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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 JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 333-3980
ECHOSTAR SATELLITE BROADCASTING CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1337871
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(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 (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
--- ---
AS OF AUGUST 11, 1998, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 1,000 SHARES OF COMMON STOCK.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(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, 1997 and June 30, 1998 (Unaudited) 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1998 (Unaudited) 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1998 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Narrative Analysis of Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds *
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 16
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
- -------------
* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q.
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
-------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 45,653 $ 29,894
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,347 and $3,272, respectively 66,045 95,072
Inventories 22,993 53,540
Subscriber acquisition costs, net 18,819 1,964
Other current assets 8,769 7,947
-------------------------
Total current assets 162,279 188,417
Restricted cash and marketable investment securities 2,245 2,245
Property and equipment, net 505,347 534,192
Advances to affiliates, net 191,823 180,965
Other noncurrent assets 100,891 96,053
-------------------------
Total assets $ 962,585 $1,001,872
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable $ 68,491 $ 100,566
Deferred revenue 122,215 109,361
Accrued expenses 72,369 115,201
Current portion of long-term debt 14,924 15,428
-------------------------
Total current liabilities 277,999 340,556
Long-term obligations, net of current portion:
1994 Notes 499,863 534,330
1996 Notes 438,512 467,005
Mortgages and other notes payable, net of current portion 40,495 33,037
Long-term deferred satellite services revenue and other
long-term liabilities 19,500 25,660
-------------------------
Total long-term obligations, net of current portion 998,370 1,060,032
-------------------------
Total liabilities 1,276,369 1,400,588
Commitments and Contingencies (Note 5)
Stockholder's Equity (Deficit):
Common stock, $.01 par value, 1,000 shares authorized,
issued and outstanding - -
Additional paid-in capital 108,838 108,838
Accumulated deficit (422,622) (507,554)
-------------------------
Total stockholder's equity (deficit) (313,784) (398,716)
-------------------------
Total liabilities and stockholder's equity (deficit) $ 962,585 $1,001,872
-------------------------
-------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- ------------------------
1997 1998 1997 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services $ 62,858 $151,527 $110,908 $280,068
Other 11,767 3,238 19,973 9,422
----------------------- ------------------------
Total DISH Network 74,625 154,765 130,881 289,490
DTH equipment sales and integration services 13,477 80,050 15,435 146,866
Satellite services 2,045 5,774 4,210 10,369
C-band and other 7,685 5,575 16,273 13,463
----------------------- ------------------------
Total revenue 97,832 246,164 166,799 460,188
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses 31,491 69,388 54,531 133,197
Customer service center and other 5,941 14,369 12,386 26,102
Satellite and transmission 3,449 5,460 6,234 10,712
----------------------- ------------------------
Total DISH Network operating expenses 40,881 89,217 73,151 170,011
Cost of sales - DTH equipment and integration services 12,079 53,749 14,307 101,000
Cost of sales - C-band and other 5,124 3,282 11,132 9,224
Marketing:
Subscriber promotion subsidies 18,313 59,993 31,090 104,828
Advertising and other 4,034 9,337 7,310 17,587
----------------------- ------------------------
Total marketing expenses 22,347 69,330 38,400 122,415
General and administrative 15,021 23,142 30,052 42,431
Amortization of subscriber acquisition costs 33,228 5,884 61,290 16,855
Depreciation and amortization 12,655 13,643 25,298 27,020
----------------------- ------------------------
Total costs and expenses 141,335 258,247 253,630 488,956
----------------------- ------------------------
Operating loss (43,503) (12,083) (86,831) (28,768)
Other Income (Expense):
Interest income 1,141 745 2,790 1,518
Interest expense, net of amounts capitalized (21,370) (29,002) (41,216) (57,305)
Other (115) (1) (175) (94)
----------------------- ------------------------
Total other income (expense) (20,344) (28,258) (38,601) (55,881)
----------------------- ------------------------
Loss before income taxes (63,847) (40,341) (125,432) (84,649)
Income tax provision, net (25) (112) (44) (283)
----------------------- ------------------------
Net loss $(63,872) $(40,453) $(125,476) $(84,932)
----------------------- ------------------------
----------------------- ------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(125,476) $(84,932)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization 25,298 27,020
Amortization of subscriber acquisition costs 61,290 16,855
Amortization of debt discount and deferred financing costs 38,698 55,141
Change in reserve for excess and obsolete inventory 1,987 17
Change in long-term deferred satellite services revenue and
other long-term liabilities 5,880 6,159
Other, net (365) -
Changes in current assets and current liabilities (69,663) 22,708
------------------------
Net cash flows from operating activities (62,351) 42,968
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities (4,706) -
Sales of marketable investment securities 18,560 -
Purchases of restricted marketable investment securities (1,995) -
Funds released from escrow and restricted cash and marketable
investment securities 72,975 -
Investment earnings placed in escrow (484) -
Purchases of property and equipment (18,453) (52,652)
Other (851) 879
------------------------
Net cash flows from investing activities 65,046 (51,773)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable (5,551) (6,954)
------------------------
Net cash flows from financing activities (5,551) (6,954)
------------------------
Net decrease in cash and cash equivalents (2,856) (15,759)
Cash and cash equivalents, beginning of period 38,428 45,653
------------------------
Cash and cash equivalents, end of period $ 35,572 $ 29,894
------------------------
------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due from affiliates $ 16,632 $ 9,193
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC" or
the "Company") is a wholly-owned subsidiary of EchoStar DBS Corporation ("DBS
Corp"). DBS Corp is a wholly-owned subsidiary of EchoStar Communications
Corporation ("ECC," and together with its subsidiaries "EchoStar"). EchoStar
is a publicly traded company on the Nasdaq National Market. Unless otherwise
stated herein, or the context otherwise requires, references herein to EchoStar
shall include ECC, DBS Corp, ESBC and all direct and indirect wholly-owned
subsidiaries thereof. ESBC's management refers readers of this Quarterly
Report on Form 10-Q to EchoStar's Quarterly Report on Form 10-Q for the three
months ended June 30, 1998. Substantially all of EchoStar's operations are
conducted by subsidiaries of ESBC. The operations of EchoStar include three
interrelated business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1998, EchoStar
had approximately 1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - 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,
construction oversight and other project integration services for
international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and data
services to business television customers and other satellite users.
These services include satellite uplink services, satellite transponder
space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's FCC-
allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II," "EchoStar
III," and "EchoStar IV"), digital satellite receivers, digital broadcast
operations center, customer service facilities, and other assets utilized in
its operations. EchoStar's principal business strategy is to continue
developing its subscription television service in the U.S. to provide consumers
with a fully competitive alternative to cable television service.
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, these statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997. Certain prior year
amounts have been reclassified to conform with the current year presentation.
4
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("FAS")
No. 130, "Reporting Comprehensive Income" ("FAS No. 130") effective as of the
first quarter of 1998. FAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no impact on
the Company's net income or stockholder's equity. The components of
comprehensive loss, net of tax, are as follows (in thousands):
<TABLE>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- -----------------------
1997 1998 1997 1998
---------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss $(63,872) $(40,453) $(125,476) $(84,932)
Change in unrealized gain (loss) on
available-for-sales securities - - (1) -
---------------------- -----------------------
Comprehensive loss $(63,872) $(40,453) $(125,477) $(84,932)
---------------------- -----------------------
---------------------- -----------------------
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
<S> <C> <C>
EchoStar Receiver Systems $ 7,649 $25,967
DBS receiver components 12,506 24,254
Consigned DBS receiver components 3,122 4,135
Finished goods - analog DTH equipment 2,116 1,959
Spare parts and other 1,440 1,082
Reserve for excess and obsolete inventory (3,840) (3,857)
--------------------
$22,993 $53,540
--------------------
--------------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
<S> <C> <C>
Accrued royalties and copyright $21,573 $ 37,975
Accrued expenses 26,118 27,335
Accrued programming 20,018 25,516
Accrued marketing expenses 4,660 24,375
---------------------
$72,369 $115,201
---------------------
---------------------
</TABLE>
5
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. COMMITMENTS AND CONTINGENCIES
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation for over $682 million following a 1996 FCC auction.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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 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.
In June 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 numerous 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, L.L.C., 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 is vigorously defending against the counterclaims. The case has been
set for trial commencing March 1999, but that date could be postponed.
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.
EchoStar 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 those actions will not
materially affect the financial position or results of operations of EchoStar.
In November 1998 and 1999, certain meteoroid events will occur as the
earth's orbit passes through the particulate trail of Comet 55P (Tempel-
Tuttle). These meteoroid events pose a potential threat to all in-orbit
geosynchronous satellites, including EchoStar's DBS satellites. EchoStar is
presently evaluating the potential effects that these meteoroid events may have
on its DBS satellites. At this time, EchoStar has not finally determined the
impact, if any, these meteoroid events could have on EchoStar's DBS satellites.
However, many of the most sophisticated satellite operators have assessed the
risk of satellite damage as very small.
6. SUBSEQUENT EVENTS
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the 119DEG.
West Longitude ("WL") orbital location. Following launch and deployment of
EchoStar IV, EchoStar I was expected to be relocated from its current position
at 119DEG. WL to the 148DEG. WL orbital location. As a result of anomalies
described below, EchoStar IV has instead been moved to the 148DEG. WL orbital
location where it is expected to provide local, educational, foreign language
and other niche service to customers in the Western United States. EchoStar I
and EchoStar II will remain at 119DEG. WL and will continue to provide DISH
Network service without interruption or change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now
6
<PAGE>
ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
appears likely that this anomaly will limit EchoStar to operation of a maximum
of 22 transponders on the satellite. The number of available transponders
will decrease over time, but based on existing data, approximately 16
transponders should be available for the full planned 12 year life of the
satellite absent additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted
in the failure of four primary transponders (transponders 5, 6, 9 and 10), and
two spare transponders on the satellite. The cause of this anomaly has not yet
been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the root
cause of the anomaly has been determined and corrective procedures, if
possible, are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the
total of 32 frequencies at the 148DEG. WL orbital location, including
frequencies 5, 6, 9 and 10, which correspond to the failed transponders.
