<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-76450
DISH, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 88-0312499
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 799-8222
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
ON AUGUST 13, 1996, REGISTRANT'S OUTSTANDING VOTING STOCK CONSISTED OF 1,000
SHARES OF COMMON STOCK, $0.01 PAR VALUE.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH
THE REDUCED DISCLOSURE FORMAT.
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<PAGE>
DISH, LTD. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements:
Balance Sheets as of December 31, 1995
and June 30, 1996 (Unaudited)........................ 1
Statements of Income for the three months
and six months ended June 30, 1995 and
1996 (Unaudited)..................................... 2
Statements of Cash Flows for the six months
ended June 30, 1995 and 1996 (Unaudited)............. 3
Condensed Notes to Financial Statements
(Unaudited).......................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 23
Item 6. Exhibits and Reports on Form 8-K...................... 24
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents........................ $ 13,949 $ --
Marketable investment securities................. 210 236
Trade accounts receivable, net................... 9,115 18,449
Advances to affiliates........................... 1,320 --
Inventories, net................................. 38,769 48,386
Income tax receivable............................ 3,870 7,446
Deferred tax assets.............................. 1,834 1,789
Other current assets............................. 12,791 15,856
-------- --------
Total current assets........................... 81,858 92,162
RESTRICTED CASH AND MARKETABLE SECURITIES:
1994 Notes escrow................................ 73,291 22,928
Other............................................ 26,400 36,200
PROPERTY AND EQUIPMENT, net........................ 333,199 390,358
OTHER NONCURRENT ASSETS............................ 44,547 57,270
-------- --------
Total assets................................... $559,295 $598,918
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable........................... $ 19,063 $ 25,255
Advances from affiliates......................... -- 20,655
Deferred programming revenue - DISH Network-SM-.. -- 13,188
Deferred programming revenue - C-band............ 5,563 5,037
Accrued expenses and other current liabilities... 21,335 12,806
Notes payable and current portion of long-term
debt............................................ 4,782 4,782
-------- --------
Total current liabilities...................... 50,743 81,723
LONG-TERM DEFERRED PROGRAMMING REVENUE - DISH
Network-SM-....................................... -- 4,163
1994 NOTES, net.................................... 382,218 408,449
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding
current portion................................... 33,444 36,337
-------- --------
Total liabilities.............................. 466,405 530,672
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDER'S EQUITY (Note 1):
Preferred Stock, 20,000,000 and
no shares authorized, 1,616,681
and no shares of Series A
Cumulative Preferred Stock issued
and outstanding, including accrued
dividends of $1,555,000 and $0,
respectively.................................... 16,607 --
Class A Common Stock, $.01 par value, 200,000,000
and no shares authorized, 6,470,599 and no
shares issued and outstanding, respectively..... 65 --
Class B Common Stock, $.01 par value, 100,000,000
and no shares authorized, 29,804,401 and no
shares issued and outstanding, respectively..... 298 --
Common Stock, $.01 par value, none and 1,000
shares authorized, issued and outstanding,
respectively.................................... --
Additional paid-in capital....................... 89,495 106,465
Unrealized holding gains on available-for-sale
securities, net of deferred taxes............... 251 95
Retained earnings (deficit)...................... (13,826) (38,314)
-------- --------
Total stockholder's equity..................... 92,890 68,246
-------- --------
Total liabilities and stockholder's equity..... $559,295 $598,918
-------- --------
-------- --------
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
1
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1995 1996 1995 1996
-------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
DTH products and technical services........ $ 34,865 $ 60,458 $ 71,142 $ 97,199
Programming revenue - DISH Network-SM-..... -- 5,582 -- 6,046
Programming revenue - C-band............... 3,817 3,194 7,688 6,643
Loan origination and participation income.. 570 120 835 492
-------- --------- -------- --------
Total revenue............................ 39,252 69,354 79,665 110,380
-------- --------- -------- --------
EXPENSES:
DTH products and technical services........ 27,371 57,528 56,816 90,278
Programming - DISH Network-SM-............. -- 1,664 -- 1,769
Programming - C-band....................... 3,392 2,880 6,824 6,058
Selling, general and administrative........ 7,315 18,509 15,186 29,080
Depreciation and amortization.............. 406 6,426 769 9,756
-------- --------- -------- --------
Total expenses........................... 38,484 87,007 79,595 136,941
-------- --------- -------- --------
OPERATING INCOME (LOSS)...................... 768 (17,653) 70 (26,561)
-------- --------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................ 2,963 1,571 6,601 3,279
Interest expense, net of amounts
capitalized............................... (6,327) (10,150) (12,890) (15,091)
Other, net................................. (68) (63) (40) (64)
-------- --------- -------- --------
Total other income (expense)............. (3,432) (8,642) (6,329) (11,876)
-------- --------- -------- --------
NET LOSS BEFORE INCOME TAXES................. (2,664) (26,295) (6,259) (38,437)
BENEFIT FOR INCOME TAXES..................... 851 9,097 2,206 13,949
-------- --------- -------- --------
NET LOSS..................................... $ (1,813) $ (17,198) $ (4,053) $(24,488)
-------- --------- -------- --------
-------- --------- -------- --------
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
2
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (4,053) $(24,488)
Adjustments to reconcile net loss to net cash
flows from operating activities--
Depreciation and amortization..................... 769 9,756
Provision for doubtful accounts................... -- 66
Benefit for deferred taxes........................ (4,624) (8,951)
Amortization of deferred debt issuance costs
on 1994 Notes.................................... 630 631
Amortization of discount on 1994 Notes,
net of amounts capitalized....................... 12,030 13,215
Equity in (earnings) losses of joint venture...... (23) --
Change in reserve for excess and obsolete
inventory........................................ 383 634
Change in long-term deferred programming revenue.. -- 4,163
Other, net........................................ (417) 503
Changes in working capital items --
Trade accounts receivable....................... 1,405 (9,400)
Advances (to) from affiliates, net.............. -- 23,118
Inventories..................................... (8,799) (10,251)
Income tax receivable........................... -- (3,576)
Other current assets............................ (24) (3,065)
Liability under cash management program......... (57) --
Trade accounts payable.......................... (3,879) 6,192
Deferred programming revenue.................... 218 12,662
Accrued expenses and other current liabilities.. 326 6,471
-------- --------
Net cash flows from operating activities...... (6,115) 17,680
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities....... (16,711) (28)
Sales of marketable investment securities........... 40,679 --
Purchases of restricted marketable securities....... (15,000) (15,500)
Funds released from restricted cash and marketable
securities - other................................. -- 5,700
Purchases of property and equipment................. (1,170) (5,485)
Proceeds from sale of property and equipment........ 27 --
Offering proceeds and investment earnings placed
in escrow.......................................... (4,967) (1,729)
Refund of launch payment placed in escrow........... -- (4,500)
Funds released from escrow accounts................. 29,760 56,343
Investment in SSET.................................. (284) --
Expenditures for satellite systems under
construction....................................... (30,310) (62,016)
Subscriber acquisition costs........................ -- (3,307)
Expenditures for FCC authorizations................. -- (25)
-------- --------
Net cash flows from investing activities.......... 2,024 (30,547)
-------- --------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
3
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note
payable............................................ $ (114) $ (1,082)
-------- --------
Net cash flows from financing activities.......... (114) (1,082)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............. (4,205) (13,949)
CASH AND CASH EQUIVALENTS, beginning of period........ 17,506 13,949
-------- --------
CASH AND CASH EQUIVALENTS, end of period.............. $ 13,301 $ 0
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized.. $ 233 $ 544
Cash paid for income taxes.......................... 658 --
Cumulative Series A Preferred Stock dividends....... 602 --
Satellite launch payment for EchoStar II applied
to EchoStar I launch............................... -- 15,000
Increase in note payable for deferred satellite
construction payments.............................. -- 3,167
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(1) ORGANIZATION AND PRESENTATION OF FINANCIAL STATEMENTS
Dish, Ltd. and subsidiaries ("Dish") successfully launched its first
direct broadcast satellite ("DBS"), EchoStar I, in December 1995 and, on
March 4, 1996, began broadcasting its DBS programming (the "DISH
Network-SM-") to the entire continental United States. As of August 1, 1996,
Dish had over 100,000 subscribers to DISH Network-SM- programming. The DISH
Network-SM- currently includes over 100 channels of high quality digital
video and audio programming and will expand to approximately 200 digital
video and audio channels following the successful launch of a second DBS
satellite, DirectSat I ("EchoStar II"), currently scheduled in September 1996.
In addition to its DBS business, Dish is engaged in the design,
manufacture, distribution and installation of satellite direct to home
("DTH") products and domestic distribution of DTH programming. In the first
quarter of 1996, Dish's ultimate parent corporation, EchoStar Communications
Corporation ("EchoStar"), formed a wholly owned direct subsidiary, Dish Network
Credit Corporation ("DNCC"), for the purpose of providing consumer financing
for EchoStar's domestic DTH products and services. At that time, Dish's
subsidiary that previously provided these services ceased new loan
origination activities. In future periods Dish's revenue from loan
origination and participation income will decline.
