<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 Identification No.)
incorporation or organization)
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 OCTOBER 30, 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.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 (Unaudited)....................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1998 (Unaudited)........ 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1998 (Unaudited).................. 3
Notes to Condensed 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.............................................................. 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............................................... 17
</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 Instruction (H)(1)(a) and (b) of Form 10-Q.
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 45,653 $ 42,156
Marketable investment securities ..................................... -- 1,999
Trade accounts receivable, net of allowance for uncollectible
accounts of $1,347 and $3,530, respectively ........................ 66,045 83,893
Inventories .......................................................... 22,993 81,974
Subscriber acquisition costs, net .................................... 18,819 --
Other current assets ................................................. 8,769 22,073
----------- -----------
Total current assets .................................................... 162,279 232,095
Restricted cash and marketable investment securities .................... 2,245 -
Property and equipment, net ............................................. 505,347 535,329
Advances to affiliates, net ............................................. 191,823 129,781
Other noncurrent assets ................................................. 100,891 92,352
----------- -----------
Total assets ....................................................... $ 962,585 $ 989,557
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ............................................... $ 68,491 $ 90,917
Deferred revenue ..................................................... 122,215 113,048
Accrued expenses ..................................................... 72,369 119,176
Current portion of long-term debt .................................... 14,924 15,686
----------- -----------
Total current liabilities ............................................... 277,999 338,827
Long-term obligations, net of current portion:
1994 Notes ........................................................... 499,863 552,776
1996 Notes ........................................................... 438,512 481,966
Mortgages and other notes payable, net of current portion ............ 40,495 29,292
Long-term deferred satellite services revenue and other
long-term liabilities ............................................... 19,500 27,954
----------- -----------
Total long-term obligations, net of current portion ..................... 998,370 1,091,988
----------- -----------
Total liabilities .................................................. 1,276,369 1,430,815
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) (550,096)
----------- -----------
Total stockholder's equity (deficit) .................................... (313,784) (441,258)
----------- -----------
Total liabilities and stockholder's equity (deficit) ............... $ 962,585 $ 989,557
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
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<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ............ $ 82,078 $ 179,472 $ 192,986 $ 459,540
Other ....................................... 12,969 1,674 32,942 11,096
--------- --------- --------- ---------
Total DISH Network ............................ 95,047 181,146 225,928 470,636
DTH equipment sales and integration services .. 21,975 43,921 37,410 190,787
Satellite services ............................ 3,669 5,436 7,879 15,805
C-band and other .............................. 8,970 6,253 25,243 19,716
--------- --------- --------- ---------
Total revenue .................................... 129,661 236,756 296,460 696,944
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................. 42,732 77,520 97,262 210,717
Customer service center and other ........... 10,754 19,539 23,140 45,641
Satellite and transmission .................. 3,442 6,655 9,676 17,367
--------- --------- --------- ---------
Total DISH Network operating expenses ......... 56,928 103,714 130,078 273,725
Cost of sales - DTH equipment and
integration services......................... 11,690 30,050 25,998 131,050
Cost of sales - C-band and other .............. 5,205 3,331 16,337 12,555
Marketing:
Subscriber promotion subsidies .............. 67,466 60,295 98,556 165,123
Advertising and other ....................... 16,786 8,107 24,096 25,694
--------- --------- --------- ---------
Total marketing expenses ...................... 84,252 68,402 122,652 190,817
General and administrative .................... 15,831 24,352 45,881 66,783
Amortization of subscriber acquisition costs .. 34,035 1,964 95,325 18,819
Depreciation and amortization ................. 12,922 15,019 38,220 42,039
--------- --------- --------- ---------
Total costs and expenses ......................... 220,863 246,832 474,491 735,788
--------- --------- --------- ---------
Operating loss ................................... (91,202) (10,076) (178,031) (38,844)
Other Income (Expense):
Interest income ............................... 937 805 3,727 2,323
Interest expense, net of amounts capitalized .. (22,465) (33,430) (63,681) (90,735)
Other ......................................... (73) 96 (248) 2
--------- --------- --------- ---------
Total other income (expense) ..................... (21,601) (32,529) (60,202) (88,410)
--------- --------- --------- ---------
Loss before income taxes ......................... (112,803) (42,605) (238,233) (127,254)
Income tax benefit (provision), net .............. (20) 63 (64) (220)
--------- --------- --------- ---------
Net loss ......................................... $(112,823) $ (42,542) $(238,297) $(127,474)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................. $(238,297) $(127,474)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization ...................................... 38,220 42,039
Amortization of subscriber acquisition costs ....................... 95,325 18,819
Amortization of debt discount and deferred financing costs ......... 60,009 87,586
Change in reserve for excess and obsolete inventory ................ 2,230 374
Change in long-term deferred satellite services revenue and other
long-term liabilities............................................. 9,284 8,454
Other, net ......................................................... (365) --
Changes in current assets and current liabilities .................. (35,980) 43,542
--------- ---------
Net cash flows from operating activities .............................. (69,574) 73,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ......................... (5,006) (1,999)
Sales of marketable investment securities ............................. 20,572 --
Purchases of restricted marketable investment securities .............. (1,495) --
Funds released from escrow and restricted cash and marketable
investment securities ................................................ 78,191 2,245
Purchases of property and equipment ................................... (28,295) (68,042)
Other ................................................................. (935) 1,400
--------- ---------
Net cash flows from investing activities .............................. 63,032 (66,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable ................. (8,413) (10,441)
--------- ---------
Net cash flows from financing activities .............................. (8,413) (10,441)
--------- ---------
Net decrease in cash and cash equivalents ............................. (14,955) (3,497)
Cash and cash equivalents, beginning of period ........................ 38,428 45,653
--------- ---------
Cash and cash equivalents, end of period .............................. $ 23,473 $ 42,156
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due from affiliates ........ $ 25,264 $ 10,879
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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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, or
referring to particular subsidiaries in certain circumstances, "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 September 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
September 30, 1998, EchoStar had approximately 1.6 million DISH
Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - engaged in 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 - engaged in the turn-key delivery of video,
audio and data services to business television customers and other
satellite users. These services may include satellite uplink
services, satellite transponder space usage, billing, customer
service 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 nine months ended
September 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
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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>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1998 1997 1998
--------------------------- ---------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss ............................... $(112,823) $ (42,542) $(238,297) $(127,474)
Change in unrealized gain (loss) on
available-for-sale securities........ 12 -- 11 --
--------------------------- ---------------------------
Comprehensive loss ..................... $(112,811) $ (42,542) $(238,286) $(127,474)
--------------------------- ---------------------------
--------------------------- ---------------------------
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------------------------
(Unaudited)
<S> <C> <C>
EchoStar Receiver Systems .................. $ 7,649 $ 45,880
DBS receiver components .................... 12,506 34,107
Consigned DBS receiver components .......... 3,122 2,749
Finished goods - analog DTH equipment ...... 2,116 2,505
Spare parts and other ...................... 1,440 947
Reserve for excess and obsolete inventory .. (3,840) (4,214)
------------------------------
$ 22,993 $ 81,974
------------------------------
------------------------------
</TABLE>
5
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-----------------------------
(Unaudited)
<S> <C> <C>
Accrued royalties and copyright ................... $ 21,573 $ 42,310
Accrued programming ............................... 20,018 30,965
Accrued expenses .................................. 26,118 28,584
Accrued marketing expenses ........................ 4,660 17,317
-----------------------------
$ 72,369 $119,176
-----------------------------
-----------------------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
THE NEWS CORPORATION LIMITED
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 110 DEG. WL 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.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, U.S.
