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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 333-31929
ECHOSTAR DBS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1328967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5701 S. SANTA FE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 723-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 19, 1999, the Registrant's outstanding Common stock consisted
of 1,000 shares of Common Stock, $0.01 par value.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(I)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING this Annual Report on
Form 10-K with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated into this Form 10-K by reference:
None
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 3
Item 3. Legal Proceedings................................................ 3
Item 4. Submission of Matters to a Vote of Security Holders.............. *
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 6
Item 6. Selected Financial Data.......................................... *
Item 7. Management's Narrative Analysis of Results of Operations......... 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 12
Item 8. Financial Statements and Supplementary Data...................... 12
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 12
PART III
Item 10. Directors and Executive Officers of the Registrant............... *
Item 11. Executive Compensation........................................... *
Item 12. Security Ownership of Certain Beneficial Owners and Management... *
Item 13. Certain Relationships and Related Transactions................... *
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 13
Signatures....................................................... 17
Index to Financial Statements.................................... F-1
</TABLE>
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* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instructions (I)(1)(a) and (b) of Form 10-K.
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PART I
ITEM 1. BUSINESS
BRIEF DESCRIPTION OF BUSINESS
We are a wholly-owned subsidiary of EchoStar Communications Corporation,
a publicly traded company on the Nasdaq National Market. Our company was
formed under Colorado law in January 1996 for the initial purpose of
participating in an FCC auction. On January 26, 1996, we submitted the
winning bid of $52.3 million for 24 DBS frequencies at the 148DEG. West
Longitude orbital location. Funds necessary to complete the purchase of the
DBS frequencies and commence construction of our fourth DBS satellite,
EchoStar IV, were advanced to us by our parent company and EchoStar Satellite
Broadcasting Corporation, or ESBC. In June 1997, we sold the 1997 notes
which consisted of $375 million of 12 1/2% Senior Secured Notes due 2002. The
1997 notes were retired on January 25, 1999 upon completion of the tender
offers described below. Prior to consummation of the 1997 notes offering,
our parent company contributed the outstanding capital stock of ESBC to us.
As a result of the contribution, ESBC became our wholly-owned subsidiary.
This transaction was accounted for as a reorganization of entities under
common control in which ESBC is treated as our predecessor.
Unless otherwise stated, or the context otherwise requires, references
to EchoStar and our parent company shall include all of its direct and
indirect wholly-owned subsidiaries. We refer readers of this report to
EchoStar's Annual Report for the year ended December 31, 1998. Substantially
all of our operations are conducted by subsidiaries. Our operations include
three interrelated business units:
- The DISH Network--our direct broadcast satellite, or DBS, subscription
television service in the United States. As of December 31, 1998, we
had approximately 1.9 million DISH Network subscribers.
- EchoStar Technologies Corporation--our engineering division, which is
principally responsible for the design of digital set-top boxes, or
satellite receivers, necessary for consumers to receive DISH Network
programming, and set-top boxes sold to international direct-to-home
satellite operators. We also provide uplink center design, construction
oversight and other project integration services for international
direct-to-home ventures.
- Satellite Services--our division that provides video, audio and data
services to business television customers and other satellite users.
RECENT DEVELOPMENTS
REORGANIZATION
During March 1999, our parent company received approval from the FCC to
implement a plan 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, we intend to place ownership
of all of our direct broadcast satellites and related FCC licenses into
EchoStar Satellite Corporation. For additional information regarding our
organizational structure, see Note 1 to our Combined and Consolidated
Financial Statements. DirectSat Corporation and Direct Broadcasting
Satellite Corporation which currently own EchoStar II and EchoStar III,
respectively, will both be merged into EchoStar Satellite Corporation. Our
parent also intends to merge EchoStar Space Corporation into EchoStar
Satellite Corporation. Dish, Ltd., and ESBC will be merged into us.
EchoStar IV and the related FCC licenses, which are currently owned by us,
and those satellites and FCC licenses to be acquired in the transaction with
News Corporation Limited and MCI Telecommunications Corporation/WorldCom,
also will be transferred to EchoStar Satellite Corporation. Direct
Broadcasting Satellite Corporation and EchoStar Space Corporation's assets
consist principally of certain satellite and FCC authorization assets. There
are no significant operating activities conducted by either Direct
Broadcasting Satellite Corporation or EchoStar Space Corporation.
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AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI TELECOMMUNICATIONS
CORPORATION/WORLDCOM
On November 30, 1998, our parent company announced an agreement with
MCI, News Corporation and its American Sky Broadcasting, LLC subsidiary,
pursuant to which it would acquire or receive:
- the rights to 28 frequencies at the 110DEG. WL orbital location from
which we could transmit programming to the entire continental
United States;
- two DBS satellites constructed by Space Systems/Loral, delivered
in-orbit, and currently expected to be launched in 1999;
- a recently-constructed digital broadcast operations center located
in Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute set-top
boxes internationally using News Data System, Limited's
encryption/decoding technology;
- a commitment by an affiliated entity of News Corporation to purchase
from EchoStar Technology Corporation a minimum of 500,000 set-top
boxes; and
- a three-year, no fee retransmission consent agreement for DISH Network
to rebroadcast FOX Network owned-and-operated local station signals to
their respective markets.
Our parent company will not incur any costs associated with the
construction, launch or insurance (including launch insurance and one year of
in-orbit insurance) of the two DBS satellites. Our parent company and MCI
also agreed that MCI will have the non-exclusive right to bundle DISH Network
service with MCI's telephony service offerings on mutually agreeable terms.
In addition, our parent company agreed to carry the FOX News Channel on the
DISH Network. Our parent company received standard program launch support
payments in exchange for carrying the programming. Throughout this document,
we refer to the above transaction as the "110 acquisition".
Subject to FCC approval, if we combine the capacity of the two newly
acquired satellites with our four current satellites, we expect that DISH
Network will have the capacity to provide more than 500 channels of
programming, Internet and high-speed data services and high definition
television nationwide to a subscriber's single 18-inch satellite dish. We
also believe that this transaction would position us to offer a one-dish
solution for satellite-delivered local programming to major markets across
the country. Since we plan to use many of those channels for local
programming, no particular consumer could subscribe to all 500 channels, but
all of those channels would be capable of being received from a single dish.
We also expect to be able to begin small dish service to Alaska, Hawaii,
Puerto Rico and the United States territories in the Caribbean. However, we
expect to expend over $100 million, and perhaps more than $125 million during
1999 and 2000 in one-time expenses associated with repositioning subscriber
satellite dishes to the new orbital location.
In connection with this agreement, the litigation with News Corporation
described below under "LEGAL PROCEEDINGS" has been stayed and will be
dismissed with prejudice upon closing or if the transaction is terminated for
reasons other than the breach by, or failure to fulfill a condition within
the control of, News Corporation or MCI, or in certain other limited
circumstances.
During December 1998, the Department of Justice provided antitrust
clearance for the transaction to proceed. Both the FCC and our parent
company's shareholders still must approve the transaction before we can
close. Charles W. Ergen, our parent company's controlling shareholder, has
agreed to vote in favor of the transaction, so shareholder approval is
assured. During December 1998, our parent company asked the FCC to approve
the transaction. That approval has not yet been provided and we can not
predict when the FCC will act on our parent company's request. To the best
of our knowledge, our parent company does not need to obtain any other
regulatory approvals prior to consummating the transaction.
Beneficial interest in substantially all of the assets and rights to be
acquired by EchoStar in the 110 acquisition will be transferred us promptly
after closing.
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TENDER OFFERS
On December 23, 1998, our parent company commenced cash tender offers as
part of a plan to refinance its indebtedness at more favorable interest rates
and terms. Our parent company offered to purchase any and all of the
following debt securities:
- the 12 7/8% Senior Secured Discount Notes due June 1, 2004 issued by
Dish, Ltd.;
- the 13 1/8% Senior Secured Discount Notes due 2004 issued by ESBC and;
- the 1997 notes which were issued by us.
Our parent company also announced that it had sent to all holders of its
issued and outstanding 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004 a notice to exchange all of the outstanding shares
of Series B Preferred Stock into 12 1/8% Senior Preferred Exchange Notes due
2004 on the terms and conditions set forth in the certificate of designation
relating to the Series B Preferred Stock. The Senior Exchange Notes were
issued on January 4, 1999. Immediately following the exchange, our parent
company commenced an offer to purchase any and all outstanding Senior
Exchange Notes.
The tender offers for the first three issues of notes were consummated
on January 25, 1999. The tender offers were funded with proceeds from the
offering of the 9 1/4% Senior Notes due 2006 and the 9 3/8% Senior Notes due
2009, collectively referred to as the notes. Holders of more than 99% of
each issue of debt securities tendered their notes and consented to certain
amendments to the indentures governing the notes that eliminated
substantially all of the restrictive covenants and amended certain other
provisions. The tender offer for the Senior Exchange Notes expired on
February 1, 1999 and was funded by us with proceeds from the issuance of the
Notes. More than 99% of the outstanding Senior Exchange Notes were validly
tendered.
ITEM 2. PROPERTIES
The following table sets forth certain information concerning our
material properties:
<TABLE>
<CAPTION>
APPROXIMATE OWNED OR
DESCRIPTION/USE LOCATION SQUARE FOOTAGE LEASED
- --------------- -------- -------------- -------
<S> <C> <C> <C>
Corporate headquarters and customer
service center....................... Littleton, Colorado 156,000 Owned
EchoStar Technologies Corporation
office and distribution center....... Englewood, Colorado 155,000 Owned
Warehouse and distribution center...... Denver, Colorado 132,800 Leased
Customer service center................ McKeesport, Pennsylvania 100,000 Leased
Office and distribution center......... Sacramento, California 78,500 Owned
Digital broadcast operations center.... Cheyenne, Wyoming 55,000 Owned
Customer service center................ Thornton, Colorado 55,000 Owned
European headquarters and warehouse.... Almelo, The Netherlands 53,800 Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit
for 28 frequencies at the 110 WL orbital slot purchased by MCI for more than
$682 million following a 1996 FCC auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under this agreement. Those substantial disagreements led the
parties to litigation. In mid-1997, EchoStar filed a complaint seeking
specific performance of this agreement and damages, including lost profits.
News Corporation filed an answer and counterclaims seeking unspecified
damages, denying all of the material allegations and asserting numerous
defenses. Discovery commenced in July 1997, and the case was set for trial
commencing March 1999. In connection with the
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pending 110 acquisition, the litigation between EchoStar and News Corporation
will be stayed and will be dismissed with prejudice upon closing or if the
transaction is terminated for reasons other than the breach by, or failure to
fill a condition within the control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in 1997,
EchoStar has a contingent fee arrangement with its lawyers, which provides
for the lawyers to be paid a percentage of any net recovery obtained in its
dispute with News Corporation. Although they have not been specific, the
lawyers 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 lawyers' interpretation of the fee arrangement, which
it believes significantly overstates the magnitude of its liability
thereunder. If the lawyers and EchoStar are unable to resolve this fee
dispute under the fee arrangement, the fee dispute would be resolved under
arbitration. It is too early to determine the outcome of negotiations or
arbitration regarding 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, USSB, ECC
and two of ECC's wholly-owned subsidiaries, Dish, Ltd. and 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 authorizes EchoStar to
substitute satellite-delivered network signals its subscribers, but only if
those subscribers qualify as "unserved households", defined in the Satellite
Home Viewer Act, those that, 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 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 United
States District Court for the Southern District of Florida has entered
nationwide preliminary and permanent injunctions preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold in
according to certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is
set to take effect on April 30, 1999. The injunctions cover "distributors"
as well. The plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar a "distributor" for purposes of that injunction. A
federal district court in North Carolina has also issued an injunction
against PrimeTime 24 prohibiting
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certain distant signal retransmissions to homes delineated by a contour in
the Raleigh area. Other copyright litigation against PrimeTime 24 is
pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network signals directly. EchoStar has also
implemented Satellite Home Viewer Act 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 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, several broadcast parties, acting on prior threats
filed a complaint alleging, among other things, copyright infringement
against EchoStar in federal district court in Miami. The plaintiffs in that
action have also requested the issuance of a preliminary injunction against
EchoStar. The networks also filed a counter claim containing similar
allegations against us in the Colorado litigation.
On February 24, 1999, CBS, NBC, Fox, and ABC filed with the court a
"Motion for Temporary Restraining Order, Preliminary Injunction, and Contempt
Finding" against DIRECTV in response to an announcement by DIRECTV that it
was discontinuing retransmission of the programming of the four networks
received from PrimeTime 24 and would instead distribute its own package of
network affiliates to its existing subscribers. On February 25, 1999, the
court granted CBS and Fox a temporary restraining order requiring DIRECTV and
its agents and those who act in active concert or participation with DIRECTV,
not to deliver CBS or Fox programming to subscribers who do not live in
"unserved households." For purposes of determining whether a subscriber is
"unserved," the court referred to a modified version of the Longley-Rice
signal propagation model. The modifications in some respects reflect an order
adopted by the FCC on February 2, 1999. On March 12, 1999, DIRECTV and the
four major broadcast networks and their affiliates announced that they have
reached a settlement of that dispute. Under the terms of the settlement,
DIRECTV, stations and networks have agreed on a timeframe to disconnect
distant broadcast network signals from subscribers predicted to be ineligible
based on a modified version of the Longley-Rice signal propagation model.
Subscribers predicted to be ineligible who obtain consent from the affected
affiliate stations to receive their signals via satellite will not lose
receipt of their distant network signals. We are not sure what effect this
development will have on our business.
On March 24, 1999, the United States District Court for the District of
Colorado transferred our Colorado declaratory judgment action to Miami, where
it will in all likelihood be consolidated with the November 2, 1998 suit
filed against us by the broadcasters. It is likely that the broadcasters
will move forward on their lawsuit filed in Miami and will seek similar
remedies against us, including a temporary restraining order requiring us to
stop delivering network signals to subscribers who do not live in "unserved
households." Depending upon the terms, a restraining order could result in
us having to terminate delivery of network signals to a material portion of
our subscriber base, which could result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber turnover.
