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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 333-31929
EchoStar DBS Corporation
(Exact Name of Registrant as Specified in its Charter)
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
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No_____
As of August 12, 1999, Registrant's outstanding common stock consisted of
1,000 shares of Common Stock.
The Registrant meets the conditions set forth in General Instruction
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the
reduced disclosure format.
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<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and June 30, 1999 (Unaudited)............ 1
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998
and 1999 (Unaudited)....................................... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1999 (Unaudited)........ 3
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 4
Item 2. Management's Narrative Analysis of Results of Operations.... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... None
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 19
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............................ 21
* 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.
</TABLE>
<PAGE>
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
___________________________
Assets (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................. $ 25,308 $ 202,402
Marketable investment securities.......... 7,000 86,309
Trade accounts receivable, net of allowance
for uncollectible accounts of $2,996 and
$3,359, respectively..................... 107,743 111,447
Insurance receivable...................... - 106,000
Inventories............................... 76,708 74,893
Other current assets...................... 24,823 13,861
___________________________
Total current assets.......................... 241,582 594,912
Restricted Assets:
Interest and satellite escrows and other
restricted cash and marketable investment
securities............................... 77,657 -
Insurance receivable...................... 106,000 -
___________________________
Total restricted assets....................... 183,657 -
Property and equipment, net................... 853,818 1,326,917
FCC authorizations, net....................... 103,266 727,058
Deferred tax assets........................... 60,638 64,190
Other noncurrent assets....................... 27,212 31,006
___________________________
Total assets.......................... $1,470,173 $ 2,744,083
===========================
Liabilities and Stockholder's Equity (Deficit)
Current Liabilities:
Trade accounts payable.................... $ 90,562 $ 110,717
Deferred revenue.......................... 132,857 148,358
Accrued expenses.......................... 176,158 288,651
Advances from affiliates, net............. 54,805 257,068
Current portion of long-term debt......... 22,679 20,901
___________________________
Total current liabilities..................... 477,061 825,695
Long-term obligations, net of current portion:
1994 Notes................................ 571,674 1,503
1996 Notes................................ 497,955 1,097
1997 Notes................................ 375,000 15
Seven Year Notes.......................... - 375,000
Ten Year Notes............................ - 1,625,000
Mortgages and other notes payable, net
of current portion....................... 43,450 33,274
Notes payable to ECC, including
accumulated interest..................... 59,812 -
Long-term deferred satellite services
revenue and other long-term liabilities.. 33,358 54,157
___________________________
Total long-term obligations, net of
current portion.............................. 1,581,249 2,090,046
___________________________
Total liabilities..................... 2,058,310 2,915,741
Commitments and Contingencies (Note 8)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 1,000 shares
authorized, issued and outstanding....... - -
Additional paid-in capital................ 145,164 1,269,484
Accumulated deficit....................... (733,301) (1,441,142)
___________________________
Total stockholder's equity (deficit).......... (588,137) (171,658)
___________________________
Total liabilities and stockholder's
equity (deficit)..................... $1,470,173 $ 2,744,083
===========================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
__________________ _________________
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenue:
DISH Network:
Subscription television
services...................... $151,527 $306,023 $280,068 $566,824
Other.......................... 3,238 2,243 9,422 4,508
____________________ __________________
Total DISH Network............... 154,765 308,266 289,490 571,332
DTH equipment sales and
integration services............ 80,050 25,315 146,866 56,508
Satellite services............... 5,774 9,499 10,369 17,320
C-band and other................. 5,575 6,930 13,463 14,913
____________________ __________________
Total revenue...................... 246,164 350,010 460,188 660,073
Costs and Expenses:
DISH Network Operating Expenses:
Subscriber-related expenses.... 69,388 133,857 133,197 245,017
Customer service center and
other......................... 14,369 25,266 26,102 49,375
Satellite and transmission..... 5,460 10,859 10,712 20,305
____________________ __________________
Total DISH Network operating
expenses........................ 89,217 169,982 170,011 314,697
Cost of sales DTH equipment
and integration services........ 53,749 18,803 101,000 41,946
Cost of sales C-band and
other........................... 3,282 3,384 9,224 7,434
Marketing:
Subscriber promotion
subsidies..................... 59,993 146,110 104,828 276,827
Advertising and other.......... 9,338 8,948 17,587 20,629
___________________ __________________
Total marketing expenses......... 69,331 155,058 122,415 297,456
General and administrative....... 23,172 30,812 42,466 59,444
Amortization of subscriber
acquisition costs............... 5,884 - 16,855 -
Depreciation and amortization.... 18,635 25,256 37,005 49,818
___________________ __________________
Total costs and expenses........... 263,270 403,295 498,976 770,795
___________________ __________________
Operating loss..................... (17,106) (53,285) (38,788) (110,722)
Other Income (Expense):
Interest income.................. 2,792 4,680 6,151 8,046
Interest expense, net of amounts
capitalized..................... (37,996) (48,799) (76,656) (99,393)
Other............................ (700) (8,510) (807) (8,363)
___________________ __________________
Total other income (expense)....... (35,904) (52,629) (71,312) (99,710)
___________________ __________________
Loss before income taxes........... (53,010) (105,914) (110,100) (210,432)
Income tax provision, net.......... (112) (22) (283) (88)
___________________ __________________
Net loss before extraordinary
charges........................... (53,122) (105,936) (110,383) (210,520)
Extraordinary charge for early
retirement of debt, net of tax.... - - - (228,733)
___________________ __________________
Net loss........................... $(53,122) $(105,936)$(110,383) $(439,253)
=================== ==================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ECHOSTAR DBS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
_________________________
1998 1999
_________________________
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss....................................... $(110,383) $(439,253)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Extraordinary charge for early retirement
of debt................................... - 228,733
Loss on disposal of assets................. - 8,378
Depreciation and amortization.............. 37,005 49,818
Amortization of subscriber acquisition
costs..................................... 16,855 -
Interest on notes payable to ECC added
to principal.............................. 2,586 330
Amortization of debt discount and deferred
financing costs........................... 56,387 11,778
Change in reserve for excess and obsolete
inventory................................. 17 (383)
Change in long-term deferred satellite
services revenue and other long-term
liabilities............................... 6,159 20,799
Changes in current assets and current
liabilities............................... (4,162) 157,179
__________________________
Net cash flows from operating activities....... 4,464 37,379
Cash Flows From Investing Activities:
Purchases of marketable investment
securities.................................... (1,970) (178,133)
Sales of marketable investment securities...... 5,868 98,824
Funds released from escrow and restricted
cash and marketable investment securities..... 74,735 77,657
Investment earnings placed in escrow........... (4,081) -
Purchases of property and equipment............ (102,362) (31,785)
Other.......................................... 879 160