Satellite Broadcasting Corporation ("USSB"), ECC and two of ECC's
wholly-owned subsidiaries, Dish, Ltd. ("Dish") and Echosphere Corporation
("Echosphere"). The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the
6
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
defendants from activating receivers in Canada and from infringing any
copyrights held by WIC. It is too early to determine whether or when any
other lawsuits and/or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, which also include ECC, Dish, and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and
concerts, to residents of Canada. WIC alleges that the defendants engaged in,
promoted, and/or allowed satellite dish equipment from the United States to
be sold in Canada and to Canadian residents and that some of the defendants
allowed and profited from Canadian residents purchasing and viewing
subscription television programming that is only authorized for viewing in
the United States. The lawsuit seeks, among other things, interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada and damages in excess of the
equivalent of US $175 million. It is too early to determine whether or when
any other lawsuits and/or claims will be filed. It is also too early to make
an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
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.
The national networks and local affiliate stations have recently
challenged PrimeTime 24's methods of selling network programming (national
and local) to consumers based upon infringement of copyright. The U.S.
District Court for the Southern District of Florida entered a nationwide
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold according to certain stipulations in the
injunction. The Court also purported to enjoin PrimeTime 24's "distributors"
as well. The Plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" and has since threatened EchoStar with
litigation.
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. CBS and other broadcast networks have
informed EchoStar that they believe EchoStar's method of providing distant
network programming violates the SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in
the United States District Court for the District of Colorado against the
four major networks. In the future, EchoStar may attempt to certify a class
including the networks as well as any and all owned and operated stations and
any independent affiliates. EchoStar has asked the court to enter a judgment
declaring that EchoStar's method of providing distant network programming
does not violate the SHVA and hence does not infringe the networks'
copyrights.
Certain national television broadcast networks (and their local
affiliates) have threatened to file counter-claims or separate lawsuits
against EchoStar for both the retransmission of local-into-local and
distant-into-local signals. While to date EchoStar has not been served with a
complaint, recent press reports indicate that a lawsuit may have been filed
in Miami by the networks and their affiliates against EchoStar. 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
7
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ECHOSTAR SATELLITE BROADCASTING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
EchoStar could result. Among other things, EchoStar could be required to
terminate delivery of network signals to a material portion of its subscriber
base. Further restrictions on the sale of network channels imposed in the
future could result in decreases in subscriber activations and subscription
television services revenue and an increase in subscriber churn.
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.
METEOROID EVENTS
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.
While the probability that EchoStar's spacecraft will be damaged by space
debris is very small, that probability will increase by several orders of
magnitude during these meteoroid events. 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.
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; 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; A
MERGER OF EXISTING DBS COMPETITORS; A CHANGE IN THE REGULATIONS GOVERNING THE
SUBSCRIPTION TELEVISION SERVICE INDUSTRY; 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE. Total revenue for the three months ended September 30, 1998
was $237 million, an increase of $107 million or 83%, compared to total
revenue for the three months ended September 30, 1997 of $130 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 September 30, 1998, the Company
experienced a corresponding increase in trade accounts receivable at
September 30, 1998.
DISH Network subscription television services revenue totaled $179
million for the three months ended September 30, 1998, an increase of $97
million or 119%, 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 September 30, 1998 increased approximately 116%, as compared to
the same period in 1997. Monthly revenue per subscriber approximated $40.00
during the three-months ended September 30, 1998 and $39.50 during the three
months ended September 30, 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
and maintaining or increasing revenue per subscriber.
For the three months ended September 30, 1998, DTH equipment sales
and integration services totaled $44 million, an increase of $22 million or
100%, compared to the three months ended September 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 $35
million for the three months ended September 30, 1998, an increase of $18
million, as compared to $17 million for the three months ended September 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. DBS accessory and other sales totaled $9 million during the three
months ended September 30, 1998, a $4 million increase compared to the same
period in 1997.
9
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Substantially all of the Company's Technology revenues have
resulted from sales to two international 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 the Company's
digital set-top boxes. Due to several factors, the Company expects that its
DTH equipment and integration services revenue could decline during the
fourth quarter of 1998 as compared to revenue reported during the third
quarter of 1998, and may decline further during 1999 as compared to 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. 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. While the Company has binding purchase orders from Telefonica
for additional 1998 and 1999 deliveries of DTH equipment, the Company can not
yet predict what impact, if any, consummation of this merger might have on
its future sales to Telefonica. However in October 1998, Telefonica announced
that the merger negotiations have been suspended at this time. While the
Company continues to actively pursue additional distribution and integration
service opportunities internationally, no assurance can be given that any
such additional negotiations will be successful.
Satellite services revenue totaled $5 million for the three months
ended September 30, 1998, an increase of $1 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 $104 million for the three months ended September 30, 1998, an
increase of $47 million or 82%, 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 September 30, 1998, DISH Network
operating expenses represented 58% of subscription television services
revenue compared to 69% 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 the third quarter 1998 level in future periods, there
can be no assurance that this expense to revenue ratio will not increase.
Subscriber-related expenses totaled $78 million for the three months
ended September 30, 1998, an increase of $35 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 43% of subscription
television services revenues for the three months ended September 30, 1998
compared to 52% of subscription television services revenues for the three
months ended September 30, 1997. The decrease in subscriber-related expenses
as a percentage of subscription television services revenue resulted
primarily from a decrease in programming expenses on a per subscriber basis,
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 centers, such as personnel and telephone expenses, as well as
subscriber equipment installation and other operating expenses. Customer
service center and other expenses totaled $20 million for the three months
ended September 30, 1998, an increase of $9 million as compared to the three
months ended September 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 11% and 13% of subscription television services revenue during the
three months ended September 30, 1998 and 1997, respectively. While the
Company expects customer service center and other expenses as a percentage of
subscription television services revenue to remain near these levels in the
future, 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 satellite in-orbit
insurance. Satellite and transmission expenses increased $4 million during
the three months ended
10
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
September 30, 1998, as compared to the same period during 1997. This increase
resulted from higher satellite and other digital broadcast center operating
expenses due to an increase in the number of operational satellites. The
Company expects DISH Network operating expenses to continue to increase in
the future as subscribers are added. However, as its DISH Network subscriber
base continues to expand, 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 $30 million for the
three months ended September 30, 1998, an increase of $18 million, as
compared to the three months ended September 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 $68 million for the
three months ended September 30, 1998, a decrease of $16 million as compared
to the same period in 1997. The decrease in marketing expenses was primarily
attributable to a $9 million decrease in advertising and other expenses and a
$7 million decrease in subscriber promotion subsidies. During the fourth
quarter of 1998, the Company expects that its marketing expenses will
increase materially compared to the third quarter of 1998 as a result of
increases in advertising expenses and subscriber promotion subsidies
attributable to the Company's new marketing promotion described below.
For the three months ended September 30, 1998, the Company's
subscriber acquisition costs, inclusive of acquisition marketing expenses,
totaled $64 million (approximately $240 per new subscriber activation).
Comparatively, the Company's subscriber acquisition costs, inclusive of
acquisition marketing expenses and deferred subscriber acquisition costs,
totaled $84 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, will increase in the near-term as a result of increased
competition for DBS subscribers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
("G&A") expenses totaled $24 million for the three months ended September 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 10% for the three months ended
September 30, 1998 compared to 12% for the corresponding period in 1997.
While the Company expects that G&A expenses as a percentage of total revenue
will continue to approximate this level in the future, 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 September 30, 1998 improved to
$7 million compared to negative EBITDA of $44 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 (including subscriber promotion subsidies and
advertising) and a decrease in Technology revenue (as previously described),
the Company expects to report negative EBITDA during the fourth quarter of
1998.