In January 1996, Dish's Articles of Incorporation were amended whereby
EchoStar exchanged all previously outstanding capital stock of Dish for 1,000
shares of Dish's new $.01 par value Common Stock. The accompanying June 30,
1996 balance sheet reflects this exchange.
In January 1996, EchoStar formed a wholly owned subsidiary, EchoStar
Satellite Broadcasting Corporation ("ESB"), for the purpose of completing a
private offering (the "1996 Notes Offering"), pursuant to Rule 144A of the
Securities Act of 1933, as amended (the "Securities Act"), of 13 1/8% Senior
Secured Discount Notes due 2004 (the "1996 Notes"), resulting in net proceeds
of approximately $337.0 million. The 1996 Notes Offering was consummated in
March 1996. Proceeds from the 1996 Notes Offering will be used for: (i)
continued development, marketing and distribution of the DISH Network-SM-;
(ii) EchoStar's purchase of DBS frequencies at 148 DEG. WL; (iii) partial
funding of the construction, launch and insurance of DBSC I ("EchoStar III")
and EchoStar IV; (iv) additional launch costs of EchoStar II; and (v) other
general corporate purposes. The additional frequencies were acquired by
EchoStar at a public auction held by the Federal Communications Commission
("FCC") in January 1996 (the "FCC Auction"). In connection with the 1996
Notes Offering, EchoStar contributed all of the outstanding capital stock of
its wholly owned subsidiary, Dish to ESB. This transaction has been accounted
for as a reorganization of entities under common control whereby Dish has
been treated as the predecessor to ESB. ESB is subject to all, and EchoStar
is subject to certain of, the terms and conditions of the Indenture related
to the 1996 Notes (the "1996 Notes Indenture"). On April 24, 1996, ESB filed
a Registration Statement on Form S-1 under the Securities Act to exchange the
1996 Notes for publicly registered notes. The Registration Statement was
declared effective by the Securities and Exchange Commission on June 28,
1996. As of August 1, 1996, all of the outstanding privately placed notes had
been exchanged for the new publicly registered notes. Unless otherwise stated
herein, or the context otherwise requires, references herein to the 1996
Notes shall include the original privately placed notes and the publicly
registered notes that were exchanged for the privately placed notes.
In June 1995, EchoStar completed an offering of its Class A Common Stock,
resulting in net proceeds of approximately $63.0 million (the "Equity
Offering"). In June 1994, Dish completed an offering of 12 7/8% Senior
Secured Discount Notes due 2004 (the "1994 Notes") and Warrants
(collectively, the "1994 Notes Offering"), resulting in net proceeds of
approximately $323.3 million. As of June 30, 1996, substantially all of the
Warrants issued in connection with the 1994 Notes Offering had been
exercised. Dish and most of its subsidiaries are subject to the terms and
conditions of the Indenture related to the 1994 Notes (the "1994 Notes
Indenture").
5
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
EchoStar presently owns approximately 40% of the outstanding common stock
of Direct Broadcasting Satellite Corporation ("DBSC"). DBSC's principal
assets include an FCC conditional satellite construction permit and specific
orbital slot assignments for eleven DBS frequencies at 61.5 DEG. WL and
eleven DBS frequencies at 175 DEG. WL (the "DBS Rights"). EchoStar intends to
merge DBSC with Direct Broadcasting Satellite Corporation ("New DBSC"), a
wholly owned subsidiary of EchoStar (the "DBSC Merger"). The DBSC Merger has
been approved by DBSC shareholders but will not be consummated until the FCC
has approved the DBSC Merger. Although no assurances can be given, EchoStar
expects the FCC to issue an order with respect to the DBSC Merger in the near
future. Assuming FCC approval of the DBSC Merger, EchoStar will hold, through
New DBSC, DBSC's DBS Rights. On July 11, 1996, EchoStar filed Amendment No. 1
to a Registration Statement on Form S-4 under the Securities Act covering
658,000 shares of EchoStar Class A Common Stock that are intended to be
issued in connection with the DBSC Merger.
The accompanying consolidated financial statements include only the
accounts of Dish and its subsidiaries and exclude all accounts of Dish's
parent, ESB, and its ultimate parent, EchoStar.
Unless otherwise stated herein, or the context otherwise requires,
references herein to Dish shall include Dish and all of its direct and
indirect subsidiaries, and EchoStar shall include EchoStar, ESB, Dish and all
of their direct and indirect wholly owned subsidiaries.
The accompanying unaudited condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. For further information, refer to the Combined and Consolidated
Financial Statements and footnotes thereto included in Dish's Annual Report
on Form 10-K for the year ended December 31, 1995. Certain prior year
amounts have been reclassified to conform with the current year presentation.
SIGNIFICANT RISKS AND UNCERTAINTIES
Execution of EchoStar's business strategy to launch and operate DBS
satellites has dramatically changed its operating results and financial
position when compared to its historical results. As of June 30, 1996,
EchoStar expects to invest in the future approximately an additional $500
million to build, launch and support EchoStar I, EchoStar II, EchoStar III
and EchoStar IV (Note 6), assuming receipt of all required FCC licenses and
permits. EchoStar consummated the 1994 Notes Offering, the 1996 Notes
Offering and the Equity Offering to partially satisfy these capital
requirements. Annual interest expense on the 1994 and 1996 Notes and
depreciation of the investment in the satellites and related assets is of a
magnitude that exceeds historical levels of income before taxes.
Consequently, beginning in 1995 EchoStar reported significant net losses and
expects net losses to continue through at least 1997. EchoStar's plans also
include the construction and launch of two fixed service satellites,
additional DBS, Ku-band and KuX-band satellites, and marketing to promote its
DBS products and services.
Beginning in June 1996, Dish began marketing a special promotion in a
limited number of markets pursuant to which consumers were able to purchase a
discounted EchoStar Receiver System under the condition the consumer commits
to subscribe and prepay for DISH Network-SM- programming service for a
minimum of one year. The primary purposes of the promotion were to expand
retail distribution, build awareness of the DISH Network-SM- brand and
rapidly build a subscriber base. Due to positive retailer and consumer
results, among other factors, effective August 1, 1996, Dish began a
nationwide rollout of the promotion. While this promotion will significantly
increase Dish's investment in its subscriber base, Dish believes that the
increase in subscribers to its DISH Network-SM- and the corresponding
increase in DBS programming revenue in future periods, resulting from this
promotion, will be more than sufficient to recover the investment in
subscriber acquisition costs.
6
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar
expects negative stockholders' equity to result before December 31, 1997.
EchoStar's expected net losses will result primarily from: (i) the
amortization of the original issue discount on the 1994 and 1996 Notes; (ii)
increases in depreciation expense on the satellites and other fixed assets;
(iii) amortization expense of the subscriber acquisition costs (Note 2); and
(iv) increases in selling, general and administrative expenses to support the
DISH Network-SM-. Although the negative equity position has significant
implications, including, but not limited to, non-compliance with NASDAQ
listing criteria, which could result in delisting, EchoStar believes this
event will not materially affect the implementation and execution of its
business strategy. While EchoStar believes it will be able to obtain a waiver
from NASDAQ and remain listed, no assurance can be given NASDAQ will grant a
waiver. Delisting would result in a decline in EchoStar's common stock
trading market which could potentially depress stock and bond prices, among
other things.
As a result of the factors discussed above, EchoStar will need to raise
additional funds to complete its full complement of satellites. There can be
no assurance that necessary funds will be available or, if available, that
they will be available on terms favorable to EchoStar. Management believes,
however, but can give no assurance, that demand for its DBS products and DISH
Network-SM- programming and EchoStar's ability to satisfy this demand will
result in sufficient cash flow which, together with other sources of capital,
will be sufficient to satisfy future planned expenditures. Significant delays
or launch failures may have significant adverse consequences to EchoStar's
operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management 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 revenue and expenses for each
reporting period. Actual results could differ from those estimates.
This Form 10-Q of Dish contains statements which constitute forward
looking statements within the meaning of Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act of 1934, as amended. Those
statements appear in a number of places in the Form 10-Q and include
statements regarding the intent, belief or current expectations of EchoStar
with respect to, among other things: (i) EchoStar's financing plans; (ii)
trends affecting EchoStar's financial conditions or results of operations;
(iii) EchoStar's growth strategy; (iv) EchoStar's anticipated results of
future operations; and (v) regulatory matters affecting EchoStar. Prospective
investors are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the forward
looking statements as a result of various factors.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
Dish considers all investments purchased with an original maturity of
ninety days or less to be cash equivalents. Cash equivalents as of December
31, 1995 consist of money market funds, corporate notes and commercial paper
stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE SECURITIES
Dish classifies all marketable investment securities as
available-for-sale. Accordingly, these investments are reflected at market
value based on quoted market prices. Related unrealized gains and losses are
reported as a separate component of stockholders' equity, net of related
deferred income taxes. The specific identification method is used to
determine cost in computing realized gains and losses.