___________________________
Net cash flows from investing activities....... (26,931) (33,277)
Cash Flows From Financing Activities:
Advances from affiliates....................... 4,593 202,263
Proceeds from issuance of Seven Year Notes..... - 375,000
Proceeds from issuance of Ten Year Notes....... - 1,625,000
Debt issuance costs and prepayment premiums.... - (233,452)
Retirement of 1994 Notes....................... - (575,674)
Retirement of 1996 Notes....................... - (501,350)
Retirement of 1997 Notes....................... - (378,110)
Capital contribution to ECC.................... - (268,588)
Repayment of notes payable to ECC.............. - (60,142)
Repayments of mortgage indebtedness and
notes payable................................. (8,167) (11,954)
___________________________
Net cash flows from financing activities....... (3,574) 172,993
___________________________
Net (decrease) increase in cash and cash
equivalents................................... (26,041) 177,095
Cash and cash equivalents, beginning of
period........................................ 62,059 25,308
___________________________
Cash and cash equivalents, end of period....... $ 36,018 $ 202,403
===========================
Supplemental Disclosure of Cash Flow Information:
Capitalized interest, including amounts due
from affiliates.............................. $ 17,868 $ -
Accrued capital expenditures.................. 16,050 -
Satellite vendor financing.................... 12,950 -
Assets acquired from News Corporation and MCI:
FCC licenses and other...................... - 626,120
Satellites.................................. - 451,200
Digital broadcast operations center......... - 47,000
Capital contribution from ECC................. - 1,124,320
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business Activities
Principal Business
EchoStar DBS Corporation ("DBS Corp," or the "Company"), is a wholly-owned
subsidiary of EchoStar Communications Corporation ("ECC" and together with its
subsidiaries "EchoStar"), a publicly traded company on the Nasdaq National
Market. During March 1999, EchoStar received approval from the Federal
Communications Commission ("FCC") to reorganize certain of its direct and
indirect wholly-owned subsidiaries in order to streamline its organization and
operations. During the first quarter of 1999, EchoStar placed ownership of
all of its direct broadcast satellites and related FCC licenses into EchoStar
Satellite Corporation ("ESC"). DirectSat Corporation, Direct Broadcasting
Satellite Corporation ("DBSC") and EchoStar Space Corporation ("Space") were
merged into ESC. Dish, Ltd., and EchoStar Satellite Broadcasting Company
("ESBC") were merged into the Company. EchoStar IV and the related FCC
licenses were transferred to ESC. The accompanying financial statements
retroactively reflect this reorganization.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include ECC, DBS Corp and all direct and
indirect wholly-owned subsidiaries thereof. DBS Corp's management refers
readers of this Quarterly Report on Form 10-Q to EchoStar's Quarterly Report
on Form 10-Q for the six months ended June 30, 1999. Substantially all of
EchoStar's operations are conducted by subsidiaries of DBS Corp. The
operations of EchoStar include three interrelated business units:
* The DISH Network a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1999,
EchoStar had approximately 2.6 million DISH Network subscribers.
* EchoStar Technologies Corporation ("ETC") engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other
digital equipment for the DISH Network ("EchoStar receiver systems"),
and the design 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 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 centers, 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 United States to provide
consumers with a fully competitive alternative to cable television service.
Recent Developments
On June 24, 1999, EchoStar acquired certain high-power DBS assets from
The News Corporation Limited ("News Corporation") and MCI Telecommunications
Corporation/WorldCom ("MCI") in exchange for shares of its Class A common
stock (the "110 Acquisition"). A total of 8,603,116 pre-split shares of
EchoStar Class A common stock were issued, valued at approximately $1.12
billion, at the date of issuance. The original purchase price was reduced by
approximately $45.6 million. The reduction consisted of $30 million as
compensation to EchoStar in exchange for the elimination of a commitment by an
affiliate of News Corporation to purchase a minimum of 500,000 set-top boxes
from ETC, and approximately $15.6 million of commitments assumed by EchoStar
related to the build-out of the digital broadcast center in Gilbert, Arizona.
The primary assets acquired by EchoStar from News and MCI in the transaction
are:
4
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
* the rights to 28 DBS frequencies at the 110 degrees West Longitude
("WL") orbital location;
* two DBS satellites ("EchoStar V" and "EchoStar VI") to be delivered
in-orbit (including construction, launch and insurance costs), and
currently expected to be launched in September 1999 and December 1999
or January 2000, respectively;
* a recently-constructed digital broadcast operations center located
in Gilbert, Arizona;
* a worldwide license from NDS Limited to use certain technology in
connection with the manufacture and distribution of set-top boxes
intended for use with the services of certain network operators; and
* a three-year retransmission consent agreement for the DISH Network
to rebroadcast FOX Broadcasting Company's local station signals in
those markets where FOX owns the local affiliate.
Beneficial interest in the assets and rights acquired by EchoStar in the
110 Acquisition were transferred to the Company promptly after closing.
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 six months ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999. For further information, refer to the combined and consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998. Certain prior year
amounts have been reclassified to conform with the current year presentation.
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.
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
December 31, June 30,
1998 1999
_______________________________
(Unaudited)
<S> <C> <C>
DBS receiver components.......... $ 27,050 $ 31,665
EchoStar receiver systems........ 45,025 30,113
Consigned DBS receiver
components...................... 6,073 12,931
Finished goods - analog DTH
equipment....................... 2,656 3,617
Spare parts and other............ 1,085 1,365
Reserve for excess and obsolete
inventory....................... (5,181) (4,798)
________________________________
$ 76,708 $ 74,893
================================
</TABLE>
5
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
December 31, June 30,
1998 1999
_______________________________
(Unaudited)
<S> <C> <C>
EchoStar I....................... $ 201,607 $ 201,607
EchoStar II...................... 228,694 228,694
EchoStar III..................... 234,083 234,083
EchoStar IV...................... 105,005 105,005
Furniture, fixtures and
equipment....................... 182,717 209,710
Buildings and improvements....... 42,121 39,180
Tooling and other................ 5,551 5,613
Land............................. 1,640 1,640
Vehicles......................... 1,288 1,312
Construction in progress......... 18,329 514,154
_______________________________
Total property and equipment.. 1,021,035 1,540,998
Accumulated depreciation......... (167,217) (214,081)
_______________________________
Property and equipment, net... $ 853,818 $ 1,326,917
</TABLE>
Construction in progress consists of the following (in thousands):
<TABLE>
December 31, June 30,
1998 1999
_______________________________
(Unaudited)
<S> <C> <C>
Progress amounts for satellite
construction, launch, and launch
insurance:
EchoStar V......................... $ $ 243,100
EchoStar VI........................ - 208,100
Digital broadcast operations center... - 47,000
Other................................. 18,329 15,954
_____________________________
$ 18,329 $ 514,154
=============================
</TABLE>
5. EchoStar IV
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch on May 8, 1998. This anomaly
resulted in a reduction of power available to operate the satellite and
accelerated consumption of fuel. Available power will continue to decline
over the next several years, resulting in continuing reductions in the number
of available transponders. Approximately 16 transponders should be available
for the entire life of the satellite. In addition, an unrelated anomaly
discovered during the third quarter of 1998 resulted in the failure of six
transponders during 1998. The satellite is equipped with a total of 44
transponders. In September 1998, EchoStar filed a $219.3 million insurance
claim for a total constructive loss (as defined in the launch insurance
policy) related to EchoStar IV. That claim is pending.