Consequently, while power continues to be available to operate 22 transponders
on the satellite, to fully utilize the remaining available capacity of the
satellite, EchoStar will need to file an application with the FCC to obtain
authorization to operate transponders which correspond to frequencies which are
not currently assigned to EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148DEG. WL also provide service to Alaska and Hawaii. In April
1998, EchoStar received a waiver from the FCC with respect to this obligation
because EchoStar planned to provide DBS service to those states via EchoStar IV
from the 119DEG. WL orbital location. As a result of moving EchoStar IV to the
148DEG. WL orbital location, EchoStar will not be able to provide DBS service
to Alaska and Hawaii from 119DEG. WL and probably will not be able to fulfill
its original obligation to provide DBS service to Alaska and Hawaii from
148DEG. WL either. Consequently, EchoStar will probably need to obtain a
waiver of its obligation to provide service to Alaska and Hawaii in connection
with its application to operate EchoStar IV at 148DEG. WL on a permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an fixed satellite service ("FSS") satellite.
EchoStar also intends to construct and launch a replacement satellite at
119DEG. WL which would provide service to Alaska and Hawaii. If the FCC were
to deny EchoStar's request, EchoStar's ability to provide DBS service from
EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III, which was launched October 5,
1997. Certain of EchoStar III's electric power converters ("EPC") are
operating at temperatures slightly outside of engineering specifications. The
high EPC temperatures may require certain transponders on EchoStar III to be
turned off for several weeks during summer and winter solstice seasons to avoid
overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its
satellite assets that are required because of lost transmission capacity caused
by these anomalies. However, no assurance can be provided as to the ultimate
amount that may be received from these insurance claims. EchoStar will
continue to evaluate the operating performance of EchoStar III and EchoStar IV
and may modify its loss assessment as new events or circumstances develop.
EchoStar does not maintain insurance for lost profit opportunity.
7
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON ITS 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 HISTORICAL RESULTS 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: A
TOTAL OR PARTIAL LOSS OF A SATELLITE DUE TO OPERATIONAL FAILURES, SPACE DEBRIS
OR OTHERWISE; A DECREASE IN SALES OF DIGITAL EQUIPMENT AND RELATED SERVICES TO
INTERNATIONAL DIRECT-TO-HOME ("DTH") SERVICE PROVIDERS; A DECREASE IN DISH
NETWORK SUBSCRIBER GROWTH; AN INCREASE IN SUBSCRIBER ACQUISITION COSTS AND
SUBSCRIBER PROMOTION SUBSIDIES; AN UNEXPECTED PRODUCT SHORTAGE; IMPEDIMENTS TO
THE RETRANSMISSION OF LOCAL OR DISTANT BROADCAST NETWORK SIGNALS; LOWER THAN
EXPECTED DEMAND FOR ECHOSTAR'S DELIVERY OF LOCAL BROADCAST NETWORK SIGNALS; AN
UNEXPECTED BUSINESS INTERRUPTION DUE TO THE FAILURE OF THIRD-PARTIES TO
REMEDIATE YEAR 2000 ISSUES; THE INABILITY OF THE COMPANY TO RETAIN NECESSARY
AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION ("FCC"); AN INCREASE
IN 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; THE OUTCOME OF ANY LITIGATION IN WHICH THE COMPANY MAY BE
INVOLVED; 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
THAT INCLUDE THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES,"
"INTENDS" OR THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY
STATEMENTS MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-
LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD
CONSIDER THE RISKS DESCRIBED HEREIN.
RECENT DEVELOPMENTS
SATELLITE ANOMALIES
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the 119DEG.
West Longitude ("WL") orbital location. Following launch and deployment of
EchoStar IV, EchoStar I was expected to be relocated from its current position
at 119DEG. WL to the 148DEG. WL orbital location. As a result of anomalies
described below, EchoStar IV has instead been moved to the 148DEG. WL orbital
location where it is expected to provide local, educational, foreign language
and other niche service to customers in the Western United States. EchoStar I
and EchoStar II will remain at 119DEG. WL and will continue to provide DISH
Network service without interruption or change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data, approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted
in the failure of four primary transponders (transponders 5, 6, 9 and 10), and
two spare transponders on the satellite. The cause of this anomaly has not yet
been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the root
cause of the anomaly has been determined and corrective procedures, if
possible, are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the FCC to use 24 of the total of 32 frequencies at the 148DEG. WL
orbital location, including frequencies 5, 6, 9 and 10, which correspond to the
failed transponders. Consequently, while power continues to be available to
operate 22 transponders on the satellite, to fully utilize the remaining
available capacity of the satellite, EchoStar will need to file an application
8
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
with the FCC to obtain authorization to operate transponders which correspond
to frequencies which are not currently assigned to EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148DEG. WL also provide service to Alaska and Hawaii. In April
1998, EchoStar received a waiver from the FCC with respect to this obligation
because EchoStar planned to provide DBS service to those states via EchoStar IV
from the 119DEG. WL orbital location. As a result of moving EchoStar IV to the
148DEG. WL orbital location, EchoStar will not be able to provide DBS service
to Alaska and Hawaii from 119DEG. WL and probably will not be able to fulfill
its original obligation to provide DBS service to Alaska and Hawaii from
148DEG. WL either. Consequently, EchoStar will probably need to obtain a
waiver of its obligation to provide service to Alaska and Hawaii in connection
with its application to operate EchoStar IV at 148DEG. WL on a permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an fixed satellite service ("FSS") satellite.
EchoStar also intends to construct and launch a replacement satellite at
119DEG. WL which would provide service to Alaska and Hawaii. If the FCC were
to deny EchoStar's request, EchoStar's ability to provide DBS service from
EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III, which was launched October 5,
1997. Certain of EchoStar III's electric power converters ("EPC") are
operating at temperatures slightly outside of engineering specifications. The
high EPC temperatures may require certain transponders on EchoStar III to be
turned off for several weeks during summer and winter solstice seasons to avoid
overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its
satellite assets that are required because of lost transmission capacity caused
by these anomalies. However, no assurance can be provided as to the ultimate
amount that may be received from these insurance claims. EchoStar will
continue to evaluate the operating performance of EchoStar III and EchoStar IV
and may modify its loss assessment as new events or circumstances develop.
EchoStar does not maintain insurance for lost profit opportunity.
PRIMETIME 24
Section 119 of the Satellite Home Viewer Act ("SHVA") authorizes EchoStar
to sell satellite-delivered network signals (ABC, NBC, CBS Fox, etc.) to
EchoStar subscribers, but only if those subscribers qualify as "unserved"
households as that term is defined in the SHVA. Historically, EchoStar
obtained broadcast network signals for distribution to its subscribers through
PrimeTime 24, Joint Venture ("PrimeTime 24"). PrimeTime 24 also distributes
network signals to certain of EchoStar's competitors in the satellite industry.
Recently, a federal court in Florida issued a nationwide injunction in CBS
INC., FOX BROADCASTING CO., ET. AL. V. PRIMETIME 24, JOINT VENTURE, NO. 96-3650-
CIV-NESBITT (S.D. FLA. JULY 10, 1998), severely restricting the ability of
PrimeTime 24 and its distributors to sell Fox and CBS programming, and
requiring the disconnection of significant numbers of existing PrimeTime 24
subscribers nationwide by early October 1998. The order also imposed other
obligations on PrimeTime 24 and its distributors with respect to future sales
of Fox and CBS programming nationwide. Additionally, in a federal court suit
in North Carolina, ABC, INC., V. PRIMETIME 24,
9
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
JOINT VENTURE, NO. 1:97CV00090 (M.D.N.C. JULY 16, 1998), a judge recently
granted summary judgment to ABC severely restricting the ability of PrimeTime
24 to sell ABC programming in Raleigh-Durham.
As a result of: (a) these rulings; (b) EchoStar's determination to sell
local network channels back into the area from which they originate; (c) 1997
adjustments to copyright royalties payable in connection with delivery of
network signals by satellite; and (d) a number of other regulatory, political,
legal, contractual and business factors, during July 1998, EchoStar ceased
delivering PrimeTime 24 programming, and began uplinking and distributing
network signals directly. EchoStar has also implemented Section 119 compliance
procedures which will materially restrict the market for the sale of network
signals by EchoStar. It is also possible that some or all of the networks,
and/or their affiliates, will bring copyright infringement actions against
EchoStar, similar to those described above, in the near future. In the event
of a decision adverse to EchoStar in any such litigation, significant damage
awards and additional material restrictions on the sale of network signals by
EchoStar could result. Among other things, EchoStar may be required to
terminate delivery of network signals to a material portion of its subscriber
base. The compliance program implemented by EchoStar, and any further
restrictions on sale of network channels imposed in the future, may result in
decreases in subscriber activations and subscription television services
revenue and an increase in subscriber churn.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997.
REVENUE. Total revenue for the three months ended June 30, 1998 was $246
million, an increase of $148 million or 152%, as compared to total revenue for
the three months ended June 30, 1997 of $98 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth combined
with increased revenue from the Company's Technology business unit. The
Company expects that its revenues will continue to increase as the number of
DISH Network subscribers increases. Consistent with the increases in total
revenue and the number of DISH Network subscribers during the three months
ended June 30, 1998, the Company experienced a corresponding increase in trade
accounts receivable at June 30, 1998.
DISH Network subscription television services revenue totaled $152 million
for the three months ended June 30, 1998, an increase of $89 million, or 141%
compared to the same period in 1997. This increase was directly attributable
to the increase in the number of DISH Network subscribers. The average number
of DISH Network subscribers during the three months ended June 30, 1998
increased approximately 160%, as compared to the same period in 1997. Monthly
revenue per subscriber approximated $39 during each of the three-month periods
ended June 30, 1998 and 1997. DISH Network subscription television services
revenue principally consists of revenue from basic, premium and pay-per-view
subscription television services. DISH Network subscription television
services revenue will continue to increase to the extent the Company is
successful in increasing the number of DISH Network subscribers.
For the three months ended June 30, 1998, DTH equipment sales and
integration services totaled $80 million, an increase of $67 million compared
to the three months ended June 30, 1997. DTH equipment sales consist of sales
of digital set-top boxes and other digital satellite broadcasting equipment by
the Company to international DTH service operators. The Company currently has
agreements to provide equipment to DTH service operators in Spain and Canada.
Sales pursuant to these agreements totaled $74 million for the three months
ended June 30, 1998, an increase of $62 million, as compared to $12 million for
the three months ended June 30, 1997. Revenue for the three months ended June
30, 1998 primarily related to sales of digital set-top boxes and other
equipment while revenue for the same period in 1997 resulted from the provision
of integration services. The increase in DTH equipment sales and integration
services revenue was primarily attributable to an increase in the volume of set-
top boxes sold.