During the fourth quarter of 1998, the Company introduced a new
marketing promotion (the "DISH Network One-Rate Plan"). Under the DISH
Network One-Rate Plan, consumers are eligible to receive a $249 rebate on the
purchase of certain EchoStar Receiver Systems. The rebate is contingent upon
the subscriber's one-year commitment to subscribe to the America's Top 100 CD
programming package and two premium channel packages, committing the
subscriber to a monthly programming payment of at least $48.98. The consumer
must pay the entire sales price of the system at the time of purchase, but is
not required to prepay for the programming. After receiving the subscriber's
first full programming payment (equal to $97.96 for two months of
programming), the Company issues a $249 rebate to the subscriber. Although
there can be no assurance as to the ultimate duration of the DISH Network
One-Rate Plan, it will continue through at least December 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
The Company's subscriber acquisition costs, both in aggregate and on
a per subscriber basis, will increase in direct relation to the participation
rate in the DISH Network One-Rate Plan. While the Company presently expects
less than one-third of its fourth quarter subscriber activations to result
from the DISH Network One-Rate Plan, the actual consumer participation level
could be significantly higher. To the extent that actual consumer
participation levels exceed present expectations and subscriber acquisition
costs materially increase, the Company's EBITDA results will be negatively
impacted in the near-term because subscriber acquisition costs are expensed
as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses for the three months ended September 30, 1998 (including
amortization of subscriber acquisition costs of $2 million) aggregated $17
million, a decrease of $30 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 $32 million), partially offset by an increase in depreciation
related to depreciable assets placed in service during 1998. Since October
1997, net subscriber acquisition costs have been expensed as incurred and no
additional subscriber acquisition costs have been deferred.
OTHER INCOME AND EXPENSE. Other expense, net totaled $33 million for
the three months ended September 30, 1998, an increase of $11 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") combined with a decrease in capitalized
interest.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE. Total revenue for the nine months ended September 30, 1998
was $697 million, an increase of $401 million compared to total revenue for
the nine months ended September 30, 1997 of $296 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 $460
million for the nine months ended September 30, 1998, an increase of $267
million or 138%, 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 nine
months ended September 30, 1998 increased approximately 137% as compared to
the same period in 1997.
For the nine months ended September 30, 1998, DTH equipment sales
and integration services totaled $191 million, an increase of $154 million
compared to the nine months ended September 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.
Satellite services revenue totaled $16 million for the nine months
ended September 30, 1998, an increase of $8 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 $274 million for the nine months ended September 30, 1998, an
increase of $144 million or 110%, 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. DISH Network operating expenses represented 60% and 67% of
subscription television services revenue during the nine months ended
September 30, 1998 and 1997, respectively.
Subscriber-related expenses totaled $211 million for the nine months
ended September 30, 1998, an increase of $114 million compared to the same
period in 1997. Subscriber-related expenses totaled 46% of subscription
television services revenues for the nine months ended September 30, 1998
compared to 50% during the nine months ended September 30, 1997.
12
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Customer service center and other expenses totaled $46 million for
the nine months ended September 30, 1998, an increase of $23 million as
compared to the nine months ended September 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 10% of subscription television services revenue
during the nine months ended September 30, 1998 compared to 12% of
subscription television services revenue during the same period of the prior
year.
Satellite and transmission expenses increased $7 million during the
nine months ended September 30, 1998, as compared to the same period during
1997. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of
sales -DTH equipment and integration services totaled $131 million for the
nine months ended September 30, 1998, an increase of $105 million, as
compared to the nine months ended September 30, 1997. This increase is
consistent with the increase in DTH equipment revenue.
MARKETING EXPENSES. Marketing expenses totaled $191 million for the
nine months ended September 30, 1998, an increase of $68 million or 56%,
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 $165 million for the nine months ended September 30, 1998,
an increase of $66 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
nine-month period ended September 30, 1997, a portion of such expenses were
initially deferred and amortized over the related prepaid subscription term
(generally one year). Advertising and other expenses totaled $26 million for
the nine months ended September 30, 1998, an increase of $2 million over the
same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $67
million for the nine months ended September 30, 1998, an increase of $21
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 10% for the nine months ended September 30, 1998 compared to 15%
for the corresponding period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
EBITDA for the nine months ended September 30, 1998 improved to $22 million
compared to negative EBITDA of $44 million 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 nine months ended September 30, 1998 (including amortization
of subscriber acquisition costs of $19 million) aggregated $61 million, a $73
million decrease 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 $76
million), partially offset by an increase in depreciation related to
depreciable assets placed in service during 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $88 million for
the nine months ended September 30, 1998, an increase of $28 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
IMPACT OF YEAR 2000 ISSUE
The Company has assessed and continues to assess the impact of the
Year 2000 Issue on its computer systems and operations. The Year 2000 Issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year. Thus, as the century date approaches, date
sensitive systems may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the Year 2000 may cause computer
systems to process critical financial and operational information incorrectly.
The Company is currently engaged in the remediation and testing of
its critical computer systems to ensure Year 2000 compliance thereof. In
connection with this effort, the Company has segregated its computer systems
and corresponding Year 2000 compliance risk into three categories: internal
financial and administrative systems, service-delivery systems, and
third-party systems. With respect to the Company's internal financial and
administrative systems, the Company has substantially completed the
identification, modification (as necessary) and testing of all such systems.
While there can be no assurance, the Company currently believes that its
internal financial and administrative systems are Year 2000 compliant. The
Company currently is completing a similar effort with respect to its
service-delivery systems and although there can be no assurance, the Company
expects all such systems to be fully Year 2000 compliant by the end of 1998.
The Company also is currently assessing its vulnerability to unexpected
business interruptions due to the failure of external third-parties to
remediate their Year 2000 compliance issues. In connection with this
assessment, the Company is in the process of communicating with all of its
significant third-party business partners, suppliers and vendors to determine
the extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issues.
While there can be no assurance, the Company believes its costs to
successfully mitigate the Year 2000 Issue will not be material to its
operations. If the Company's Plan is not successful or is not completed in a
timely manner, the Year 2000 Issue could significantly disrupt the Company's
ability to transact business with its customers and suppliers, and could have
a material impact on its operations. There can be no assurance that the
systems of other companies with which the Company's systems interact also
will be timely converted, or that any such failure to convert by another
company would not have an adverse effect on the Company's business or its
operations.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
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 110 DEG. 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.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, U.S.
Satellite Broadcasting Corporation ("USSB"), ECC and two of ECC's
wholly-owned subsidiaries, Dish, Ltd. ("Dish") and Echosphere Corporation
("Echosphere"). The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from activating receivers in
Canada and from infringing any copyrights held by WIC. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It
is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of
Queen's Bench of Alberta Judicial District of Edmonton against certain
defendants, which also include ECC, Dish, and Echosphere. WIC is a company
authorized to broadcast certain copyrighted work, such as movies and
concerts, to residents of Canada. WIC alleges that the defendants engaged in,
promoted, and/or allowed satellite dish equipment from the United States to
be sold in Canada and to Canadian residents and that some of the defendants
allowed and profited from Canadian residents purchasing and viewing
subscription television programming that is only authorized for viewing in
the United States. The lawsuit seeks, among other things, interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada and damages in excess of the
equivalent of US $175 million. It is too early to determine whether or when
any other lawsuits and/or claims will be filed. It is also too early to make
an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
15
<PAGE>
BROADCAST NETWORK PROGRAMMING
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.
The national networks and local affiliate stations have recently
challenged PrimeTime 24's methods of selling network programming (national
and local) to consumers based upon infringement of copyright. The U.S.