During May 1999, EchoStar IV experienced anomalies affecting
transponders, heating systems and the fuel system. In July 1999, prior to
arriving at the 110 degrees WL orbital location, additional fuel system
anomalies were confirmed. The recent anomalies have not caused material
reductions in functionality to date. While there can be no assurance, we do
not currently expect a material adverse impact on short or medium term
satellite operations. It is not yet possible to conclude whether these
anomalies will result in further reductions of satellite functionality or
useful life in the future. We have not completed our assessment of the
6
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
additional impairment, if any, to EchoStar IV, but we currently continue to
believe that insurance proceeds will be sufficient to offset all write-downs
of satellite assets that might ultimately be necessary because of lost
functionality caused by anomalies and consequences of which we are currently
aware. However, we can provide no assurance as to the ultimate amount that
may be received from the insurance claim, or that coverage will be available.
We will continue to evaluate the performance of EchoStar IV and may modify our
loss assessment as new events or circumstances develop.
As a result of the recent anomalies that EchoStar IV experienced, we
have instructed our broker to notify our insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite on May 8, 1998 through May 8,
1999. Due to the anomalies that EchoStar IV experienced and the pending claim
for a total constructive loss, we did not obtain in-orbit insurance on
EchoStar IV. Consequently, in the event we do not resolve our pending
insurance claim to our satisfaction, EchoStar IV will not be insured if
further losses occur in the future.
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
December 31, June 30,
1998 1999
_______________________________
(Unaudited)
<S> <C> <C>
Interest.......................... $ 24,918 $ 82,000
Royalties and copyright fees...... 49,400 66,523
Programming....................... 35,472 52,846
Marketing......................... 33,463 51,160
Other............................. 32,905 36,122
_______________________________
$ 176,158 $ 288,651
===============================
</TABLE>
7. Long-Term Debt
On January 25, 1999, the Company sold $375 million principal amount of
9 1/4% Senior Notes due 2006 (the "Seven Year Notes") and $1.625 billion
principal amount of 9 3/8% Senior Notes due 2009 (the "Ten Year Notes," and
together with the Seven Year Notes, the "Notes"). Concurrent with the closing
of these offerings, the Company used approximately $1.658 billion of net
proceeds received from the sale of the Notes to complete tender offers for the
outstanding 12 7/8% Senior Secured Discount Notes due June 1, 2004 issued by
Dish, Ltd. ("the 1994 Notes"), the 13 1/8% Senior Secured Discount Notes due
2004 issued by ESBC ("the 1996 Notes") and the 121/2% Senior Secured Notes due
2002 issued by the Company ("the 1997 Notes"). In February 1999, ECC used
approximately $268 million of net proceeds received from the sale of the Notes
to complete a tender offer related to the 12 1/8% Senior Preferred Exchange
Notes due 2004, issued on January 4, 1999, in exchange for all of its issued
and outstanding 12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock. Substantially all of the restrictive covenants contained in each of
the respective indentures were removed upon closing of the tender offers. The
consummation of the tender offers resulted in a one-time extraordinary charge
to the Company's net income of $229 million (approximately $203 million of
tender premiums and consent fees and approximately $26 million associated with
the write-off of unamortized deferred financing costs and other transaction-
related costs).
8. Commitments and Contingencies
The News Corporation Limited
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other thing, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under this agreement. Those substantial
7
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
disagreements led to litigation which the parties subsequently settled. In
connection with the News Corporation litigation that arose in 1997, EchoStar
has a contingent fee arrangement with its attorneys, which provides for the
attorneys to be paid a percentage of any net recovery obtained in its dispute
with News Corporation. The attorneys have asserted that they may be entitled
to receive payments in excess of $80 million to $100 million under this fee
arrangement in connection with the settlement of the dispute with News
Corporation. EchoStar intends to vigorously contest the attorneys'
interpretation of the fee arrangement, which EchoStar believes significantly
overstates the magnitude of its liability. If the attorneys and EchoStar are
unable to resolve this fee dispute under the fee arrangement, the fee dispute
would be resolved through arbitration or litigation. It is too early to
determine the outcome of this fee dispute.
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, United
States Satellite Broadcasting Company, Inc., EchoStar, and two of EchoStar's
wholly-owned subsidiaries. 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 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 and Echosphere Corporation, a wholly-owned subsidiary
of EchoStar. 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 $175 million. It is too early to determine whether or when
any other lawsuits 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 authorizes EchoStar to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as consumers
who, among other things, "cannot receive, through the use of a conventional
outdoor rooftop receiving antenna, an over-the-air signal of Grade B
intensity, as defined by the FCC, of a primary network station affiliated with
that network." Historically, EchoStar obtained distant broadcast network
signals for distribution to its customers through PrimeTime 24, Joint Venture
("PrimeTime 24"). PrimeTime 24 also distributed network signals to certain of
EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. The United States District Court for the Southern
District of Florida entered a nationwide permanent injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
injunction covers "distributors" as well. The plaintiffs in the Florida
litigation informed EchoStar that they considered EchoStar to be a
"distributor" for purposes of that injunction. A federal district court in
North Carolina has also issued an injunction against PrimeTime 24 prohibiting
certain distant signal retransmissions in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
8
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by EchoStar.