Restricted Cash and Marketable Securities in escrow as reflected on the
accompanying balance sheets represent the remaining net proceeds received
from the 1994 Notes Offering, plus interest earned, less amounts expended to
date in connection with the development, construction and launch of the DISH
Network-SM-. These proceeds
7
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
are held in a separate escrow account (the "1994 Escrow Account") for the
benefit of the holders of the 1994 Notes and are invested in certain debt and
other marketable securities, as permitted by the 1994 Notes Indenture, until
disbursed for the express purposes identified in the 1994 Notes Offering
Prospectus. As of June 30, 1996, approximately $22.9 million remained in the
1994 Escrow Account and was withdrawn on August 12, 1996 to partially fund
insurance costs related to the launch of EchoStar II.
Other Restricted Cash includes $11.4 million and $5.7 million at December
31, 1995 and June 30, 1996, respectively, to satisfy certain covenants
regarding launch insurance required by the 1994 Notes Indenture. Dish is
required to maintain launch insurance and Restricted Cash totaling $225.0
million for EchoStar II. Dish has obtained $219.3 million of launch insurance
for EchoStar II, and, together with the cash segregated and reserved on the
accompanying balance sheet as of June 30, 1996, has satisfied its launch
insurance obligations under the 1994 Notes Indenture. In addition, as of June
30, 1996, $15.0 million was in an escrow account established pursuant to a
DBS satellite receiver manufacturing contract for payment to the manufacturer
as certain milestones are reached and $15.5 million was in an escrow account
for the purpose of cash collateralizing certain standby letters of credit
(Note 4). The major components of Restricted Cash and Marketable Securities
are as follows (in thousands):
<TABLE>
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------------- --------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST GAIN VALUE
--------- ---------- ------ --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Commercial paper.... $66,214 $ -- $66,214 $36,327 $ -- $36,327
Government bonds.... 32,904 420 33,324 22,296 171 22,467
Accrued interest.... 153 -- 153 334 -- 334
------- ---- ------- ------- ---- -------
$99,271 $420 $99,691 $58,957 $171 $59,128
------- ---- ------- ------- ---- -------
------- ---- ------- ------- ---- -------
</TABLE>
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary
products are manufactured by outside suppliers to Dish's specifications. Dish
also distributes non-proprietary products purchased from other manufacturers.
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. The major components of inventory were as follows (in
thousands):
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
DISH Network-SM- DBS Receivers............. $ -- $19,911
DBS receiver components.................... 9,615 12,844
Consigned DBS receiver components.......... -- 8,784
Finished goods - C-band.................... 11,161 3,819
Finished goods - International............. 9,297 4,234
Competitor DBS Receivers................... 9,404 --
Spare parts................................ 2,089 2,225
Reserve for excess and obsolete inventory.. (2,797) (3,431)
------- -------
$38,769 $48,386
------- -------
------- -------
8
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Cost includes interest capitalized on the EchoStar DBS System during
construction at Dish's effective borrowing rate. The major components of
property and equipment were as follows (in thousands):
ESTIMATED
USEFUL LIFE DECEMBER 31, JUNE 30,
(IN YEARS) 1995 1996
----------- ------------ --------
Construction in progress........... -- $282,373 $128,437
EchoStar I satellite............... 12 -- 201,672
Furniture, fixtures and equipment.. 2-12 35,127 51,895
Buildings and improvements......... 7-40 21,006 21,409
Tooling and other.................. 2 2,039 3,913
Land............................... -- 1,613 1,613
Vehicles........................... 7 1,310 1,325
-------- --------
Total property and equipment..... 343,468 410,264
Less-Accumulated depreciation.. (10,269) (19,906)
-------- --------
Net property and equipment..... $333,199 $390,358
-------- --------
-------- --------
Construction in progress primarily includes capitalized costs related to
the construction and launch of EchoStar II, which is currently scheduled for
launch in September 1996. Construction in progress consisted of the following
(in thousands):
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
Progress amounts for satellite construction, launch,
launch insurance, capitalized interest, launch and
in-orbit tracking, telemetry and control services:
EchoStar I......................................... $193,629 $ --
EchoStar II........................................ 88,634 126,541
Other................................................. 110 1,896
-------- --------
$282,373 $128,437
-------- --------
-------- --------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31, JUNE 30,
1995 1996
------- -------
Deferred tax assets, net........................... $12,109 $21,201
FCC authorizations, net of amortization............ 11,309 12,072
1994 Notes deferred debt issuance costs,
net of amortization............................... 10,622 9,991
SSET convertible subordinated debentures
and accrued interest.............................. 9,610 9,919
Subscriber acquisition costs, net of amortization.. -- 3,215
Other, net......................................... 897 872
------- -------
$44,547 $57,270
------- -------
------- -------
9
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DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization periods for FCC authorization costs are
determined at the time the services related to the applicable FCC authorization
commences, or capitalized costs are written off at the time efforts to provide
services are abandoned. FCC authorization costs are expected to have a useful
life of approximately 12 years.
SUBSCRIBER ACQUISITION COSTS
For the purpose of attracting subscribers to the DISH Network-SM-, Dish has
sponsored certain sales promotions through independent consumer electronics and
satellite retailers. Dish effectively sells its proprietary DBS reception
equipment to these retailers at less than cost under the condition consumers
commit to subscribe and prepay for DISH Network-SM- programming service for a
minimum of one year. The subscriber acquisition costs recorded represent the
difference between the direct costs of the hardware and the revenue generated
from the sales of the hardware. These costs have been deferred and are being
amortized over the expected minimum life of the subscriber, currently estimated
to be three years. Any unamortized investment with respect to subscribers who
discontinue DISH Network-SM- service after one year but before the end of three
years, will be fully amortized to expense at that time. Dish believes subscriber
acquisition costs will be recovered through future revenue generated from sales
of DISH Network-SM- programming. Amortization expense of subscriber acquisition
costs for the three and six months ended June 30, 1996 was approximately
$92,000.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists of advance payments received from
programming providers and subscribers for satellite television programming to be
provided in future periods. The revenue is recognized on a straight-line basis
over the period the programming is provided.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying income
statements includes: (i) amortization of original issue discount on the 1994
Notes; (ii) interest expense on contractor financing of EchoStar I; and (iii)
interest expense on corporate mortgage debt.
(3) LONG-TERM DEBT
1994 NOTES
On June 7, 1994, Dish completed the 1994 Notes Offering of 624,000 units
consisting of $624.0 million aggregate principal amount of the 1994 Notes and
3,744,000 Warrants. The 1994 Notes Offering resulted in net proceeds to Dish of
approximately $323.3 million. As of June 30, 1996, substantially all of the
Warrants issued in connection with the 1994 Notes Offering had been exercised.
Interest on the 1994 Notes currently is not payable in cash but accrues through
June 1, 1999, with the 1994 Notes accreting to $624.0 million by that date.
Thereafter, interest on the 1994 Notes will be payable in cash semi-annually on
June 1 and December 1 of each year, commencing December 1, 1999. At June 30,
1996, the 1994 Notes were reflected in the accompanying financial statements at
$408.4 million, net of unamortized discount of $215.6 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
From May 1994 to May 1996, the principal subsidiaries of EchoStar, except
EchoStar Satellite Corporation ("ESC") (the "Borrowers"), were parties to an
agreement with Bank of America Illinois, which provided a revolving credit
facility (the "Credit Facility") for working capital advances and for letters of
credit necessary for inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996 and EchoStar does not currently
10
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DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
intend to arrange a replacement credit facility. Instead, EchoStar is using
available cash to collateralize its letter of credit obligations, which
historically was the only significant use of the Credit Facility. At June 30,
1996, EchoStar had cash collateralized $15.5 million of certain standby
letters of credit for trade purchases which is included in restricted cash
and marketable securities in the accompanying financial statements (Note 2).
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- ------------------
1995 1996 1995 1996
------- ------ ------- -------
Current (provision) benefit
Federal............... $ (831) $2,966 $(1,598) $ 4,937
State................. (175) (22) (369) 181
Foreign............... (274) 2 (451) (120)
------- ------ ------- -------
(1,280) 2,946 (2,418) 4,998
------- ------ ------- -------
Deferred benefit
Federal............... 1,766 5,391 3,816 7,959
State................. 365 760 808 992
------- ------ ------- -------
2,131 6,151 4,624 8,951
------- ------ ------- -------
Total benefit.... $ 851 $9,097 $ 2,206 $13,949
------- ------ ------- -------
------- ------ ------- -------
Dish's deferred tax assets (approximately $23.0 million at June 30, 1996)
relate principally to temporary differences for amortization of original issue
discount on the 1994 Notes, net operating loss carryforwards and various accrued
expenses which are not deductible until paid. No valuation allowance has been
provided because Dish currently believes it is more likely than not that these
deferred assets will ultimately be realized. If future operating results differ
materially and adversely from Dish's current expectations, its judgment
regarding the need for a valuation allowance may change.