We are subject to various other legal proceedings and claims which arise
in the ordinary course of our business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not
materially affect the our financial position or results of operations.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 19, 1997, all 1,000 authorized, issued and outstanding
shares of our common stock were held by EchoStar. There is currently no
established trading market for our common stock.
We have never declared or paid any cash dividends on our common stock
and do not expect to declare dividends in the foreseeable future. Payment of
any future dividends will depend upon our earnings and capital requirements,
our debt facilities, and other factors the Board of Directors considers
appropriate. We currently intend to retain our earnings, if any, to support
future growth and expansion. Our ability to declare dividends is affected by
covenants in our debt facilities.
ITEM 7. 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; A DECREASE IN SALES OF
DIGITAL EQUIPMENT AND RELATED SERVICES TO INTERNATIONAL DIRECT-TO-HOME
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 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
MERGER OF EXISTING DBS COMPETITORS; A CHANGE IN THE REGULATIONS GOVERNING THE
SUBSCRIPTION TELEVISION SERVICE INDUSTRY; THE OUTCOME OF ANY LITIGATION IN
WHICH WE MAY BE INVOLVED; FAILURE TO CONSUMMATE THE 110 ACQUISITION; 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
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
REVENUE. Total revenue for the year ended December 31, 1998 was $986
million, an increase of $510 million compared to total revenue for the year
ended December 31, 1997 of $476 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth combined with
increased revenue from our ETC and Satellite Services business units. We
expect that our revenues will continue to increase as the number of DISH
Network subscribers increases.
DISH Network subscription television services revenue totaled $669
million for the year ended December 31, 1998, an increase of $370 million or
124% compared to 1997. This increase was directly attributable to the
increase in the number of DISH Network subscribers. Average DISH Network
subscribers for the year ended December 31, 1998 increased approximately 120%
compared to 1997. As of December 31, 1998, we had approximately 1.9 million
DISH Network subscribers compared to 1.04 million at December 31, 1997. Monthly
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revenue per subscriber approximated $39.25 and $38.50 during the years ended
December 31, 1998 and 1997, 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 year ended December 31, 1998, DTH equipment sales and
integration services totaled $254 million, an increase of $164 million
compared to 1997. 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. The increase in DTH
equipment sales and integration services revenue was primarily attributable
to an increase in the volume of set-top boxes sold.
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 an expected decrease in demand
combined with a decrease in the sales price of digital set-top boxes
attributable to increased competition, we expect that our DTH equipment and
integration services revenue will decline during 1999 as compared to 1998.
Such revenue may decline in 1999 by as much as 50% as compared to 1998.
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 have resumed.
Although we have binding purchase orders from Telefonica for 1999 deliveries
of DTH equipment, we cannot yet predict what impact, if any, consummation of
this merger might have on our future sales to Telefonica. As part of the 110
acquisition, we received a minimum order from a subsidiary of News
Corporation for 500,000 set-top boxes. Although we continue 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 $22 million during 1998, an increase
of $11 million as compared to 1997. 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 1999 to the extent we are successful in
increasing the number of our BTV customers and developing and implementing
new services.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $397 million during 1998, an increase of $204 million or 106%,
compared to 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 59%
and 65% of subscription television services revenue during 1998 and 1997,
respectively. Although we expect DISH Network operating expenses as a
percentage of subscription television services revenue to decline modestly
from 1998 levels in future periods, this expense to revenue ratio could
increase.
Subscriber-related expenses totaled $298 million during 1998, an
increase of $154 million compared to 1997. Such expenses, which include
programming expenses, copyright royalties, residuals payable to retailers and
distributors, and billing, lockbox and other variable subscriber expenses,
represented 45% of subscription television services revenues during 1998
compared to 48% during 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 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 $72 million during 1998, an increase of $37 million as
compared to 1997. 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
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and other expenses totaled 11% of subscription television services revenue
during 1998 compared to 12% of subscription television services revenue
during 1997. Although we expect customer service center and other expenses
as a percentage of subscription television services revenue to remain near
1998 levels in the future, this expense to revenue ratio could 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 $26 million during 1998, an $11 million
increase compared to 1997. 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 are
placed in service.
COST OF SALES--DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of
sales--DTH equipment and integration services totaled $175 million during
1998, an increase of $114 million compared to 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. As a percentage of DTH equipment revenue, cost of sales
represented 69% and 68% during 1998 and 1997, respectively. We expect that
cost of sales 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 $332 million during
1998, an increase of $149 million or 81%, compared to 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. During all of 1998 we recognized subscriber
promotion subsidies as incurred. These expenses totaled $284 million during
1998, an increase of $135 million over 1997. This increase resulted from
increased subscriber activations and the immediate recognition of all
subscriber promotion subsidies incurred in 1998, due to the removal of any
prepaid subscription requirement. During 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 $48 million
during 1998, an increase of $13 million over 1997.
During 1998, our subscriber acquisition costs, inclusive of acquisition
marketing expenses, totaled $314 million, or approximately $285 per new
subscriber activation. Comparatively, our 1997 subscriber acquisition costs,
inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $252 million, or approximately $340 per new
subscriber activation. The decrease in our subscriber acquisition costs, on
a per new subscriber activation basis, principally resulted from decreases in
the manufactured cost of EchoStar receiver systems. We expect that our
subscriber acquisition costs, on a per new subscriber activation basis, will
increase in the near-term as we introduce aggressive marketing promotions to
acquire new subscribers. For example, during 1999 we introduced the
PrimeStar bounty program. Our subscriber acquisition costs under this
program are significantly higher than those under our other marketing
programs. To the extent that we either extend the duration of the PrimeStar
bounty program or begin to offer similar bounty programs for other
competitors' subscribers, our subscriber acquisition costs, both in the
aggregate and on a per new subscriber activation basis, will materially
increase.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $95 million during 1998, an increase of $29 million as
compared to 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% during 1998
compared to 14% during 1997. Although we expect that G&A expenses as a
percentage of total revenue will approximate 1998 levels or decline modestly
in the future, this expense to revenue ratio could increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA was negative $29 million and negative $52 million, during
1998 and 1997, respectively. EBITDA, as adjusted to exclude amortization of
subscriber acquisition costs, was negative $48 million for 1998 compared to
negative $173 million for 1997. This improvement in EBITDA principally
resulted from increases in our ETC and DISH Network revenues. We believe our
ability to repay our existing debt will be significantly influenced by our
ability to continue to improve
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reported EBITDA. However, EBITDA does not purport to represent cash provided
or used by operating activities and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
We believe it is common practice in the telecommunications industry for
investment bankers and others to use various multiples of current or
projected EBITDA for purposes of estimating current or prospective enterprise
value and as one of many measures of operating performance. Conceptually,
EBITDA measures the amount of income generated each period that could be used
to service debt, because EBITDA is independent of the actual leverage
employed by the business; but EBITDA ignores funds needed for capital
expenditures and expansion. Some investment analysts track the relationship
of EBITDA to total debt as one measure of financial strength. However,
EBITDA does not purport to represent cash provided or used by operating
activities and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
EBITDA differs significantly from cash flows from operating activities
reflected in the consolidated statement of cash flows. Cash from operating
activities is net of interest and taxes paid and is a more comprehensive
determination of periodic income on a cash (vs. accrual) basis, exclusive of
non-cash items of income and expenses such as depreciation and amortization.
In contrast, EBITDA is derived from accrual basis income and is not reduced
for cash invested in working capital. Consequently, EBITDA is not affected
by the timing of receivable collections or when accrued expenses are paid.
We are not aware of any uniform standards for determining EBITDA and believe
presentations of EBITDA may not be calculated consistently by different
entities in the same or similar businesses. EBITDA is shown before and after
amortization of subscriber acquisition costs, which were deferred through
September 1997 and amortized over one year.
During the fourth quarter of 1998, we introduced the DISH Network
One-Rate Plan. Under the DISH Network One-Rate Plan, consumers are eligible
to receive a rebate of up to $299 on the purchase of certain EchoStar
receiver systems. Consequently, the costs of acquiring subscribers who
qualify for the DISH Network One-Rate Plan are materially higher than for
other DISH Network subscribers. 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), we issue a rebate of up to $299 to the subscriber. Although
subscriber acquisition costs are materially higher under the DISH Network
One-Rate Plan, we believe that these customers are more profitable because of
the higher average revenue per subscriber. In addition, we believe that
these customers represent lower credit risk and therefore may be marginally
less likely to churn than other DISH Network subscribers. Although there can
be no assurance as to the ultimate duration of the DISH Network One-Rate
Plan, it will continue through at least April 1999.
Our subscriber acquisition costs, both in the aggregate and on a per
subscriber basis, will increase in direct relation to the participation rate
in the DISH Network One-Rate Plan. While we presently expect approximately
one-third of our new subscriber activations to result from the DISH Network
One-Rate Plan during the duration of the promotion, 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, our EBITDA results will be negatively
impacted because subscriber acquisition costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
during 1998, including amortization of subscriber acquisition costs of $19
million, aggregated $102 million, a $71 million decrease compared to 1997.
The decrease in depreciation and amortization expenses principally resulted
from a decrease in amortization of subscriber acquisition costs of $102
million, partially offset by an increase in depreciation related to the
commencement of operation of EchoStar III, EchoStar IV and other depreciable
assets placed in service during 1998. Promotional programs changed in
October 1997 and we ceased deferral of subscriber acquisition costs after
that date. All previously deferred costs were fully amortized during 1998
OTHER INCOME AND EXPENSE. Other expense, net totaled $163 million
during 1998, an increase of $64 million as compared to 1997. The increase in
other expense resulted primarily from interest expense associated with our
12 1/2% Senior Secured Notes due 2002 issued in June 1997, combined with
increased interest expense resulting from
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increased accreted balances on our 12 7/8% Senior Secured Discount Notes due
2004 issued in 1994 and our 13 1/8% Senior Secured Discount Notes due 2004
issued in 1996.
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.
We have established a five-phase plan to address potential Year 2000
issues:
- INVENTORY--the identification of all relevant hardware, embedded
software, system software and application software to establish
the scope of subsequent phases;
- 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 are currently
in 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. We expect
to have the assessment phase substantially completed by April 1999.
Upon completion of the assessment phase, we will begin 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 June 1999.
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 August 1999. Upon
successful completion of the implementation phase we will be able to certify
our Year 2000 readiness. While there can be no assurance, we currently
believe that our internal financial and administrative systems are Year 2000
ready.
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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 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 are currently in the remediation phase of our Year 2000
readiness plan. The remediation phase of the plan is expected to be complete
by April 1999. We expect to perform validation and testing of communications
between our digital broadcast center and our DBS satellites 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 completed all remediation activities and is currently in the
final stages of testing/validation. Subsequent to completion of its
testing/validation activities, the vendor has indicated it will contractually
certify its Year 2000 readiness during the second quarter of 1999, 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 70% 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. We presently expect to complete this process by
April 1999 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
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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.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance that requires capitalization of certain costs incurred during an
internal-use software development project. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. We do not expect that adoption of
SOP 98-1 will materially affect our consolidated financial statements.
INFLATION
Inflation has not materially affected our operations during the past
three years. We believe that our ability to increase the prices charged for
our products and services in future periods will depend primarily on
competitive pressures. We do not have any material backlog of our products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
INTEREST RATE RISK. Our exposure to market risk for changes in interest
rates relates to our debt obligations and cash and marketable investment
securities (unrestricted and restricted) portfolio.
As of December 31, 1998, we estimated the fair value of our fixed-rate
debt and mortgages and other notes payable to be approximately $1.9 billion
using quoted market prices where available, or discounted cash flow analyses.
The market risk associated with our debt is the potential increase in fair
value resulting from a decrease in interest rates. A 10% decrease in assumed
interest rates would increase the fair value of our debt by approximately
$50.8 million.
Based on our average balance of cash and cash equivalents and restricted
and unrestricted marketable investment securities during 1998, a 10% decrease
in the average interest rate experienced in 1998 would not materially impact
our annual interest income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
(1) FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Public Accountants....................................... F-2
Combined and Consolidated Balance Sheets at December 31, 1997 and 1998......... F-3
Combined and Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 1996, 1997 and 1998......................... F-4
Combined and Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998......................... F-5
Combined and Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998............................................. F-6
Notes to Combined and Consolidated Financial Statements........................ F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1(a)* Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.4(a) to the Company's Registration
Statement on Form S-4, Registration No. 333-31929).
3.1(b)* Bylaws of the Company (incorporated by reference to Exhibit
3.4(b) to the Company's Registration Statement on Form S-4,
Registration No. 333-31929).
4.1* Indenture relating to the Seven Year Notes, dated as of January
25, 1999, by and among the Company, the Guarantors and U.S.
Bank Trust National Association, as trustee.(incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form s-4, Registration No. 333-71345).
4.2* Indenture relating to the Ten Year Notes, dated as of January
25, 1999, by and among the Company, the Guarantors and U.S.
Bank Trust National Association, as trustee. (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form s-4, Registration No. 333-71345).
4.3* Registration Rights Agreement relating to the Seven Year Notes
by and among the Company, the Guarantors and the parties named
therein. (incorporated by reference to Exhibit 4.5 to the
Company's Registration Statement on Form s-4, Registration No.
333-71345).
4.4* Registration Rights Agreement relating to the Ten Year Notes by
and among the Company, the Guarantors and the parties named
therein. (incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form s-4, Registration No.
333-71345).