District Court for the Southern District of Florida entered a nationwide
injunction preventing PrimeTime 24 from selling its programming to consumers
unless the programming was sold according to certain stipulations in the
injunction. The Court also purported to enjoin PrimeTime 24's "distributors"
as well. The Plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" and has since threatened EchoStar with
litigation.
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. CBS and other broadcast networks have
informed EchoStar that they believe EchoStar's method of providing distant
network programming violates the SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in
the United States District Court for the District of Colorado against the
four major networks. In the future, EchoStar may attempt to certify a class
including the networks as well as any and all owned and operated stations and
any independent affiliates. EchoStar has asked the court to enter a judgment
declaring that EchoStar's method of providing distant network programming
does not violate the SHVA and hence does not infringe the networks'
copyrights.
Certain national television broadcast networks (and their local
affiliates) have threatened to file counter-claims or separate lawsuits
against EchoStar for both the retransmission of local-into-local and
distant-into-local signals. While to date EchoStar has not been served with a
complaint, recent press reports indicate that a lawsuit may have been filed
in Miami by the networks and their affiliates against EchoStar. 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 could be required to
terminate delivery of network signals to a material portion of its subscriber
base. Further restrictions on the sale of network channels imposed in the
future could result in decreases in subscriber activations and subscription
television services revenue and an increase in subscriber churn.
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
<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
September 30, 1998 (incorporated by reference to EchoStar's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1998).
99.2* Condensed Consolidated Financial Statements of Dish, Ltd. for
the quarterly period ended September 30, 1998 (incorporated by
reference to Dish, Ltd.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998).
99.3+ Condensed Financial Statements of DBSC for the quarterly period
ended September 30, 1998.
99.4+ Condensed Combined and Consolidated Financial Statements of Echo
Satellite for the quarterly period ended September 30, 1998.
</TABLE>
- --------------------------------
+ Filed herewith.
* Incorporated by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the third quarter of 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR SATELLITE BROADCASTING CORPORATION
By: /s/ DAVID K. MOSKOWITZ
--------------------------
David K. Moskowitz
Senior Vice President, General Counsel,
Secretary and Director
(DULY AUTHORIZED OFFICER)
By: /s/ STEVEN B. SCHAVER
--------------------------
Steven B. Schaver
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: November 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR SATELLITE BROADCASTING CORPORATION OF AND FOR
THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THOSE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 42,156
<SECURITIES> 1,999
<RECEIVABLES> 87,423
<ALLOWANCES> 3,530
<INVENTORY> 81,974
<CURRENT-ASSETS> 232,095
<PP&E> 662,876
<DEPRECIATION> 127,547
<TOTAL-ASSETS> 989,557
<CURRENT-LIABILITIES> 338,827
<BONDS> 1,064,034
0
0
<COMMON> 0
<OTHER-SE> (441,258)
<TOTAL-LIABILITY-AND-EQUITY> 989,557
<SALES> 681,139<F1>
<TOTAL-REVENUES> 696,944
<CGS> 417,330<F2>
<TOTAL-COSTS> 735,788
<OTHER-EXPENSES> 88,410
<LOSS-PROVISION> 8,201
<INTEREST-EXPENSE> 90,735<F3>
<INCOME-PRETAX> (127,254)
<INCOME-TAX> 220
<INCOME-CONTINUING> (127,474)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (127,474)
<EPS-PRIMARY> (127,474)
<EPS-DILUTED> (127,474)
<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
SEPTEMBER 30, 1998
DIRECT BROADCASTING SATELLITE CORPORATION
COLORADO 84-1328967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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>
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets -
December 31, 1997 and September 30, 1998 (Unaudited)........................ 1
Condensed Statements of Operations for the
three and nine months ended September 30, 1997 and 1998 (Unaudited)......... 2
Condensed Statements of Cash Flows for the
nine months ended September 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, SEPTEMBER 30,
1997 1998
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ - $ 46
Other current assets ..................................................... 7 193
-----------------------------
Total current assets ........................................................ 7 239
EchoStar III ................................................................ 92,408 120,479
FCC authorizations .......................................................... 18,504 18,157
-----------------------------
Total assets ........................................................... $ 110,919 $ 138,875
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable and accrued expenses .............................. $ 545 $ 768
Advances from affiliates, net ............................................ 30,601 67,347
Current portion of notes payable ......................................... 2,961 3,135
-----------------------------
Total current liabilities ................................................... 34,107 71,250
Other notes payable, net of current portion ................................. 11,351 9,548
Notes payable to ECC and accumulated interest ............................... 54,597 58,497
-----------------------------
Total liabilities ...................................................... 100,055 139,295
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) (16,744)
-----------------------------
Total stockholder's equity .................................................. 10,864 (420)
-----------------------------
Total liabilities and stockholder's equity ............................. $ 110,919 $ 138,875
-----------------------------
-----------------------------
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenue ............................... $ - $ - $ - $ -
Expenses:
Satellite and transmission ......... - 310 - 310
Depreciation and amortization ...... - 2,040 - 6,122
Interest expense ................... 1,609 1,586 4,556 4,852
-------------------------------- -------------------------------
Total expenses ........................ 1,609 3,936 4,556 11,284
-------------------------------- -------------------------------
Loss before income taxes .............. (1,609) (3,936) (4,556) (11,284)
Income tax provision .................. - - - -
-------------------------------- -------------------------------
Net loss .............................. $ (1,609) $ (3,936) $ (4,556) $(11,284)
-------------------------------- -------------------------------
-------------------------------- -------------------------------
</TABLE>
See accompanying Notes to Condensed Financial Statements.
2
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................................. $ (4,556) $(11,284)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization ...................................................... - 6,122
Interest on notes payable to ECC added to principal ................................ 4,868 3,900
Changes in current assets and current liabilities:
Other current assets ............................................................. (7) (186)
Accounts payable and accrued expenses ............................................ (1,668) 223
-------------------------------
Net cash flows from operating activities .............................................. (1,363) (1,225)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for satellite systems under construction and other ....................... (16,611) -
-------------------------------
Net cash flows from investing activities .............................................. (16,611) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net ......................................................... 17,976 2,900
Repayment of other notes payable ...................................................... - (1,629)
-------------------------------
Net cash flows from financing activities .............................................. 17,976 1,271
Net increase in cash and cash equivalents ............................................. 2 46
Cash and cash equivalents, beginning of period ........................................ 1 -
-------------------------------
Cash and cash equivalents, end of period .............................................. $ 3 $ 46
-------------------------------
-------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due to affiliates ............................. $ 7,944 $ -
Reclassification of satellite assets .................................................. - 33,846
Accrued capital expenditures .......................................................... 1,000 -
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, or referring to particular subsidiaries in certain
circumstances, "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 September 30, 1998,
EchoStar had approximately 1.6 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - engaged in 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 - engaged in the turn-key delivery of video, audio
and data services to business television customers and other satellite
users. These services may include satellite uplink services, satellite
transponder space usage, billing, customer service 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 nine months
ended September 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
4
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
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
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 III DEVELOPMENTS
During July 1998, EchoStar announced that certain of the electronic power
converters ("EPC") on EchoStar's third DBS satellite, EchoStar III, were
operating at higher than expected temperatures. In August 1998, Lockheed Martin,
the satellite manufacturer, notified EchoStar that it had re-qualified the EPC's
at the higher temperatures. As a result, EchoStar does not expect that this
anomaly will have a material impact on EchoStar III's transmission capacity.
During October 1998, Lockheed Martin advised EchoStar that EchoStar III had
experienced an anomaly which, to date, has resulted in the loss of six TWTAs.