A substantial portion of the Company's Technology revenues have resulted
from sales to two DTH providers. As a result, the Company's Technology
business currently is economically dependent on these two DTH providers. The
Company's future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for EchoStar's digital set-top
10
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
boxes. Due to several factors, the Company expects that its DTH equipment and
integration services revenue may decline during the third and fourth quarters
of 1998 by as much as 30% to 40% as compared to such revenue reported during
the first and second quarters of 1998. These factors include an expected
decrease in demand resulting from the fulfillment of initial stock orders
combined with a decrease in the sales price of digital set-top boxes due to
increased competition from other providers of DTH equipment. Further, during
July 1998 Telefonica S.A. ("Telefonica"), one of the two DTH service providers
described above, announced its intention to merge with Sogecable ("Canal Plus
Satellite"), one of its primary competitors. In addition to providing
competitive DTH services in Spain, the Canal Plus satellite system in Spain
has more set-top boxes in the field than Telefonica, and its conditional
access and compression systems are not compatible with the equipment
manufactured by EchoStar for Telefonica. The Company can not yet determine
the possible impact that such a merger might have on future sales to
Telefonica. The Company has binding purchase orders from Telefonica for
additional 1998 and 1999 deliveries of DTH equipment. While the Company
continues to actively pursue additional distribution and integration service
opportunities, no assurance can be given that any such additional negotiations
will be successful.
Satellite services revenue totaled $6 million for the three months ended
June 30, 1998, an increase of $4 million as compared to the same period in
1997. These revenues include, among other things, fees charged to content
providers for signal carriage and revenues earned from business television
("BTV") customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$89 million for the three months ended June 30, 1998, an increase of $48
million as compared to the same period in 1997. The increase in DISH Network
operating expenses was consistent with and primarily attributable to the
increase in the number of DISH Network subscribers. For the three months ended
June 30, 1998, DISH Network operating expenses represented 59% of subscription
television services revenue compared to 65% of subscription television revenue
during the corresponding period in 1997. While the Company expects DISH
Network operating expenses as a percentage of subscription television services
revenue to approximate this level in future periods, there can be no assurance
that this expense to revenue ratio will not increase.
Subscriber-related expenses totaled $69 million for the three months ended
June 30, 1998, an increase of $38 million compared to the same period in 1997.
Such expenses, which include programming expenses, copyright royalties,
residuals payable to retailers and distributors, and billing, lockbox and other
variable subscriber expenses, totaled 46% of subscription television services
revenues for the three months ended June 30, 1998, compared to 50% of
subscription television services revenues for the three months ended June 30,
1997. The decrease in subscriber-related expenses as a percentage of
subscription television services revenue resulted primarily from a decrease in
programming expenses, which resulted from a change in product mix combined with
price discounts received from certain content providers.
Customer service center and other expenses principally consist of costs
incurred in the operation of the Company's DISH Network customer service
center, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center
and other expenses totaled $14 million for the three months ended June 30,
1998, an increase of $8 million as compared to the three months ended June 30,
1997. The increase in customer service center and other expenses resulted from
increased personnel expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 9% of subscription
television services revenue during each of the three-month periods ended June
30, 1998 and 1997. While the Company expects customer service center and other
expenses as a percentage of subscription television services revenue to
approximate this level for the remainder of 1998, there can be no assurance
that this expense to revenue ratio will not increase.
Satellite and transmission expenses include expenses associated with the
operation of the Company's digital broadcast center, contracted satellite
tracking, telemetry and control ("TT&C") services, and in-orbit insurance on
the Company's DBS satellites. Satellite and transmission expenses increased $2
million during the three months ended June 30, 1998, as compared to the same
period during 1997. This increase resulted from higher TT&C services expenses
and other digital broadcast center operating expenses due to an increase in the
number of the Company's operational DBS satellites. The Company expects DISH
Network operating expenses to continue to
11
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
increase in the future as subscribers are added. However, as its DISH Network
subscriber base continues to expand, the Company expects that such costs as a
percentage of DISH Network revenue may decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales -
DTH equipment and integration services totaled $54 million for the three months
ended June 30, 1998, an increase of $42 million, as compared to the three
months ended June 30, 1997. This increase is consistent with the increase in
DTH equipment revenue. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators.
MARKETING EXPENSES. Marketing expenses totaled $69 million for the three
months ended June 30, 1998, an increase of $47 million as compared to the same
period in 1997. The increase in marketing expenses was primarily attributable
to the increase in subscriber promotion subsidies. Subscriber promotion
subsidies include the excess of transaction costs over transaction proceeds at
the time of sale of EchoStar Receiver Systems, activation allowances paid to
retailers, and other promotional incentives. The Company recognizes subscriber
promotion subsidies as incurred. These expenses totaled $60 million for the
three months ended June 30, 1998, an increase of $42 million over the same
period in 1997. This increase resulted from increased subscriber activations
and the immediate recognition of all subscriber promotion subsidies incurred in
1998, whereas during the three-month period ended June 30, 1997, a portion of
such expenses were initially deferred and amortized over the related prepaid
subscription term (generally one year). This accelerated expense recognition
resulted from the introduction of the "1997 Promotion" in June 1997. The 1997
Promotion maintained the suggested retail price for a standard EchoStar
Receiver System at $199, but eliminated the requirement for the coincident
purchase of an extended subscription commitment. For the three months ended
June 30, 1998, the Company's subscriber acquisition costs, inclusive of
acquisition marketing expenses, totaled $66 million (approximately $280 per new
subscriber activation). Comparatively, the Company's subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $43 million (in excess of $300 per new subscriber
activation) during the same period in 1997. The decrease in the Company's
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from decreases in the manufactured cost of EchoStar
Receiver Systems. The Company expects that its subscriber acquisition costs,
on a per new subscriber activation basis, may increase during the remainder of
1998 as a result of increased competition for DBS subscribers. Advertising and
other expenses totaled $9 million for the three months ended June 30, 1998, an
increase of $5 million over the same period in 1997, as a result of increased
marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $23 million for the three-month period ended June 30, 1998, an
increase of $8 million as compared to the same period in 1997. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses as a percentage of total
revenue decreased to 9% for the three months ended June 30, 1998 compared to
15% for the corresponding period in 1997. While the Company expects that G&A
expenses as a percentage of total revenue will approximate this level for the
remainder of 1998, there can be no assurance that this expense to revenue ratio
will not increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA").
EBITDA for the three months ended June 30, 1998 improved to $7 million compared
to $2 million for the same period in 1997. This improvement in EBITDA
principally resulted from increases in Technology (i.e., DTH equipment sales
and integration services) and DISH Network revenues. Due to expected increases
in new subscriber activations, increased marketing activity and a decrease in
Technology revenue (as previously described), the Company expects that EBITDA
results during the third and fourth quarters of 1998 may decline. To the
extent that new subscriber activations exceed expectations or subscriber
acquisition costs materially increase, the Company's EBITDA results may be
negatively impacted in the near-term because subscriber acquisition costs are
expensed as incurred.
The Company expects to begin production of its next generation of digital
set-top boxes during the third quarter of 1998. While there can be no
assurance, the Company expects that the introduction of these digital set-top
boxes may result in manufacturing cost reductions, thereby reducing subscriber
acquisition costs. Previous delays in the design of this new digital set-top
box will have a negative impact on EBITDA during the third quarter of 1998. In
the event the Company experiences further delays in the production of its next
generation digital set-top boxes, its inventory of digital set-top boxes, and
consequently, its future new subscriber activations, subscriber
12
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
acquisition costs and EBITDA results may be negatively impacted. While
further delays are not expected, new product introductions often involve
schedule risks that can not be anticipated or precisely quantified.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the three months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $6 million) aggregated $20 million, a decrease of $26
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease
in amortization of subscriber acquisition costs of $27 million. Beginning in
October 1997, net subscriber acquisition costs are expensed as incurred.
Consequently, no additional subscriber acquisition costs are being deferred.
The unamortized balance of such costs is expected to be fully amortized by
September 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $28 million for the
three months ended June 30, 1998, an increase of $8 million as compared to the
same period in 1997. The increase in other expense resulted primarily from
increases in interest expense associated with increased accreted balances on
the Company's 12 7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes")
and the Company's 13 1/8% Senior Secured Discount Notes due 2004 (the "1996
Notes").
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
REVENUE. Total revenue for the six months ended June 30, 1998 was $460
million, an increase of $293 million as compared to total revenue for the six
months ended June 30, 1997 of $167 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth combined with
increased revenue from the Company's Technology business unit.
DISH Network subscription television services revenue totaled $280 million
for the six months ended June 30, 1998, an increase of $169 million, or 153%,
compared to the same period in 1997. This increase was directly attributable
to the increase in the number of DISH Network subscribers. The average number
of DISH Network subscribers during the six months ended June 30, 1998 increased
approximately 154% as compared to the same period in 1997.
For the six months ended June 30, 1998, DTH equipment sales and
integration services totaled $147 million, an increase of $132 million compared
to the six months ended June 30, 1997. The increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in the
volume of set-top boxes sold. DTH equipment and integration services revenue
for the six months ended June 30, 1998 principally resulted from sales of
digital set-top boxes and other equipment while revenue for the same period in
1997 related to the provision of integration services.
Satellite services revenue totaled $10 million for the six months ended
June 30, 1998, an increase of $6 million as compared to the same period in
1997. The increase in satellite services revenue was primarily attributable to
increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$170 million for the six months ended June 30, 1998, an increase of $97 million
as compared to the same period in 1997. The increase in DISH Network operating
expenses was consistent with and primarily attributable to the increase in the
number of DISH Network subscribers. For the six months ended June 30, 1998,
DISH Network operating expenses represented 61% of subscription television
services revenue compared to 66% of subscription television revenue during the
corresponding period in 1997.
Subscriber-related expenses totaled $133 million for the six months ended
June 30, 1998, an increase of $78 million compared to the same period in 1997.
Subscriber-related expenses totaled 48% of subscription television services
revenues for the six months ended June 30, 1998, compared to 49% during the six
months ended June 30, 1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Customer service center and other expenses totaled $26 million for the
six months ended June 30, 1998, an increase of $14 million as compared to the
six months ended June 30, 1997. The increase in customer service center and
other expenses resulted from increased personnel expenses to support the
growth of the DISH Network. Customer service center and other expenses
totaled 9% of subscription television services revenue during the six months
ended June 30, 1998, compared to 11% of subscription television services
revenue during the same period of the prior year.
Satellite and transmission expenses increased $5 million during the six
months ended June 30, 1998, as compared to the same period during 1997. This
increase resulted from higher TT&C services expenses and other digital
broadcast center operating expenses due to an increase in the number of the
Company's operational DBS satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales -
DTH equipment and integration services totaled $101 million for the six
months ended June 30, 1998, an increase of $87 million, as compared to the
six months ended June 30, 1997. This increase is consistent with the
increase in DTH equipment revenue.