10.1(a)* Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin
Marietta as successor to General Electric, EchoStar,
Astro-Space Division ("General Electric") (incorporated by
reference to Exhibit 10.1(a) to the Registration Statement on
Form S-1 of Dish, Ltd. ("Dish") Registration No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract, dated
as of October 2, 1992, between ESC and Martin Marietta as
successor to General Electric (incorporated by reference to
Exhibit 10.1(b) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
</TABLE>
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<TABLE>
<S> <C>
10.1(c)* Second Amendment to the Satellite Construction Contract, dated
as of October 30, 1992, between ESC and Martin Marietta as
successor to General Electric (incorporated by reference to
Exhibit 10.1(c) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.1(d)* Third Amendment to the Satellite Construction Contract, dated
as of April 1, 1993, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(d)to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract, dated
as of August 19, 1993, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(e) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated by reference to
Exhibit 10.1(f) to the Registration Statement on Form S-1 of
Dish, Registration No. 33-81234).
10.1(g)* Sixth Amendment to the Satellite Construction Contract, dated
as of June 7, 1994, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(g) to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract, dated
as of July 18, 1996, between ESC and Martin Marietta
(incorporated by reference to Exhibit 10.1(h) to the Quarterly
Report on Form 10-Q of EchoStar for the quarter ended June 30,
1996, Commission File No. 0-26176).
10.2* Master Purchase and License Agreement, dated as of August 12,
1986, between Houston Tracker Systems, Inc. ("HTS") and
Cable/Home Communications Corp. (a subsidiary of General
Instruments Corporation) (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.3* Master Purchase and License Agreement, dated as of June 18,
1986, between Echosphere Corporation and Cable/Home
Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.4* Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation and Household Retail
Services, Inc. (incorporated by reference to Exhibit 10.6 to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
10.5* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.6* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated by reference to Exhibit
10.8 to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
10.7* Form of Satellite Launch Insurance Declarations (incorporated
by reference to Exhibit 10.10 to the Registration Statement on
Form S-1 of Dish, Registration No. 33-81234).
10.8* Dish 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.11 to the Registration Statement on Form S-1 of
Dish, Registration No. 33-76450).
10.9* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1 of Dish, Registration
No. 33-81234).
</TABLE>
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<TABLE>
<S> <C>
10.10* Manufacturing Agreement, dated as of March 22, 1995, between
Houston Tracker Systems, Inc. and SCI Technology, Inc.
(incorporated by reference to Exhibit 10.12 to the Registration
Statement on Form S-1 of Dish, Commission File No. 33-81234).
10.11* Manufacturing Agreement dated as of April 14, 1995 by and
between ESC and Sagem Group (incorporated by reference to
Exhibit 10.13 to the Registration Statement on Form S-1 of
EchoStar Communications Corporation ("ECC"), Registration
No. 33-91276).
10.12* Statement of Work, dated January 31, 1995 from ESC to Divicom
Inc. (incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of ECC, Registration
No. 33-91276).
10.13* Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Space Corporation and
Lockheed-Khrunichev-Energia International, Inc. (incorporated
by reference to Exhibit 10.15 to the Registration Statement on
Form S-1 of ECC, Registration No. 33-91276).
10.14* EchoStar 1995 Stock Incentive Plan (incorporated by reference
to Exhibit 10.16 to the Registration Statement on Form S-1 of
ECC, Registration No. 33-91276).
10.15(a)* Eighth Amendment to Satellite Construction Contract, dated as
of February 1, 1994, between DirectSat Corporation and Martin
Marietta (incorporated by reference to Exhibit 10.17(a) to the
Quarterly Report on Form 10-Q of ECC for the quarter ended
June 30, 1996, Commission File No. 0-26176).
10.15(b)* Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta (incorporated by reference to Exhibit 10.15 to the
Registration Statement of Form S-4 of ECC, Registration
No. 333-03584).
10.15(c)* Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin
Marietta (incorporated by reference to Exhibit 10.17(b) to the
Quarterly Report on Form 10-Q of ECC for the quarter ended
June 30, 1996, Commission File No. 0-26176).
10.16* Satellite Construction Contract, dated as of July 18, 1996,
between EDBS and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.18 to the Quarterly Report on Form 10-Q
of ECC for the quarter ended June 30, 1996, Commission File
No. 0-26176).
10.17* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta, dated as of May 31, 1995
(incorporated by reference to Exhibit 10.14 to the Registration
Statement of Form S-4 of ECC, Registration No. 333-03584).
10.18* Right and License Agreement by and among HTS and Asia
Broadcasting and Communications Network, Ltd., dated December
19, 1996 (incorporated by reference to Exhibit 10.18 to the
Annual Report on Form 10-K of ECC for the year ended December 31,
1996, as amended, Commission file No. 0-26176).
10.19* Agreement between HTS, ESC and ExpressVu Inc., dated January 8,
1997, as amended (incorporated by reference to Exhibit 10.18 to
the Annual Report on Form 10-K of ECC for the year ended
December 31, 1996, as amended, Commission file No. 0-26176).
10.20* Amendment No. 9 to Satellite Construction Contract, effective
as of July 18, 1996, between Direct Satellite Broadcasting
Corporation, a Delaware corporation ("DBSC") and Martin
Marietta Corporation (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q of ECC for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.21* Amendment No. 10 to Satellite Construction Contract, effective
as of May 31, 1996, between DBSC and Lockheed Martin
Corporation (incorporated by reference to Exhibit 10.2 to the
Quarterly Report on Form 10-Q of ECC for the quarterly period
ended June 30, 1997, Commission File No. 0-26176).
</TABLE>
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<TABLE>
<S> <C>
10.22* Contract for Launch Services, dated April 5, 1996, between
Lockheed Martin Commercial Launch Services, Inc. and EchoStar
Space Corporation (incorporated by reference to Exhibit 10.3 to
the Quarterly Report on Form 10-Q of ECC for the quarterly
period ended June 30, 1997, Commission File No. 0-26176).
10.23* OEM Manufacturing, Marketing and Licensing Agreement, dated as
of February 17, 1998, by and among HTS, ESC and Philips
Electronics North America Corporation (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of ECC for the quarterly period ended March 31, 1998,
Commission File No. 0-26176).
10.24* Licensing Agreement, dated as of February 23, 1998, by and
among HTS, ESC and VTech Communications Ltd. (incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q
of ECC for quarterly period ended March 31, 1998, Commission
File No. 0-26176).
10.25* Agreement to form NagraStar LLC, dated as of June 23, 1998 by
and between Kudelski S.A., ECC and ESC (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
of ECC for quarterly period ended June 30, 1998, Commission
File No. 0-26176).
10.26* Purchase Agreement by and among American Sky Broadcasting, LLC,
The News Corporation Limited, MCI Telecommunications
Corporation and EchoStar Communications Corporation, dated
November 30, 1998. (incorporated by reference to Exhibit 10.1
to the Form 8-K filed by ECC on November 30, 1998, Commission
File No. 0-26176).
10.27* Form of Registration Rights Agreement to be entered into among
EchoStar Communications Corporation, MCI Telecommunications
Corporation, and a to-be-named wholly-owned subsidiary of MCI
Telecommunications Corporation, American Sky Broadcasting, LLC,
and a to-be-named wholly-owned subsidiary of The News
Corporation Limited (incorporated by reference to Exhibit 10.2
to the Current Report on Form 8-K of EchoStar, filed as of
December 1, 1998).
10.28* Voting Agreement dated November 30, 1998, among EchoStar
Communications Corporation, American Sky Broadcasting, LLC, The
News Corporation Limited and MCI Telecommunications Corporation
(incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K of EchoStar, filed as of December 1, 1998).
27+ Financial Data Schedule.
</TABLE>
- -------------------
* Incorporated by reference.
** Constitutes a management contract or compensatory plan or arrangement.
+ Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, EchoStar has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ECHOSTAR DBS CORPORATION
By: /s/ STEVEN B. SCHAVER
---------------------------
Steven B. Schaver
Chief Financial Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
EchoStar and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ CHARLES W. ERGEN President and Director March 29, 1999
- ------------------------ (PRINCIPAL EXECUTIVE OFFICER)
Charles W. Ergen
/s/ STEVEN B. SCHAVER Chief Financial Officer March 29, 1999
- ------------------------ (PRINCIPAL FINANCIAL OFFICER)
Steven B. Schaver
/s/ JAMES DEFRANCO Director March 29, 1999
- ------------------------
James DeFranco
/s/ DAVID K. MOSKOWITZ Director March 29, 1999
- ------------------------
David K. Moskowitz
* By: /s/ DAVID K. MOSKOWITZ
------------------------
David K. Moskowitz
Attorney-in-Fact
17
<PAGE>
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................ F-2
Combined and Consolidated Balance Sheets at December 31, 1997
and 1998.......................................................... F-3
Combined and Consolidated Statements of Operations and Comprehensive
Loss for the years ended December 31, 1996, 1997 and 1998......... F-4
Combined and Consolidated Statements of Changes in Stockholder's
Equity for the years ended December 31, 1996, 1997 and 1998....... F-5
Combined and Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998............................ F-6
Notes to Combined and Consolidated Financial Statements............. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar DBS Corporation:
We have audited the accompanying combined and consolidated balance
sheets of EchoStar DBS Corporation (a Colorado corporation) and affiliates
and subsidiaries, as described in Note 1, as of December 31, 1997 and 1998,
and the related combined and consolidated statements of operations and
comprehensive loss, changes in stockholder's equity and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined and consolidated financial
position of EchoStar DBS Corporation and affiliates and subsidiaries as of
December 31, 1997 and 1998, and the combined and consolidated results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 1999.
F-2
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ 62,059 $ 25,308
Marketable investment securities.......................................... 3,906 7,000
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,347 and $2,996, respectively.............. 66,045 107,743
Inventories............................................................... 22,993 76,708
Other current assets...................................................... 28,264 24,823
----------- -----------
Total current assets......................................................... 183,267 241,582
Restricted Assets:
Insurance receivable (Note 3)............................................. - 106,000
Interest escrow........................................................... 112,284 69,129
Satellite escrow and other restricted cash and marketable investment
securities............................................................. 75,478 8,528
----------- -----------
Total restricted cash and marketable investment securities................... 187,762 183,657
Property and equipment, net.................................................. 859,284 853,818
FCC authorizations, net...................................................... 99,220 103,266
Advances to affiliates, net.................................................. 2,021 -
Deferred tax assets.......................................................... 64,409 60,638
Other noncurrent assets...................................................... 35,811 27,212
----------- -----------
Total assets............................................................ $ 1,431,774 $ 1,470,173
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable.................................................... $ 69,036 $ 90,562
Deferred revenue.......................................................... 122,215 132,857
Accrued expenses.......................................................... 97,090 176,158
Advances from affiliates, net............................................. - 54,805
Current portion of long-term debt......................................... 17,885 22,679
----------- -----------
Total current liabilities.................................................... 306,226 477,061
Long-term obligations, net of current portion:
1994 Notes................................................................ 499,863 571,674
1996 Notes................................................................ 438,512 497,955
1997 Notes................................................................ 375,000 375,000
Mortgages and other notes payable, net of current portion................. 51,846 43,450
Notes payable to ECC, including accumulated interest...................... 54,597 59,812
Long-term deferred satellite services revenue and other
long-term liabilities................................................... 19,500 33,358
----------- -----------
Total long-term obligations, net of current portion.......................... 1,439,318 1,581,249
----------- -----------
Total liabilities....................................................... 1,745,544 2,058,310
Commitments and Contingencies (Note 8)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares authorized, issued and - -
outstanding...............................................................