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. EchoStar asked the court to enter a judgment declaring that
its method of providing distant network programming does not violate the
Satellite Home Viewer Act and hence does not infringe the networks'
copyrights. On November 5, 1998, the four major broadcast networks and their
affiliate groups filed a complaint against EchoStar in federal court in Miami
alleging, among other things, copyright infringement. The plaintiffs in that
action have also requested the issuance of a preliminary injunction against
EchoStar. The case filed by EchoStar was subsequently transferred to the
Florida courts.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. ("DIRECTV") in Miami relating to the delivery of distant
network channels to DIRECTV customers by satellite. On March 12, 1999,
DIRECTV and the four networks announced that they had reached a settlement of
that dispute. Under the terms of the settlement, DIRECTV customers predicted
to receive a strong signal of Grade A intensity from their local stations will
lose access to their satellite provided network channels by July 31, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal of Grade B intensity from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all providers
of satellite delivered network programming other than EchoStar agreed to this
cut off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that court to enjoin EchoStar from providing
network programming except under very limited circumstances. In general, the
networks want EchoStar to turn off programming to its customers on the same
schedule agreed to by DIRECTV. EchoStar intends to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to
EchoStar in this case, significant material restrictions on the sale of
distant ABC, NBC, CBS and Fox channels 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. While the Networks have not sought
monetary damages, they have sought to recover attorney fees if they prevail.
EchoStar has commenced sending letters to some of its subscribers warning that
their access to distant broadcast network channels might be terminated this
year. Such terminations would result in a small reduction in average monthly
revenue per subscriber. While there can be no assurance, any such decrease
could be offset by increases in average monthly revenue per subscriber
resulting from the delivery of local network channels by satellite, and
increases in programming offerings that will follow the scheduled launches of
EchoStar V and EchoStar VI later this year. While there can be no assurance,
legislation pending in the Senate would, if passed into law, reduce the number
of customers whose network channels EchoStar might otherwise be required to
terminate.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the Company's financial position or results of operations.
Meteoroid Events
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). EchoStar
believes that its DBS satellites did not incur any significant damage as a
result of these events. Similar meteoroid events are expected to occur again
in November 1999. These meteoroid events continue to 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 the November 1999 meteoroid events. EchoStar is
presently evaluating the potential effects that the November 1999 meteoroid
events may have on its DBS satellites. While there can be no assurance, due
9
<PAGE>
ECHOSTAR DBS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
to its significant satellite capacity, EchoStar is relatively well positioned
to avoid any interruption of service due to any potential damage resulting
from these meteoroid events.
9. Segment Reporting
The Company adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements of public business enterprises and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders.
<TABLE>
Elim- EchoStar DBS Corp,
nations Consoli- Other Affiliates
Dish Satellite and dated EchoStar And
Network ETC Services Other Total Activity Subsidiaries
________ _____ ________ _____ ______ _________ __________
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 1998
Revenue...... $305,158 $141,247 $10,794 $3,078 $460,277 $(89) $460,188
Net income
(loss)...... (75,195) 19,579 9,480 (49,467) (95,603)(14,780) (110,383)
Six Months Ended
June 30, 1999
Revenue...... $593,988 $49,405 $23,158 $(7,309) $659,242 $831 $660,073
Net income (loss)
before
extraordinary
charges....... (203,113) (7,018) 12,183 18,487 (179,461)(31,059) (210,520)
</TABLE>
10
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors
or employees acting on our 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 our actual results 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 our actual results to differ
materially are the following: a total or partial loss of a satellite due to
operational failures, space debris or otherwise; an unsuccessful launch or
deployment of our fifth or sixth satellite, EchoStar V and EchoStar VI,
respectively; a decrease in sales of digital equipment and related services to
international direct-to-home or DTH service providers; a decrease in DISH
Network subscriber growth; an increase in subscriber turnover; an increase in
subscriber acquisition costs; impediments to the retransmission of local or
distant broadcast network signals which could result from pending litigation
or legislation; lower than expected demand for our delivery of local broadcast
network signals; an unexpected business interruption due to the failure of
third-parties to remediate Year 2000 issues; our inability to retain necessary
authorizations from the FCC; an increase in competition from cable, direct
broadcast satellite, other satellite system operators, and other providers of
subscription television services; the introduction of new technologies and
competitors into the subscription television business; a change in the
regulations governing the subscription television service industry; the
outcome of any litigation in which we may be involved; general business and
economic conditions; and other risk factors described from time to time in our
reports filed with the Securities and Exchange Commission. 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 and
should not place undue reliance on any forward-looking statements.
Results of Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998.
Revenue. Total revenue for the three months ended June 30, 1999 was
$350 million, an increase of $104 million compared to total revenue for the
three months ended June 30, 1998 of $246 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth,
partially offset by a decrease in EchoStar Technologies Corporation's or ETC's
DTH equipment sales and integration services revenue. We expect that our
revenues will continue to increase as the number of DISH Network subscribers
increases.
DISH Network subscription television services revenue totaled
$306 million for the three months ended June 30, 1999, an increase of
$154 million or 102% compared to the same period in 1998. This increase was
directly attributable to the increase in the number of DISH Network
subscribers and higher average revenue per subscriber. Average DISH Network
subscribers for the three months ended June 30, 1999 increased approximately
89% compared to the same period in 1998. As of June 30, 1999, we had
approximately 2.6 million DISH Network subscribers compared to 1.4 million at
June 30, 1998. Monthly revenue per subscriber approximated $42 and $39 during
the three months ended June 30, 1999 and 1998, respectively. 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 will continue to increase to the
extent we are successful in increasing the number of DISH Network subscribers
and maintaining or increasing revenue per subscriber.
For the three months ended June 30, 1999, DTH equipment sales and
integration services totaled $25 million, a decrease of $55 million compared
to 1998. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment by us to international DTH
service operators. We currently have agreements to provide equipment to DTH
service operators in Spain and Canada. This decrease in DTH equipment sales
and integration services revenue, which was expected, was primarily
attributable to decreased shipments to the Spanish DTH service operator as a
result of lower demand.
11
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
Substantially all of our ETC revenues have resulted from sales to two
international DTH providers. As a result, our ETC business currently is
economically dependent on these two DTH providers. Our 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
our digital set-top boxes. Due to the continued decrease in the sales price
of digital set-top boxes and increasing competition, we expect that our DTH
equipment and integration services revenue for the year ended December 31,
1999 may decline as much as 50% as compared to 1998. Although we continue to
actively pursue additional distribution and integration service opportunities
internationally, no assurance can be given that any such efforts will be
successful.