MARKETING EXPENSES. Marketing expenses totaled $122 million for the six
months ended June 30, 1998, an increase of $84 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to the increase in subscriber promotion subsidies. These
expenses totaled $105 million for the six months ended June 30, 1998, an
increase of $74 million over the same period in 1997. The increase in
subscriber promotion subsidies resulted from increased subscriber activations
and the introduction of the 1997 Promotion in June 1997. Advertising and
other expenses totaled $18 million for the six months ended June 30, 1998, an
increase of $11 million over the same period in 1997, as a result of
increased marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $42 million
for the six-month period ended June 30, 1998, an increase of $12 million as
compared to the same period in 1997. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the
growth of the DISH Network. G&A expenses as a percentage of total revenue
decreased to 9% for the six months ended June 30, 1998 compared to 18% for
the corresponding period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
for the six months ended June 30, 1998 improved to $15 million compared to
negative EBITDA of $243,000 during the same period in 1997. This improvement
in EBITDA principally resulted from increases in Technology and DISH Network
revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $17 million) aggregated $44 million, a decrease of $43
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease
in amortization of subscriber acquisition costs of $44 million.
OTHER INCOME AND EXPENSE. Other expense, net totaled $56 million for
the six months ended June 30, 1998, an increase of $17 million as compared to
the same period in 1997. The increase in other expense resulted primarily
from increases in interest expense associated with increased accreted
balances on the 1994 Notes and the 1996 Notes.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar
the DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation for over $682 million following a 1996 FCC
auction. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under the News Agreement.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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
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.
In June 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 numerous 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, L.L.C., 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 is vigorously defending against the counterclaims. The case has
been set for trial commencing March 1999, but that date could be postponed.
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.
EchoStar 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 those actions will not
materially affect the financial position or results of operations of EchoStar.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<S> <C>
27+ Financial Data Schedule.
99.1* Condensed Consolidated Financial Statements of EchoStar
Communications Corporation for the quarterly period ended
June 30, 1998 (incorporated by reference to EchoStar's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1998).
99.2* Condensed Consolidated Financial Statements of Dish, Ltd. for the
quarterly period ended June 30, 1998 (incorporated by reference to
Dish, Ltd.'s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998).
99.3+ Financial Statements of DBSC for the quarterly period ended June 30,
1998.
99.4+ Condensed Combined and Consolidated Financial Statements of Echo
Satellite for the quarterly period ended June 30, 1998.
</TABLE>
- ---------------------------------
+ Filed herewith.
* Incorporated by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the second quarter of 1998.
16
<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/ DAVID K. MOSKOWITZ
-------------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary and
Director
By: /s/ JOHN R. HAGER
-------------------------------------------------------
John R. Hager
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR SATELLITE BROADCASTING CORPORATION AS
OF AND FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THOSE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,894
<SECURITIES> 0
<RECEIVABLES> 98,344
<ALLOWANCES> 3,272
<INVENTORY> 53,540
<CURRENT-ASSETS> 188,417
<PP&E> 646,801
<DEPRECIATION> 112,609
<TOTAL-ASSETS> 1,001,872
<CURRENT-LIABILITIES> 340,556
<BONDS> 1,034,372
0
0
<COMMON> 0
<OTHER-SE> (398,716)
<TOTAL-LIABILITY-AND-EQUITY> 1,001,872
<SALES> 449,819<F1>
<TOTAL-REVENUES> 460,188
<CGS> 280,235<F2>
<TOTAL-COSTS> 488,956
<OTHER-EXPENSES> 55,881
<LOSS-PROVISION> 4,900
<INTEREST-EXPENSE> 57,305<F3>
<INCOME-PRETAX> (84,649)
<INCOME-TAX> 283
<INCOME-CONTINUING> (84,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,932)
<EPS-PRIMARY> (84,932)
<EPS-DILUTED> (84,932)
<FN>
<F1>Includes sales of programming.
<F2>Includes costs of programming.
<F3>Net of amounts capitalized.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.3
QUARTERLY REPORT FOR THE PERIOD ENDED
JUNE 30, 1998
DIRECT BROADCASTING SATELLITE CORPORATION
COLORADO 84-1328967
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Telephone number, including area code)
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets -
December 31, 1997 and June 30, 1998 (Unaudited) . . . . . . . . . . 1
Condensed Statements of Operations for the
three and six months ended June 30, 1997 and 1998 (Unaudited) . . . 2
Condensed Statements of Cash Flows for the
six months ended June 30, 1997 and 1998 (Unaudited) . . . . . . . . 3
Notes to Condensed Financial Statements (Unaudited). . . . . . . . . . 4
Item 2. Management's Narrative Analysis of Results of Operations . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . *
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . *
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 . . . . . . . . . . . . . . . . . . . N/A
</TABLE>
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
- -------------------------
* 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>
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ - $ 44
Other current assets . . . . . . . . . . . . . . . . 7 7
-----------------------
Total current assets . . . . . . . . . . . . . . . . . 7 51
EchoStar III . . . . . . . . . . . . . . . . . . . . . 92,408 88,558
FCC authorizations . . . . . . . . . . . . . . . . . . 18,504 18,272
-----------------------
Total assets . . . . . . . . . . . . . . . . . . . $110,919 $106,881
-----------------------
-----------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable and accrued expenses. . . . . $ 545 $ 375
Advances from affiliates, net. . . . . . . . . . . . 30,601 32,708
Current portion of notes payable . . . . . . . . . . 2,961 3,081
-----------------------
Total current liabilities. . . . . . . . . . . . . . . 34,107 36,164
Other notes payable, net of current portion. . . . . . 11,351 10,018
Notes payable to ECC and accumulated interest. . . . . 54,597 57,183
-----------------------
Total liabilities. . . . . . . . . . . . . . . . . 100,055 103,365
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $0.01 par value, 1,000 shares
authorized, issued and outstanding . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . 16,324 16,324
Accumulated deficit. . . . . . . . . . . . . . . . (5,460) (12,808)
-----------------------
Total stockholder's equity . . . . . . . . . . . . . . 10,864 3,516
-----------------------
Total liabilities and stockholder's equity . . . . $110,919 $106,881
-----------------------
-----------------------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
1
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1998 1997 1998
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ -
Expenses:
Depreciation and amortization. . . . . . . . . . . . - 2,040 - 4,082
Interest expense . . . . . . . . . . . . . . . . . . 1,592 1,581 2,945 3,266
--------------------------- -------------------------
Total expenses . . . . . . . . . . . . . . . . . . . . 1,592 3,621 2,945 7,348
--------------------------- -------------------------
Loss before income taxes . . . . . . . . . . . . . . . (1,592) (3,621) (2,945) (7,348)
Income tax provision . . . . . . . . . . . . . . . . . - - - -
--------------------------- -------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(1,592) $(3,621) $(2,945) $(7,348)
--------------------------- -------------------------
--------------------------- -------------------------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
2
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(2,945) $(7,348)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization. . . . . . . . . . . . . . - 4,082
Interest on notes payable to ECC added to principal. . . 2,907 2,586
Changes in current assets and current liabilities:
Other current assets . . . . . . . . . . . . . . . . . (7) -
Accounts payable and accrued expenses. . . . . . . . . (1,310) (170)
-------------------------
Net cash flows from operating activities . . . . . . . . . (1,355) (850)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for satellite systems under construction
and other. . . . . . . . . . . . . . . . . . . . . . . . (9,998) -
-------------------------
Net cash flows from investing activities . . . . . . . . . (9,998) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net. . . . . . . . . . . . . . . 11,352 2,107
Repayment of other notes payable . . . . . . . . . . . . . - (1,213)
-------------------------
Net cash flows from financing activities . . . . . . . . . 11,352 894
Net decrease in cash and cash equivalents. . . . . . . . . (1) 44
Cash and cash equivalents, beginning of period . . . . . . 1 -
-------------------------
Cash and cash equivalents, end of period . . . . . . . . . $ - $ 44
-------------------------
-------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due to affiliates. $ 5,014 -
The purchase price of DBSC was "pushed-down" by
EchoStar Communications Corporation to DBSC
as follows in the related purchase accounting:
Satellite construction costs . . . . . . . . . . . . . 51,244 -
FCC authorization. . . . . . . . . . . . . . . . . . . 16,648 -
Notes payable to EchoStar, including accrued
interest of $3,382 . . . . . . . . . . . . . . . . . (49,382) -
Trade accounts payable and accrued expenses. . . . . . (1,687) -
Other notes payable. . . . . . . . . . . . . . . . . . (500) -
Additional paid-in capital . . . . . . . . . . . . . . (16,323) -
</TABLE>
See accompanying Notes to Condensed Financial Statements.
3
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
During 1994, EchoStar Communications Corporation ("ECC," and together with
its subsidiaries, "EchoStar") acquired approximately 40% of the outstanding
common stock of Direct Broadcasting Satellite Corporation ("Old DBSC"), a
Delaware corporation. Old DBSC's principal assets included a Federal
Communications Commission ("FCC") conditional satellite permit and specific
orbital slot assignments for a total of 22 DBS frequencies. Through December
1996, EchoStar advanced Old DBSC a total of $46 million in the form of notes
receivable to enable Old DBSC to make required payments under the EchoStar III
construction contract. During January 1997, EchoStar consummated the merger of
Old DBSC with a wholly-owned subsidiary of ECC ("DBSC" or the "Company"). This
transaction was accounted for as a purchase and the excess of the purchase price
over the fair value of Old DBSC's tangible assets was allocated to Old DBSC's
FCC authorizations. Upon consummation of the Merger, Old DBSC ceased to exist.
EchoStar is a publicly-traded company on the Nasdaq National Market and its
operations include three interrelated business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1998,
EchoStar had approximately 1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - 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,
construction oversight and other project integration services for
international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and data
services to business television customers and other satellite users.
These services include satellite uplink services, satellite
transponder space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to provide
consumers with a fully competitive alternative to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed 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, these statements 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. Operating results for the three and
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report filed as Exhibit 99.3 to EchoStar Satellite
Broadcasting Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997. Certain prior year amounts have been reclassified to conform
with the current year presentation.
4
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
PURPOSE OF FINANCIAL STATEMENTS
DBSC is not currently subject to the reporting requirements of Section 13
or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act").