Additional paid-in capital................................................ 125,164 145,164
Accumulated other comprehensive loss...................................... (8) -
Accumulated deficit....................................................... (438,926) (733,301)
----------- -----------
Total stockholder's equity (deficit)......................................... (313,770) (588,137)
----------- -----------
Total liabilities and stockholder's equity (deficit).................... $ 1,431,774 $1,470,173
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-3
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services................. $ 49,650 $ 298,883 $ 669,310
Other............................................ 8,238 42,925 12,799
----------- ----------- -----------
Total DISH Network................................. 57,888 341,808 682,109
DTH equipment sales and integration services....... 77,390 90,263 253,841
Satellite services................................. 5,822 11,135 22,304
C-band and other................................... 56,003 32,696 27,655
----------- ----------- -----------
Total revenue......................................... 197,103 475,902 985,909
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses...................... 22,840 143,529 298,443
Customer service center and other................ 12,996 35,078 72,482
Satellite and transmission....................... 6,573 14,563 26,067
----------- ----------- -----------
Total DISH Network operating expenses.............. 42,409 193,170 396,992
Cost of sales - DTH equipment and integration
services..................................... 75,984 60,918 174,615
Cost of sales - C-band and other................... 42,345 23,909 16,496
Marketing:
Subscriber promotion subsidies................... 35,239 148,502 283,694
Advertising and other............................ 17,929 34,843 47,986
----------- ----------- -----------
Total marketing expenses........................... 53,168 183,345 331,680
General and administrative......................... 48,693 66,060 94,824
Amortization of subscriber acquisition costs....... 16,073 121,428 18,819
Depreciation and amortization...................... 27,296 51,408 83,338
----------- ----------- -----------
Total costs and expenses.............................. 305,968 700,238 1,116,764
----------- ----------- -----------
Operating loss........................................ (108,865) (224,336) (130,855)
Other Income (Expense):
Interest income.................................... 15,111 12,512 10,111
Interest expense, net of amounts capitalized....... (62,430) (110,003) (172,942)
Other.............................................. (345) (1,451) (618)
----------- ----------- -----------
Total other income (expense).......................... (47,664) (98,942) (163,449)
----------- ----------- -----------
Loss before income taxes.............................. (156,529) (323,278) (294,304)
Income tax benefit (provision), net................... 54,853 (146) (71)
----------- ----------- -----------
Net loss.............................................. $ (101,676) $ (323,424) $ (294,375)
----------- ----------- -----------
----------- ----------- -----------
Change in unrealized gain (loss) on available-for-sale
securities, net of tax ............................ (263) 4 8
----------- ----------- -----------
Comprehensive loss.................................... $ (101,939) $ (323,420) $ (294,367)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-4
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT AND
UNREALIZED
COMMON STOCK COMMON ADDITIONAL HOLDING
---------------- PREFERRED STOCK PAID-IN GAINS
SHARES AMOUNT STOCK WARRANTS CAPITAL (LOSSES) TOTAL
-------- ------ --------- -------- --------- ---------- ---------
(Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994................. 33,544 $336 $15,991 $26,133 $62,197 $ (849) $103,808
Issuance of Common Stock................ 2 - - - 2 - 2
8% Series A Cumulative Preferred Stock
dividends (at $0.38 per share)........ - - 616 - - (616) -
Exercise of Common Stock Warrants....... 2,731 26 - (25,419) 25,393 - -
Common Stock Warrants exchanged for ECC
Warrants.............................. - - - (714) 714 - -
Launch bonuses funded by issuance of
ECC's Class A Common Stock............ - - - - 1,192 - 1,192
Unrealized holding gains on
available-for-sale securities, net.... - - - - - 251 251
Net loss................................ - - - - - (12,361) (12,361)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1995................. 36,277 362 16,607 - 89,498 (13,575) 92,892
Issuance of Common Stock (Note 1)....... 1 - - - 2 - 2
Reorganization of entities under common
control (Note 1)...................... (36,275) (362) (16,607) - 16,969 - -
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options.......... - - - - 2,372 - 2,372
Unrealized holding losses on
available-for-sale securities, net.... - - - - - (263) (263)
Net loss................................ - - - - - (101,676) (101,676)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1996................. 3 - - - 108,841 (115,514) (6,673)
Purchase price "pushed-down" to DBSC by
ECC (Note 1).......................... - - - - 16,323 - 16,323
Unrealized holding gains on
available-for-sale securities, net.... - - - - - 4 4
Net loss................................ - - - - - (323,424) (323,424)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1997................. 3 - - - 125,164 (438,934) (313,770)
Contribution of satellite asset......... - - - - 20,000 - 20,000
Unrealized holding gains on
available-for-sale securities, net ... - - - - - 8 8
Net loss................................ - - - - - (294,375) (294,375)
------- ------ -------- -------- --------- -------- --------
Balance, December 31, 1998................. 3 $ - $ - $ - $145,164 $(733,301) $(588,137)
------- ------ -------- -------- --------- -------- --------
------- ------ -------- -------- --------- -------- --------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-5
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (101,676) $(323,424) $(294,375)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization.................. 27,296 51,408 83,338
Amortization of subscriber acquisition costs... 16,073 121,428 18,819
Interest on notes payable to ECC added to
principal...................................... - 5,215 5,215
Deferred income tax benefit.................... (50,515) (361) -
Amortization of debt discount and deferred
financing costs............................. 61,695 83,221 125,724
Change in reserve for excess and obsolete
inventory................................... 2,866 (1,823) 1,341
Change in long-term deferred satellite services
revenue and other long-term liabilities..... 5,949 12,056 13,858
Other, net..................................... 536 403 -
Changes in current assets and current liabilities:
Trade accounts receivable, net............... (4,368) (52,562) (41,698)
Inventories.................................. (36,864) 51,597 (55,056)
Subscriber acquisition costs................. (84,202) (72,118) -
Other current assets......................... (3,118) 13,359 (11,611)
Trade accounts payable....................... 22,165 27,808 21,526
Deferred revenue............................. 103,511 18,120 10,642
Accrued expenses............................. 17,816 58,124 68,328
---------- --------- ---------
Net cash flows from operating activities.......... (22,836) (7,549) (53,949)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities..... (138,328) (36,586) (8,970)
Sales of marketable investment securities......... 119,730 51,513 5,868
Purchases of restricted marketable investment (21,100) (1,495) -
securities......................................
Funds released from escrow and restricted cash and
marketable investment securities................ 235,402 120,215 116,468
Offering proceeds and investment earnings placed (193,972) (227,561) (6,343)
in escrow.......................................
Repayments from (advances to) affiliates, net..... (33,105) 9,976 -
Purchases of property and equipment............... (214,614) (221,750) (153,513)
Expenditures for FCC authorizations............... (55,420) - -
Other............................................. 6,445 (391) 3,150
---------- --------- ---------
Net cash flows from investing activities.......... (294,962) (306,079) (43,340)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock............ 2 - -
Proceeds from (repayment of) note payable to ECC.. 12,000 (12,000) -
Net proceeds from issuance of 1996 Notes.......... 336,916 - -
Net proceeds from issuance of 1997 Notes.......... - 362,500 -
Advances from affiliates.......................... - - 77,090
Repayments of mortgage indebtedness and notes
payable......................................... (6,631) (13,253) (16,552)
---------- --------- ---------
Net cash flows from financing activities.......... 342,287 337,247 60,538
---------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 24,489 23,619 (36,751)
Cash and cash equivalents, beginning of year...... 13,951 38,440 62,059
---------- --------- ---------
Cash and cash equivalents, end of year............ $ 38,440 $ 62,059 $ 25,308
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying Notes to Combined and Consolidated Financial Statements.
F-6
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
BASIS OF PRESENTATION
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
intends to place ownership of all of its direct broadcast satellites and
related FCC licenses into EchoStar Satellite Corporation ("ESC"). DirectSat
Corporation and Direct Broadcasting Satellite Corporation ("DBSC"), which
currently own EchoStar II and EchoStar III, respectively, will both be merged
into ESC. EchoStar also intends to merge EchoStar Space Corporation ("Space")
into ESC. Dish, Ltd., and EchoStar Satellite Broadcasting Company ("ESBC")
will be merged into the Company. EchoStar IV and the related FCC licenses,
which are currently owned by DBS Corp, and those satellites and FCC licenses
to be acquired in the 110 Acquisition (defined herein), also will be
transferred to ESC. The accompanying financial statements retroactively
reflect the consolidated historical results of DBS Corp and its subsidiaries
combined with the historical results of Space and DBSC. Substantially all of
EchoStar's operating activities are conducted by subsidiaries of DBS Corp.
DBSC and Space's assets consist principally of certain satellite and FCC
authorization assets. There are no significant operating activities conducted
by either DBSC or Space. (See Organization and Legal Structure below).
DBS Corp was formed under Colorado law in January 1996 for the
initial purpose of participating in an FCC auction. On January 26, 1996, DBS
Corp submitted the winning bid of $52.3 million for 24 direct broadcast
satellite ("DBS") frequencies at the 148DEG. West Longitude ("WL")
orbital location. Funds necessary to complete the purchase of the DBS
frequencies and commence construction of the Company's fourth DBS satellite,
EchoStar IV, were advanced to the Company by ECC. In June 1997, DBS Corp
completed an offering (the "1997 Notes Offering") of 12 1/2% Senior Secured
Notes due 2002 (the "1997 Notes"). The 1997 Notes were retired on January 25,
1999 upon completion of the Tender Offers (as defined herein). Prior to
consummation of the 1997 Notes Offering, ECC contributed all of the
outstanding capital stock (the "Contribution") of ESBC to DBS Corp. As a
result of the Contribution, ESBC became a wholly-owned subsidiary of DBS
Corp. This transaction was accounted for as a reorganization of entities
under common control in which ESBC is treated as the predecessor of DBS Corp.
During 1994, EchoStar acquired approximately 40% of the outstanding
common stock of Direct Broadcasting Satellite Corporation ("Old DBSC"). Old
DBSC's principal assets included an 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 its
satellite (EchoStar III) construction contract. As of December 31, 1996,
these notes receivable totaled $49 million, including accrued interest of $3
million. On January 8, 1997, EchoStar consummated the merger of Old DBSC with
a wholly-owned subsidiary of EchoStar, DBSC, as defined above. EchoStar
issued approximately 650,000 shares of its Class A common stock to acquire
the remaining 60% of Old DBSC that it did not previously own. 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 (approximately $16 million). Upon consummation of
the merger, Old DBSC ceased to exist.
F-7
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRINCIPAL BUSINESS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORk - a DBS subscription television service in the United
States. As of December 31, 1998, EchoStar had approximately 1.9
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 direct-to-home
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 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 United States
to provide consumers with a fully competitive alternative to cable television
service.
AGREEMENT WITH NEWS CORPORATION LIMITED AND MCI TELECOMMUNICATIONS
CORPORATION/WORLDCOM
On November 30, 1998, EchoStar announced an agreement with MCI
Telecommunications Corporation/WorldCom ("MCI"), The News Corporation Limited
("News Corporation") and its American Sky Broadcasting, LLC subsidiary (the
"110 Acquisition"). Pursuant to the 110 Acquisition, EchoStar would acquire
or receive:
- the rights to 28 frequencies at the 110DEG. WL orbital location
from which EchoStar could transmit programming to the entire
continental United States;
- two DBS satellites constructed by Space Systems/Loral, delivered
in-orbit and currently expected to be launched during 1999;
- a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- a worldwide license agreement to manufacture and distribute set-top
boxes internationally using News Data System, Limited's
encryption/decoding technology;
- a commitment by an affiliated entity of News Corporation to purchase
from ETC a minimum of 500,000 set-top boxes; and o a three-year, no
fee agreement for the DISH Network to rebroadcast FOX Broadcasting
Company owned-and-operated local station signals to their respective
markets.
EchoStar will not incur any costs associated with the construction,
launch or insurance (including launch insurance and one year of in-orbit
insurance) of the two DBS satellites. EchoStar and MCI also agreed that MCI
will have the non-exclusive right to bundle DISH Network service with MCI's
telephony service offerings on mutually agreeable terms. In addition,
EchoStar agreed to carry the FOX News Channel on the DISH Network. EchoStar
received standard program launch support payments in exchange for carrying
the programming.
By combining the capacity of the two newly acquired satellites at
the 110DEG. WL orbital slot and EchoStar's current satellites at the
119DEG. WL orbital slot (subject to FCC approval), EchoStar expects that
the DISH Network will have the capacity to provide more than 500 channels of
programming, Internet and high-speed data services and high definition
television nationwide to a subscriber's single 18-inch satellite dish, and
would be positioned to
F-8
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
offer a one-dish solution for satellite-delivered local programming to major
markets across the United States. EchoStar also expects to be able to serve
Alaska, Hawaii, Puerto Rico and the United States territories in the
Caribbean from the 110DEG. WL orbital slot.
Beneficial interest in substantially all of the assets and rights to
be acquired by EchoStar in the 110 Acquisition will be transferred to the
Company promptly after closing.
TENDER OFFERS
On December 23, 1998, EchoStar commenced cash tender offers ("Tender
Offers") as part of a plan to refinance its indebtedness at more favorable
interest rates and terms. EchoStar offered to purchase any and all of the
following debt securities:
- the 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 1997 Notes issued by the Company.
EchoStar also announced that it had sent to all holders of its
issued and outstanding 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock due 2004 (the "Series B Preferred Stock") a notice to
exchange all of the outstanding shares of Series B Preferred Stock into 12
1/8% Senior Preferred Exchange Notes due 2004 (the "Senior Exchange Notes")
on the terms and conditions set forth in the certificate of designation
relating to the Series B Preferred Stock. The Senior Exchange Notes were
issued on January 4, 1999. Immediately following the exchange, EchoStar
commenced an offer to purchase any and all outstanding Senior Exchange Notes.
The Tender Offers for the first three issues of notes were
consummated on January 25, 1999. The Tender Offers were funded with proceeds
from the offering of the 9 1/4% Senior Notes due 2006 (the "Seven Year
Notes") and the 9 3/8% Senior Notes due 2009 (the "Ten Year Notes," and
together with the Seven Year Notes, the "Notes") described at Note 4, with
holders of more than 99% of each issue of debt securities tendering their
notes and consenting to certain amendments to the indentures governing the
notes that eliminated substantially all of the restrictive covenants and
amended certain other provisions. The Tender Offer for the Senior Exchange
Notes expired on February 1, 1999 and was funded by the Company with proceeds
from the issuance of the Notes. More than 99% of the outstanding Senior
Exchange Notes were validly tendered.
F-9
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
PRO FORMA FINANCIAL INFORMATION
The following table sets forth: (i) certain historical balance sheet
data as of December 31, 1998, (ii) a balance sheet as of December 31, 1998 as
adjusted to give effect to the consummation of the Tender Offers and the
concurrent issuance of the Notes, and (iii) a balance sheet as of December
31, 1998 as further adjusted for the pro forma effects assuming consummation
of the 110 Acquisition.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------------
AS ADJUSTED
ACTUAL AS ADJUSTED AND PRO FORMA
------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Cash, cash equivalents, and marketable investment securities.... $ 32,308 $ 292,674 $ 292,674
Restricted cash and marketable investment securities............ 77,657 - -
----------- ----------- -----------
Total cash, cash equivalents and marketable investment
securities................................................... 109,965 292,674 292,674
----------- ----------- -----------
----------- ----------- -----------
Total assets $ 1,470,173 $ 1,656,971 $ 2,826,971
----------- ----------- -----------
----------- ----------- -----------
Long-term debt (net of current portion):
Mortgages and notes payable.................................. $ 43,450 $ 43,450 $ 43,450
Notes payable to ECC, including accrued interest............. 59,812 - -
1994 Notes................................................... 571,674 1,390 1,390
1996 Notes................................................... 497,955 950 950
1997 Notes................................................... 375,000 15 15
9 1/4% Senior Notes due 2006................................. - 375,000 375,000
9 3/8% Senior Notes due 2009................................. - 1,625,000 1,625,000
----------- ----------- -----------
Total long-term debt....................................... 1,547,891 2,045,805 2,045,805
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 3,000 shares
authorized, issued and outstanding......................... - - -
Additional paid-in capital................................... 145,164 345,164 1,515,164
Accumulated deficit.......................................... (733,301) (1,244,417) (1,244,417)
----------- ----------- -----------
Total stockholder's equity (deficit)............................ (588,137) (899,253) 270,747
----------- ----------- -----------
Total liabilities and stockholder's equity (deficit)............ $ 1,470,173 $ 1,656,971 $2,826,971
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Restrictions on cash held in escrow under the terms of indentures
were removed as a result of the Tender Offers. The restricted cash balances
as of December 31, 1998 have been reclassified and included in the "as
adjusted" amount of cash, cash equivalents and marketable investment
securities. The restriction on the insurance receivable of $106 million (not
shown) was also removed.