The satellite is equipped with a total of 44 TWTAs. Only 11 TWTAs are necessary
to fully utilize EchoStar's 11 frequencies at 61.5(degree) WL, where the
satellite is located. While there has been no interruption of service for
EchoStar customers and no interruption of service is expected, EchoStar is
presently working with Lockheed Martin to investigate the cause and potential
implications of the anomaly. Lockheed Martin has informally advised EchoStar
that it is possible the anomaly may result in the loss of additional
transponders in the future.
As a result of the anomaly related to the TWTAs, EchoStar has instructed
its broker to notify its insurance carriers of an occurrence under the terms of
the EchoStar III launch insurance policy. The EchoStar III launch insurance
policy provides for insurance of $219.3 million covering the period from launch
of the satellite (October 5, 1997) through October 5, 1998. Under that policy,
EchoStar has until early 1999 to file a claim for either a constructive total or
partial loss. It may be several months before all of the data required in
connection with the filing of a claim can
5
<PAGE>
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
be accumulated. Pending completion of the anomaly investigation, EchoStar has
transitioned to a 60-day, $200 million in-orbit insurance policy on EchoStar
III at standard industry rates. However, the policy contains an exclusion for
future TWTA losses based on similar anomalies. As a result of the exclusion,
and in the event that comprehensive coverage for similar TWTA anomalies is
ultimately denied under the launch insurance policy, EchoStar could
potentially experience uninsured losses of capacity on EchoStar III in the
future, up to and including a total loss of capacity. While there can be no
assurance, the Company and its insurers expect that in-orbit insurance can be
procured on more traditional terms in the future if the anomaly investigation
is satisfactorily concluded and no further failures occur in the interim.
Based on information currently available, management has evaluated the
potential financial statement impact of this satellite anomaly in accordance
with its stated accounting policies. EchoStar has not completed its assessment
of the impairment to EchoStar III, but currently believes that insurance
proceeds will be sufficient to offset any write-down of satellite assets that
may be required because of lost transmission capacity caused by this anomaly.
However, no assurance can be provided as to the ultimate amount that may be
received from the insurance claim, or that coverage will be available. EchoStar
will continue to evaluate the performance of EchoStar III 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 SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 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 September 30, 1998. EchoStar III was placed into service
in January 1998. Interest expense totaled $2 million for the three months ended
September 30, 1998 and 1997. Interest expense represents interest incurred on
the notes payable to ECC.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997.
Depreciation on EchoStar III totaled $6 million for the nine months ended
September 30, 1998. Interest expense totaled $5 million for the nine months
ended September 30, 1998 and 1997.
7
<PAGE>
EXHIBIT 99.4
QUARTERLY REPORT FOR THE PERIOD ENDED
SEPTEMBER 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>
Item 1. Financial Statements
Condensed Combined and Consolidated Balance Sheets -
December 31, 1997 and September 30, 1998 (Unaudited)............................. 1
Condensed Combined and Consolidated Statements of Operations for the
three and nine months ended September 30, 1997 and 1998 (Unaudited).............. 2
Condensed Combined and Consolidated Statements of Cash Flows for the
nine months ended September 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............................. 10
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, SEPTEMBER 30,
1997 1998
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................................... $ 45,653 $ 42,202
Marketable investment securities ............................................. - 1,999
Trade accounts receivable, net of allowance for uncollectible accounts of
$1,347 and, $3,530, respectively ........................................... 66,045 83,893
Inventories .................................................................. 22,993 81,974
Subscriber acquisition costs, net ............................................ 18,819 -
Other current assets ......................................................... 9,424 19,767
------------------------------
Total current assets ............................................................ 162,934 229,835
Restricted cash and marketable investment securities ............................ 2,245 -
Property and equipment, net ..................................................... 597,755 655,808
Advances to affiliates, net ..................................................... 161,222 62,434
Other noncurrent assets ......................................................... 118,747 113,008
------------------------------
Total assets ............................................................... $ 1,042,903 $ 1,061,085
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ....................................................... $ 68,800 $ 91,685
Deferred revenue ............................................................. 122,215 113,048
Accrued expenses ............................................................. 72,605 119,176
Current portion of long-term debt ............................................ 17,885 18,821
------------------------------
Total current liabilities ....................................................... 281,505 342,730
Long-term obligations, net of current portion:
1994 Notes ................................................................... 499,863 552,776
1996 Notes ................................................................... 438,512 481,966
Notes payable to ECC including accumulated interest .......................... 54,597 58,497
Mortgages and other notes payable, net of current portion .................... 51,846 38,840
Long-term deferred satellite services revenue and other long-term
liabilities ................................................................ 19,500 27,954
------------------------------
Total long-term obligations, net of current portion ............................. 1,064,318 1,160,033
------------------------------
Total liabilities .......................................................... 1,345,823 1,502,763
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) (566,840)
------------------------------
Total stockholder's equity (deficit) ............................................ (302,920) (441,678)
------------------------------
Total liabilities and stockholder's equity (deficit) ....................... $ 1,042,903 $ 1,061,085
------------------------------
------------------------------
</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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services .............. $ 82,078 $ 179,472 $ 192,986 $ 459,540
Other ......................................... 12,969 1,674 32,942 11,096
-------------------------- --------------------------
Total DISH Network .............................. 95,047 181,146 225,928 470,636
DTH equipment sales and integration services .... 21,975 43,921 37,410 190,787
Satellite services .............................. 3,669 5,436 7,879 15,805
C-band and other ................................ 8,970 6,253 25,243 19,716
-------------------------- --------------------------
Total revenue ...................................... 129,661 236,756 296,460 696,944
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................... 42,732 77,520 97,262 210,717
Customer service center and other ............. 10,754 19,539 23,140 45,641
Satellite and transmission .................... 3,442 6,965 9,676 17,677
-------------------------- --------------------------
Total DISH Network operating expenses ........... 56,928 104,024 130,078 274,035
Cost of sales - DTH equipment and
integration services ............................ 11,690 30,050 25,998 131,050
Cost of sales - C-band and other ................ 5,205 3,331 16,337 12,555
Marketing:
Subscriber promotion subsidies ................ 67,466 60,295 98,556 165,123
Advertising and other ......................... 16,786 8,107 24,096 25,694
-------------------------- --------------------------
Total marketing expenses ........................ 84,252 68,402 122,652 190,817
General and administrative ...................... 15,831 24,352 45,881 66,783
Amortization of subscriber acquisition costs .... 34,035 1,964 95,325 18,819
Depreciation and amortization ................... 12,922 17,059 38,220 48,161
-------------------------- --------------------------
Total costs and expenses ........................... 220,863 249,182 474,491 742,220
-------------------------- --------------------------
Operating loss ..................................... (91,202) (12,426) (178,031) (45,276)
Other Income (Expense):
Interest income ................................. 937 805 3,727 2,323
Interest expense, net of amounts capitalized .... (24,074) (35,016) (68,237) (95,587)
Other ........................................... (73) 96 (248) 2
-------------------------- --------------------------
Total other income (expense) ....................... (23,210) (34,115) (64,758) (93,262)
-------------------------- --------------------------
Loss before income taxes ........................... (114,412) (46,541) (242,789) (138,538)
Income tax benefit (provision), net ................ (20) 63 (64) (220)
-------------------------- --------------------------
Net loss ........................................... $(114,432) $ (46,478) $(242,853) $(138,758)
-------------------------- --------------------------
-------------------------- --------------------------
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
-------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................................. $(242,853) $(138,758)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization ...................................................... 38,220 48,161
Amortization of subscriber acquisition costs ....................................... 95,325 18,819
Amortization of debt discount and deferred financing costs ......................... 60,009 87,586
Interest on notes payable to ECC added to principal ................................ 4,868 3,900
Change in reserve for excess and obsolete inventory ................................ 2,230 374
Change in long-term deferred satellite services revenue and other long-term
liabilities ...................................................................... 9,284 8,454
Other, net ......................................................................... (365) -
Changes in current assets and current liabilities, net ............................. (19,679) 46,479
-------------------------------
Net cash flows from operating activities .............................................. (52,961) 75,015
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ......................................... (5,006) (1,999)
Sales of marketable investment securities ............................................. 20,572 -
Purchases of restricted marketable investment securities .............................. (1,495) -
Funds released from escrow and restricted cash and marketable investment
securities .......................................................................... 78,191 2,245
Investment earnings placed in escrow .................................................. - -
Purchases of property and equipment ................................................... (44,906) (68,042)
Other ................................................................................. (935) 1,400
-------------------------------
Net cash flows from investing activities .............................................. 46,421 (66,396)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable ................................. (8,413) (12,070)
-------------------------------
Net cash flows from financing activities .............................................. (8,413) (12,070)
-------------------------------
Net decrease in cash and cash equivalents ............................................. (14,953) (3,451)
Cash and cash equivalents, beginning of period ........................................ 38,429 45,653
-------------------------------
Cash and cash equivalents, end of period .............................................. $ 23,476 $ 42,202
-------------------------------
-------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due to affiliates ............................. $33,208. $ 10,879
Accrued capital expenditures .......................................................... 1,000 -
Reclassification of satellite asset ................................................... - 33,846
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, or referring to particular subsidiaries in
certain circumstances, "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 September 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 September 30, 1998,
EchoStar had approximately 1.6 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - engaged in 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 - engaged in the turn-key delivery of video, audio
and data services to business television customers and other satellite
users. These services may include satellite uplink services, satellite
transponder space usage, billing, customer service 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.