However, pursuant to the terms of an indenture between ESBC and First Trust
National Association dated March 25, 1996 (the "Indenture"), DBSC is required to
provide quarterly and annual reports comparable to that which would have been
required if DBSC were subject to the requirements of Section 13 or 15(d) of the
Exchange Act. Since DBSC does not have a separate Commission File Number with
the Securities and Exchange Commission, DBSC has made these financial
statements, complete with Management's Narrative Analysis of Results of
Operations, publicly available. These financial statements were prepared solely
to comply with the reporting requirements under the Indenture. For further
information, refer to the consolidated financial statements and footnotes
thereto included in EchoStar's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 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.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") effective as of the first
quarter of 1998. FAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no impact on
the Company's net income or stockholder's equity. For the periods reported, the
Company's comprehensive income is equal to its net income.
3. SUBSEQUENT EVENTS
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the
119DEG. West Longitude ("WL") orbital location. Following launch and
deployment of EchoStar IV, EchoStar I was expected to be relocated from its
current position at 119DEG. WL to the 148DEG. WL orbital location. As a result
of anomalies described below, EchoStar IV has instead been moved to the
148DEG. WL orbital location where it is expected to provide local,
educational, foreign language and other niche service to customers in the
Western United States. EchoStar I and EchoStar II will remain at 119DEG. WL
and will continue to provide DISH Network service without interruption or
change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data, approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted in
the failure of four primary transponders (transponders 5, 6, 9 and 10), and two
spare transponders on the satellite. The cause of this anomaly has not yet been
established. EchoStar recently received notification from the manufacturer of
the satellite, Lockheed Martin, that several transponders, in addition to those
which have failed, are not recommended for use until the root cause of the
anomaly has been determined and corrective procedures, if possible, are
implemented to avoid further failures.
5
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the total
of 32 frequencies at the 148DEG. WL orbital location, including frequencies 5,
6, 9 and 10, which correspond to the failed transponders. Consequently, while
power continues to be available to operate 22 transponders on the satellite, to
fully utilize the remaining available capacity of the satellite, EchoStar will
need to file an application with the FCC to obtain authorization to operate
transponders which correspond to frequencies which are not currently assigned to
EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148DEG. WL also provide service to Alaska and Hawaii. In April
1998, EchoStar received a waiver from the FCC with respect to this obligation
because EchoStar planned to provide DBS service to those states via EchoStar
IV from the 119DEG. WL orbital location. As a result of moving EchoStar IV to
the 148DEG. WL orbital location, EchoStar will not be able to provide DBS
service to Alaska and Hawaii from 119DEG. WL and probably will not be able to
fulfill its original obligation to provide DBS service to Alaska and Hawaii
from 148DEG. WL either. Consequently, EchoStar will probably need to obtain a
waiver of its obligation to provide service to Alaska and Hawaii in
connection with its application to operate EchoStar IV at 148DEG. WL on a
permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an fixed satellite service ("FSS")
satellite. EchoStar also intends to construct and launch a replacement
satellite at 119DEG. WL which would provide service to Alaska and Hawaii. If
the FCC were to deny EchoStar's request, EchoStar's ability to provide DBS
service from EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III, which was launched October 5,
1997. Certain of EchoStar III's electric power converters ("EPC") are
operating at temperatures slightly outside of engineering specifications.
The high EPC temperatures may require certain transponders on EchoStar III to
be turned off for several weeks during summer and winter solstice seasons to
avoid overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its satellite
assets that are required because of lost transmission capacity caused by these
anomalies. However, no assurance can be provided as to the ultimate amount that
may be received from these insurance claims. EchoStar will continue to evaluate
the operating performance of EchoStar III and EchoStar IV and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
6
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997.
Direct Broadcasting Satellite Corporation ("DBSC") is the Federal
Communications Commission ("FCC") licensee and owner of EchoStar III but has no
operations as a stand-alone entity. EchoStar III is an integral part of the
DISH Network and DBSC is dependent on EchoStar Communications Corporation
("ECC") and ECC's other subsidiaries for all necessary funding and all
management and administrative functions. Depreciation on EchoStar III totaled
$2 million for the three months ended June 30, 1998. EchoStar III was placed
into service in January 1998. Interest expense totaled $2 million and
$1 million for the three months ended June 30, 1998 and 1997, respectively.
Interest expense represents interest incurred on the notes payable to ECC.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
Depreciation on EchoStar III totaled $4 million for the six months ended
June 30, 1998. Interest expense totaled $3 million for the six months ended
June 30, 1998 and 1997.
7
<PAGE>
EXHIBIT 99.4
QUARTERLY REPORT FOR THE PERIOD ENDED
JUNE 30, 1998
CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Telephone number, including area code)
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Condensed Combined and Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998 (Unaudited). . . . . . 1
Condensed Combined and Consolidated Statements of Operations
for the three and six months ended June 30, 1997
and 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . 2
Condensed Combined and Consolidated Statements of Cash Flows
for the six months ended June 30, 1997
and 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Combined and Consolidated Financial
Statements (Unaudited) . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Narrative Analysis of Results of Operations . . 9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . *
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 . . . . . . . . . . . . . . N/A
</TABLE>
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
- ----------------
* 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>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,653 $ 29,938
Trade accounts receivable, net of allowance for uncollectible
accounts of $1,347 and, $3,272, respectively . . . . . . . . . . . . . . . . . . 66,045 95,072
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,993 53,540
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . 18,819 1,964
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,424 7,095
-------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,934 187,609
Restricted cash and marketable investment securities . . . . . . . . . . . . . . . . . 2,245 2,245
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597,755 622,750
Advances to affiliates, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,222 148,257
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,747 115,184
-------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,042,903 $ 1,076,045
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,800 $ 100,941
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,215 109,361
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,605 115,201
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 17,885 18,509
-------------------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,505 344,012
Long-term obligations, net of current portion:
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,863 534,330
1996 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,512 467,005
Notes payable to ECC including accumulated interest . . . . . . . . . . . . . . . . 54,597 57,183
Mortgages and other notes payable, net of current portion . . . . . . . . . . . . . 51,846 43,055
Long-term deferred satellite services revenue and other long-term liabilities . . . 19,500 25,660
-------------------------------
Total long-term obligations, net of current portion . . . . . . . . . . . . . . . . . . 1,064,318 1,127,233
-------------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345,823 1,471,245
Commitments and Contingencies (Note 5)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 2,000 shares authorized, issued and outstanding . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,162 125,162
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (428,082) (520,362)
-------------------------------
Total stockholder's equity (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . (302,920) (395,200)
-------------------------------
Total liabilities and stockholder's equity (deficit) . . . . . . . . . . . . . . . $ 1,042,903 $ 1,076,045
-------------------------------
-------------------------------
</TABLE>
See accompanying Notes to Condensed Combined and Consolidated
Financial Statements.
1
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1997 1998 1997 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services . . . . . . . . $62,858 $151,527 $110,908 $280,068
Other . . . . . . . . . . . . . . . . . . . . . 11,767 3,238 19,973 9,422
----------------------------- -----------------------------
Total DISH Network . . . . . . . . . . . . . . . . 74,625 154,765 130,881 289,490
DTH equipment sales and integration services . . . 13,477 80,050 15,435 146,866
Satellite services . . . . . . . . . . . . . . . . 2,045 5,774 4,210 10,369
C-band and other . . . . . . . . . . . . . . . . . 7,685 5,575 16,273 13,463
----------------------------- -----------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . 97,832 246,164 166,799 460,188
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses . . . . . . . . . . 31,491 69,388 54,531 133,197
Customer service center and other . . . . . . . 5,941 14,369 12,386 26,102
Satellite and transmission . . . . . . . . . . . 3,449 5,460 6,234 10,712
----------------------------- -----------------------------
Total DISH Network operating expenses . . . . . . 40,881 89,217 73,151 170,011
Cost of sales - DTH equipment and integration
services . . . . . . . . . . . . . . . . . . . . 12,079 53,749 14,307 101,000
Cost of sales - C-band and other . . . . . . . . . 5,124 3,282 11,132 9,224
Marketing:
Subscriber promotion subsidies . . . . . . . . . 18,313 59,993 31,090 104,828
Advertising and other . . . . . . . . . . . . . 4,034 9,337 7,310 17,587
----------------------------- -----------------------------
Total marketing expenses . . . . . . . . . . . . . 22,347 69,330 38,400 122,415
General and administrative . . . . . . . . . . . . 15,021 23,142 30,052 42,431
Amortization of subscriber acquisition costs . . . 33,228 5,884 61,290 16,855
Depreciation and amortization . . . . . . . . . . 12,655 15,683 25,298 31,102
----------------------------- -----------------------------
Total costs and expenses . . . . . . . . . . . . . . 141,335 260,287 253,630 493,038
----------------------------- -----------------------------
Operating loss . . . . . . . . . . . . . . . . . . . (43,503) (14,123) (86,831) (32,850)
Other Income (Expense):
Interest income . . . . . . . . . . . . . . . . . 1,141 745 2,790 1,518
Interest expense, net of amounts capitalized . . . (22,962) (30,583) (44,161) (60,571)
Other . . . . . . . . . . . . . . . . . . . . . . (115) (1) (175) (94)
----------------------------- -----------------------------
Total other income (expense) . . . . . . . . . . . . (21,936) (29,839) (41,546) (59,147)
----------------------------- -----------------------------
Loss before income taxes . . . . . . . . . . . . . . (65,439) (43,962) (128,377) (91,997)
Income tax provision, net . . . . . . . . . . . . . . (25) (112) (44) (283)
----------------------------- -----------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . $(65,464) $(44,074) $(128,421) $(92,280)
----------------------------- -----------------------------
----------------------------- -----------------------------
</TABLE>
See accompanying Notes to Condensed Combined and Consolidated
Financial Statements.