The increase in as adjusted and pro forma total assets includes a
net increase in cash available to the Company for working capital of
approximately $186 million as a result of the Notes offering, plus $1.17
billion of assets to be acquired by EchoStar pursuant to the 110 Acquisition
and contributed to the Company.
The increase in additional paid-in capital consists of $200 million
in cash to be contributed to the Company by ECC and additional assets valued
at $1.17 billion, to be acquired by EchoStar in the 110 Acquisition and
contributed to the Company.
The increase in accumulated deficit results from (a) a distribution
of the offering proceeds to EchoStar of approximately $269 million to retire
the Senior Exchange Notes, including related costs of that tender offer, (b)
interest expense of approximately $13.6 million from December 31, 1998
through January 25, 1999, the date of consummation of the Tender Offers on
debt repurchased and paid, and (c) the estimated extraordinary loss upon the
F-10
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
early retirement of the 1994 Notes, the 1996 Notes and the 1997 Notes
pursuant to the Tender Offers of approximately $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) that the Company will report in 1999.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W.
Ergen were reorganized in 1993 into Dish, Ltd. (together with its
subsidiaries, "Dish, Ltd."). In April 1995, ECC was formed to complete an
initial public offering of its Class A common stock. Concurrently, Mr. Ergen
exchanged all of his then outstanding shares of Class B common stock and 8%
Series A Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC. In
December 1995, ECC merged Dish, Ltd. with a wholly-owned subsidiary of ECC
(the "Merger"). Substantially all of EchoStar's operations are conducted by
subsidiaries of Dish, Ltd. The following table summarizes the organizational
structure of EchoStar and its principal subsidiaries as of December 31, 1998:
<TABLE>
<CAPTION>
REFERRED TO
LEGAL ENTITY HEREIN AS PARENT
- ---------------------------------------------------------- ----------- ---------------
<S> <C> <C>
EchoStar Communications Corporation ECC Publicly owned
EchoStar DBS Corporation DBS Corp ECC
EchoStar Space Corporation Space ECC
Direct Broadcasting Satellite Corporation DBSC ECC
EchoStar Satellite Broadcasting Corporation ESBC DBS Corp
Dish, Ltd. Dish, Ltd. ESBC
EchoStar Satellite Corporation ESC Dish, Ltd.
Echosphere Corporation Echosphere Dish, Ltd.
EchoStar Technologies Corporation (formerly HTS, a Texas
Corporation) ETC Dish, Ltd.
Houston Tracker Systems, Inc., a Colorado Corporation
formed in 1998 HTS Dish, Ltd.
DirectSat Corporation DirectSat Dish, Ltd.
EchoStar International Corporation EIC Dish, Ltd.
</TABLE>
SIGNIFICANT RISKS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. The Company is highly leveraged, which makes
it vulnerable to changes in general economic conditions. At December 31,
1998, on a pro forma basis after giving effect to consummation of the Tender
Offers and the concurrent issuance of the Notes, the Company's outstanding
long-term debt (including both the current and long-term portions) would have
been approximately $2.07 billion. Beginning in 1999, the Company will have
semi-annual cash debt service requirements of approximately $94 million
related to the Notes. The Company's ability to meet its debt service
obligations will depend on, among other factors, the successful execution of
its business strategy, which is subject to uncertainties and contingencies
beyond the Company's control.
EXPECTED OPERATING LOSSES. Since 1996, the Company has reported
significant operating and net losses. Improvements in the Company's future
results of operations are largely dependent upon its ability to increase its
customer base while maintaining its overall cost structure, controlling
subscriber turnover and effectively managing its subscriber acquisition
costs. No assurance can be given that the Company will be effective with
regard to these matters. In addition, the Company incurs significant
acquisition costs to obtain DISH Network subscribers. The high cost of
obtaining new subscribers magnifies the negative effects of subscriber
turnover.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements present the combination of DBS
Corp, Space and DBSC, each direct wholly-owned subsidiaries of ECC. All
significant intercompany transactions between DBS Corp, Space and DBSC
(consisting primarily of capital advanced by DBS Corp to Space and DBSC) and
between DBS Corp and its
F-11
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
subsidiaries have been eliminated. Advances to affiliates are recorded at
cost and represent the net amount of funds advanced to, or received from,
unconsolidated affiliates of DBS Corp.
The Company accounts for investments in 50% or less owned entities
using the equity method. At December 31, 1996, 1997 and 1998, these
investments were not material to the Company's combined and consolidated
financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the
U.S. dollar because their sales and purchases are predominantly denominated
in that currency. Transactions denominated in currencies other than U.S.
dollars are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses which are reflected in income as unrealized (based on period-end
translation) or realized (upon settlement of the transaction). Net
transaction gains (losses) during 1996, 1997 and 1998 were not material to
the Company's results of operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. Cash equivalents
as of December 31, 1997 and 1998 consist of money market funds, corporate
notes and commercial paper; such balances are stated at cost which equates to
market value.
F-12
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STATEMENTS OF CASH FLOWS DATA
The following presents the Company's supplemental cash flow
statement disclosure (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash paid for interest............................................... $ 3,007 $ 5,953 $57,706
Cash paid for income taxes........................................... 383 209 83
Capitalized interest................................................. 31,818 43,169 21,619
Satellite launch payment for EchoStar II applied to
EchoStar I launch.................................................. 15,000 - -
Satellite vendor financing........................................... 31,167 14,400 12,950
Other notes payable.................................................. - 5,322 -
Contribution of satellite asset...................................... - - 20,000
The purchase price of Old DBSC was "pushed-down" by ECC
to the Company as follows in the related purchase accounting:
EchoStar III satellite under construction........................ - 51,241 -
FCC authorizations............................................... - 16,243 -
Notes payable to ECC, including accrued interest of $3,382....... - (49,382) -
Accounts payable and accrued expenses............................ - (1,279) -
Other notes payable.............................................. - (500) -
Additional paid-in capital....................................... - (16,323) -
</TABLE>
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE
INVESTMENT SECURITIES
As of December 31, 1997 and 1998, the Company has classified all
marketable investment securities as available-for-sale. The fair market value
of marketable investment securities approximates the carrying value and
represents the quoted market prices at the balance sheet dates. Related
unrealized gains and losses, if material, are reported as a separate
component of stockholder's equity, net of related deferred income taxes, if
applicable. The specific identification method is used to determine cost in
computing realized gains and losses.
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying combined and consolidated balance
sheets, include cash restricted as of December 1997 and 1998 by the indenture
related to the 1997 Notes, plus investment earnings thereon. Restricted cash
and marketable investment securities are invested in certain permitted debt
and other marketable investment securities until disbursed for the express
purposes identified in the applicable indenture. The major components of
marketable investment securities and restricted cash and marketable
investment securities are as follows (in thousands):
<TABLE>
<CAPTION>
RESTRICTED CASH AND MARKETABLE
MARKETABLE INVESTMENT SECURITIES INVESTMENT SECURITIES
DECEMBER 31, DECEMBER 31,
--------------------------------- -----------------------------------
1997 1998 1997 1998
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Commercial paper....................... $ 3,906 $ - $ 128,734 $ 8,424
Corporate notes........................ - 7,000 38,093 54,360
Government bonds....................... - - 16,695 14,517
Certificates of deposit................ - - 2,245 -
Accrued interest....................... - - 1,995 356
---------------------------------- ----------------------------------
$ 3,906 $ 7,000 $ 187,762 $ 77,657
---------------------------------- ----------------------------------
---------------------------------- ----------------------------------
</TABLE>
Marketable investment securities and restricted cash and marketable
investment securities include debt securities of $85 million with contractual
maturities of one year or less. As of December 31, 1998 the Company did not
hold any debt securities with contractual maturities between one and five
years or with contractual maturities of more
F-13
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
than five years. Actual maturities may differ from contractual maturities as
a result of the Company's ability to sell these securities prior to maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for the Company's 1994 Notes, 1996 Notes and 1997 Notes
are based on quoted market prices. The fair values of the Company's mortgages
and other notes payable are estimated using discounted cash flow analyses.
The interest rates assumed in such discounted cash flow analyses reflect
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The following table summarizes the book
and fair values of the Company's debt facilities at December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
----------------------- ------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
1994 Notes................................ $ 499,863 $ 570,960 $ 571,674 $ 636,480
1996 Notes................................ 438,512 488,650 497,955 580,000
1997 Notes................................ 375,000 406,875 375,000 431,250
Mortgages and other notes payable......... 69,731 69,127 66,129 61,975
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling
and storage costs. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998
--------- --------
<S> <C> <C>
EchoStar receiver systems.................................. $ 7,649 $ 45,025
DBS receiver components.................................... 12,506 27,050
Consigned DBS receiver components.......................... 3,122 6,073
Finished goods - analog DTH equipment...................... 2,116 2,656
Spare parts and other...................................... 1,440 1,085
Reserve for excess and obsolete inventory.................. (3,840) (5,181)
--------- --------
$ 22,993 $ 76,708
--------- --------
--------- --------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $26 million, $32 million and $16 million during the years
ended December 31, 1996, 1997 and 1998, respectively. The costs of satellites
under construction are capitalized during the construction phase, assuming
the eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss
would be charged to expense in the period such loss was incurred. The amount
of any such loss would be reduced to the extent of insurance proceeds
received as a result of the launch or in-orbit failure. Depreciation is
recorded on a straight-line basis for financial reporting purposes. Repair
and maintenance costs are charged to expense when incurred. Renewals and
betterments are capitalized.
The Company reviews its long-lived assets and identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
assets which are held and used in operations, the asset would be impaired if
the book value of the asset exceeded the undiscounted future net cash flows
related to the asset. For those assets which are to be disposed of, the
assets
F-14
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
would be impaired to the extent the fair value does not exceed the book
value. The Company considers relevant cash flow, estimated future operating
results, trends and other available information including the fair value of
frequency rights owned, in assessing whether the carrying value of assets are
recoverable.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences
at the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $6 million, $11 million and $6
million during the years ended December 31, 1996, 1997 and 1998, respectively.
REVENUE RECOGNITION
Revenue from the provision of DISH Network subscription television
services and satellite services is recognized as revenue in the period such
services are provided. Revenue from sales of digital set-top boxes and
related accessories is recognized upon shipment to customers. Revenue from
the provision of integration services is recognized as revenue in the period
the services are performed.
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
In August 1996, the Company began selling its EchoStar receiver
systems below its manufactured cost to consumers conditioned upon the
consumer's one-year prepaid subscription to the DISH Network's America's Top
50 CD programming package. From August 1996 through September 1997, the
excess of the Company's aggregate costs (equipment, programming and other)
over proceeds from equipment sales and prepaid programming was expensed
("subscriber promotion subsidies") upon shipment of the equipment. Remaining
costs were deferred ("subscriber acquisition costs") and amortized over the
term of the prepaid subscription (normally one year). Effective October 1997,
promotional programs changed and new subscribers were not required to prepay
for a year of programming. Consequently, the Company began expensing
subscriber acquisition costs as incurred. As of December 31, 1998, all
previously deferred costs were fully amortized.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of issuing the 1994 Notes, the 1996 Notes and the 1997 Notes
were deferred and are being amortized to interest expense over the terms of
the respective notes. The original issue discounts related to the 1994 Notes
and the 1996 Notes are being accreted to interest expense so as to reflect a
constant rate of interest on the accreted balance of the 1994 Notes and the
1996 Notes.
DEFERRED REVENUE
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as
revenue in the period the programming is provided to the subscriber.
F-15
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
LONG-TERM DEFERRED SATELLITE SERVICES REVENUE
Long-term deferred satellite services revenue consists of advance
payments from certain content providers for carriage of their signal on the
DISH Network. Such amounts are deferred and recognized as revenue on a
straight-line basis over the related contract terms (up to ten years).
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998
-------- ---------
<S> <C> <C>
Royalties and copyright fees...................... $ 21,573 $ 49,400
Programming....................................... 20,018 35,472
Marketing......................................... 4,660 33,463
Interest.......................................... 24,621 24,918
Other............................................. 26,218 32,905
-------- ---------
$ 97,090 $ 176,158
-------- ---------
-------- ---------
</TABLE>
ADVERTISING COSTS
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $18 million, $35 million and $48 million for
the years ended December 31, 1996, 1997 and 1998, respectively.
COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("FAS
No. 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. The Company
adopted FAS No. 130 effective as of the first quarter of 1998. FAS No. 130
establishes new rules for the reporting and display of comprehensive loss and
its components, however it has no impact on the Company's net loss or
stockholder's equity. The change in unrealized gain (loss) on
available-for-sale securities is the only component of the Company's other
comprehensive loss. Accumulated other comprehensive loss presented on the
accompanying combined and consolidated balance sheets consists of the
accumulated net unrealized loss on available-for-sale securities, net of
deferred taxes.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
provides guidance that requires capitalization of certain costs incurred
during an internal-use software development project. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company does not
expect that adoption of SOP 98-1 will materially affect its combined and
consolidated financial statements.
RECLASSIFICATIONS
Certain prior year balances in the combined and consolidated
financial statements have been reclassified to conform with the 1998
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
F-16
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
--------- ------------
<S> <C> <C>
EchoStar I....................................... $ 201,607 $ 201,607
EchoStar II...................................... 228,694 228,694
EchoStar III..................................... - 234,083
EchoStar IV...................................... - 105,005
Furniture, fixtures and equipment................ 92,170 182,717
Buildings and improvements....................... 22,114 42,121
Tooling and other................................ 4,336 5,551
Land............................................. 1,636 1,640
Vehicles......................................... 1,321 1,288
Construction in progress......................... 393,189 18,329
--------- ------------
Total property and equipment................. 945,067 1,021,035
Accumulated depreciation......................... (85,783) (167,217)
--------- ------------
Property and equipment, net.................. $ 859,284 $ 853,818
--------- ------------
--------- ------------
</TABLE>
EchoStar III, which was launched in October 1997, commenced
commercial operation in January 1998. EchoStar IV, which was launched in May
1998, commenced commercial operation in August 1998. As of December 31, 1997
construction in progress primarily consisted of EchoStar III ($234 million)
and EchoStar IV ($120 million).