During July 1998, Telefonica, one of the two DTH service providers
described above, announced its intention to merge with Sogecable (Canal Plus
Satellite), one of its primary competitors. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite were resumed and
again suspended. Currently, we do not expect that merger negotiations will
resume. Although we have binding purchase orders from Telefonica for 1999
deliveries of DTH equipment, we cannot yet predict the impact, if any,
eventual consummation of this often discussed merger might have on our future
sales to Telefonica.
Satellite services revenue totaled $9 million during the three months
ended June 30, 1999, an increase of $3 million as compared to the same period
during 1998. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time BTV
customers. Satellite services revenue is expected to increase during the
remainder of 1999 to the extent we are successful in increasing the number of
our BTV customers and developing and implementing new services.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning that
their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber. While there can be no assurance, any
such decreases could be offset by increases in average monthly revenue per
subscriber resulting from the delivery of local network channels by satellite,
and increases in programming offerings that will follow the scheduled launches
of EchoStar V and EchoStar VI later this year. While there can be no
assurance, legislation pending in the Senate would, if passed into law, reduce
the number of customers whose network channels we may otherwise be required to
terminate.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$170 million during the three months ended June 30, 1999, an increase of
$81 million or 91%, compared to the same period in 1998. 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 56% and 59% of subscription television services
revenue during the three months ended June 30, 1999 and 1998, respectively.
Subscriber-related expenses totaled $134 million during the three months
ended June 30, 1999, an increase of $65 million compared to the same period in
1998. Such expenses, which include programming expenses, copyright royalties,
residuals payable to retailers and distributors, and billing, lockbox and
other variable subscriber expenses, represented 44% of subscription television
services revenues during the three months ended June 30, 1999 compared to 46%
during the same period in 1998. The decrease in this expense to revenue ratio
resulted from subscription television services revenue increasing at a greater
rate than subscriber-related expenses, due to greater premium channel
penetration and subscription price increases. Although we do not currently
expect subscriber-related expenses as a percentage of subscription television
services revenue to increase materially in future periods, there can be no
assurance this expense to revenue ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our 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 $25 million during the three months ended June 30, 1999, an
increase of $11 million as compared to the same period in 1998. The increase
12
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
in customer service center and other expenses resulted from increased
personnel and telephone expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 8% of subscription
television services revenue during the three months ended June 30, 1999, as
compared to 9% during the same period in 1998. Although we do not expect
customer service center and other expenses as a percentage of subscription
television services revenue to increase materially in future periods, there
can be no assurance this expense to revenue ratio will not materially
increase.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite
and transmission expenses totaled $11 million during the three months ended
June 30, 1999, a $6 million increase compared to the same period in 1998.
This increase resulted from higher satellite and other digital broadcast
center operating expenses due to an increase in the number of operational
satellites. We expect satellite and transmission expenses to continue to
increase in the future as additional satellites or digital broadcast centers
are placed in service. Satellite and transmission expenses totaled 4% of
subscription television services revenue during the three months ended June
30, 1999 and 1998. We expect this expense to revenue ratio to decline to the
extent we are successful in increasing the number of DISH Network subscribers
and maintaining or increasing revenue per subscriber.
Cost of sales DTH equipment and Integration Services. Cost of sales
DTH equipment and integration services totaled $19 million during the three
months ended June 30, 1999, a decrease of $35 million compared to the same
period in 1998. This decrease is consistent with the decrease 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. Cost of sales DTH equipment
and integration services represented 74% and 67% of DTH equipment revenue,
during the three months ended June 30, 1999 and 1998, respectively. We expect
that cost of sales DTH equipment and integration services may increase as a
percentage of DTH equipment revenue in the future, due to price pressure
resulting from increased competition from other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $155 million during the
three months ended June 30, 1999, an increase of $86 million or 124%, compared
to the same period in 1998. The increase in marketing expenses was primarily
attributable to an 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. Advertising
and other expenses totaled $9 million during each of the three months ended
June 30, 1999 and 1998.
During the three months ended June 30, 1999, our subscriber acquisition
costs, inclusive of acquisition marketing expenses, totaled $151 million, or
approximately $365 per new subscriber activation. Comparatively, our
subscriber acquisition costs during the three months ended June 30, 1998,
inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $66 million, or approximately $280 per new
subscriber activation. The increase in our subscriber acquisition costs, on a
per new subscriber activation basis, principally resulted from the
introduction of several aggressive marketing promotions to acquire new
subscribers.
During the second quarter of 1999, we introduced the C-band bounty
program, continued our PrimeStar bounty program and further enhanced our DISH
Network One-Rate Plan. Our subscriber acquisition costs under these programs
are significantly higher than those under our other marketing programs. Under
the enhanced DISH Network One-Rate Plan, consumers are eligible to receive a
rebate that ranges from $100 up to $299 on the purchase of certain EchoStar
receiver systems. To be eligible for this rebate, a subscriber must make a
one-year commitment to subscribe to our America's Top 100 CD programming
package plus additional channels. The amount of the monthly programming
commitment determines the amount of the rebate. Although subscriber
acquisition costs are materially higher under this plan compared to previous
promotions, DISH Network One-Rate Plan customers generally provide materially
greater average revenue per subscriber than a typical DISH Network subscriber.
In addition, we believe that these customers represent lower credit risk and
therefore may be marginally less likely to disconnect their service than other
DISH Network subscribers. Under the enhanced DISH Network One-Rate Plan, we
presently expect the participation rate to remain at approximately 30% of new
subscriber activations during the duration of the promotion. To the extent
that actual consumer participation levels exceed present expectations,
13
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
subscriber acquisition costs may materially increase. Although there can be
no assurance as to the ultimate duration of the DISH Network One-Rate Plan, it
will continue through at least September 1999.
Under our bounty programs, current C-band and PrimeStar customers are
eligible to receive a free base-level EchoStar receiver system, free
installation and six months of our America's Top 40 programming (which retails
for $19.99 per month) without charge. A subscriber must make a one-year
commitment to subscribe to either our America's Top 40 or our America's Top
100 CD programming package and prove that they are a current C-band or
PrimeStar customer to be eligible for this program.
Based upon our current promotions we expect a modest increase in average
subscriber acquisition costs during the remainder of 1999. However our
subscriber acquisition costs, both in aggregate and on a per new subscriber
activation basis, may materially increase to the extent that we expand our
bounty programs or the DISH Network One-Rate Plan, or if we determine that
more aggressive promotions are necessary to respond to competition, or for
other reasons.