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)
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 nine months ended September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1997 1998
-------------------------- -------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net loss .................................. $(114,432) $(46,478) $(242,853) $(138,758)
Change in unrealized gain (loss) on
available-for-sale securities .......... 12 - 11 -
-------------------------- -------------------------
Comprehensive loss ........................ $(114,420) $(42,478) $(242,842) $(138,758)
-------------------------- -------------------------
-------------------------- -------------------------
</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, SEPTEMBER 30,
1997 1998
--------------------------------
(Unaudited)
<S> <C> <C>
EchoStar Receiver Systems ....................................... $ 7,649 $45,880
DBS receiver components ......................................... 12,506 34,107
Consigned DBS receiver components ............................... 3,122 2,749
Finished goods - analog DTH equipment ........................... 2,116 2,505
Spare parts and other ........................................... 1,440 947
Reserve for excess and obsolete inventory ....................... (3,840) (4,214)
--------------------------------
$22,993 $81,974
--------------------------------
--------------------------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------------------------
(Unaudited)
<S> <C> <C>
Accrued royalties and copyright ................................. $21,573 $ 42,310
Accrued programming ............................................. 20,018 30,965
Accrued expenses ................................................ 26,354 28,584
Accrued marketing expenses ...................................... 4,660 17,317
--------------------------------
$72,605 $119,176
--------------------------------
--------------------------------
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
THE NEWS CORPORATION LIMITED
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 110(Degree) WL 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
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)
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.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial Division,
against certain defendants which include: General Instrument Corporation, HBO,
Warner Communications, Inc., John Doe, Showtime, U.S. Satellite Broadcasting
Corporation ("USSB"), ECC and two of ECC's wholly-owned subsidiaries, Dish, Ltd.
("Dish") and Echosphere Corporation ("Echosphere"). The lawsuit seeks, among
other things, an interim and permanent injunction prohibiting the defendants
from activating receivers in Canada and from infringing any copyrights held by
WIC. It is too early to determine whether or when any other lawsuits and/or
claims will be filed. It is also too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include ECC, Dish, and Echosphere. WIC is a company authorized to broadcast
certain copyrighted work, such as movies and concerts, to residents of Canada.
WIC alleges that the defendants engaged in, promoted, and/or allowed satellite
dish equipment from the United States to be sold in Canada and to Canadian
residents and that some of the defendants allowed and profited from Canadian
residents purchasing and viewing subscription television programming that is
only authorized for viewing in the United States. The lawsuit seeks, among other
things, interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of US $175 million. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
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.
The national networks and local affiliate stations have recently challenged
PrimeTime 24's methods of selling network programming (national and local) to
consumers based upon infringement of copyright. The U.S. District Court for the
Southern District of Florida entered a nationwide injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold according to certain stipulations in the injunction. The Court also
purported to enjoin PrimeTime 24's "distributors" as well. The Plaintiff in the
Florida litigation informed EchoStar that it considered EchoStar a "distributor"
and has since threatened EchoStar with litigation.
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
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)
restrict the market for the sale of network signals by EchoStar. CBS and
other broadcast networks have informed EchoStar that they believe EchoStar's
method of providing distant network programming violates the SHVA and hence
infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. In the future, EchoStar may attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. EchoStar has asked the court to enter a judgment declaring that
EchoStar's method of providing distant network programming does not violate the
SHVA and hence does not infringe the networks' copyrights.
Certain national television broadcast networks (and their local affiliates)
have threatened to file counter-claims or separate lawsuits against EchoStar for
both the retransmission of local-into-local and distant-into-local signals.
While to date EchoStar has not been served with a complaint, recent press
reports indicate that a lawsuit may have been filed in Miami by the networks and
their affiliates against EchoStar. 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 could be required to terminate delivery of network
signals to a material portion of its subscriber base. Further restrictions on
the sale of network channels imposed in the future could result in decreases in
subscriber activations and subscription television services revenue and an
increase in subscriber churn.
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.
METEOROID EVENTS
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. While the probability that
EchoStar's spacecraft will be damaged by space debris is very small, that
probability will increase by several orders of magnitude during these meteoroid
events. 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.
6. SUBSEQUENT EVENTS
ECHOSTAR III DEVELOPMENTS
During July 1998, EchoStar announced that certain of the electronic power
converters ("EPC") on EchoStar's third DBS satellite, EchoStar III, were
operating at higher than expected temperatures. In August 1998, Lockheed Martin,
the satellite manufacturer, notified EchoStar that it had re-qualified the EPC's
at the higher temperatures. As a result, EchoStar does not expect that this
anomaly will have a material impact on EchoStar III's transmission capacity.
During October 1998, Lockheed Martin advised EchoStar that EchoStar III had
experienced an anomaly which, to date, has resulted in the loss of six TWTAs.
The satellite is equipped with a total of 44 TWTAs. Only 11 TWTAs are necessary
to fully utilize EchoStar's 11 frequencies at 61.5(degree) WL, where the
satellite is located. While there has been no interruption of service for
EchoStar customers and no interruption of service is expected, EchoStar is
presently working with Lockheed Martin to investigate the cause and potential
implications of the anomaly. Lockheed Martin has informally advised EchoStar
that it is possible the anomaly may result in the loss of additional
transponders in the future.