ECHOSTAR IV IMPAIRMENT
As previously announced, the south solar array on EchoStar IV did
not properly deploy subsequent to the launch of EchoStar IV on May 8, 1998.
This anomaly has resulted in a reduction of power available to operate the
satellite. In addition, an unrelated anomaly discovered during the third
quarter of 1998 resulted in the failure of six transponders. The satellite is
equipped with a total of 44 transponders. Only 24 transponders are necessary
to fully utilize the Company's 24 frequencies at 148DEG. WL, where the
satellite is located.
The Company is currently able to use a maximum of only 20
transponders as a result of the solar array anomaly described above. The
number of available transponders will decrease over time, but based on
existing data, the Company expects that approximately 16 transponders will
probably be available over the entire expected 12 year life of the satellite,
absent significant additional transponder or other failures. In September
1998, the Company filed a $219.3 million insurance claim for a total
constructive loss (as defined in the launch insurance policy) related to
EchoStar IV. However, if the Company were to receive $219.3 million for a
total constructive loss on the satellite, the insurers would obtain the sole
right to the benefits of salvage from EchoStar IV under the terms of the
launch insurance policy. While the Company believes it has suffered a total
constructive loss of EchoStar IV in accordance with that definition in the
launch insurance policy, the Company presently intends to negotiate a
settlement with the insurers that will compensate the Company for the reduced
satellite transmission capacity and allow the Company to retain title to the
asset.
Space originally contracted for the launch of EchoStar IV.
Accordingly, all costs associated with the launch of EchoStar IV were
recognized by Space. Funds necessary to pay for the launch of EchoStar IV
were advanced to Space by ECC ($20 million) and DBS Corp ($64 million).
However, because DBS Corp is the named insured under the terms of the
EchoStar IV launch insurance policy, it will be entitled to all proceeds from
any insurance settlement. Consequently, in September 1998, Space transferred
its cost-basis in EchoStar IV to DBS Corp and ECC in settlement of prior
advances. ECC then made a $20 million capital contribution of its basis in
EchoStar IV to DBS Corp. As a result of these transactions (and prior to the
impairment provision described below), all costs associated with the
construction, launch and insurance of EchoStar IV are reflected on the
Company's balance sheet.
F-17
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During the third quarter of 1998, the Company recorded a $106
million provision for loss in connection with the estimated reduced
operational capacity of EchoStar IV. This loss provision represents the
Company's present estimate of the asset impairment attributable to lost
transmission capacity on EchoStar IV resulting from the solar array anomaly
described above. The Company also recorded a $106 million gain attributable
to an anticipated insurance claim receivable that it believes is probable of
receipt. While there can be no assurance as to the amount of the final
insurance settlement, the Company believes that it will receive insurance
proceeds related to EchoStar IV that will be sufficient to at least fully
offset its asset impairment attributable to the reduction in capacity
sustained by EchoStar IV. While the Company believes it has sustained a total
constructive loss, insurers have requested additional information and may
contest the claim. To the extent that it appears probable that the Company
will receive insurance proceeds in excess of the $106 million currently
recorded and that no further provision for loss is necessary, a gain will be
recognized for the incremental amount in the period that the amount of the
final settlement can be reasonably estimated. Likewise, if the satellite
insurers obtain the right to salvage from EchoStar IV by payment to the
Company of the $219.3 million insured amount, the Company will record an
additional loss for the remaining carrying value of EchoStar IV.
ECHOSTAR III ANOMALY
During 1998, three transponders on EchoStar III malfunctioned,
resulting in the failure of a total of six transponders on the satellite.
While a maximum of 32 transponders can be operated at any time, the satellite
was equipped with a total of 44 transponders to provide redundancy. As a
result of this redundancy and because the Company is only licensed by the FCC
to operate 11 transponders at 61.5DEG. WL, where the satellite is
located, the transponder anomaly has not resulted in a loss of service to
date. The satellite manufacturer, Lockheed Martin, has advised the Company
that it believes it has identified the root cause of the failures, and that
while further transponder failures are possible, Lockheed Martin does not
believe it is likely that the operational capacity of EchoStar III will be
reduced below 32 transponders. Lockheed Martin also believes it is unlikely
that the Company's ability to operate at least the 11 licensed transponders
on the satellite will be affected. The Company will continue to evaluate the
performance of EchoStar III and may be required to modify its loss assessment
as new events or circumstances develop.
The time for filing a claim for a loss under the satellite insurance
policy that covered EchoStar III at the time of the transponder failures has
passed. While the insurance carriers were notified of the anomaly, as a
result of the built-in redundancy on the satellite and Lockheed Martin's
conclusions with respect to further failures, no claim for loss was filed.
During the anomaly investigation, the Company obtained a $200 million
in-orbit insurance policy on EchoStar III at standard industry rates, which
was renewed through June 25, 1999. However, the policy contains a
three-transponder deductible if the satellite is operating at 120 watts per
transponder, or a six-transponder deductible if the satellite is operating at
230 watts per transponder. As such, the policy would not cover transponder
failures unless transponder capacity is reduced to less than 26 transponders
in the 120 watt mode or 13 transponders in the 230 watt mode, during the
coverage period. As a result of the deductible, the Company could potentially
experience uninsured losses of capacity on EchoStar III. Although there can
be no assurance, the Company expects that in-orbit insurance can be procured
on more traditional terms in the future if no further failures occur in the
interim. If further failures do occur, the Company may not be able to obtain
additional insurance on EchoStar III on commercially reasonable terms. The
Company does not maintain insurance for lost profit opportunity.
F-18
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT
As described in Note 1, except for residual aggregate non-tendered
debt of approximately $2.4 million, the 1994 Notes, 1996 Notes and the 1997
Notes that were outstanding at December 31, 1998 were retired in connection
with closing of the Tender Offers and the concurrent sale of the Seven and
Ten Year Notes. Additionally, substantially all of the restrictive covenants
contained in each of the respective indentures were removed upon closing of
the Tender Offers. A brief summary of the terms of the residual notes
outstanding follows.
1994 NOTES
In June 1994, Dish, Ltd. issued the 1994 Notes, which consisted of
12 7/8% Senior Secured Discount Notes due June 1, 2004 and Common Stock
Warrants (the "Warrants") (collectively, the "1994 Notes Offering"). The 1994
Notes Offering resulted in net proceeds to Dish, Ltd. of $323 million. The
1994 Notes bear interest at a rate of 12 7/8% computed on a semi-annual bond
equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $1,000 per bond (an aggregate of approximately $1.5
million for the bonds not tendered) by that date. Commencing in December
1999, interest on the 1994 Notes will be payable in cash on December 1 and
June 1 of each year. The remaining balance of 1994 Notes matures on June 1,
2004.
1996 NOTES
In March 1996, ESBC issued the 1996 Notes which consisted of 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes Offering"). The 1996
Notes Offering resulted in net proceeds to ESBC of approximately $337
million. The 1996 Notes bear interest at a rate of 13 1/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1996 Notes will not be
payable in cash prior to March 15, 2000, with the 1996 Notes accreting to a
principal amount at stated maturity of $1,000 per bond (an aggregate of
approximately $1.1 million for the bonds not tendered) by that date.
Commencing in September 2000, interest on the 1996 Notes will be payable in
cash on September 15 and March 15 of each year. The 1996 Notes that remain
outstanding following the Tender Offers mature on March 15, 2004.
1997 NOTES
In June 1997, the Company issued the 1997 Notes which consisted of
12 1/2% Senior Secured Notes due 2002 (the "1997 Notes Offering"). The 1997
Notes Offering resulted in net proceeds to the Company of approximately $363
million. Interest accrues on the 1997 Notes at a rate of 12 1/2% and is
payable in cash semi-annually on January 1 and July 1 of each year,
commencing January 1, 1998. Approximately $109 million of the net proceeds of
the 1997 Notes Offering was placed in the Interest Escrow to fund the first
five semi-annual interest payments (through January 1, 2000). Additionally,
approximately $112 million of the net proceeds of the 1997 Notes Offering was
placed in the Satellite Escrow to fund the construction, launch and insurance
of EchoStar IV. The 1997 Notes that remain outstanding following the Tender
Offers mature on July 1, 2002.
SEVEN AND TEN YEAR NOTES
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).
Interest accrues at annual rates of 9 1/4% and 9 3/8% on the Seven Year and
Ten Year Notes, respectively. Interest on the Seven and Ten Year Notes is
payable semi-annually in cash in arrears on February 1 and August 1 of each
year, commencing August 1, 1999.
Concurrently with the closing of the Notes offering, the Company
used approximately $1.658 billion of net proceeds received from the sale of
the Notes to complete the Tender Offers for its outstanding 1994 Notes, 1996
Notes and 1997 Notes. In February 1999, ECC used approximately $268 million
of net proceeds received from the sale of the Notes to complete the Tender
Offers related to the Senior Exchange Notes issued on January 4, 1999, in
exchange for all issued and outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock. Following expiration
F-19
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of the Tender Offers, and aggregate of approximately $2.4 million of 1994
Notes, 1996 Notes and 1997 Notes remain outstanding.
The Notes are general senior unsecured obligations, which (i) rank
PARI PASSU in right of payment to each other and to all existing and future
senior unsecured obligations, (ii) rank senior to all existing and future
junior obligations, and (iii) are effectively junior to secured obligations
to the extent of the collateral securing such obligations, including any
borrowings under future secured credit facilities. With the exception of
certain de minimis domestic and foreign subsidiaries, the Notes are fully,
unconditionally and jointly and severally guaranteed by all subsidiaries of
the Company, (collectively, the "Notes Guarantors").
Except under certain circumstances requiring prepayment premiums,
and in other limited circumstances, the Seven and Ten Year Notes are not
redeemable at the Company's option prior to February 1, 2003 and February 1,
2004, respectively. Thereafter, the Seven Year Notes will be subject to
redemption, at the option of the Company, in whole or in part, at redemption
prices decreasing from 104.625% during the year commencing February 1, 2003
to 100% on or after February 1, 2005, together with accrued and unpaid
interest thereon to the redemption date. The Ten Year Notes will be subject
to redemption, at the option of the Company, in whole or in part, at
redemption prices decreasing from 104.688% during the year commencing
February 1, 2004 to 100% on or after February 1, 2008, together with accrued
and unpaid interest thereon to the redemption date.
The indentures related to the Notes (the "Indentures") contain
restrictive covenants that, among other things, impose limitations on the
ability of the Company to: (i) incur additional indebtedness; (ii) apply the
proceeds of certain asset sales; (iii) create, incur or assume liens; (iv)
create dividend and other payment restrictions with respect to the Company's
subsidiaries; (v) merge, consolidate or sell assets; and (vi) enter into
transactions with affiliates. In addition, the Company may pay dividends on
its equity securities only if: (1) no default shall have occurred or is
continuing under the Indentures; and (2) after giving effect to such dividend
and the incurrence of any indebtedness (the proceeds of which are used to
finance the dividend), the Company's ratio of total indebtedness to cash flow
(calculated in accordance with the Indentures) would not exceed 8.0 to 1.0.
Moreover, the aggregate amount of such dividends generally may not exceed the
sum of the difference of cumulative consolidated cash flow (calculated in
accordance with the Indentures) minus 120% of consolidated interest expense
of the Company (calculated in accordance with the Indentures), in each case
from April 1, 1999 plus an amount equal to 100% of the aggregate net cash
proceeds received by the Company and its subsidiaries from the issuance or
sale of certain equity interests of the Company or EchoStar. In the event of
a change of control, as defined in the Indentures, the Company will be
required to make an offer to repurchase all of the Seven and Ten Year Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
together with accrued and unpaid interest thereon, to the date of repurchase.
F-20
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MORTGAGES AND OTHER NOTES PAYABLE
Mortgages and other notes payable consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
8.25% note payable for satellite vendor financing for EchoStar I due in equal
monthly installments of $722, including interest, through February 2001...... $ 24,073 $ 17,137
8.25% note payable for satellite vendor financing for EchoStar II due in equal
monthly installments of $562, including interest, through November 2001...... 22,489 17,416
8.25% note payable for satellite vendor financing for EchoStar III due in equal
monthly installments of $294, including interest, through October 2002....... 13,812 12,183
8.25% note payable for satellite vendor financing for EchoStar IV due in equal
monthly installments of $264, including interest, through May 2003........... - 12,950
Mortgages and other unsecured notes payable due in installments through April
2009 with interest rates ranging from 8% to 10%.............................. 9,357 6,443
---------- ---------
Total....................................................................... 69,731 66,129
Less current portion........................................................ (17,885) (22,679)
---------- ---------
Mortgages and other notes payable, net of current portion................... $ 51,846 $ 43,450
---------- ---------
---------- ---------
</TABLE>
During 1995 and 1996, ECC advanced the Company $46 million in the
form of notes payable to enable the Company to make required payments under
its EchoStar III construction contract. The notes payable bear interest at
11.25%, which is being added to principle.
Future maturities of the Company's outstanding long-term debt, after
consummation of the Tender Offers and issuance of the Notes on January 25,
1999, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MORTGAGES
AND OTHER
SEVEN YEAR TEN YEAR NOTES
NOTES NOTES PAYABLE TOTAL
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
YEAR ENDING DECEMBER 31,
1999...................... $ - $ - $ 22,679 $ 22,679
2000...................... - - 20,314 20,314
2001...................... - - 13,560 13,560
2002...................... - - 5,855 5,855
2003...................... - - 1,675 1,675
Thereafter................ 375,000 1,625,000 4,400 2,004,400
---------- ------------ ---------- ------------
Total........................ $ 375,000 $ 1,625,000 $ 68,483 $ 2,068,483
---------- ------------ ---------- ------------
---------- ------------ ---------- ------------
</TABLE>
SATELLITE VENDOR FINANCING
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments that are deferred until
after the respective satellites are in orbit (satellite vendor financing).