General and Administrative Expenses. General and administrative expenses
totaled $31 million during the three months ended June 30, 1999, an increase
of $8 million as compared to the same period in 1998. 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 represented 9% during each of the three months ended June 30, 1999 and
1998. Although we expect G&A expenses as a percentage of total revenue to
remain near this level or decline modestly in future periods, this expense to
revenue ratio could increase.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash deferred compensation. EBITDA was negative
$26 million during the three months ended June 30, 1999 compared to $2 million
during the three months ended June 30, 1998. EBITDA, as adjusted to exclude
amortization of subscriber acquisition costs, was negative $26 million for the
three months ended June 30, 1999 compared to $7 million for the same period in
1998. This decline in EBITDA principally resulted from a decrease in DTH
equipment revenue and an increase in subscriber promotion subsidies. It is
important to note that EBITDA does not represent cash provided or used by
operating activities. Further, our calculation of EBITDA for the three months
ended June 30, 1999 does not include approximately $1.7 million of non-cash
compensation resulting from appreciation of stock options granted to
employees. EBITDA should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our
EBITDA results will be negatively impacted because subscriber acquisition
costs are expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses,
excluding amortization of subscriber acquisition costs, aggregated $25 million
during the three months ended June 30, 1999, a $6 million increase compared to
the same period in 1998. This increase principally resulted from an increase
in depreciation related to the commencement of operation of EchoStar IV in
August of 1998 and other depreciable assets placed in service during 1998.
Amortization of subscriber acquisition costs totaled $6 million during the
three months ended June 30, 1998. These costs became fully amortized during
the third quarter of 1998, as we began expensing subscriber acquisition costs
at the time of sale during October 1997.
Other Income and Expense. Other expense, net totaled $53 million during
the three months ended June 30, 1999, an increase of $17 million compared to
the same period in 1998. This increase was primarily the result of a loss on
disposal of assets and an increase in interest expense. In January 1999, we
refinanced our outstanding 12 1/2% Senior Secured Notes due 2002 issued in
June 1997, referred to herein as the 1997 notes; our 12 7/8% Senior Secured
Discount Notes due 2004 issued in 1994, referred to herein as the 1994 notes;
and our 13 1/8% Senior Secured Discount Notes due 2004 issued in 1996,
referred to herein as the 1996 notes, at more favorable interest rates and
terms. In connection with the refinancing, we consummated an offering of
9 1/4% Senior Notes due 2006, referred to herein as the seven year notes, and
9 3/8% Senior Notes due 2009, referred to herein as the ten year notes.
Although the seven and ten year notes have lower interest rates than the debt
securities we repurchased, interest expense increased by approximately $11
14
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
million because we raised additional debt to cover tender premiums and consent
and other fees related to the refinancing.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998.
Revenue. Total revenue for the six months ended June 30, 1999 was
$660 million, an increase of $200 million compared to total revenue for the
six months ended June 30, 1998 of $460 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth and higher
average revenue per subscriber.
DISH Network subscription television services revenue totaled
$567 million for the six months ended June 30, 1999, an increase of
$287 million or 102% compared to the same period in 1998. This increase was
directly attributable to the increase in the number of DISH Network
subscribers and higher average revenue per subscriber. Average DISH Network
subscribers for the six months ended June 30, 1999 increased approximately 88%
compared to the same period in 1998.
For the six months ended June 30, 1999, DTH equipment sales and
integration services totaled $57 million, a decrease of $90 million compared
to 1998. This expected decrease in DTH equipment sales and integration
services revenue was primarily attributable to a decrease in demand combined
with a decrease in the sales price of digital set-top boxes attributable to
increased competition.
Satellite services revenue totaled $17 million during the six months
ended June 30, 1999, an increase of $7 million as compared to the same period
during 1998. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time BTV
customers.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$315 million during the six months ended June 30, 1999, an increase of
$145 million or 85%, compared to the same period in 1998. 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 56% and 61% of subscription television
services revenue during the six months ended June 30, 1999 and 1998,
respectively.
Subscriber-related expenses totaled $245 million during the six months
ended June 30, 1999, an increase of $112 million compared to the same period
in 1998. Such expenses represented 43% of subscription television services
revenues during the six months ended June 30, 1999 compared to 48% during the
same period in 1998. The decrease in this expense to revenue ratio resulted
from subscription television services revenue increasing at a greater rate
than subscriber-related expenses, due to greater premium channel penetration
and subscription price increases. Although we expect subscriber-related
expenses as a percentage of subscription television services revenue to remain
near this level in future periods, this expense to revenue ratio could
increase.
Customer service center and other expenses totaled $49 million during the
six months ended June 30, 1999, an increase of $23 million as compared to the
same period in 1998. The increase in customer service center and other
expenses resulted from increased personnel and telephone expenses to support
the growth of the DISH Network. Customer service center and other expenses
totaled 9% of subscription television services revenue during each of the six
months ended June 30, 1999 and 1998.
Satellite and transmission expenses totaled $20 million during the six
months ended June 30, 1999, a $9 million increase compared to the same period
in 1998. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites. Satellite and transmission expenses represented 4% of
subscription television services revenue during the six months ended
June 30, 1999 and 1998.
Cost of sales DTH equipment and Integration Services. Cost of sales
DTH equipment and integration services totaled $42 million during the six
months ended June 30, 1999, a decrease of $59 million compared to the same
period in 1998. This decrease is consistent with the decrease in DTH
equipment revenue. Cost of sales DTH equipment and integration services
15
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
represented 74% of DTH equipment revenue during the six months ended
June 30, 1999 as compared to 69% during the same period in 1998.
Marketing Expenses. Marketing expenses totaled $297 million during the
six months ended June 30, 1999, an increase of $175 million or 143%, compared
to the same period in 1998. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Advertising
and other expenses totaled $21 million during the six months ended June 30,
1999, an increase of $3 million over the same period in 1998.
During the six months ended June 30, 1999, our subscriber acquisition
costs, inclusive of acquisition marketing expenses, totaled $293 million.
Comparatively, our subscriber acquisition costs during the six months ended
June 30, 1998, inclusive of acquisition marketing expenses and deferred
subscriber acquisition costs, totaled $102 million. The increase in our
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the introduction of several aggressive marketing
promotions to acquire new subscribers.