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Lockheed Martin Corporation ("Martin") for the
construction and delivery of high powered DBS satellites and for related
services. Martin has completed construction of both EchoStar I and EchoStar II
and is in the construction phase on EchoStar III and EchoStar IV. The
construction contract for EchoStar III contains a provision whereby, beginning
August 1, 1997, a PER DIEM penalty of $3,333, to a maximum of $100,000, is
payable if EchoStar III is not delivered by July 31, 1997. Beginning September
1, 1997, additional delays in the delivery of EchoStar III would result in
additional PER DIEM penalties of $33,333, up to a maximum of $5.0 million in the
aggregate.
EchoStar has entered into a contract with Martin to begin the construction
phase of EchoStar's fourth DBS satellite ("EchoStar IV"). This contract contains
an option provision which allows EchoStar to instruct Martin to begin the
construction phase of a fifth DBS satellite ("EchoStar V"). The contract for
EchoStar IV also contains a provision whereby, beginning February 16, 1998, a
PER DIEM penalty of $50,000, to a maximum of $5.0 million in the aggregate, is
payable if EchoStar IV is not delivered by February 15, 1998. The contract also
contains a provision whereby Martin is entitled to an early delivery incentive
payment of $50,000 for each day before February 15, 1998 the satellite is
delivered to the launch site of Baikonur, Kazakhstan, up to a maximum of $5.0
million in the aggregate.
11
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DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Contractor financing of $28.0 million will be used for EchoStar II.
Contractor financing of $15.0 million will be used for both EchoStar III and
EchoStar IV. Interest on the contractor financing will range between 7.75% and
8.25% and principal payments are payable in equal monthly installments over five
years following the launch of the respective satellite.
EchoStar has entered into a contract with Arianespace, Inc. ("Arianespace")
to launch EchoStar II from Korou, French Guiana (the "Arianespace Contract").
The launch is currently scheduled for September 1996 on a dedicated Ariane 42P
launch vehicle. The Arianespace Contract contains provisions entitling either
party to delay the launch in limited circumstances, subject to the payment of
penalties in some cases. As of June 30, 1996, EchoStar has paid Arianespace
approximately $43.4 million pursuant to the Arianespace Contract. All remaining
payments are payable monthly and will be due prior to the launch. Subsequent to
June 30, 1996, an additional payment relating to the launch totaling $17.4
million was made to Arianespace.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining cost is payable in installments in accordance with the payment
schedule set forth in the Lockheed Contract, which requires that substantially
all payments be made to Lockheed prior to the launch.
Subsequent to June 30, 1996, EchoStar and Martin amended the contracts for
the construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar will issue a corporate
guarantee covering all obligations to Martin with respect to the contractor
financing for EchoStar I and EchoStar II. In consideration for the receipt of
the corporate guarantee by EchoStar, Martin has agreed to eliminate the letter
of credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debt and the market value of EchoStar's Class A Common Stock. This
transaction has been approved by EchoStar's board of directors with EchoStar's
principal stockholder abstaining from the vote. Additionally, EchoStar will
issue a corporate guarantee covering all obligations to Martin with respect to
the contractor financing for EchoStar III and EchoStar IV.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic,
a territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the relevant launch period,
subject to the payment of penalties based on the length of the delay and the
proximity of the request to the launch date. EchoStar has paid LKE $20.0 million
pursuant to the LKE Contract. No additional payments are currently required to
be made to LKE until 1997.
PURCHASE COMMITMENTS
Dish has entered into agreements with various manufacturers to purchase DBS
satellite receivers and related components manufactured based on Dish's supplied
specifications. As of June 30, 1996 the remaining commitments total
approximately $402.4 million. At June 30, 1996, the total of all outstanding
purchase order commitments with domestic and foreign suppliers was approximately
$419.2 million. All but approximately $189.2 million of the purchases related to
these commitments are expected to be made during 1996 and the remainder is
expected to be made during 1997. EchoStar expects to finance these purchases
from available cash, marketable investment securities and sales of its DISH
Network-SM- programming.
12
<PAGE>
DISH, LTD. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The 1994 Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish (collectively, the "1994 Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The consolidated net assets of Dish, including the non-guarantors, exceeded the
consolidated net assets of the 1994 Notes Guarantors by approximately $277,000
and $180,000 as of December 31, 1995 and June 30, 1996, respectively.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Dish currently operates three related businesses: (i) operation of the
DISH Network-SM- and continued development of the EchoStar DBS System; (ii)
design, manufacture, marketing, installation and distribution of DTH products
worldwide; and (iii) domestic distribution of DTH programming. The growth of
DBS service and equipment sales has had and will continue to have a material
negative impact on Dish's domestic sales of C-band DTH products; however this
negative impact has been more than offset for the six months ended June 30,
1996 by sales of EchoStar Receiver Systems. During March 1996 Dish began
broadcasting and selling programming packages available from the DISH
Network-SM-. Dish expects to derive its revenue principally from monthly fees
from subscribers to DISH Network-SM- programming and, to a lesser extent,
from the sale of EchoStar Receiver Systems. As sales of EchoStar DBS
programming and receivers increase, Dish expects the decline in its sales of
domestic C-band DTH products to continue at an accelerated rate.
Dish generally bills for DISH Network-SM- programming periodically in
advance and recognizes revenue as service is provided. Revenue is a function
of the number of subscribers, the mix of programming packages selected and
the rates charged, and transaction fees for ancillary programming activities
and satellite usage time agreements. DBS programming costs will generally be
based upon the number of subscribers to each programming offering. From time
to time Dish may engage in promotional activities that include discounted
rates for limited periods, which will result in lower average revenue per
subscriber for the applicable periods. Beginning in June 1996, Dish began
marketing a special promotion in a limited number of markets pursuant to
which consumers were able to purchase a discounted EchoStar Receiver System
under the condition the consumer commits to subscribe and prepay for DISH
Network-SM- programming service for a minimum of one year. Under this
promotion the consumer is able to purchase the discounted EchoStar Receiver
System and prepay the annual programming package for as low as $499. The
primary purposes of the promotion were to expand retail distribution, build
awareness of the DISH Network-SM- brand and rapidly build a subscriber base.
Due to positive retailer and consumer results, among other factors, effective
August 1, 1996, Dish began a nationwide rollout of the promotion. While this
promotion will significantly increase Dish's investment in its subscriber
base, Dish believes that the increase in subscribers to its DISH Network-SM-
and the corresponding increase in DBS programming revenue in future periods,
resulting from this promotion, will be more than sufficient to recover the
investment in subscriber acquisition costs.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 1995
REVENUE. Total revenue for the three and six months ended June 30, 1996
was $69.4 million and $110.4 million, respectively, an increase of $30.1
million, or 77%, and $30.7 million, or 39%, respectively, as compared to
total revenue for the three and six months ended June 30, 1995 of $39.3
million and $79.7 million, respectively. Revenue from domestic sales of DTH
products for the three and six months ended June 30, 1996 was $50.9 million
and $74.9 million, respectively, an increase of $31.5 million, or 163%, and
$35.0 million, or 88%, respectively, as compared to the same periods in 1995.
The increase in domestic revenue was primarily due to $43.5 million and $51.7
million in revenue from the sale of EchoStar Receiver Systems during the
three and six months ended June 30, 1996, respectively. There were no
EchoStar Receiver System sales during the comparable periods in 1995. The
increases in domestic revenue were principally offset by a decrease of $4.7
million, or 50%, and $9.6 million, or 50%, in revenue from sales of C-band
satellite receivers and related accessories, during the three and six months
ended June 30, 1996, respectively, as compared to the same periods in 1995.
Additionally, domestic revenue generated from satellite receivers sold for a
competitor's DBS system ("Competitor DBS Receivers") decreased approximately
$5.8 million, or 98%, and $4.8 million, or 37%, for the three and six months
ended June 30, 1996, respectively, compared to the same periods in 1995.
Revenue from Competitor DBS Receiver sales was $114,000 and $8.0 million for
the three and six months ended June 30, 1996, respectively, as compared to
$5.9 million and $12.8 million for the same periods in 1995.
14
<PAGE>
The increases in domestic revenue were also partially offset by a decrease of
$2.4 million, or 61%, and $3.6 million, or 53%, in revenue from sales of
non-proprietary descrambler modules, during the three and six months ended
June 30, 1996, as compared to the same periods in 1995. The domestic market
for C-band DTH products continued to decline during the three and six months
ended June 30, 1996, and this decline will continue with the growth of DBS
service and equipment sales. Consistent with the increases in revenue noted
above, Dish has experienced a corresponding increase in trade accounts
receivable at June 30, 1996, and expects this trend to continue with the
nationwide rollout of the promotion discussed above.
Domestically, Dish sold approximately 110,000 and 155,000 satellite
receivers in the three and six months ended June 30, 1996, respectively, an
increase of 323% and 193%, respectively, as compared to approximately 26,000
and 53,000 satellite receivers, respectively, for the same periods in 1995.