2
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1998
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(128,421) $(92,280)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,298 31,102
Amortization of subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . 61,290 16,855
Amortization of debt discount and deferred financing costs . . . . . . . . . . . . . 38,698 55,141
Interest on notes payable to ECC added to principal . . . . . . . . . . . . . . . . 2,907 2,586
Change in reserve for excess and obsolete inventory . . . . . . . . . . . . . . . . 1,987 17
Change in long-term deferred satellite services revenue and other long-term
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,880 6,159
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (365) -
Changes in current assets and current liabilities, net . . . . . . . . . . . . . . . (59,628) 24,645
-------------------------------
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . (52,354) 44,225
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . (4,706) -
Sales of marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . 18,560 -
Purchases of restricted marketable investment securities . . . . . . . . . . . . . . . . (1,995) -
Funds released from escrow and restricted cash and marketable investment securities . . . 72,491 -
Investment earnings placed in escrow . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,451) (52,652)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (851) 879
-------------------------------
Net cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . 55,048 (51,773)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable . . . . . . . . . . . . . . . . . . (5,551) (8,167)
-------------------------------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . (5,551) (8,167)
-------------------------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (2,857) (15,715)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . 38,429 45,653
-------------------------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 35,572 $ 29,938
-------------------------------
-------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due to affiliates . . . . . . . . . . . . . . . . $ 21,736 $ 9,193
Accrued capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 -
The purchase price of DBSC was "pushed-down" by EchoStar Communications Corporation to DBSC
as follows in the related purchase accounting:
Satellite construction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,241 -
FCC authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,651 -
Notes payable to EchoStar, including accrued interest of $3,382 . . . . . . . . . . (49,382) -
Trade accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . (1,687) -
Other notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (500) -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,323) -
</TABLE>
See accompanying Notes to Condensed Combined and Consolidated
Financial Statements.
3
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The following represents Echo Satellite, a combination of EchoStar
Satellite Broadcasting Corporation ("ESBC") and Direct Broadcasting Satellite
Corporation, a Colorado corporation ("DBSC"). Both ESBC and DBSC are
wholly-owned subsidiaries of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, "EchoStar"), a publicly-traded company on the
Nasdaq National Market. ESBC was formed in January 1996 for the initial
purpose of completing an offering of $580 million principal amount at
maturity of 13 1/8% Senior Secured Discount Notes (the "1996 Notes") due 2002
(the "1996 Notes Offering"). On January 8, 1997, Direct Broadcasting
Satellite Corporation, a Delaware corporation ("Old DBSC"), was merged (the
"Merger") with DBSC. This transaction was accounted for as a purchase and
the excess of the purchase price over the fair value of Old DBSC's assets was
allocated to FCC authorizations in the related purchase accounting. Upon
consummation of the Merger, Old DBSC, which was incorporated January 23, 1981
in the State of Delaware, ceased to exist and DBSC became a guarantor of the
1996 Notes. DBSC is the FCC licensee for a satellite permit and orbital slot
assignments and the owner of EchoStar III, a satellite built to become an
integral part of the DISH Network, but has no operations as a stand-alone
entity. DBSC is dependent on ECC and ECC's other subsidiaries for all
necessary funding and all management and administrative functions.
The accompanying financial statements represent the combined and
consolidated financial statements of ESBC and DBSC ("Echo Satellite" or the
"Company"). Readers of this Quarterly Report should refer to EchoStar's
Quarterly Report on Form 10-Q for the three months ended June 30, 1998.
Substantially all of EchoStar's operations are conducted by subsidiaries
of ESBC. EchoStar's operations include three interrelated business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS")
subscription television service in the United States. As of June
30, 1998, EchoStar had approximately 1.4 million DISH Network
subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - 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, construction oversight and other project
integration services for international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and
data services to business television customers and other
satellite users. These services include satellite uplink
services, satellite transponder space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop
the "EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to
provide consumers with a fully competitive alternative to cable television
service.
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, these
statements do not include all of the information and footnotes
4
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. All significant intercompany accounts and transactions
have been eliminated in consolidation. Operating results for the three and
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report filed as Exhibit 99.4 to
EchoStar Satellite Broadcasting Corporation's Annual Report on Form 10-K for
the year ended December 31, 1997. Certain prior year amounts have been
reclassified to conform with the current year presentation.
PURPOSE OF FINANCIAL STATEMENTS
Echo Satellite currently is not subject to the reporting requirements of
Section 13 or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange
Act"). However, pursuant to the terms of an indenture between ESBC and First
Trust National Association dated March 25, 1996 (the "Indenture"), Echo
Satellite is required to provide quarterly and annual reports comparable to
that which would have been required if Echo Satellite were subject to the
requirements of Section 13 or 15(d) of the Exchange Act. Since Echo
Satellite does not have a separate Commission File Number with the Securities
and Exchange Commission, Echo Satellite has made these financial statements,
complete with Management's Narrative Analysis of Results of Operations,
publicly available. These financial statements were prepared solely to comply
with the reporting requirements under the Indenture. For further
information, refer to the consolidated financial statements and footnotes
thereto included in EchoStar's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 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.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards ("FAS")
No.130, "Reporting Comprehensive Income" ("FAS No. 130") effective as of the
first quarter of 1998. FAS No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, however it has no
impact on the Company's net income or stockholder's equity. The components
of comprehensive loss, net of tax, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ------------------------
1997 1998 1997 1998
--------------------------- ------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss.............. $(65,464) $(44,074) $(128,421) $(92,280)
Change in unrealized
gain (loss) on
available-for-sales
securities........... - - (1) -
--------------------------- ------------------------
Comprehensive loss.... $(65,464) $(44,074) $(128,422) $(92,280)
--------------------------- ------------------------
--------------------------- ------------------------
</TABLE>
5
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------------------------
(Unaudited)
<S> <C> <C>
EchoStar Receiver Systems . . . . . . . . $ 7,649 $25,967
DBS receiver components . . . . . . . . . 12,506 24,254
Consigned DBS receiver components . . . . 3,122 4,135
Finished goods - analog DTH
equipment . . . . . . . . . . . 2,116 1,959
Spare parts and other . . . . . . . . . . 1,440 1,082
Reserve for excess and obsolete
inventory . . . . . . . . . . . (3,840) (3,857)
----------------------------
$22,993 $53,540
----------------------------
----------------------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------------------------
(Unaudited)
<S> <C> <C>
Accrued royalties and copyright . . . . . . $21,573 $ 37,974
Accrued expenses . . . . . . . . . . . . . 26,354 27,336
Accrued programming . . . . . . . . . . . . 20,018 25,516
Accrued marketing expenses . . . . . . . . 4,660 24,375
----------------------------
$72,605 $115,201
----------------------------
----------------------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar
the DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation for over $682 million following a 1996 FCC
auction. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under the News Agreement.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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
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.
In June 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 numerous 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,
6
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
L.L.C., 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 is
vigorously defending against the counterclaims. The case has been set for
trial commencing March 1999, but that date could be postponed.
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.
EchoStar 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 those actions will not
materially affect the financial position or results of operations of EchoStar.
In November 1998 and 1999, certain meteoroid events will occur as the
earth's orbit passes through the particulate trail of Comet 55P
(Tempel-Tuttle). These meteoroid events pose a potential threat to all
in-orbit geosynchronous satellites, including EchoStar's DBS satellites.
EchoStar is presently evaluating the potential effects that these meteoroid
events may have on its DBS satellites. At this time, EchoStar has not
finally determined the impact, if any, these meteoroid events could have on
EchoStar's DBS satellites. However, many of the most sophisticated satellite
operators have assessed the risk of satellite damage as very small.
6. SUBSEQUENT EVENTS
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the
119DEG. West Longitude ("WL") orbital location. Following launch and
deployment of EchoStar IV, EchoStar I was expected to be relocated from its
current position at 119DEG. WL to the 148DEG. WL orbital location. As a result
of anomalies described below, EchoStar IV has instead been moved to the
148DEG. WL orbital location where it is expected to provide local,
educational, foreign language and other niche service to customers in the
Western United States. EchoStar I and EchoStar II will remain at 119DEG. WL
and will continue to provide DISH Network service without interruption or
change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data, approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted
in the failure of four primary transponders (transponders 5, 6, 9 and 10),
and two spare transponders on the satellite. The cause of this anomaly has
not yet been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the
root cause of the anomaly has been determined and corrective procedures, if
possible, are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the
total of 32 frequencies at the 148DEG. WL orbital location, including
frequencies 5, 6, 9 and 10, which correspond to the failed transponders.
Consequently, while power continues to be available to operate 22
transponders on the satellite, to fully utilize the remaining available
capacity of the satellite, EchoStar will need to file an application with the
FCC to obtain authorization to operate transponders which correspond to
frequencies which are not currently assigned to EchoStar by the FCC.
7
<PAGE>
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO CONDENSED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS-Continued
(Unaudited)
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148DEG. WL also provide service to Alaska and Hawaii. In April
1998, EchoStar received a waiver from the FCC with respect to this obligation
because EchoStar planned to provide DBS service to those states via EchoStar
IV from the 119DEG. WL orbital location. As a result of moving EchoStar IV to
the 148DEG. WL orbital location, EchoStar will not be able to provide DBS
service to Alaska and Hawaii from 119DEG. WL and probably will not be able to
fulfill its original obligation to provide DBS service to Alaska and Hawaii
from 148DEG. WL either. Consequently, EchoStar will probably need to obtain a
waiver of its obligation to provide service to Alaska and Hawaii in
connection with its application to operate EchoStar IV at 148DEG. WL on a
permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an fixed satellite service ("FSS")
satellite. EchoStar also intends to construct and launch a replacement
satellite at 119DEG. WL which would provide service to Alaska and Hawaii. If
the FCC were to deny EchoStar's request, EchoStar's ability to provide DBS
service from EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III, which was launched October 5,
1997. Certain of EchoStar III's electric power converters ("EPC") are
operating at temperatures slightly outside of engineering specifications.
The high EPC temperatures may require certain transponders on EchoStar III to
be turned off for several weeks during summer and winter solstice seasons to
avoid overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in
accordance with its stated accounting policies. The Company has not
completed its assessment of the impairment of these satellites, but currently
believes insurance proceeds will be sufficient to offset any write-downs of
its satellite assets that are required because of lost transmission capacity
caused by these anomalies. However, no assurance can be provided as to the
ultimate amount that may be received from these insurance claims. EchoStar
will continue to evaluate the operating performance of EchoStar III and
EchoStar IV and may modify its loss assessment as new events or circumstances
develop. EchoStar does not maintain insurance for lost profit opportunity.
8
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON ITS 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 HISTORICAL RESULTS 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: A
TOTAL OR PARTIAL LOSS OF A SATELLITE DUE TO OPERATIONAL FAILURES, SPACE
DEBRIS OR OTHERWISE; A DECREASE IN SALES OF DIGITAL EQUIPMENT AND RELATED
SERVICES TO INTERNATIONAL DIRECT-TO-HOME ("DTH") SERVICE PROVIDERS; A
DECREASE IN DISH NETWORK SUBSCRIBER GROWTH; AN INCREASE IN SUBSCRIBER
ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; AN UNEXPECTED PRODUCT
SHORTAGE; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR DISTANT BROADCAST
NETWORK SIGNALS; LOWER THAN EXPECTED DEMAND FOR ECHOSTAR'S DELIVERY OF LOCAL
BROADCAST NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE
FAILURE OF THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; THE INABILITY OF THE
COMPANY TO RETAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS
COMMISSION ("FCC"); AN INCREASE IN 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; THE OUTCOME OF ANY
LITIGATION IN WHICH THE COMPANY MAY BE INVOLVED; 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 THAT INCLUDE THE
TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR
THE LIKE TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE
HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE
RISKS DESCRIBED HEREIN.