General and Administrative Expenses. General and administrative expenses
totaled $59 million during the six months ended June 30, 1999, an increase of
$17 million as compared to the same period in 1998. 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 totaled 9% during each of the six months ended June 30, 1999 and 1998.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and other non-cash deferred compensation. EBITDA was negative
$59 million and negative $2 million, during the six months ended June 30, 1999
and 1998, respectively. EBITDA, as adjusted to exclude amortization of
subscriber acquisition costs, was negative $59 million for the six months
ended June 30, 1999 compared to $15 million for the same period in 1998. This
decline in EBITDA principally resulted from a decrease in DTH equipment
revenue and an increase in subscriber promotion subsidies. It is important to
note that EBITDA does not represent cash provided or used by operating
activities. Further, our calculation of EBITDA for the six months ended June
30, 1999 does not include approximately $1.7 million of non-cash compensation
resulting from appreciation of stock options granted to employees. EBITDA
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $50 million during the six months ended June 30, 1999, a $4 million
decrease compared to the same period in 1998, during which subscriber
acquisition costs were amortized. The decrease in depreciation and
amortization expenses principally resulted from subscriber acquisition costs
becoming fully amortized during the third quarter of 1998, offset by an
increase in depreciation related to the commencement of operation of EchoStar
IV in August of 1998 and other depreciable assets placed in service during
1998.
Other Income and Expense. Other expense, net totaled $100 million during
the six months ended June 30, 1999, an increase of $29 million as compared to
the same period in 1998. This increase was primarily the result of a loss on
disposal of assets and an increase in interest expense associated with our
seven and ten year notes.
Year 2000 Readiness Disclosure
We have assessed and continue to assess the impact of the Year 2000 issue
on our 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. If our
Year 2000 remediation plan is not successful or is not completed in a timely
manner, the Year 2000 issue could significantly disrupt our ability to
transact business with our customers and suppliers, and could have a material
impact on our operations. Even if our Year 2000 remediation plan is
successful or completed on time, there can be no assurance that the systems of
other companies with which our systems interact will be timely converted, or
that any such failure to convert by another company would not have an adverse
effect on our business or operations.
16
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
We have established a five-phase plan to address potential Year 2000
issues:
* Inventory the identification of all relevant hardware and software
to establish the scope of subsequent testing;
* Assessment the process of evaluating the current level of Year 2000
readiness of all components identified in the inventory phase,
defining actions necessary to retire, replace or otherwise correct
all non-conforming components and estimating resources and timelines
required by action plans;
* Remediation the correction of previously identified Year 2000
issues;
* Validation/testing the evaluation of each component's performance
as the date is rolled forward to January 1, 2000 and other dates and
times relating to the Year 2000 issue; and
* Implementation the process of updating components and correcting
Year 2000 issues in the production operating environment of a system.
In connection with this effort, we have segregated our computer systems
and corresponding Year 2000 readiness risk into three categories: internal
financial and administrative systems, service-delivery systems, and third-
party systems.
Internal Financial and Administrative Systems
With respect to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We have also
completed the process of assessing these systems by communicating with our
outside software and hardware vendors and reviewing their certifications of
Year 2000 readiness, as well as reviewing internal custom programming codes.
Upon completion of the assessment phase, we began the remediation and
validation/testing phases. During the remediation phase, we will attempt to
correct all problems detected while performing the assessment phase. During
the validation/testing phase, we will create a parallel environment of all
internal and administrative systems. We will run tests on the parallel
environment to assess its reaction to changes in dates and times relating to
the Year 2000 issue. We currently expect the remediation and
validation/testing phases to be complete by the end of August 1999, for most
of our corporate systems.
Once all known problems are corrected within the parallel environment, we
will make changes to the actual operating environment of our internal
financial and administrative systems during the implementation phase. We
currently expect to complete the implementation phase by mid October 1999.
While we presently believe that our internal financial and administrative
systems are Year 2000 ready, we will not be able to certify our Year 2000
readiness until the successful completion of the implementation phase. As new
or enhanced technology and software are integrated into our financial and
administrative systems we will perform additional testing to attempt to ensure
continued Year 2000 readiness.
Service-Delivery Systems
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites and
third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware
and software changes that normally occur over time. This system gives us the
ability to perform "real-time" testing of the various elements of the system
by simulating the year 2000 rollover, and confirming system operation. This
ability to perform accurate offline simulations has provided a tremendous
benefit to our Year 2000 test process.
We have completed initial testing of our set-top receivers. During these
tests, the dates in the broadcast system, and hence the set-top receivers were
rolled forward to each of the dates and times affected by the Year 2000 issue.
We deemed these initial tests successful, as no problems were detected during
thorough testing of the set-top receivers when the dates were rolled forward.
These tests also affirm the integrity of the broadcast systems supplying the
17
<PAGE>
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS-Continued
set-top receivers with critical operational system information. As new
technology and software are integrated into our set-top receivers, we will
perform additional testing to attempt to ensure continued Year 2000 readiness.
In addition to the practical testing performed above, we have completed
an independent inventory and assessment of the systems at our digital
broadcast center and have substantially completed the remediation phase of our
Year 2000 readiness plan. We will continue to perform validation and testing
of communications within our digital broadcast center and expect to complete
this testing during the third quarter of 1999. The validation and testing of
our digital broadcast center is not expected to cause interruption of
programming to DISH Network subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do
not expect changes in dates and times to affect the operation of our DBS
satellites.
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has
indicated it has substantially completed all testing and remediation
activities on its core systems and is currently testing its custom interfaces.
The vendor has indicated it believes it is currently Year 2000 ready, however
we can not provide any assurance in this regard.
Third-Party Systems
We also are currently assessing our vulnerability to unexpected business
interruptions due to the failure of third-parties to remediate Year 2000
readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant
requesting that they certify their Year 2000 readiness. To date, we have
received responses from approximately 75% of these vendors. We are presently
in the process of contacting our critical suppliers and vendors who have
either not responded or have not responded adequately to our requests for
proof of certification and will continue to follow-up on unresolved issues
thereafter. There can be no assurance that third-parties who have responded,
or will respond, to our request regarding Year 2000 readiness have responded,
or will respond, accurately or satisfactorily, or that anticipated Year 2000
actions set forth in their responses will be properly conducted.
Contingency Planning
We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used
to try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we
will continue to contact our critical vendors in order to obtain certification
of their Year 2000 readiness. However, no assurance can be made that such
contingency plans will resolve any Year 2000 problems that may occur, in a
manner which is satisfactory or desirable to us.