Although there was an increase in the number of satellite receivers sold in
1996 as compared to 1995, overall revenue did not increase proportionately as
a result of a substantial shift in product mix to lower priced DBS receivers
and related accessories, and an approximate 15% reduction in the average
selling price of C-band satellite receivers. Included in the number of
satellite receivers sold for the three and six months ended June 30, 1996 are
approximately 103,000 and 120,000, respectively, EchoStar Receiver Systems.
EchoStar Receiver System revenue represented approximately 63% and 47%,
respectively, of total revenue for the three and six months ended June 30,
1996.
Also included in the number of satellite receivers sold for the three
and six months ended June 30, 1996 are approximately 300 and 19,000,
respectively, Competitor DBS Receivers as compared to 10,000 and 21,000,
respectively, for the same periods in 1995. During the six months ended June
30, 1996, the Competitor DBS Receivers were sold at an approximate 28%
reduction in the average selling price as compared to the six months ended
June 30, 1995. Competitor DBS Receiver revenue represented less than 1% and
approximately 7% of total revenue for the three and six months ended June 30,
1996, respectively. Dish's agreement to distribute Competitor DBS Receiver
systems terminated on December 31, 1995 and during the first half of 1996,
Dish sold all of its existing inventory of Competitor DBS Receivers. The
elimination of Competitor DBS Receiver inventory has been more than offset by
a substantial increase in inventory of EchoStar Receiver Systems and related
components, the sale of which has more than offset the elimination of revenue
derived from the sale of Competitor DBS Receivers.
In future periods, domestic DTH product revenue will be primarily
generated from the sale of EchoStar Receiver Systems and, to a lesser extent,
sales of C-band DTH products and related accessories. Beginning in June 1996,
Dish began marketing a special promotion in a limited number of markets
pursuant to which consumers were able to purchase a discounted EchoStar
Receiver System under the condition the consumer commits to subscribe and
prepay for DISH Network-SM- programming service for a minimum of one year.
The primary purpose of the promotion was to expand retail distribution, build
awareness of the DISH Network-SM- brand and rapidly build a subscriber base.
Due to positive retailer and consumer results, among other factors, effective
August 1, 1996, Dish began a nationwide rollout of the promotion. During the
promotional period, Dish will not recognize any DTH product revenue or
expense related to EchoStar Receiver Systems sold pursuant to this promotion.
Instead, Dish will capitalize the difference between the direct costs of the
EchoStar Receiver System and the related revenue generated from these sales.
This difference will be deferred and will be amortized over the expected
minimum life of the subscriber. Dish believes that the revenue generated from
sales of DISH Network-SM- programming in future periods, resulting from this
promotion, will more than offset the investment in subscriber acquisition
costs.
DISH Network-SM- programming revenue was $5.6 million and $6.0 million
for the three and six months ended June 30, 1996, respectively. Since Dish
did not begin broadcasting and selling programming packages available on the
DISH Network-SM- service until March 1996, there was no DISH Network-SM-
programming revenue generated during the comparable periods in 1995. As of
August 1, 1996, Dish had over 100,000 subscribers to DISH Network-SM-
programming.
C-band programming revenue was $3.2 million and $6.6 million for the
three and six months ended June 30, 1996, respectively, a decrease of
$623,000, or 16%, and $1.0 million, or 14%, compared to the same periods in
1995. The decrease is attributable to the industry-wide decline in domestic
C-band equipment sales and the related decline in C-band DTH programming
revenue. This decline in C-band equipment sales and the related programming
revenue is
15
<PAGE>
expected to continue for the foreseeable future. The expected decline in
C-band DTH programming revenue in 1996 has been more than offset by sales of
DISH Network-SM- programming.
Loan origination and participation income for the three and six months
ended June 30, 1996 was $120,000 and $492,000, respectively, a decrease of
$450,000, or 79%, and $343,000, or 41%, respectively, compared to the same
periods in 1995. The decrease in loan origination and participation income
for the three and six months ended June 30, 1996 was primarily due to the
formation of DNCC, a wholly owned direct subsidiary of EchoStar, in the first
quarter of 1996. EchoStar formed DNCC to provide consumer financing of
EchoStar's domestic DTH products and services. Concurrent with the formation
of DNCC, Dish's subsidiary which previously provided these services ceased
new loan origination activities. In future periods, revenue from loan
origination and participation income will continue to decline.
Revenue from international sales of DTH products for the three and six
months ended June 30, 1996 was $9.5 million and $22.3 million, respectively,
a decrease of $6.0 million, or 39%, and $8.9 million, or 29%, respectively,
as compared to the same periods in 1995. The decrease is directly
attributable to a decrease in the number of analog satellite receivers sold
combined with decreasing margins on products sold. Internationally, Dish sold
approximately 51,000 and 126,000 analog satellite receivers during the three
and six months ended June 30, 1996, a decrease of 46% and 30%, respectively,
compared to approximately 94,000 and 181,000 units sold during the same
periods in 1995. Overall, Dish's international markets for analog DTH
products declined during the three and six months ended June 30, 1996 as
anticipation for new international digital services continues to increase.
This international decline in demand for analog satellite receivers is
similar to the decline which has occurred in the United States and was
expected by Dish. To offset this anticipated decline in demand for analog
satellite receivers, Dish has been negotiating with digital service providers
to distribute their proprietary receivers in Dish's international markets.
While Dish is actively pursuing these distribution opportunities, no
assurance can be given that such negotiations will be successful.
OPERATING EXPENSES. Costs of DTH products sold were $57.5 million and
$90.3 million for the three and six months ended June 30, 1996, respectively,
an increase of $30.2 million, or 110%, and $33.5 million, or 59%,
respectively, as compared to the same periods in 1995. The increase in DTH
operating expenses for 1996 resulted primarily from the increase in sales of
DTH products. Operating expenses for DTH products as a percentage of DTH
product revenue were 95% and 93% for the three and six months ended June 30,
1996, respectively, compared to 79% and 80% for the same periods in 1995,
respectively. This increase was principally the result of declining sales
prices of C-band DTH products and Competitor DBS Receivers as described
above, during the three and six months ended June 30, 1996 as compared to the
same periods in 1995.
In future periods, the costs of domestic DTH product sold will be
primarily related to the sale of EchoStar Receiver Systems and, to a lesser
extent, sales of C-band DTH products and related accessories. Beginning in
June 1996, Dish began marketing a special promotion in a limited number of
markets pursuant to which consumers were able to purchase a discounted
EchoStar Receiver System under the condition the consumer commits to
subscribe and prepay for DISH Network-SM- programming service for a minimum
of one year. The primary purposes of the promotion were to expand retail
distribution, build awareness of the DISH Network-SM- brand and rapidly build
a subscriber base. Due to positive retailer and consumer results, among other
factors, effective August 1, 1996, Dish began a nationwide rollout of the
promotion. During the promotional period, Dish will not recognize any DTH
revenue or expense related to EchoStar Receiver Systems sold pursuant to this
promotion. Instead, Dish will capitalize the difference between the direct
costs of the EchoStar Receiver System and the related revenue generated from
these sales. This difference will be deferred and will be amortized over the
expected minimum life of the subscriber.
The costs of DISH Network-SM- programming were $1.7 million and $1.8
million for the three and six months ended June 30, 1996, respectively. Since
Dish did not begin broadcasting and selling programming packages available on
the DISH Network-SM- service until March 4, 1996, there were no DISH
Network-SM- programming expenses incurred during the comparable periods in
1995. DISH Network-SM-programming costs as a percentage of DISH Network-SM-
programming revenue were 30% and 29% for the three and six months ended June
30, 1996, respectively.
The costs of C-band programming were $2.9 million and $6.1 million for
the three and six months ended June 30, 1996, respectively, a decrease of
$512,000, or 15%, and $766,000, or 11%, respectively, as compared to the same
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<PAGE>
periods in 1995. This decrease is mainly attributable to the decrease in
C-band programming revenue. C-band programming expenses as a percentage of
C-band programming revenue for the three and six months ended June 30, 1996
were 90% and 91%, respectively, as compared to 89%, for each of the same
periods in 1995. The increase in C-band programming expenses as a percentage
of C-band programming revenue was principally the result of declining sales
prices of C-band programming. As previously discussed, the domestic market
for C-band DTH products has continued to decline with the growth of DBS
service and equipment sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $18.5 million and $29.1 million for the three
and six months ended June 30, 1996, respectively, an increase of $11.2
million, or 153%, and $13.9 million, or 92%, respectively, as compared to the
same periods in 1995. Selling, general and administrative expenses as a
percentage of total revenue increased to 27% and 26% for the three and six
months ended June 30, 1996, respectively, as compared to 19% for each of the
same periods in 1995. This increase was principally due to: (i) marketing and
advertising prior to and in conjunction with the introduction of DISH
Network-SM- service; (ii) increased personnel in all areas of the
organization to support the DISH Network-SM-; (iii) costs related to the
Digital Broadcast Center, which commenced operations in the third quarter of
1995; and (iv) costs associated with operating the DISH Network-SM- Call
Center and related services which have been outsourced. In future periods,
Dish believes that although selling, general and administrative expenses will
continue to increase, such increase as a percentage of future revenue will
decrease as subscribers are added and additional revenue from sales of DISH
Network-SM- programming is generated.