The Company utilized $36 million, $28 million, $14 million and $13 million of
satellite vendor financing for EchoStar I, EchoStar II, EchoStar III and
EchoStar IV, respectively. The satellite vendor financing with respect to
EchoStar I and EchoStar II is secured by substantially all assets of Dish,
Ltd. and its subsidiaries (subject to certain restrictions) and a corporate
guarantee of ECC. The satellite vendor financings for both EchoStar III and
EchoStar IV are secured by an ECC corporate guarantee.
F-21
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. INCOME TAXES
As of December 31, 1998, the Company had net operating loss
carryforwards ("NOLs") for Federal income tax purposes of approximately $448
million. The NOLs expire beginning in the year 2011. The use of the NOLs is
subject to statutory and regulatory limitations regarding changes in
ownership. Financial Accounting Standard No. 109, "Accounting for Income
Taxes," ("FAS No. 109") requires that the potential future tax benefit of
NOLs be recorded as an asset. FAS No. 109 also requires that deferred tax
assets and liabilities be recorded for the estimated future tax effects of
temporary differences between the tax basis and book value of assets and
liabilities. Deferred tax assets are offset by a valuation allowance if
deemed necessary.
In 1998, the Company increased its valuation allowance sufficient to
fully offset net deferred tax assets arising during the year. Realization of
net deferred tax assets is not assured and is principally dependent on
generating future taxable income prior to expiration of the NOLs. Management
believes existing net deferred tax assets in excess of the valuation
allowance will, more likely than not, be realized. The Company continuously
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changed circumstances indicate that
it is more likely that not the additional benefits will be realized. Any
future adjustments to the valuation allowance will be recognized as a
separate component of the Company's provision for income taxes.
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
---------- ----------
<S> <C> <C>
Current deferred tax assets:
Accrued royalties............................................... $ 6,506 $ 15,971
Inventory reserves and cost methods............................. 1,180 1,759
Accrued expenses................................................ 6,391 9,845
Allowance for doubtful accounts................................. 517 1,098
Reserve for warranty costs...................................... 270 101
Unrealized holding loss on marketable investment securities..... 4 -
---------- ----------
Total current deferred tax assets................................. 14,868 28,774
Current deferred tax liabilities:
Subscriber acquisition costs and other.......................... (6,846) -
---------- ----------
Total current deferred tax liabilities............................ (6,846) -
---------- ----------
Gross current deferred tax assets................................. 8,022 28,774
Valuation allowance............................................... (5,081) (22,065)
---------- ----------
Net current deferred tax assets................................... 2,941 6,709
Noncurrent deferred tax assets:
General business and foreign tax credits........................ 2,224 2,072
Net operating loss carryforwards................................ 122,515 164,123
Amortization of original issue discount on 1994 Notes
and 1996 Notes................................................ 60,831 105,095
Other........................................................... 7,571 12,999
---------- ----------
Total noncurrent deferred tax assets.............................. 193,141 284,289
Noncurrent deferred tax liabilities:
Depreciation.................................................... (17,264) (24,115)
Other........................................................... (230) (144)
---------- ----------
Total noncurrent deferred tax liabilities......................... (17,494) (24,259)
---------- ----------
Gross deferred tax assets......................................... 175,647 260,030
---------- ----------
Valuation allowance............................................... (111,238) (199,392)
---------- ----------
Net noncurrent deferred tax assets................................ 64,409 60,638
---------- ----------
Net deferred tax assets........................................... $ 67,350 $ 67,347
---------- ----------
---------- ----------
</TABLE>
F-22
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The components of the benefit (provision for) from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997 1998
--------- ------------ ----------
<S> <C> <C> <C>
Current benefit (provision):
Federal........................................ $ 4,596 $ (361) $ -
State.......................................... (49) (9) 6
Foreign........................................ (209) (137) (77)
-------- ----------- ---------
4,338 (507) (71)
Deferred benefit:
Federal........................................ 48,043 108,598 97,819
State.......................................... 2,472 8,082 7,319
Increase in valuation allowance................ - (116,319) (105,138)
-------- ----------- ---------
50,515 361 -
-------- ----------- ---------
Total benefit (provision)................... $ 54,853 $ (146) $ (71)
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
The actual tax benefit (provision) for 1996, 1997 and 1998 are
reconciled to the amounts computed by applying the statutory Federal tax rate
to income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
----- ------ ------
<S> <C> <C> <C>
Statutory rate..................................... 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit......... 1.8 1.6 1.6
Research and development and foreign tax credits... - 0.7 -
Non-deductible interest expense.................... (1.4) (0.5) (1.3)
Other.............................................. (0.4) (0.8) 0.4
Increase in valuation allowance.................... - (36.0) (35.7)
----- ------ ------
Total benefit from income taxes.................... 35.0% -% -%
----- ------ ------
----- ------ ------
</TABLE>
6. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLAN
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers,
directors and key employees. EchoStar has reserved up to 10 million shares of
its Class A common stock for granting awards under the Stock Incentive Plan.
All stock options granted through December 31, 1998 have included exercise
prices not less than the fair market value of EchoStar's Class A common stock
at the date of grant, and vest, as determined by EchoStar's Board of
Directors, generally at the rate of 20% per year.
During 1998, EchoStar adopted the 1998 Incentive Plan which provided
certain key employees a contingent incentive that would be paid, at the key
employee's election, in stock options, a cash award or a combination thereof.
The payment of these incentives was contingent upon the achievement of
certain financial and other goals of EchoStar. EchoStar did not meet any of
the goals during 1998. Accordingly, no cash incentives were paid, all stock
options granted pursuant to the Incentive Plan were cancelled and no
compensation expense was recognized related to 1998 Incentive Plan. The Board
of Directors has approved a similar plan for 1999. Any payments under this
plan are contingent upon the achievement of certain financial and other goals.
F-23
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
A summary of EchoStar's incentive stock option activity for the
years ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year...................... 1,117,133 $ 12.23 1,025,273 $14.27 1,524,567 $ 14.99
Granted........................ 138,790 27.02 779,550 17.05 698,135 18.78
Repriced....................... - - 255,794 17.00 - -
Exercised...................... (103,766) 10.24 (98,158) 9.64 (188,182) 12.52
Forfeited...................... (126,884) 13.27 (437,892) 19.46 (587,505) 17.08
--------- --------- --------- ---------- --------- -----------
Options outstanding, end of year 1,025,273 $ 14.27 1,524,567 $14.99 1,447,015 $ 16.29
--------- --------- --------- ---------- --------- -----------
--------- --------- --------- ---------- --------- -----------
Exercisable at end of year..... 258,368 $ 11.31 347,009 $12.15 482,303 $ 13.83
--------- --------- --------- ---------- --------- -----------
--------- --------- --------- ---------- --------- -----------
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING WEIGHTED- AS OF WEIGHTED-
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1998 LIFE EXERCISE PRICE 1998 EXERCISE PRICE
- ----------------- ------------ ----------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 9.333 - $11.870 306,379 3.72 $ 9.61 212,536 $ 9.57
17.000 - 18.290 937,546 6.19 17.04 265,271 17.03
22.000 - 26.688 203,090 7.28 22.88 4,496 26.69
- ----------------- ------------ ----------- -------------- ------------- ---------------
$ 9.333 - $26.688 1,447,015 5.82 $ 16.29 482,303 $13.83
- ----------------- ------------ ----------- -------------- ------------- ---------------
- ----------------- ------------ ----------- -------------- ------------- ---------------
</TABLE>
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than
$17.00 per share of Class A common stock to $17.00 per share. The Board of
Directors would not typically consider reducing the exercise price of
previously granted options. However, these options were repriced due to the
occurrence of certain events beyond the reasonable control of the employees
of EchoStar which significantly reduced the incentive these options were
intended to create. The fair market value of the Class A common stock was
$15.25 on the date of the repricing. Options to purchase approximately
256,000 shares of Class A common stock were affected by this repricing.
ACCOUNTING FOR STOCK-BASED COMPENSATION
EchoStar has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under
APB 25, EchoStar does not recognize compensation expense on the issuance of
stock under its Stock Incentive Plan because the option terms are fixed and
the exercise price equals the market price of the underlying stock on the
date of grant. In October 1995, the Financial Accounting Standards Board
issued Financial Accounting Standard No. 123, "Accounting and Disclosure of
Stock-Based Compensation," ("FAS No. 123") which established an alternative
method of expense recognition for stock-based compensation awards to
employees based on fair values. EchoStar elected to not adopt FAS No. 123 for
expense recognition purposes.
F-24
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Pro forma information regarding net income and earnings per share is
required by FAS No. 123 and has been determined as if EchoStar had accounted
for its stock-based compensation plans using the fair value method prescribed
by that statement. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting
period. All options are initially assumed to vest. Compensation previously
recognized is reversed to the extent applicable to forfeitures of unvested
options. The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate..................... 6.80% 6.09% 5.64%
Volatility factor........................... 62% 68% 67%
Dividend yield.............................. 0.00% 0.00% 0.00%
Expected term of options.................... 6 years 6 years 6 years
Weighted-average fair value of
options granted........................... $ 16.96 $ 10.38 $ 12.03
</TABLE>
The Company's pro forma net loss was $103 million, $325 million and
$297 million for the years ended December 31, 1996, 1997, and 1998,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock-based compensation awards.
7. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Board of Directors and shareholders approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1,
1997. Under the ESPP, EchoStar is authorized to issue a total of 100,000
shares of Class A common stock. Substantially all full-time employees who
have been employed by EchoStar for at least one calendar quarter are eligible
to participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under
all stock purchase plans of EchoStar at a rate which would exceed $25,000 in
fair market value of capital stock in any one year. The purchase price of the
stock is 85% of the closing price of the Class A common stock on the last
business day of each calendar quarter in which such shares of Class A common
stock are deemed sold to an employee under the ESPP. The ESPP shall terminate
upon the first to occur of (i) October 1, 2007 or (ii) the date on which the
ESPP is terminated by the Board of Directors. During 1997 and 1998, employees
purchased 4,430 and 15,776 shares of Class A common stock through the ESPP,
respectively.
401(k) EMPLOYEE SAVINGS PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan")
for eligible employees. Voluntary employee contributions to the 401(k) Plan
may be matched 50% by EchoStar, subject to a maximum annual contribution by
EchoStar of $1,000 per employee. EchoStar also may make an annual
discretionary contribution to the plan with approval by EchoStar's Board of
Directors, subject to the maximum deductible limit provided by the Internal
Revenue Code of 1986, as amended. EchoStar's cash contributions to the 401(k)
Plan totaled $226,000, $329,000 and $314,000 during 1996, 1997 and 1998,
respectively. Additionally, EchoStar contributed 55,000 shares of its Class A
common stock in 1996 (fair value of $935,000) to the 401(k) Plan as a
discretionary contribution. During 1998, EchoStar contributed 80,000 shares
of its Class A common stock (fair value of approximately $2 million) to the
401(k) Plan related to its 1997 discretionary contribution. During 1999,
EchoStar expects to contribute 65,000 shares of its Class A common stock
(fair value of
F-25
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
approximately $3 million) to the 401(k) Plan related to its 1998
discretionary contribution.
8. OTHER COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
As of December 31, 1998, the Company's purchase commitments totaled
approximately $59 million. The majority of these commitments relate to
EchoStar receiver systems and related components. All of the purchases
related to these commitments are expected to be made during 1999. The Company
expects to finance these purchases from existing unrestricted cash balances
and future cash flows generated from operations, if any.
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other things, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar. News
Corporation also agreed to make available for use by EchoStar the DBS permit
for 28 frequencies at the 110DEG. WL orbital slot purchased by MCI for
more than $682 million following a 1996 FCC auction. During late April 1997,
substantial disagreements arose between the parties regarding their
obligations under this agreement. Those substantial disagreements led the
parties to litigation. In mid-1997, EchoStar filed a complaint seeking
specific performance of this agreement and damages, including lost profits.
News Corporation filed an answer and counterclaims seeking unspecified
damages, denying all of the material allegations and asserting numerous
defenses. Discovery commenced in July 1997, and the case was set for trial
commencing March 1999. In connection with the pending 110 Acquisition, the
litigation between EchoStar and News Corporation will be stayed and will be
dismissed with prejudice upon closing or if the transaction is terminated for
reasons other than the breach by, or failure to fill a condition within the
control of, News Corporation or MCI.
In connection with the News Corporation litigation that arose in
1997, EchoStar has a contingent fee arrangement with its lawyers, which
provides for the lawyers to be paid a percentage of any net recovery obtained
in its dispute with News Corporation. Although they have not been specific,
the lawyers 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 lawyers' interpretation of the fee
arrangement, which it believes significantly overstates the magnitude of its
liability thereunder. If the lawyers and EchoStar are unable to resolve this
fee dispute under the fee arrangement, the fee dispute would be resolved
under arbitration. It is too early to determine the outcome of negotiations
or arbitration regarding 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 Corporation, ECC and two of ECC's wholly-owned
subsidiaries, Dish, Ltd. and 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
F-26
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 authorizes EchoStar to
substitute satellite-delivered network signals its subscribers, but only if
those subscribers qualify as "unserved households", defined in the Satellite
Home Viewer Act, those that, 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 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 United
States District Court for the Southern District of Florida has entered
nationwide preliminary and permanent injunctions preventing PrimeTime 24 from
selling its programming to consumers unless the programming was sold
according to certain stipulations in the injunction. The preliminary
injunction took effect on February 28, 1999, and the permanent injunction is
set to take effect on April 30, 1999. The injunctions cover "distributors" as
well. The plaintiff in the Florida litigation informed EchoStar that it
considered EchoStar 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 to
homes delineated by a contour in the Raleigh area. Other copyright litigation
against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998,
and began uplinking and distributing network signals directly. EchoStar has
also implemented Satellite Home Viewer Act 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 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, several broadcast parties, acting on prior
threats filed a complaint alleging, among other things, copyright
infringement against EchoStar in federal district court in Miami. The
plaintiffs in that action have also requested the issuance of a preliminary
injunction against EchoStar. The networks also filed a counter claim
containing similar allegations against us in the Colorado litigation.