Costs
We have not yet determined the full cost of our Year 2000 readiness plan
and its related impact on our financial condition. In the ordinary course of
business, we have made capital expenditures over the past few years to improve
our systems, for reasons other than Year 2000 remediation. Because these
upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted $300,000
for the completion of our Year 2000 readiness plan. While there can be no
assurance, we believe our costs to successfully mitigate the Year 2000 issue
will not be material to our operations. No assurance can be made, however, as
to the total cost for the Year 2000 plan until the plan has been completed.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The News Corporation Limited
During February 1997, our parent company and News Corporation announced
an agreement pursuant to which, among other thing, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of our parent
company. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under this agreement. Those substantial
disagreements led to litigation which the parties subsequently settled. In
connection with the News Corporation litigation that arose in 1997, our parent
company has a contingent fee arrangement with its attorneys, which provides
for the attorneys to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. The attorneys have asserted that they may be
entitled to receive payments in excess of $80 million to $100 million under
this fee arrangement in connection with the settlement of the dispute with
News Corporation. Our parent company intends to vigorously contest the
attorneys' interpretation of the fee arrangement, which EchoStar believes
significantly overstates the magnitude of its liability. If the attorneys and
our parent company are unable to resolve this fee dispute under the fee
arrangement, the fee dispute would be resolved through arbitration or
litigation. It is too early to determine the outcome of this fee dispute.
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, United
States Satellite Broadcasting Company, Inc., EchoStar Communications
Corporation, or ECC, and two of our wholly-owned subsidiaries. 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 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 and Echosphere Corporation, our wholly-owned
subsidiary. 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 $175 million. It is too early to determine whether or when
any other lawsuits 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 authorizes us to provide
satellite-delivered network channels to customers who qualify as "unserved
households," defined in the Satellite Home Viewer Act as consumers who, among
other things, "cannot receive, through the use of a conventional outdoor
rooftop receiving antenna, an over-the-air signal of Grade B intensity, as
defined by the FCC, of a primary network station affiliated with that
network." Historically, we obtained distant broadcast network signals for
distribution to our customers through PrimeTime 24, Joint Venture. PrimeTime
24 also distributed network signals to certain of our competitors in the
satellite industry.
The national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. The United States District Court for the Southern
District of Florida entered a nationwide permanent injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
injunction covers "distributors" as well. The plaintiffs in the Florida
litigation informed us that they considered us a "distributor" for purposes of
19
<PAGE>
PART II - OTHER INFORMATION
that injunction. A federal district court in North Carolina has also issued
an injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions in the Raleigh area. Other copyright litigation against
PrimeTime 24 is pending.
We ceased delivering PrimeTime 24 programming in July 1998, and began
uplinking and distributing network channels directly. We have also implemented
Satellite Home Viewer Act Section 119 compliance procedures which materially
restrict the market for the sale of network channels by us.
On October 19, 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. We asked the court to enter a judgment declaring that our method of
providing distant network programming does not violate the Satellite Home
Viewer Act and hence does not infringe the networks' copyrights. On
November 5, 1998, the four major broadcast networks and their affiliate groups
filed a complaint against us in federal court in Miami alleging, among other
things, copyright infringement. The plaintiffs in that action have also
requested the issuance of a preliminary injunction against us. The case filed
by us was subsequently transferred to the Florida courts.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. On March 12, 1999, DIRECTV and
the four networks announced that they had reached a settlement of that
dispute. Under the terms of the settlement, DIRECTV customers predicted to
receive a strong signal of Grade A intensity from their local stations will
lose access to their satellite provided network channels by July 31, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal of Grade B intensity from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all providers
of satellite delivered network programming other than us agreed to this cut
off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that court to enjoin us from providing network
programming except under very limited circumstances. In general, the networks
want us to turn off programming to our customers on the same schedule agreed
to by DIRECTV. We intend to vigorously contest the issuance of such an
injunction. In the event of a decision adverse to us in this case,
significant material restrictions on the sale of distant ABC, NBC, CBS and Fox
channels by us could result. Among other things, we could be required to
terminate delivery of network signals to a material portion of our subscriber
base. While the Networks have not sought monetary damages, they have sought
to recover attorney fees if they prevail. We have commenced sending letters
to some of our subscribers warning that their access to distant broadcast
network channels might be terminated this year. Such terminations would
result in a small reduction in average monthly revenue per subscriber. While
there can be no assurance, any such decrease could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in programming offerings that
will follow the scheduled launches of EchoStar V and EchoStar VI later this
year. While there can be no assurance, legislation pending in the Senate
would, if passed into law, reduce the number of customers whose network
channels we might otherwise be required to terminate.
Environmental Protection Agency
In connection with a recent expansion of our digital broadcast center in
Cheyenne, Wyoming, two additional underground storage tanks were installed by
a contractor. The underground storage tanks were properly installed and are
being operated in accordance with Environmental Protection Agency regulations.
However, the EPA has alleged that the State of Wyoming was not timely advised
of the installation of those tanks, and that a certificate of compliance was
not timely filed following installation. As a result, during May 1999, we
received notice that the EPA filed a complaint against us and has proposed to
assess a civil penalty of $9,500. In accordance with our construction
contract for the digital broadcast center, the general contractor has agreed
to defend and indemnify us and to hold us harmless for any costs involved with
resolving the complaint. While there can be no assurance, we expect to
resolve this complaint in the near-term.
20
<PAGE>
PART II - OTHER INFORMATION
We are subject to various other legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to those actions will not materially affect
our financial position or results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This information is incorporated by reference to Item 1 of Part I of
this document.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27* Financial Data Schedule.
________________________________
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 1999.
21
<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 DBS 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: August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR DBS CORPORATION AS OF AND FOR THE QUARTER ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 202,402
<SECURITIES> 86,309
<RECEIVABLES> 111,447
<ALLOWANCES> 3,359
<INVENTORY> 74,893
<CURRENT-ASSETS> 594,912
<PP&E> 1,326,917
<DEPRECIATION> 214,081
<TOTAL-ASSETS> 2,744,083
<CURRENT-LIABILITIES> 825,695
<BONDS> 2,035,889
0
0
<COMMON> 0
<OTHER-SE> (171,658)
<TOTAL-LIABILITY-AND-EQUITY> 2,744,083
<SALES> 642,752<F1>
<TOTAL-REVENUES> 660,073
<CGS> 364,077<F2>
<TOTAL-COSTS> 770,795
<OTHER-EXPENSES> 99,710
<LOSS-PROVISION> 8,379
<INTEREST-EXPENSE> 99,393
<INCOME-PRETAX> (210,432)
<INCOME-TAX> (88)
<INCOME-CONTINUING> (210,520)
<DISCONTINUED> 0
<EXTRAORDINARY> (228,733)
<CHANGES> 0
<NET-INCOME> (439,253)
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COST OF PROGRAMMING.
</FN>
</TABLE>