Research and development costs totaled $1.4 million and $2.6 million for
the three and six months ended June 30, 1996, respectively, as compared to
$1.2 million and $2.5 million for the same periods in 1995. The increase was
principally due to increased research and development costs necessary to
provide digital DBS satellite receivers to domestic and international
markets, principally offset by a reduction research necessary to provide
C-band receivers to domestic and international markets.
EBITDA. As expected, Dish incurred operating losses for the three and
six months ended June 30, 1996. EBITDA for the three and six months ended
June 30, 1996 was a negative $11.2 million and a negative $16.8 million,
respectively, a decrease of $12.4 million and $17.6 million, respectively,
compared to the same periods in 1995. The decrease resulted from the factors
affecting revenue and expenses discussed above. EBITDA represents earnings
before interest income, interest expense net of other income, income taxes,
depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income as an indicator of operating performance and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles. Dish
expects to continue to report operating losses in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation for the three and six
months ended June 30, 1996 was $6.4 million and $9.8 million, respectively,
an increase of $6.0 million and $9.0 million, respectively, as compared to
$406,000 and $769,000 for the three and six months ended June 30, 1995. The
overall increase primarily resulted from depreciation on the Digital
Broadcast Center and EchoStar I which were placed in service during the
fourth quarter of 1995 and the first quarter of 1996, respectively, and the
amortization of subscriber acquisition costs discussed below.
Also included within deprecation and amortization is amortization of
subscriber acquisition costs. For the purpose of attracting subscribers to
the DISH Network-SM-, Dish has sponsored certain sales promotions through
independent consumer electronics and satellite retailers. Dish effectively
sells its proprietary DBS reception equipment to these retailers at less than
cost under the condition consumers commit to subscribe and prepay for DISH
Network-SM- programming service for a minimum of one year. The subscriber
acquisition costs recorded represent the difference between the direct costs
of the hardware and the revenue generated from the sales of the hardware.
These costs have been deferred and are being amortized over the expected
minimum life of the subscriber, currently estimated to be three years. Any
unamortized investment with respect to subscribers who discontinue DISH
Network-SM- service after one year but before the end of three years, will be
fully amortized to expense at that time. Dish believes subscriber acquisition
costs will be recovered through future revenue generated from sales of DISH
Network-SM- programming. Amortization
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expense of subscriber acquisition costs for the three and six months ended
June 30, 1996 was approximately $92,000. In future periods, with the
nationwide rollout of this promotion, amortization expense is expected to be
of a magnitude which significantly exceeds historical levels, even if the
promotional period is terminated in the near future.
OTHER INCOME AND EXPENSE. Other expense for the three and six months
ended June 30, 1996 was $8.6 million and $11.9 million, respectively, an
increase of $5.2 million, or 152%, and $5.5 million, or 88%, respectively, as
compared to the same periods in 1995. The increase in other expense for the
three and six months ending June 30, 1996 resulted primarily from a decrease
in interest income due to decreases in the 1994 Escrow Account, marketable
investment securities and cash and cash equivalents combined with a decrease
in the amount of interest capitalized compared to the same periods in 1995.
PROVISION FOR INCOME TAXES. Income tax benefit for the three and six
months ended June 30, 1996 was $9.1 million and $13.9 million, respectively,
compared to income tax benefit of $851,000 and $2.2 million during the same
periods in 1995. This increase is principally the result of changes in
components of income and expenses discussed above during the three and six
months ended June 30, 1996. Dish's deferred tax assets (approximately $23.0
million at June 30, 1996) relate principally to temporary differences for
amortization of original issue discount on the 1994 Notes, net operating loss
carryforwards and various accrued expenses which are not deductible until
paid. No valuation allowance has been provided because Dish currently
believes it is more likely than not that these deferred assets will
ultimately be realized. If future operating results differ materially and
adversely from Dish's current expectations, its judgment regarding the need
for a valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $17.7 million for the six
months ended June 30, 1996, as compared to $6.1 million used by operations
for the same period in 1995. The cash provided by operations for the six
months ended June 30, 1996 was mainly a result of increases in advances from
affiliates, deferred programming revenue and current liabilities, all
partially offset by increases in inventory and trade accounts receivable. If
the net advances from affiliates of $23.1 million for working capital
purposes were not received, Dish's operations would have used $5.4 million in
cash for the six months ended June 30, 1996. As Dish builds its DISH
Network-SM- subscriber base, operating cash flow should improve due to an
increase in revenue attributable to DISH Network-SM- programming. In the
event subscriptions to DISH Network-SM- programming do not meet anticipated
levels or the investment in subscriber acquisition costs continues to
increase beyond planned levels, negative operating cash flow may result.
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
except EchoStar Satellite Corporation ("ESC") (the "Borrowers"), were parties
to an agreement with Bank of America Illinois, which provided a revolving
credit facility (the "Credit Facility") for working capital advances and for
letters of credit necessary for inventory purchases and satellite
construction payments. EchoStar does not currently intend to arrange a
replacement credit facility. Instead, EchoStar is using available cash to
collateralize its letter of credit obligations, which historically was the
only significant use of the Credit Facility. At June 30, 1996, EchoStar had
cash collateralized $15.5 million of certain standby letters of credit for
trade purchases which is included in restricted cash and marketable
securities in the accompanying financial statements.
During June 1994, Dish issued 624,000 units consisting of $624.0 million
principal amount of the 1994 Notes and 3,744,000 Warrants (representing
2,808,000 shares of EchoStar Class A Common Stock) for aggregate net proceeds
of approximately $323.3 million, which were placed in the 1994 Escrow
Account. As of June 30, 1996, substantially all of the Warrants issued in
connection with the 1994 Notes Offering had been exercised. Through June 30,
1996, $322.9 million had been withdrawn from the 1994 Escrow Account. At June
30, 1996, approximately $298.0 million of these proceeds had been applied to
development and construction of the EchoStar DBS System and approximately
$24.9 million had been applied to other permitted uses. As of June 30, 1996,
approximately $22.9 million remained in the 1994 Escrow Account, which
included investment earnings, and was withdrawn on August 12, 1996 to
partially fund insurance costs related to the launch of EchoStar II.
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In March 1996, ESB consummated a private placement of the 1996 Notes. On
April 24, 1996, ESB filed a Registration Statement on Form S-1 under the
Securities Act to exchange the 1996 Notes for publicly registered notes which
was declared effective by the Securities and Exchange Commission on June 28,
1996. As of August 1, 1996, all of the outstanding privately placed notes had
been exchanged for the new publicly registered notes. ESB was formed in
January 1996 for the purpose of the 1996 Notes Offering. In connection with
the 1996 Notes Offering, EchoStar has contributed all of the outstanding
capital stock of its wholly owned subsidiary, Dish, to ESB. ESB issued
580,000 notes consisting of $580.0 million principal amount of the 1996 Notes
for aggregate net proceeds of approximately $337.0 million of which $177.3
million was placed in the 1996 Escrow Account. Through June 30, 1996, $19.3
million had been withdrawn from the 1996 Escrow Account for development and
construction of EchoStar III and EchoStar IV. As of June 30, 1996,
approximately $160.4 million remained in the 1996 Escrow Account, which
included investment earnings. Subsequent to June 30, 1996, an additional $5.0
million has been withdrawn from the 1996 Notes Escrow Account. EchoStar
guarantees the 1996 Notes on a subordinated basis.
EchoStar anticipates expending an additional $60 million in working
capital during the second half of 1996, including the investment in
subscriber acquisition costs. This cash requirement could increase if any of
the following occur, among other things: (i) subscriptions to DISH
Network-SM- programming do not meet anticipated levels; (ii) actual expenses
exceed present estimates; or (iii) investment in subscriber acquisition costs
continues to increase beyond planned levels. In addition to the working
capital requirements discussed above, during the second half of 1996,
EchoStar expects to expend: (i) approximately $43.4 million in connection
with the launch of EchoStar II (which was partially funded with the remaining
balance of the 1994 Escrow Account subsequent to June 30, 1996); (ii)
approximately $30.7 million for launch insurance on EchoStar II; (iii)
approximately $8.3 million for in-orbit payments to Martin on EchoStar I and
EchoStar II; (iv) approximately $38.0 million in connection with the launch
of EchoStar III; (v) approximately $45.0 million for construction of EchoStar
III and EchoStar IV; and (vi) approximately $41.8 million for the purchase of
DBS frequencies at 148 DEG. WL, which is due to the FCC five days after
EchoStar receives FCC approval for use of these frequencies. Funds for these
expenditures are expected to come from the 1996 Notes Escrow Account and
available cash and marketable investment securities. Beyond 1997, EchoStar
will expend approximately $68.1 million on contractor financing debt related
to EchoStar I and EchoStar II. Additionally, EchoStar has committed to expend
approximately $225 million to build, launch and support EchoStar III and
EchoStar IV in 1997 and beyond. In order to continue to build, launch and
support EchoStar III and EchoStar IV beyond the first quarter of 1997,
EchoStar will need additional capital. Even if EchoStar terminates the
construction contracts with Martin for the construction of EchoStar III and
EchoStar IV, EchoStar will still need additional capital as a result of
termination penalties contained in the contracts. There can be no assurances
that additional capital will be available, or, if available, that it will be
available on terms favorable to EchoStar.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar expects
negative stockholders' equity to result before December 31, 1997. Although the
negative equity position has significant implications, including, but not
limited to, non-compliance with NASDAQ listing criteria, which could result in
delisting, EchoStar believes this event will not materially affect the
implementation and execution of its business strategy. While EchoStar believes
it will be able to obtain a waiver from NASDAQ and remain listed, no assurance
can be given NASDAQ will grant a waiver. Delisting would result in a decline in
EchoStar's common stock trading market which could potentially depress stock and
bond prices, among other things.