RECENT DEVELOPMENTS
SATELLITE ANOMALIES
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the 119DEG.
West Longitude ("WL") orbital location. Following launch and deployment of
EchoStar IV, EchoStar I was expected to be relocated from its current
position at 119DEG. WL to the 148DEG. WL orbital location. As a result of
anomalies described below, EchoStar IV has instead been moved to the
148DEG. WL orbital location where it is expected to provide local,
educational, foreign language and other niche service to customers in the
Western United States. EchoStar I and EchoStar II will remain at 119DEG. WL
and will continue to provide DISH Network service without interruption or
change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data, approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted
in the failure of four primary transponders (transponders 5, 6, 9 and 10),
and two spare transponders on the satellite. The cause of this anomaly has
not yet been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the
root cause of the anomaly has been determined and corrective procedures, if
possible, are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the FCC to use 24 of the total of 32 frequencies at the 148DEG. WL
orbital location, including frequencies 5, 6, 9 and 10, which correspond to
the failed transponders. Consequently, while power continues to be available
to operate 22 transponders on the satellite, to fully utilize the remaining
available capacity of the satellite, EchoStar will need to file an
application
9
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
with the FCC to obtain authorization to operate transponders which correspond
to frequencies which are not currently assigned to EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148DEG. WL also provide service to Alaska and Hawaii. In April
1998, EchoStar received a waiver from the FCC with respect to this obligation
because EchoStar planned to provide DBS service to those states via EchoStar
IV from the 119DEG. WL orbital location. As a result of moving EchoStar IV to
the 148DEG. WL orbital location, EchoStar will not be able to provide DBS
service to Alaska and Hawaii from 119DEG. WL and probably will not be able to
fulfill its original obligation to provide DBS service to Alaska and Hawaii
from 148DEG. WL either. Consequently, EchoStar will probably need to obtain a
waiver of its obligation to provide service to Alaska and Hawaii in
connection with its application to operate EchoStar IV at 148DEG. WL on a
permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an fixed satellite service ("FSS")
satellite. EchoStar also intends to construct and launch a replacement
satellite at 119DEG. WL which would provide service to Alaska and Hawaii. If
the FCC were to deny EchoStar's request, EchoStar's ability to provide DBS
service from EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III, which was launched October 5,
1997. Certain of EchoStar III's electric power converters ("EPC") are
operating at temperatures slightly outside of engineering specifications.
The high EPC temperatures may require certain transponders on EchoStar III to
be turned off for several weeks during summer and winter solstice seasons to
avoid overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in
accordance with its stated accounting policies. The Company has not
completed its assessment of the impairment of these satellites, but currently
believes insurance proceeds will be sufficient to offset any write-downs of
its satellite assets that are required because of lost transmission capacity
caused by these anomalies. However, no assurance can be provided as to the
ultimate amount that may be received from these insurance claims. EchoStar
will continue to evaluate the operating performance of EchoStar III and
EchoStar IV and may modify its loss assessment as new events or circumstances
develop. EchoStar does not maintain insurance for lost profit opportunity.
PRIMETIME 24
Section 119 of the Satellite Home Viewer Act ("SHVA") authorizes
EchoStar to sell satellite-delivered network signals (ABC, NBC, CBS Fox,
etc.) to EchoStar subscribers, but only if those subscribers qualify as
"unserved" households as that term is defined in the SHVA. Historically,
EchoStar obtained broadcast network signals for distribution to its
subscribers through PrimeTime 24, Joint Venture ("PrimeTime 24"). PrimeTime
24 also distributes network signals to certain of EchoStar's competitors in
the satellite industry.
Recently, a federal court in Florida issued a nationwide injunction in
CBS INC., FOX BROADCASTING CO., ET. AL. V. PRIMETIME 24, JOINT VENTURE, NO.
96-3650-CIV-NESBITT (S.D. FLA. JULY 10, 1998), severely restricting the
ability of PrimeTime 24 and its distributors to sell Fox and CBS programming,
and requiring the disconnection of significant numbers of existing PrimeTime
24 subscribers nationwide by early October 1998. The order also imposed
other obligations on PrimeTime 24 and its distributors with respect to future
sales of Fox and CBS programming nationwide. Additionally, in a federal
court suit in North Carolina, ABC, INC., V. PRIMETIME 24, JOINT
10
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
VENTURE, NO. 1:97CV00090 (M.D.N.C. JULY 16, 1998), a judge recently granted
summary judgment to ABC severely restricting the ability of PrimeTime 24 to
sell ABC programming in Raleigh-Durham.
As a result of: (a) these rulings; (b) EchoStar's determination to sell
local network channels back into the area from which they originate; (c) 1997
adjustments to copyright royalties payable in connection with delivery of
network signals by satellite; and (d) a number of other regulatory,
political, legal, contractual and business factors, during July 1998,
EchoStar ceased delivering PrimeTime 24 programming, and began uplinking and
distributing network signals directly. EchoStar has also implemented Section
119 compliance procedures which will materially restrict the market for the
sale of network signals by EchoStar. It is also possible that some or all of
the networks, and/or their affiliates, will bring copyright infringement
actions against EchoStar, similar to those described above, in the near
future. In the event of a decision adverse to EchoStar in any such
litigation, significant damage awards and additional material restrictions on
the sale of network signals by EchoStar could result. Among other things,
EchoStar may be required to terminate delivery of network signals to a
material portion of its subscriber base. The compliance program implemented
by EchoStar, and any further restrictions on sale of network channels imposed
in the future, may result in decreases in subscriber activations and
subscription television services revenue and an increase in subscriber churn.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997.
REVENUE. Total revenue for the three months ended June 30, 1998 was
$246 million, an increase of $148 million or 152%, as compared to total
revenue for the three months ended June 30, 1997 of $98 million. The
increase in total revenue was primarily attributable to DISH Network
subscriber growth combined with increased revenue from the Company's
Technology business unit. The Company expects that its revenues will
continue to increase as the number of DISH Network subscribers increases.
Consistent with the increases in total revenue and the number of DISH Network
subscribers during the three months ended June 30, 1998, the Company
experienced a corresponding increase in trade accounts receivable at June 30,
1998.
DISH Network subscription television services revenue totaled $152
million for the three months ended June 30, 1998, an increase of $89 million,
or 141% compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the three months ended June
30, 1998 increased approximately 160%, as compared to the same period in
1997. Monthly revenue per subscriber approximated $39 during each of the
three-month periods ended June 30, 1998 and 1997. DISH Network subscription
television services revenue principally consists of revenue from basic,
premium and pay-per-view subscription television services. DISH Network
subscription television services revenue will continue to increase to the
extent the Company is successful in increasing the number of DISH Network
subscribers.
For the three months ended June 30, 1998, DTH equipment sales and
integration services totaled $80 million, an increase of $67 million compared
to the three months ended June 30, 1997. DTH equipment sales consist of
sales of digital set-top boxes and other digital satellite broadcasting
equipment by the Company to international DTH service operators. The Company
currently has agreements to provide equipment to DTH service operators in
Spain and Canada. Sales pursuant to these agreements totaled $74 million for
the three months ended June 30, 1998, an increase of $62 million, as compared
to $12 million for the three months ended June 30, 1997. Revenue for the
three months ended June 30, 1998 primarily related to sales of digital
set-top boxes and other equipment while revenue for the same period in 1997
resulted from the provision of integration services. The increase in DTH
equipment sales and integration services revenue was primarily attributable
to an increase in the volume of set-top boxes sold.
A substantial portion of the Company's Technology revenues have resulted
from sales to two DTH providers. As a result, the Company's Technology
business currently is economically dependent on these two DTH providers. The
Company's future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for EchoStar's digital set-top
11
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
boxes. Due to several factors, the Company expects that its DTH equipment
and integration services revenue may decline during the third and fourth
quarters of 1998 by as much as 30% to 40% as compared to such revenue
reported during the first and second quarters of 1998. These factors include
an expected decrease in demand resulting from the fulfillment of initial
stock orders combined with a decrease in the sales price of digital set-top
boxes due to increased competition from other providers of DTH equipment.
Further, during July 1998 Telefonica S.A. ("Telefonica"), one of the two DTH
service providers described above, announced its intention to merge with
Sogecable ("Canal Plus Satellite"), one of its primary competitors. In
addition to providing competitive DTH services in Spain, the Canal Plus
satellite system in Spain has more set-top boxes in the field than
Telefonica, and its conditional access and compression systems are not
compatible with the equipment manufactured by EchoStar for Telefonica. The
Company can not yet determine the possible impact that such a merger might
have on future sales to Telefonica. The Company has binding purchase orders
from Telefonica for additional 1998 and 1999 deliveries of DTH equipment.
While the Company continues to actively pursue additional distribution and
integration service opportunities, no assurance can be given that any such
additional negotiations will be successful.
Satellite services revenue totaled $6 million for the three months ended
June 30, 1998, an increase of $4 million as compared to the same period in
1997. These revenues include, among other things, fees charged to content
providers for signal carriage and revenues earned from business television
("BTV") customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $89 million for the three months ended June 30, 1998, an increase of
$48 million as compared to the same period in 1997. The increase in DISH
Network operating expenses was consistent with and primarily attributable to
the increase in the number of DISH Network subscribers. For the three months
ended June 30, 1998, DISH Network operating expenses represented 59% of
subscription television services revenue compared to 65% of subscription
television revenue during the corresponding period in 1997. While the
Company expects DISH Network operating expenses as a percentage of
subscription television services revenue to approximate this level in future
periods, there can be no assurance that this expense to revenue ratio will
not increase.
Subscriber-related expenses totaled $69 million for the three months
ended June 30, 1998, an increase of $38 million compared to the same period
in 1997. Such expenses, which include programming expenses, copyright
royalties, residuals payable to retailers and distributors, and billing,
lockbox and other variable subscriber expenses, totaled 46% of subscription
television services revenues for the three months ended June 30, 1998,
compared to 50% of subscription television services revenues for the three
months ended June 30, 1997. The decrease in subscriber-related expenses as a
percentage of subscription television services revenue resulted primarily
from a decrease in programming expenses, which resulted from a change in
product mix combined with price discounts received from certain content
providers.