On February 24, 1999, CBS, NBC, Fox, and ABC filed with the court a
"Motion for Temporary Restraining Order, Preliminary Injunction, and Contempt
Finding" against DIRECTV, Inc. ("DIRECTV") in response to an announcement by
DIRECTV that it was discontinuing retransmission of the programming of the
four networks received from PrimeTime 24 and would instead distribute its own
package of network affiliates to its existing subscribers. On February 25,
1999, the court granted CBS and Fox a temporary restraining order requiring
DIRECTV and its agents and those who act in active concert or participation
with DIRECTV, not to deliver CBS or Fox programming to subscribers who do not
live in "unserved households." For purposes of determining whether a
subscriber is "unserved," the court referred to a modified version of the
Longley-Rice signal propagation model. The modifications in some respects
reflect an order adopted by the FCC on February 2, 1999. On March 12, 1999,
DIRECTV and the four major broadcast networks and their affiliates announced
that they have reached a settlement of
F-27
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
that dispute. Under the terms of the settlement, DIRECTV, stations and
networks have agreed on a timeframe to disconnect distant broadcast network
signals from subscribers predicted to be ineligible based on a modified
version of the Longley-Rice signal propagation model. Subscribers predicted
to be ineligible who obtain consent from the affected affiliate stations to
receive their signals via satellite will not lose receipt of their distant
network signals. EchoStar is not sure what effect this development will have
on its business.
On March 24, 1999, we have a hearing scheduled in a Denver court on
similar matters with similar parties. If we were to lose that hearing, it is
likely that the broadcasters would move forward on their lawsuit filed in
Miami and would seek similar remedies against us, including a temporary
restraining order requiring us to stop delivering network signals to
subscribers who do not live in "unserved households." Depending upon the
terms, a restraining order could result in us having to terminate delivery of
network signals to a material portion of our subscriber base, which could
result in decreases in subscriber activations and subscription television
services revenue and an increase in subscriber turnover.
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 certain meteoroid events occurred as the earth's
orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle).
While there can be no assurance, the Company 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 the Company's DBS satellites. While the
probability that the Company'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. The Company is presently
evaluating the potential effects that the November 1999 meteoroid events may
have on its DBS satellites. At this time, the Company has not finally
determined the impact, if any, these meteoroid events may have on its DBS
satellites.
9. SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
With the exception of certain de minimis domestic and foreign
subsidiaries (collectively, the "Non-Guarantors"), the Seven and Ten Year
Notes are fully, unconditionally and jointly and severally guaranteed by all
subsidiaries of the Company.
F-28
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The combined assets, stockholders' equity, net loss and operating
cash flows of the Non-Guarantors represent less than 1% of the combined and
consolidated assets, stockholder's equity, net loss and operating cash flows
of the Company, including the non-guarantors during both 1997 and 1998.
Summarized combined and consolidated financial information for the Company
and the subsidiary guarantors is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ 196,988 $ 475,877 $ 985,909
Expenses.................................. 305,705 700,104 1,116,733
---------- ---------- -----------
Operating loss............................ (108,717) (224,227) (130,824)
Other income (expense).................... (47,640) (98,941) (163,406)
---------- ---------- -----------
Net loss before taxes..................... (156,357) (323,168) (294,230)
Income tax benefit (provision), net....... 54,849 (146) (72)
---------- ---------- -----------
Net loss.................................. $ (101,508) $ (323,314) $ (294,302)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets.............................................. $ 183,215 $ 241,464
Property and equipment, net................................. 859,279 853,818
Other noncurrent assets..................................... 388,934 374,421
----------- -----------
Total assets................................................ $ 1,431,428 $ 1,469,703
----------- -----------
----------- -----------
Current liabilities......................................... $ 305,656 $ 476,296
Long-term liabilities....................................... 1,439,318 1,581,249
Stockholder's equity (deficit).............................. (313,546) (587,842)
----------- -----------
Total liabilities and stockholder's equity (deficit)........ $ 1,431,428 $ 1,469,703
----------- -----------
----------- -----------
</TABLE>
10. 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 and for related disclosures
about products and services, geographic areas, and major customers.
FAS No. 131 requires companies to use the "management approach" to
reporting segment information, which focuses on the financial information
that a company's chief decision maker uses to make operating decisions and to
assess the company's performance. EchoStar's management reviews information
for the Company to the extent necessary for debt compliance purposes.
However, operational decisions are based on EchoStar's consolidated financial
statements. Accordingly, in the following table EchoStar's consolidated
segment information has been reconciled to amounts presented in the
accompanying financial statements of the Company. "Other EchoStar Activity"
includes the operations of EchoStar conducted through subsidiaries other than
the Company. These operations consist primarily of direct equipment sales to
subscribers, consumer products financing activities and niche programming
revenue.
F-29
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
BUSINESS UNIT DESCRIPTIONS
The operations of EchoStar include three interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States.
- ETC - the design, distribution and sale of EchoStar receiver
systems for the DISH Network as well as for direct-to-home
projects of other internationally, together with the provision
of uplink center design, construction oversight and other
project integration services for international direct-to-home
ventures.
- SATELLITE SERVICEs - engaged in the delivery of video, audio and
data services to business television customers and other
satellite users. These services my include satellite uplink
services, satellite transponder space usage, billing, customer
service and other services.
The accounting policies for the above business units are the same as
those described in the summary of significant accounting policies for the
combined and consolidated entity. Both EchoStar and the Company account for
intersegment sales and transfers at cost. All other revenue and expenses from
segments below the quantitative thresholds are attributable to sales of
C-band equipment and other corporate administrative functions. Only those
assets and measures of profit and loss that are included in the measure of
assets and profit and loss used by EchoStar's chief operating decision maker
are reported.
FINANCIAL DATA BY BUSINESS UNIT
<TABLE>
<CAPTION>
DBS CORP,
ECHOSTAR OTHER AFFILIATES
DISH SATELLITE ELIMINATIONS CONSOLIDATED ECHOSTAR AND
NETWORK ETC SERVICES AND OTHER TOTAL ACTIVITY SUBSIDIARIES
--------- --------- -------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue...................... $ 142,913 $ 18,930 $ 2,542 $ 34,516 $ 198,901 $ (1,798) $ 197,103
Depreciation and amortization 2,356 1,143 - 39,915 43,414 (45) 43,369
Total expenses............... 161,404 26,007 1,724 119,111 308,246 (2,278) 305,968
EBITDA....................... (16,135) (7,685) 818 (42,929) (65,931) 435 (65,496)
Interest income.............. 1,894 730 - 13,006 15,630 (519) 15,111
Interest expense............. 2,015 3 - 59,469 61,487 943 62,430
Income tax benefit, net...... 34,117 3,708 - 16,868 54,693 160 54,853
Net income (loss)............ 3,541 (6,187) 818 (99,158) (100,986) (690) (101,676)
YEAR ENDED DECEMBER 31, 1997
Revenue...................... $ 378,377 $ 82,609 $ 3,458 $ 12,974 $ 477,418 $ (1,516) $ 475,902
Depreciation and amortization 158,992 1,659 - 12,625 173,276 (440) 172,836
Total expenses............... 569,998 73,081 329 58,281 701,689 (1,451) 700,238
EBITDA....................... (32,629) 11,186 3,129 (32,681) (50,995) (505) (51,500)
Interest income.............. 10,114 180 - 6,957 17,251 (4,739) 12,512
Interest expense............. 27,503 - - 76,689 104,192 5,811 110,003
Income tax provision, net.... (7) (32) - (107) (146) - (146)
Net income (loss)............ (231,223) 4,378 2,889 (88,869) (312,825) (10,599) (323,424)
YEAR ENDED DECEMBER 31, 1998
Revenue...................... $ 733,382 $ 251,958 $23,442 $ (26,116) $ 982,666 $ 3,243 $ 985,909
Depreciation and amortization 85,107 2,097 26 15,406 102,636 (479) 102,157
Total expenses............... 871,269 193,852 3,495 36,941 1,105,557 11,207 1,116,764
EBITDA....................... (52,781) 60,202 19,973 (47,649) (20,255) (8,443) (28,698)
Interest income.............. 9,280 - 2 21,004 30,286 (20,175) 10,111
Interest expense............. 49,042 282 - 118,205 167,529 5,413 172,942
Income tax benefit
(provision), net........... 17 (11) - (50) (44) (27) (71)
Net loss..................... (199,356) 30,333 18,409 (110,268) (260,882) (33,493) (294,375)
</TABLE>
F-30
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
OTHER
GEOGRAPHIC INFORMATION UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- -------- ------------- ---------
<S> <C> <C> <C> <C>
1996
Total revenue*..................... $ 159,611 $ 26,984 $ 10,508 $ 197,103
Long-lived assets.................. 656,697 1,103 233 658,033
1997
Total revenue*..................... $ 446,461 $ 20,592 $ 8,849 $ 475,902
Long-lived assets.................. 957,166 1,217 121 958,504
1998
Total revenue*..................... $ 967,746 $ 18,163 $ - $ 985,909
Long-lived assets.................. 955,586 1,498 - 957,084
</TABLE>
* Revenues are attributed to geographic regions based upon the location from
which the sale originated.
TRANSACTIONS WITH MAJOR CUSTOMERS
During 1998, export sales to two customers together totaled $210 million
and accounted for approximately 21% of the Company's total revenue. Revenues
for these customers are included within the ETC business unit. Complete or
partial loss of one or both of these customers would have a material adverse
effect on the Company's results of operations.
11. VALUATION AND QUALIFYING ACCOUNTS
The Company's valuation and qualifying accounts as of December 31, 1996,
1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
YEAR EXPENSES DEDUCTIONS END OF YEAR
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Assets:
Allowance for doubtful accounts....... $ 1,106 $ 2,340 $ (1,952) $ 1,494
Loan loss reserve..................... 78 157 (94) 141
Reserve for inventory................. 2,797 4,304 (1,438) 5,663
Liabilities:
Reserve for warranty costs and other.. 1,105 (342) - 763
YEAR ENDED DECEMBER 31, 1997:
Assets:
Allowance for doubtful accounts....... $ 1,494 $ 4,343 $ (4,490) $ 1,347
Loan loss reserve..................... 141 7 (87) 61
Reserve for inventory................. 5,663 1,650 (3,473) 3,840
Liabilities:
Reserve for warranty costs and other.. 763 - (53) 710
YEAR ENDED DECEMBER 31, 1998:
Assets:
Allowance for doubtful accounts....... $ 1,347 $ 10,692 $ (9,043) $ 2,996
Loan loss reserve..................... 61 31 (92) -
Reserve for inventory................. 3,840 1,744 (403) 5,181
Liabilities:
Reserve for warranty costs and other.. 710 - (435) 275
</TABLE>
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's quarterly results of operations are summarized as follows
(in thousands):
F-31
<PAGE>
ECHOSTAR DBS CORPORATION AND AFFILIATES AND SUBSIDIARIES
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR
COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Total revenue............... $ 68,967 $ 97,831 $ 129,662 $ 179,442
Operating loss.............. (43,328) (43,503) (91,202) (46,303)
Net loss.................... (63,303) (66,067) (119,567) (74,487)
Year Ended December 31, 1998:
Total revenue............... $ 214,024 $ 246,165 $ 236,755 $ 288,965
Operating loss.............. (21,682) (17,106) (17,206) (74,861)
Net loss.................... (57,261) (53,122) (60,577) (123,415)
</TABLE>
13. SUBSEQUENT EVENTS
PRIMESTAR
On February 26, 1999, EchoStar announced that it had sent a letter
to the Board of Directors of PrimeStar expressing its desire and willingness
to make an offer to purchase PrimeStar's high-powered DBS assets. These
assets consist of two high-powered DBS satellites, Tempo I and Tempo II, and
11 of the 32 DBS frequencies capable of coverage of the entire continental
United States, located at the 119DEG. WL orbital position. EchoStar's
letter stated that it was ready, willing and able to make an offer to pay
$600 million of total consideration (including assumed liabilities) for these
assets on terms, other than price, substantially the same as those contained
in an agreement among PrimeStar, Hughes Electronics Corporation, and certain
other persons dated January 22, 1999. The deadline for a response to this
letter has subsequently expired. Finalization of a future offer would be
conditioned on the ability of PrimeStar to enter into and perform its
obligations under a definitive agreement with EchoStar without breaching any
contract to which PrimeStar or any of its affiliates is a party or by which
they are otherwise bound.
F-32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR DBS CORPORATION AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THOSE
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,308
<SECURITIES> 7,000
<RECEIVABLES> 110,739
<ALLOWANCES> 2,996
<INVENTORY> 76,708
<CURRENT-ASSETS> 241,582
<PP&E> 1,021,035
<DEPRECIATION> 167,217
<TOTAL-ASSETS> 1,470,173
<CURRENT-LIABILITIES> 477,061
<BONDS> 1,488,079
0
0
<COMMON> 0
<OTHER-SE> (588,137)
<TOTAL-LIABILITY-AND-EQUITY> 1,470,173
<SALES> 963,605<F1>
<TOTAL-REVENUES> 985,909
<CGS> 588,103<F2>
<TOTAL-COSTS> 1,116,764
<OTHER-EXPENSES> 163,449
<LOSS-PROVISION> 10,642
<INTEREST-EXPENSE> 10,111<F3>
<INCOME-PRETAX> (294,304)
<INCOME-TAX> 71
<INCOME-CONTINUING> (294,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (294,375)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COSTS OF PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