As a result of the anomaly related to the TWTAs, EchoStar has instructed
its broker to notify its insurance carriers of an occurrence under the terms of
the EchoStar III launch insurance policy. The EchoStar III launch
8
<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)
insurance policy provides for insurance of $219.3 million covering the period
from launch of the satellite (October 5, 1997) through October 5, 1998. Under
that policy, EchoStar has until early 1999 to file a claim for either a
constructive total or partial loss. It may be several months before all of
the data required in connection with the filing of a claim can be
accumulated. Pending completion of the anomaly investigation, EchoStar has
transitioned to a 60-day, $200 million in-orbit insurance policy on EchoStar
III at standard industry rates. However, the policy contains an exclusion for
future TWTA losses based on similar anomalies. As a result of the exclusion,
and in the event that comprehensive coverage for similar TWTA anomalies is
ultimately denied under the launch insurance policy, EchoStar could
potentially experience uninsured losses of capacity on EchoStar III in the
future, up to and including a total loss of capacity. While there can be no
assurance, the Company and its insurers expect that in-orbit insurance can be
procured on more traditional terms in the future if the anomaly investigation
is satisfactorily concluded and no further failures occur in the interim.
Based on information currently available, management has evaluated the
potential financial statement impact of this satellite anomaly in accordance
with its stated accounting policies. EchoStar has not completed its assessment
of the impairment to EchoStar III, but currently believes that insurance
proceeds will be sufficient to offset any write-down of satellite assets that
may be required because of lost transmission capacity caused by this anomaly.
However, no assurance can be provided as to the ultimate amount that may be
received from the insurance claim, or that coverage will be available. EchoStar
will continue to evaluate the performance of EchoStar III and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
9
<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;
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; A MERGER OF EXISTING DBS COMPETITORS; A CHANGE IN THE
REGULATIONS GOVERNING THE SUBSCRIPTION TELEVISION SERVICE INDUSTRY; 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997.
REVENUE. Total revenue for the three months ended September 30, 1998 was
$237 million, an increase of $107 million or 83%, compared to total revenue for
the three months ended September 30, 1997 of $130 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
September 30, 1998, the Company experienced a corresponding increase in trade
accounts receivable at September 30, 1998.
DISH Network subscription television services revenue totaled $179 million
for the three months ended September 30, 1998, an increase of $97 million or
119%, 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
September 30, 1998 increased approximately 116%, as compared to the same period
in 1997. Monthly revenue per subscriber approximated $40.00 during the
three-months ended September 30, 1998 and $39.50 during the three months ended
September 30, 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 and maintaining or increasing
revenue per subscriber.
For the three months ended September 30, 1998, DTH equipment sales and
integration services totaled $44 million, an increase of $22 million or 100%,
compared to the three months ended September 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 $35
million for the three months ended September 30, 1998, an increase of $18
million, as compared to $17 million for the three months ended September 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. DBS
accessory and other sales totaled $9 million during the three months ended
September 30, 1998, a $4 million increase compared to the same period in 1997.
10
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Substantially all of the Company's Technology revenues have resulted from
sales to two international 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 the Company's digital set-top boxes. Due to several
factors, the Company expects that its DTH equipment and integration services
revenue could decline during the fourth quarter of 1998 as compared to revenue
reported during the third quarter of 1998, and may decline further during 1999
as compared to 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. 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. While the Company has binding purchase orders from
Telefonica for additional 1998 and 1999 deliveries of DTH equipment, the Company
can not yet predict what impact, if any, consummation of this merger might have
on its future sales to Telefonica. However in October 1998, Telefonica announced
that the merger negotiations have been suspended at this time. While the Company
continues to actively pursue additional distribution and integration service
opportunities internationally, no assurance can be given that any such
additional negotiations will be successful.
Satellite services revenue totaled $5 million for the three months ended
September 30, 1998, an increase of $1 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
$104 million for the three months ended September 30, 1998, an increase of $47
million or 83%, 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 September 30, 1998, DISH Network operating expenses represented 58% of
subscription television services revenue compared to 69% 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 the third quarter 1998 level in
future periods, there can be no assurance that this expense to revenue ratio
will not increase.
Subscriber-related expenses totaled $78 million for the three months ended
September 30, 1998, an increase of $35 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 43% of subscription television services
revenues for the three months ended September 30, 1998 compared to 52% of
subscription television services revenues for the three months ended September
30, 1997. The decrease in subscriber-related expenses as a percentage of
subscription television services revenue resulted primarily from a decrease in
programming expenses on a per subscriber basis, 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
centers, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center and
other expenses totaled $20 million for the three months ended September 30,
1998, an increase of $9 million as compared to the three months ended September
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 11% and 13% of subscription
television services revenue during the three months ended September 30, 1998 and
1997, respectively. While the Company expects customer service center and other
expenses as a percentage of subscription television services revenue to remain
near these levels in the future, 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 satellite in-orbit
insurance. Satellite and transmission expenses increased $4 million during the
three months ended
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
September 30, 1998, as compared to the same period during 1997. This increase
resulted from higher satellite and other digital broadcast center operating
expenses due to an increase in the number of operational satellites. The
Company expects DISH Network operating expenses to continue to increase in
the future as subscribers are added. However, as its DISH Network subscriber
base continues to expand, 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 $30 million for the three months
ended September 30, 1998, an increase of $18 million, as compared to the three
months ended September 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 $68 million for the three
months ended September 30, 1998, a decrease of $16 million as compared to the
same period in 1997. The decrease in marketing expenses was primarily
attributable to a $9 million decrease in advertising and other expenses and a $7
million decrease in subscriber promotion subsidies. During the fourth quarter of
1998, the Company expects that its marketing expenses will increase materially
compared to the third quarter of 1998 as a result of increases in advertising
expenses and subscriber promotion subsidies attributable to the Company's new
marketing promotion described below.
For the three months ended September 30, 1998, the Company's subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled $64
million (approximately $240 per new subscriber activation). Comparatively, the
Company's subscriber acquisition costs, inclusive of acquisition marketing
expenses and deferred subscriber acquisition costs, totaled $84 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, will
increase in the near-term as a result of increased competition for DBS
subscribers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $24 million for the three months ended September 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 10% for the three months ended September 30, 1998 compared
to 12% for the corresponding period in 1997. While the Company expects that G&A
expenses as a percentage of total revenue will continue to approximate this
level in the future, 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 September 30, 1998 improved to $7 million
compared to negative EBITDA of $44 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
(including subscriber promotion subsidies and advertising) and a decrease in
Technology revenue (as previously described), the Company expects to report
negative EBITDA during the fourth quarter of 1998.
During the fourth quarter of 1998, the Company introduced a new marketing
promotion (the "DISH Network One-Rate Plan"). Under the DISH Network One-Rate
Plan, consumers are eligible to receive a $249 rebate on the purchase of certain
EchoStar Receiver Systems. The rebate is contingent upon the subscriber's
one-year commitment to subscribe to the America's Top 100 CD programming package
and two premium channel packages, committing the subscriber to a monthly
programming payment of at least $48.98. The consumer must pay the entire sales
price of the system at the time of purchase, but is not required to prepay for
the programming. After receiving the subscriber's first full programming payment
(equal to $97.96 for two months of programming), the Company issues a $249
rebate to the subscriber. Although there can be no assurance as to the ultimate
duration of the DISH Network One-Rate Plan, it will continue through at least
December 1998.
12
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
The Company's subscriber acquisition costs, both in aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate in
the DISH Network One-Rate Plan. While the Company presently expects less than
one-third of its fourth quarter subscriber activations to result from the DISH
Network One-Rate Plan, the actual consumer participation level could be
significantly higher. To the extent that actual consumer participation levels
exceed present expectations and subscriber acquisition costs materially
increase, the Company's EBITDA results will be negatively impacted in the
near-term because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
the three months ended September 30, 1998 (including amortization of subscriber
acquisition costs of $2 million) aggregated $19 million, a decrease of $28
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 $32 million),
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III in January 1998 and other depreciable assets placed in
service during 1998. Since October 1997, net subscriber acquisition costs have
been expensed as incurred and no additional subscriber acquisition costs have
been deferred.