Customer service center and other expenses principally consist of costs
incurred in the operation of the Company's DISH Network customer service
center, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center
and other expenses totaled $14 million for the three months ended June 30,
1998, an increase of $8 million as compared to the three months ended June
30, 1997. The increase in customer service center and other expenses
resulted from increased personnel expenses to support the growth of the DISH
Network. Customer service center and other expenses totaled 9% of
subscription television services revenue during each of the three-month
periods ended June 30, 1998 and 1997. While the Company expects customer
service center and other expenses as a percentage of subscription television
services revenue to approximate this level for the remainder of 1998, there
can be no assurance that this expense to revenue ratio will not increase.
Satellite and transmission expenses include expenses associated with the
operation of the Company's digital broadcast center, contracted satellite
tracking, telemetry and control ("TT&C") services, and in-orbit insurance on
the Company's DBS satellites. Satellite and transmission expenses increased
$2 million during the three months ended June 30, 1998, as compared to the
same period during 1997. This increase resulted from higher TT&C services
expenses and other digital broadcast center operating expenses due to an
increase in the number of the Company's operational DBS satellites. The
Company expects DISH Network operating expenses to continue to
12
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
increase in the future as subscribers are added. However, as its DISH
Network subscriber base continues to expand, the Company expects that such
costs as a percentage of DISH Network revenue may decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $54 million for the three
months ended June 30, 1998, an increase of $42 million, as compared to the
three months ended June 30, 1997. This increase is consistent with the
increase in DTH equipment revenue. Cost of sales - DTH equipment and
integration services principally includes costs associated with digital
set-top boxes and related components sold to international DTH operators.
MARKETING EXPENSES. Marketing expenses totaled $69 million for the
three months ended June 30, 1998, an increase of $47 million as compared to
the same period in 1997. The increase in marketing expenses was primarily
attributable to the increase in subscriber promotion subsidies. Subscriber
promotion subsidies include the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar Receiver Systems, activation
allowances paid to retailers, and other promotional incentives. The Company
recognizes subscriber promotion subsidies as incurred. These expenses
totaled $60 million for the three months ended June 30, 1998, an increase of
$42 million over the same period in 1997. This increase resulted from
increased subscriber activations and the immediate recognition of all
subscriber promotion subsidies incurred in 1998, whereas during the
three-month period ended June 30, 1997, a portion of such expenses were
initially deferred and amortized over the related prepaid subscription term
(generally one year). This accelerated expense recognition resulted from the
introduction of the "1997 Promotion" in June 1997. The 1997 Promotion
maintained the suggested retail price for a standard EchoStar Receiver System
at $199, but eliminated the requirement for the coincident purchase of an
extended subscription commitment. For the three months ended June 30, 1998,
the Company's subscriber acquisition costs, inclusive of acquisition
marketing expenses, totaled $66 million (approximately $280 per new
subscriber activation). Comparatively, the Company's subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $43 million (in excess of $300 per new subscriber
activation) during the same period in 1997. The decrease in the Company's
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from decreases in the manufactured cost of EchoStar
Receiver Systems. The Company expects that its subscriber acquisition costs,
on a per new subscriber activation basis, may increase during the remainder
of 1998 as a result of increased competition for DBS subscribers.
Advertising and other expenses totaled $9 million for the three months ended
June 30, 1998, an increase of $5 million over the same period in 1997, as a
result of increased marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $23 million for the three-month period ended June 30, 1998,
an increase of $8 million as compared to the same period in 1997. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 9% for the three months ended June
30, 1998 compared to 15% for the corresponding period in 1997. While the
Company expects that G&A expenses as a percentage of total revenue will
approximate this level for the remainder of 1998, there can be no assurance
that this expense to revenue ratio will not increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA for the three months ended June 30, 1998 improved to $7
million compared to $2 million for the same period in 1997. This improvement
in EBITDA principally resulted from increases in Technology (i.e., DTH
equipment sales and integration services) and DISH Network revenues. Due to
expected increases in new subscriber activations, increased marketing
activity and a decrease in Technology revenue (as previously described), the
Company expects that EBITDA results during the third and fourth quarters of
1998 may decline. To the extent that new subscriber activations exceed
expectations or subscriber acquisition costs materially increase, the
Company's EBITDA results may be negatively impacted in the near-term because
subscriber acquisition costs are expensed as incurred.
The Company expects to begin production of its next generation of
digital set-top boxes during the third quarter of 1998. While there can be
no assurance, the Company expects that the introduction of these digital
set-top boxes may result in manufacturing cost reductions, thereby reducing
subscriber acquisition costs. Previous delays in the design of this new
digital set-top box will have a negative impact on EBITDA during the third
quarter of 1998. In the event the Company experiences further delays in the
production of its next generation digital set-top boxes, its inventory of
digital set-top boxes, and consequently, its future new subscriber
activations, subscriber
13
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
acquisition costs and EBITDA results may be negatively impacted. While
further delays are not expected, new product introductions often involve
schedule risks that can not be anticipated or precisely quantified.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended June 30, 1998 (including amortization of
subscriber acquisition costs of $6 million) aggregated $22 million, a
decrease of $24 million as compared to the corresponding period in 1997. The
decrease in depreciation and amortization expenses principally resulted from
the decrease in amortization of subscriber acquisition costs (decrease of $27
million), partially offset by an increase in depreciation related to the
commencement of operation of EchoStar III and other depreciable assets placed
in service during 1998. Beginning in October 1997, net subscriber
acquisition costs are expensed as incurred. Consequently, no additional
subscriber acquisition costs are being deferred. The unamortized balance of
such costs is expected to be fully amortized by September 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $30 million for
the three months ended June 30, 1998, an increase of $8 million as compared
to the same period in 1997. The increase in other expense resulted primarily
from increases in interest expense associated with increased accreted
balances on the Company's 12 7/8% Senior Secured Discount Notes due 2004 (the
"1994 Notes") and the Company's 13 1/8% Senior Secured Discount Notes due
2004 (the "1996 Notes").
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
REVENUE. Total revenue for the six months ended June 30, 1998 was $460
million, an increase of $293 million as compared to total revenue for the six
months ended June 30, 1997 of $167 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth combined with
increased revenue from the Company's Technology business unit.
DISH Network subscription television services revenue totaled $280
million for the six months ended June 30, 1998, an increase of $169 million,
or 153%, compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the six months ended June
30, 1998 increased approximately 154% as compared to the same period in 1997.
For the six months ended June 30, 1998, DTH equipment sales and
integration services totaled $147 million, an increase of $132 million
compared to the six months ended June 30, 1997. The increase in DTH
equipment sales and integration services revenue was primarily attributable
to an increase in the volume of set-top boxes sold. DTH equipment and
integration services revenue for the six months ended June 30, 1998
principally resulted from sales of digital set-top boxes and other equipment
while revenue for the same period in 1997 related to the provision of
integration services.
Satellite services revenue totaled $10 million for the six months ended
June 30, 1998, an increase of $6 million as compared to the same period in
1997. The increase in satellite services revenue was primarily attributable
to increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $170 million for the six months ended June 30, 1998, an increase of
$97 million as compared to the same period in 1997. The increase in DISH
Network operating expenses was consistent with and primarily attributable to
the increase in the number of DISH Network subscribers. For the six months
ended June 30, 1998, DISH Network operating expenses represented 61% of
subscription television services revenue compared to 66% of subscription
television revenue during the corresponding period in 1997.
Subscriber-related expenses totaled $133 million for the six months
ended June 30, 1998, an increase of $78 million compared to the same period
in 1997. Subscriber-related expenses totaled 48% of subscription television
services revenues for the six months ended June 30, 1998, compared to 49%
during the six months ended June 30, 1997.
14
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS --
CONTINUED
Customer service center and other expenses totaled $26 million for the
six months ended June 30, 1998, an increase of $14 million as compared to the
six months ended June 30, 1997. The increase in customer service center and
other expenses resulted from increased personnel expenses to support the
growth of the DISH Network. Customer service center and other expenses
totaled 9% of subscription television services revenue during the six months
ended June 30, 1998, compared to 11% of subscription television services
revenue during the same period of the prior year.
Satellite and transmission expenses increased $5 million during the six
months ended June 30, 1998, as compared to the same period during 1997. This
increase resulted from higher TT&C services expenses and other digital
broadcast center operating expenses due to an increase in the number of the
Company's operational DBS satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $101 million for the six
months ended June 30, 1998, an increase of $87 million, as compared to the
six months ended June 30, 1997. This increase is consistent with the
increase in DTH equipment revenue.
MARKETING EXPENSES. Marketing expenses totaled $122 million for the six
months ended June 30, 1998, an increase of $84 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to the increase in subscriber promotion subsidies. These
expenses totaled $105 million for the six months ended June 30, 1998, an
increase of $74 million over the same period in 1997. The increase in
subscriber promotion subsidies resulted from increased subscriber activations
and the introduction of the 1997 Promotion in June 1997. Advertising and
other expenses totaled $18 million for the six months ended June 30, 1998, an
increase of $11 million over the same period in 1997, as a result of
increased marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $42 million
for the six-month period ended June 30, 1998, an increase of $12 million as
compared to the same period in 1997. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the
growth of the DISH Network. G&A expenses as a percentage of total revenue
decreased to 9% for the six months ended June 30, 1998 compared to 18% for
the corresponding period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
for the six months ended June 30, 1998 improved to $15 million compared to
negative EBITDA of $243,000 during the same period in 1997. This improvement
in EBITDA principally resulted from increases in Technology and DISH Network
revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $17 million) aggregated $48 million, a decrease of
$39million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease
in amortization of subscriber acquisition costs (decrease of $44 million),
partially offset by an increase in depreciation related to the commencement
of operation of EchoStar III and other depreciable assets placed in service
during 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $59 million for
the six months ended June 30, 1998, an increase of $17 million as compared to
the same period in 1997. The increase in other expense resulted primarily
from interest expense associated with the 1997 Notes, and increases in
interest expense associated with increased accreted balances on the 1994
Notes and the 1996 Notes.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar
the DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation for over $682 million following a 1996 FCC
auction. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under the News Agreement.
In May 1997, EchoStar filed a Complaint 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. EchoStar also 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
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.
In June 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 numerous 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, L.L.C., 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 is vigorously defending against the counterclaims. The case has
been set for trial commencing March 1999, but that date could be postponed.
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.
EchoStar 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 those actions will not
materially affect the financial position or results of operations of EchoStar.
16
