is effective for both interim
and annual periods ending after December 15, 1997 but requires retroactive
restatement upon adoption. EchoStar will adopt SFAS No. 128 in the fourth
quarter of 1997. EchoStar does not believe such adoption will have a material
effect on either its previously reported or future EPS.
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS
No. 129), which continues the existing requirements of APB No. 15 but expands
the number of companies subject to portions of its requirements.
Specifically, SFAS No. 129 requires that entities previously exempt from the
requirements of APB No. 15 disclose the pertinent rights and privileges of
all securities other than ordinary common stock. SFAS No. 129 is effective
for periods ending after December 15, 1997. EchoStar was not exempt from APB
No. 15; accordingly, the adoption of SFAS No. 129 will not have any effect on
EchoStar.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes
standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No.
130 does not require a specific format for that financial statement but
requires that the enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The adoption
of SFAS No. 130 will require additional disclosure in EchoStar's financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131") which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the requirement
to report information about major customers. SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating statements. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of SFAS No. 131 will
require additional disclosure in EchoStar's financial statements.
16
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 24, 1997, EchoStar Communications Corporation ("EchoStar")
and The News Corporation Limited ("News") announced an agreement (the "News
Agreement") pursuant to which, among other things, News agreed to acquire
approximately 50% of the outstanding capital stock of EchoStar. News also
agreed to make available for use by EchoStar the DBS permit for 28
frequencies at 110 West Longitude ("WL") purchased by MCI Communications
Corporation ("MCI") for over $682 million following a 1996 Federal
Communications Commission ("FCC") auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under the News Agreement.
On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for
the District of Colorado (the "Court"), Civil Action No. 97-960, requesting
that the Court confirm EchoStar's position and declare that News is obligated
pursuant to the News Agreement to lend $200 million to EchoStar without
interest and upon such other terms as the Court orders.
On May 9, 1997, EchoStar filed a First Amended Complaint significantly
expanding the scope of the litigation, to include breach of contract, failure
to act in good faith, and other causes of action. EchoStar seeks specific
performance of the News Agreement and damages, including lost profits based
on, among other things, a jointly prepared a ten-year business plan showing
expected profits for EchoStar in excess of $10 billion based on consummation
of the transactions contemplated by the News Agreement.
On June 9, 1997, News filed an answer and counterclaims seeking
unspecified damages. News' answer denies all of the material allegations in
the First Amended Complaint and asserts twenty defenses, including bad faith,
misconduct and failure to disclose material information on the part of
EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The
counterclaims, in which News is joined by its subsidiary American Sky
Broadcasting LLC ("AskyB") assert that EchoStar and Ergen breached their
agreements with News and failed to act and negotiate with News in good faith.
EchoStar has responded to News' answer and denied the allegations in their
counterclaims. EchoStar also has asserted various affirmative defenses.
EchoStar intends to diligently defend against the counterclaims. The parties
are now in discovery. The case has been set for a five week trial commencing
June 1, 1998, but that date could be postponed. The litigation process could
continue for many years and there can be no assurance concerning the outcome
of the litigation. An adverse decision could have a material adverse effect
on EchoStar's financial position and results of operations.
On April 25, 1997, EchoStar Satellite Corporation ("ESC") and Sagem, S.A.
("Sagem"), a French Corporation, executed a settlement and release agreement
under which Sagem agreed to return the $10.0 million down payment made to
Sagem and agreed to release the $15.0 million placed in escrow with a bank in
connection with a manufacturing agreement entered into in April 1995. ESC and
Sagem have released all claims against each other.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter of 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR SATELLITE BROADCASTING CORPORATION
By: /s/ Steven B. Schaver
--------------------------------
Steven B. Schaver
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
By: /s/ John R. Hager
-------------------------------
John R. Hager
Treasurer and Controller
(Principal Accounting Officer)
Date: November 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR SATELLITE BROADCASTING CORPORATION FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THOSE FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,473
<SECURITIES> 3,252
<RECEIVABLES> 56,261
<ALLOWANCES> 1,803
<INVENTORY> 23,050
<CURRENT-ASSETS> 156,018
<PP&E> 563,299
<DEPRECIATION> 72,986
<TOTAL-ASSETS> 954,685
<CURRENT-LIABILITIES> 232,250
<BONDS> 950,047
0
0
<COMMON> 0
<OTHER-SE> (244,033)
<TOTAL-LIABILITY-AND-EQUITY> 954,685
<SALES> 263,338<F1>
<TOTAL-REVENUES> 280,123
<CGS> 156,076<F2>
<TOTAL-COSTS> 458,184
<OTHER-EXPENSES> 60,202
<LOSS-PROVISION> 2,714
<INTEREST-EXPENSE> 63,681<F3>
<INCOME-PRETAX> (238,233)
<INCOME-TAX> 64
<INCOME-CONTINUING> (238,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (238,297)
<EPS-PRIMARY> (238,297)
<EPS-DILUTED> (238,297)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COSTS OF PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