OTHER INCOME AND EXPENSE. Other expense, net totaled $34 million for the
three months ended September 30, 1998, an increase of $11 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")
combined with a decrease in capitalized interest.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997.
REVENUE. Total revenue for the nine months ended September 30, 1998 was
$697 million, an increase of $401 million compared to total revenue for the nine
months ended September 30, 1997 of $296 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 $460 million
for the nine months ended September 30, 1998, an increase of $267 million or
138%, 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 nine months ended
September 30, 1998 increased approximately 137% as compared to the same period
in 1997.
For the nine months ended September 30, 1998, DTH equipment sales and
integration services totaled $191 million, an increase of $154 million compared
to the nine months ended September 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.
Satellite services revenue totaled $16 million for the nine months ended
September 30, 1998, an increase of $8 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
$274 million for the nine months ended September 30, 1998, an increase of $144
million or 111%, 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. DISH Network operating
expenses represented 60% and 67% of subscription television services revenue
during the nine months ended September 30, 1998 and 1997, respectively.
Subscriber-related expenses totaled $211 million for the nine months ended
September 30, 1998, an increase of $114 million compared to the same period in
1997. Subscriber-related expenses totaled 46% of subscription television
services revenues for the nine months ended September 30, 1998 compared to 50%
during the nine months ended September 30, 1997.
13
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Customer service center and other expenses totaled $46 million for the nine
months ended September 30, 1998, an increase of $23 million as compared to the
nine months ended September 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
10% of subscription television services revenue during the nine months ended
September 30, 1998 compared to 12% of subscription television services revenue
during the same period of the prior year.
Satellite and transmission expenses increased $8 million during the nine
months ended September 30, 1998, as compared to the same period during 1997.
This increase resulted from higher satellite and other digital broadcast center
operating expenses due to an increase in the number of operational satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales - DTH
equipment and integration services totaled $131 million for the nine months
ended September 30, 1998, an increase of $105 million, as compared to the nine
months ended September 30, 1997. This increase is consistent with the increase
in DTH equipment revenue.
MARKETING EXPENSES. Marketing expenses totaled $191 million for the nine
months ended September 30, 1998, an increase of $68 million or 56%, 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 $165 million
for the nine months ended September 30, 1998, an increase of $66 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 nine-month period ended September 30, 1997,
a portion of such expenses were initially deferred and amortized over the
related prepaid subscription term (generally one year). Advertising and other
expenses totaled $26 million for the nine months ended September 30, 1998, an
increase of $2 million over the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $67 million for
the nine months ended September 30, 1998, an increase of $21 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 10% for the
nine months ended September 30, 1998 compared to 15% for the corresponding
period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA for
the nine months ended September 30, 1998 improved to $22 million compared to
negative EBITDA of $44 million 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 nine months ended September 30, 1998 (including amortization of subscriber
acquisition costs of $19 million) aggregated $67 million, a $67 million decrease
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 $76 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 $93 million for the
nine months ended September 30, 1998, an increase of $28 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
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
IMPACT OF YEAR 2000 ISSUE
The Company has assessed and continues to assess the impact of the Year
2000 Issue on its computer systems and operations. The Year 2000 Issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. Thus, as the century date approaches, date sensitive
systems may recognize the year 2000 as 1900 or not at all. The inability to
recognize or properly treat the Year 2000 may cause computer systems to process
critical financial and operational information incorrectly.
The Company is currently engaged in the remediation and testing of its
critical computer systems to ensure Year 2000 compliance thereof. In connection
with this effort, the Company has segregated its computer systems and
corresponding Year 2000 compliance risk into three categories: internal
financial and administrative systems, service-delivery systems, and third-party
systems. With respect to the Company's internal financial and administrative
systems, the Company has substantially completed the identification,
modification (as necessary) and testing of all such systems. While there can be
no assurance, the Company currently believes that its internal financial and
administrative systems are Year 2000 compliant. The Company currently is
completing a similar effort with respect to its service-delivery systems and
although there can be no assurance, the Company expects all such systems to be
fully Year 2000 compliant by the end of 1998. The Company also is currently
assessing its vulnerability to unexpected business interruptions due to the
failure of external third-parties to remediate their Year 2000 compliance
issues. In connection with this assessment, the Company is in the process of
communicating with all of its significant third-party business partners,
suppliers and vendors to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 issues.
While there can be no assurance, the Company believes its costs to
successfully mitigate the Year 2000 Issue will not be material to its
operations. If the Company's Plan is not successful or is not completed in a
timely manner, the Year 2000 Issue could significantly disrupt the Company's
ability to transact business with its customers and suppliers, and could have a
material impact on its operations. There can be no assurance that the systems of
other companies with which the Company's systems interact also will be timely
converted, or that any such failure to convert by another company would not have
an adverse effect on the Company's business or its operations.
15
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
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 110(Degree) 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.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial Division,
against certain defendants which include: General Instrument Corporation, HBO,
Warner Communications, Inc., John Doe, Showtime, U.S. Satellite Broadcasting
Corporation ("USSB"), ECC and two of ECC's wholly-owned subsidiaries, Dish, Ltd.
("Dish") and Echosphere Corporation ("Echosphere"). The lawsuit seeks, among
other things, an interim and permanent injunction prohibiting the defendants
from activating receivers in Canada and from infringing any copyrights held by
WIC. It is too early to determine whether or when any other lawsuits and/or
claims will be filed. It is also too early to make an assessment of the probable
outcome of the litigation or to determine the extent of any potential liability
or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants, which
also include ECC, Dish, and Echosphere. WIC is a company authorized to broadcast
certain copyrighted work, such as movies and concerts, to residents of Canada.
WIC alleges that the defendants engaged in, promoted, and/or allowed satellite
dish equipment from the United States to be sold in Canada and to Canadian
residents and that some of the defendants allowed and profited from Canadian
residents purchasing and viewing subscription television programming that is
only authorized for viewing in the United States. The lawsuit seeks, among other
things, interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of US $175 million. It is too early to
determine whether or when any other lawsuits and/or claims will be filed. It is
also too early to make an assessment of the probable outcome of the litigation
or to determine the extent of any potential liability or damages.
16
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BROADCAST NETWORK PROGRAMMING
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.
The national networks and local affiliate stations have recently challenged
PrimeTime 24's methods of selling network programming (national and local) to
consumers based upon infringement of copyright. The U.S. District Court for the
Southern District of Florida entered a nationwide injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold according to certain stipulations in the injunction. The Court also
purported to enjoin PrimeTime 24's "distributors" as well. The Plaintiff in the
Florida litigation informed EchoStar that it considered EchoStar a "distributor"
and has since threatened EchoStar with litigation.
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. CBS and other broadcast networks have informed EchoStar
that they believe EchoStar's method of providing distant network programming
violates the SHVA and hence infringes their copyright.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four major
networks. In the future, EchoStar may attempt to certify a class including the
networks as well as any and all owned and operated stations and any independent
affiliates. EchoStar has asked the court to enter a judgment declaring that
EchoStar's method of providing distant network programming does not violate the
SHVA and hence does not infringe the networks' copyrights.
Certain national television broadcast networks (and their local affiliates)
have threatened to file counter-claims or separate lawsuits against EchoStar for
both the retransmission of local-into-local and distant-into-local signals.
While to date EchoStar has not been served with a complaint, recent press
reports indicate that a lawsuit may have been filed in Miami by the networks and
their affiliates against EchoStar. 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 could be required to terminate delivery of network
signals to a material portion of its subscriber base. Further restrictions on
the sale of network channels imposed in the future could result in decreases in
subscriber activations and subscription television services revenue and an
increase in subscriber churn.
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.
17