EchoStar has entered into a contract with Martin to begin the construction
phase of EchoStar's fourth DBS satellite ("EchoStar IV"). This contract also
contains an option provision which allows EchoStar to instruct Martin to begin
the construction phase of a fifth DBS satellite ("EchoStar V"). Contractor
financing of $15.0 million will be used for construction of EchoStar IV.
Concurrent with execution of this contract, EchoStar waived all penalties due
from Martin for the late delivery of EchoStar I and EchoStar II.
Subsequent to June 30, 1996, EchoStar and Martin amended the contracts for
the construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar will issue a corporate
guarantee covering all obligations
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to Martin with respect to the contractor financing for EchoStar I and
EchoStar II. In consideration for the receipt of the corporate guarantee by
EchoStar, Martin has agreed to eliminate the letter of credit requirements,
and to release the Preferred Stock Guarantee in accordance with a specified
formula based on the then outstanding contractor financing debt and the
market value of EchoStar's Class A Common Stock. This transaction has been
approved by EchoStar's board of directors with EchoStar's principal
stockholder abstaining from the vote. Additionally, EchoStar will issue a
corporate guarantee covering all obligations to Martin with respect to the
contractor financing for EchoStar III and EchoStar IV.
In addition to the commitments described above, Dish has entered into
agreements to purchase DBS satellite receivers and related components for the
EchoStar DBS System. As of June 30, 1996 those purchase order commitments
totaled approximately $402.4 million. At June 30, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers
was approximately $419.2 million. All but approximately $189.2 million of the
purchases related to these commitments are expected to be made during 1996
and the remainder is expected to be made during 1997. EchoStar expects to
finance these commitments from available cash, marketable investment
securities and sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $806.5 million of long-term
debt (including the 1994 and 1996 Notes, deferred satellite contract payments on
EchoStar I and mortgage debt) as of December 31, 1995 and June 30, 1996,
respectively. In addition, because interest on the 1994 Notes is not payable
currently in cash but accrues through June 1, 1999, the 1994 Notes will accrete
by $215.6 million through that date. Similarly, because interest on the 1996
Notes is not payable in cash but accrues through March 15, 2000, the 1996 Notes
will accrete by $218.3 million through that date. Contractor financing of $28.0
million will be used for EchoStar II. Contractor financing of $15.0 million will
be used for both EchoStar III and EchoStar IV. Interest on the contractor
financing will range between 7.75% and 8.25% and principal payments are payable
in equal monthly installments over five years following the launch of the
respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The 1994 and 1996 Notes Indentures impose various restrictions on the
transfer of funds among EchoStar and its subsidiaries. Although the 1996
Notes are collateralized by the stock of Dish, various assets expected to
form an integral part of the EchoStar DBS System (and not otherwise
encumbered by the 1994 Notes Indenture), and guarantees of EchoStar and
certain of its other subsidiaries, ESB's ability to fund interest and
principal payments on the 1996 Notes will depend on successful operation and
the acquisition of an adequate number of subscribers to the DISH Network-SM-
and ESB having access to available cash flows generated by the DISH
Network-SM-. If cash available to ESB is not sufficient to service the 1996
Notes, EchoStar would be required to obtain cash from other sources such as
issuance of equity securities, new borrowings or asset sales. There can be no
assurance that those alternative sources would be available, or available on
favorable terms, or sufficient to meet debt service requirements on the 1996
Notes.
OTHER
1994 AND 1996 NOTES
EchoStar I was successfully launched by Great Wall in December 1995. In the
event of a launch failure of EchoStar II, Dish would first be required under the
1994 Notes Indenture to make an offer to repurchase one-half of the then
accreted value of the 1994 Notes. In the event that EchoStar does not have the
right to use orbital slot authorizations granted by the FCC covering a minimum
of 21 transponders at a single full CONUS orbital slot, ESB and Dish will be
required to make an offer to repurchase all or a portion of the outstanding 1996
Notes and 1994 Notes, respectively. Additionally, in the event that EchoStar DBS
Corporation, a wholly owned subsidiary of EchoStar, fails to obtain
authorization from the FCC for frequencies purchased at the FCC Auction in
January 1996, or in the event that such authorization is revoked or rescinded,
ESB will be required under the 1996 Notes Indenture to repurchase the maximum
principal amount of the 1996 Notes that may be purchased with the proceeds of
any refund received from the FCC up to $52.3 million.
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If the DBSC Merger or similar transaction does not occur on or before March
1, 1997, ESB will be required to repurchase at least $83.0 million principal
amount of the 1996 Notes. Further, in the event that EchoStar incurs more than
$7.8 million in expenses (as defined in the 1996 Notes Indenture) in connection
with the DBSC Merger, ESB will be required to apply an amount equal to such
expenses minus $7.8 million to an offer to repurchase the maximum principal
amount of the 1996 Notes that may be purchased out of such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its current
business plan could not be fully implemented. Further, EchoStar's short-term
liquidity would be adversely affected in the event of: (i) significant delay in
the delivery of certain products and equipment necessary for operation of the
EchoStar DBS System; (ii) shortfalls in estimated levels of future operating
cash flows; or (iii) unanticipated expenses in connection with development of
the EchoStar DBS System.
RECEIVER MANUFACTURERS
Dish has agreements with two manufacturers to supply DBS receivers for
Dish. To date, only one of the manufacturers has produced a receiver acceptable
to Dish. No assurances can be given that Dish's other manufacturer will be able
to produce an acceptable receiver in the future. Until the other manufacturer
produces a receiver acceptable to Dish, Dish is dependent on one manufacturing
source for its receivers. To date, Dish has paid the non-performing manufacturer
$10.0 million and has an additional $15.0 million in an escrow account as
security for Dish's payment obligations under that contract. If that
manufacturer does not produce an acceptable receiver in the near future, Dish
may terminate that contract, which would cause longer term dependence on a
single manufacturing source. If Dish's sole manufacturer is unable for any
reason to produce receivers in a quantity sufficient to meet demand, Dish's
liquidity and results of operations may be adversely affected. If the contract
with Dish's other manufacturer is terminated, there can be no assurance Dish
would be able to recover all amounts paid the manufacturer or otherwise held in
escrow.
FORWARD LOOKING STATEMENTS
This Form 10-Q of Dish contains statements which constitute forward looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended. Those statements appear
in a number of places in the Form 10-Q and include statements regarding the
intent, belief or current expectations of EchoStar with respect to, among other
things: (i) EchoStar's financing plans; (ii) trends affecting EchoStar's
financial conditions or results of operations; (iii) EchoStar's growth strategy;
(iv) EchoStar's anticipated results of future operations; and (v) regulatory
matters affecting EchoStar. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward looking statements as a result of various
factors.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). EchoStar
adopted SFAS No. 121 in the first quarter of 1996 and its adoption has not had a
material impact on EchoStar's financial position, results of operations or cash
flows.
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but requires
pro forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. EchoStar intends to continue to
measure compensation cost under APB No. 25 and to comply with the pro forma
disclosure requirements. Therefore, this statement has had no impact on
EchoStar's results of operations.
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IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the past
three years. EchoStar believes that its ability to increase charges for products
and services in future periods will depend primarily on competitive pressures.
EchoStar does not have any material backlog of its products.
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PART II
ITEM 1. LEGAL PROCEEDINGS
EchoStar is a party to certain legal proceedings arising in the ordinary
course of its business. EchoStar does not believe that any of these proceedings
will have a material adverse affect on EchoStar's financial position or results
of operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1* Amended and Restated Agreement for Exchange of Stock and
Merger, dated as of May 31, 1995, by and among EchoStar
Communications Corporation, a Nevada corporation formed
in April 1995 ("EchoStar"), Charles W. Ergen and EchoStar
(incorporated herein by reference to Exhibit 2.2 to the
Registration Statement Form S-1, Registration No. 33-91276).
2.2* Agreement regarding purchase of debentures between Dish,
Ltd. (formerly EchoStar Communications Corporation, a
Nevada corporation formed in December 1993 ("Dish")), SSE
Telecom, Inc. ("SSET"), dated March 14, 1994, including
Plan and Agreement of Merger, by and among Dish,
DirectSat Merger Corporation, DirectSat Corporation and
SSET (incorporated herein by reference to Exhibit 2.2 to
the Registration Statement on Form S-1, Registration No.
33-76450).
3.1(a)* Amended and Restated Articles of Incorporation of Dish
(incorporated herein by reference to Exhibit 3.1(a) to
the Annual Report on Form 10-K of Dish for the fiscal
year end December 31, 1995).
3.1(b)* Bylaws of Dish (incorporated herein by reference to
Exhibit 3.1(b) to the Annual Report on Form 10-K of Dish
for the fiscal year ended December 31, 1995).
4.1* Indenture of Trust between Dish and First Trust National
Association ("First Trust"), as Trustee (incorporated
herein by reference to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as
Warrant Agent (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.3* Security Agreement in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.1 (incorporated
herein by reference to the Registration Statement on Form
S-1 of Dish, Registration No. 33-76450).
4.4* Escrow and Disbursement Agreement between Dish and First
Trust (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.1 herein
(incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust, Continental
Bank, N.A. and Martin Marietta Corporation ("Martin
Marietta") (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of
EchoStar (incorporated herein by reference to Exhibit 4.7
to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.8* Registration Rights Agreement by and between EchoStar
and Charles W. Ergen (incorporated herein by reference to
Exhibit 4.8 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
4.9* Indenture of Trust between ESB and First Trust, as
Trustee (incorporated herein by reference to Exhibit 4.9
to the Annual Report on Form 10-K of EchoStar, Commission
File No. 0-26176).
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<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.10* Security Agreement of ESB in favor of First Trust, as
Trustee under the Indenture filed as Exhibit 4.9
(incorporated herein by reference to Exhibit 4.10 to the
Annual Report on Form 10-K of EchoStar. Commission File
No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESB and First
Trust (incorporated herein by reference to Exhibit 4.11
to the Annual Report on Form 10-K of EchoStar.
Commission File No. 0-26176).
4.12* Pledge Agreement of ESB in favor of First Trust, as
Trustee under the Indenture filed as Exhibit 4.9
(incorporated herein by reference to Exhibit 4.12 to the
Annual Report on Form 10-K of EchoStar, Commission File
No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as
Trustee under the Indenture filed as Exhibit 4.9
(incorporated herein by reference to Exhibit 4.13 to the
Annual Report on Form 10-K of EchoStar. Commission File
No. 0-26176).
4.15* Registration Rights Agreement by and between ESB,
EchoStar, Dish, Ltd., New DBSC and Donald, Lufkin &
Jenrette Securities Corporation (incorporated herein by
reference to Exhibit 4.14 to the Annual Report on Form
10-K of EchoStar, Commission File No. 0-26176).
10.1(a)* Satellite Construction Contract, dated as of February 6,
1990, between EchoStar Satellite Corporation ("ESC") and
Martin Marietta Corporation as successor to General
Electric EchoStar, Astro-Space Division ("General
Electric") (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd.
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
herein by reference to the Registration Statement on Form
S-1 of Dish, Ltd. Registration No. 33-76450).
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
herein by reference to the Registration Statement on Form
S-1 of Dish, Ltd. 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 herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd.
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 herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd.
Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction
Contract, between ESC and Martin Marietta (incorporated
herein by reference to the Registration Statement on Form
S-8 of EchoStar, 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 herein by reference to the Registration
Statement on Form S-8 of EchoStar, 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 herein by reference to Exhibit
10.1(h) to the Form 10-Q of EchoStar as of June 30, 1996,
Commission File No. 0-26176).
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2* Satellite Launch Contract, dated as of September 27,
1993, between ESC and the China Great Wall Industry
Corporation (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd.
Registration No. 33-76450).
10.3* Distributor Agreement, dated as of July 30, 1993,
between Echosphere Corporation ("Echosphere") and Thomson
Consumer Electronics, Inc. (incorporated herein by
reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.4* 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 herein
by reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.5* Master Purchase and License Agreement, dated as of June
18, 1986, between Echosphere and Cable/Home
Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd.
Registration No. 33-76450).
10.6* Merchandising Financing Agreement, dated as of June 29,
1989, between Echo Acceptance Corporation ("EAC") and
Household Retail Services, Inc. (incorporated herein by
reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.7* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.8* Consulting Agreement, dated as of February 17, 1994,
between ESC and Telesat Canada (incorporated herein by
reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.9* Form of Satellite Launch Insurance Declarations
(incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.10* Dish 1994 Stock Incentive Plan (incorporated herein by
reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.11* Form of Tracking, Telemetry and Control Contract between
AT&T Corp. and ESC (incorporated herein by reference to
the Registration Statement on Form S-8 of EchoStar,
Registration No. 33-81234).
10.12* Manufacturing Agreement, dated as of March 22, 1995,
between HTS and SCI Technology (incorporated herein by
reference to Exhibit 10.12 to the Registration Statement
as Form S-1 of Dish, Ltd. Commission File No. 33-81234).
10.13* Manufacturing Agreement dated as of April 14, 1995 by
and between ESC and Sagem Group (incorporated herein by
reference to Exhibit 10.13 to the Registration Statement
on Form S-1 of EchoStar, Registration No. 33-91276).
10.14* Statement of Work, dated January 31, 1995 from EchoStar
Satellite Corporation Inc. to Divicom Inc. (incorporated
herein by reference to Exhibit 10.14 to the Registration
Statement on Form S-1, Registration No. 33-91276).
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<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.15* Launch Services Contract, dated as of June 2, 1995, by
and between EchoStar Satellite Corporation and Lockheed-
Khrunichev-Energia-International, Inc. (incorporated
herein by reference to Exhibit 10.15 to the Registration
Statement on Form S-1, Registration No. 33-91276).
10.16* EchoStar 1995 Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.16 to the Registration
Statement on Form S-1, Registration No. 33-91276).
10.17(a)* Eighth Amendment to Satellite Construction Contract,
dated as of February 1, 1994, between DirectSat
Corporation and Martin Marietta Corporation (incorporated
herein by reference to Exhibit 10.17(a) to the Form 10-Q
of EchoStar as of June 30, 1996, Commission File No. 0-26176).
10.17(b)* Tenth Amendment to Satellite Construction Contract,
dated as of July 18, 1996, between DirectSat Corporation
and Martin Marietta Corporation (incorporated herein by
reference to Exhibit 10.17(b) to the Form 10-Q of
EchoStar as of June 30, 1996, Commission File No. 0-26176).
10.18* Satellite Construction Contract, dated as of July 18,
1996, between EchoStar DBS Corporation and Lockheed
Martin Corporation (incorporated herein by reference to
Exhibit 10.18 to the Form 10-Q of EchoStar as of June 30,
1996, Commission File No. 0-26176).
27 Financial Data Schedule
______________
* Incorporated by reference pursuant to Rule 12D-32 under the Securities and
Exchange Act of 1934, as amended.
(b) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by Dish during the period covered
by this Quarterly Report on Form 10-Q.
27
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dish, Ltd.
Date: August 13, 1996 /s/ STEVEN B. SCHAVER
--------------------------------
Steven B. Schaver
Vice President and
Chief Financial Officer
/s/ STEVEN B. SCHAVER
--------------------------------
Steven B. Schaver
Principal Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED BALANCE SHEET OF DISH, LTD. AND SUBSIDIARIES AS OF
JUNE 30, 1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THOSE FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 0
<SECURITIES> 236 236
<RECEIVABLES> 19,297 19,297
<ALLOWANCES> (848) (848)
<INVENTORY> 48,386 48,386
<CURRENT-ASSETS> 92,162 92,162
<PP&E> 410,264 410,264
<DEPRECIATION> (19,906) (19,906)
<TOTAL-ASSETS> 598,918 598,918
<CURRENT-LIABILITIES> 81,723 81,723
<BONDS> 444,786 444,786
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 68,246 68,246
<TOTAL-LIABILITY-AND-EQUITY> 529,918 598,918
<SALES> 69,234<F1> 109,888<F1>
<TOTAL-REVENUES> 69,354 110,380
<CGS> 62,072<F2> 98,105<F2>
<TOTAL-COSTS> 87,007 136,941
<OTHER-EXPENSES> 8,642 11,876
<LOSS-PROVISION> (569) 41
<INTEREST-EXPENSE> 10,150<F3> 15,091<F3>
<INCOME-PRETAX> (26,295) (38,437)
<INCOME-TAX> 9,097 13,949
<INCOME-CONTINUING> (17,198) (24,488)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (17,198) (24,488)
<EPS-PRIMARY> (17,198) (24,488)
<EPS-DILUTED> (17,198) (24,488)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES THE COST OF PROVIDING PROGRAMMING.
<F3>NET OF AMOUNTS CAPITALIZED.
</FN>
</TABLE>
