- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-3980
ECHOSTAR SATELLITE BROADCASTING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 84-1337871
(STATE OR OTHER JURISDICTION (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 NOVEMBER 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.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of December 31, 1995
and September 30, 1996 (Unaudited)..................... 1
Statements of Operations for the three months and nine
months ended September 30, 1995 and 1996 (Unaudited).... 2
Statements of Cash Flows for the nine months
ended September 30, 1995 and 1996 (Unaudited)......... 3
Notes to Financial Statements (Unaudited)............... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................... 24
Item 6. Exhibits and Reports on Form 8-K....................... 25
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 13,949 $ 28,926
Marketable investment securities ............................. 210 42,122
Trade accounts receivable, net ............................... 9,115 18,958
Advances to affiliates ....................................... 1,320 63,653
Inventories, net ............................................. 38,769 44,246
Income tax receivable ........................................ 3,870 6,527
Deferred tax assets .......................................... 1,834 2,457
Subscriber acquisition costs, net ............................ -- 43,470
Other current assets ......................................... 12,791 19,404
-------- ----------
Total current assets ....................................... 81,858 269,763
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES:
Dish Notes escrow ............................................ 73,291 --
ESBC Notes escrow ............................................ -- 135,449
Other ........................................................ 26,400 41,461
PROPERTY AND EQUIPMENT, net .................................... 333,199 495,055
OTHER NONCURRENT ASSETS ........................................ 44,547 76,820
-------- ----------
Total assets ............................................... $559,295 $1,018,548
-------- ----------
-------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable ....................................... $ 19,063 $ 28,062
Deferred programming revenue - DISH Network-SM- .............. -- 63,008
Deferred programming revenue - C-ban d ....................... 5,563 4,308
Accrued expenses and other current liabilities ............... 21,335 13,750
Notes payable and current portion of long-term debt .......... 4,782 11,344
-------- ----------
Total current liabilities .................................. 50,743 120,472
LONG-TERM DEFERRED PROGRAMMING REVENUE - DISH Network-SM- ...... -- 6,790
DISH NOTES, net ................................................ 382,218 422,777
ESBC NOTES, net ................................................ -- 372,570
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE, excluding current
portion ...................................................... 33,444 53,842
OTHER LONG-TERM LIABILITIES .................................... -- 437
-------- ----------
Total liabilities .......................................... 466,405 976,888
-------- ----------
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 ................................... 89,495 106,466
Unrealized holding gains on available-for-sale securities,
net of deferred taxes ...................................... 251 35
Retained earnings (deficit) .................................. (13,826) (64,841)
-------- ----------
Total stockholder's equity ................................. 92,890 41,660
-------- ----------
Total liabilities and stockholder's equity ................. $559,295 $1,018,548
-------- ----------
-------- ----------
The accompanying notes to consolidated financial
statements are an integral part of these balance sheets.
1
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1995 1996 1995 1996
--------- -------- --------- --------
REVENUE:
DTH products and technical services .... $ 39,373 $ 37,159 $ 110,515 $ 134,358
Programming - DISH Network-SM- ........... -- 15,279 -- 21,325
Programming - C-band ................... 3,791 2,885 11,479 9,528
Loan origination and participation
income ................................ 442 184 1,277 676
-------- --------- --------- ---------
Total revenue ....................... 43,606 55,507 123,271 165,887
-------- --------- --------- ---------
EXPENSES:
DTH products and technical services .... 30,803 35,254 87,619 125,532
Programming - DISH Network-SM- ........... -- 6,108 -- 7,877
Programming - C-band ................... 3,473 2,573 10,297 8,631
Selling, general and administrative .... 8,268 22,924 23,454 52,022
Depreciation and amortization .......... 721 10,247 1,490 20,003
-------- --------- --------- ---------
Total expenses ...................... 43,265 77,106 122,860 214,065
-------- --------- --------- ---------
OPERATING INCOME (LOSS) ................... 341 (21,599) 411 (48,178)
-------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income ........................ 3,530 4,259 10,131 12,089
Interest expense, net of amounts
capitalized ........................... (5,859) (18,262) (18,749) (44,036)
Other, net ............................. 218 124 178 60
-------- --------- --------- ---------
Total other income (expense) ........ (2,111) (13,879) (8,440) (31,887)
-------- --------- --------- ---------
NET LOSS BEFORE INCOME TAXES .............. (1,770) (35,478) (8,029) (80,065)
BENEFIT FOR INCOME TAXES .................. 854 12,954 3,060 29,050
-------- --------- --------- ---------
NET LOSS .................................. $ (916) $ (22,524) $ (4,969) $(51,015)
-------- --------- --------- ---------
-------- --------- --------- ---------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
2
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................... $ (4,969) $ (51,015)
Adjustments to reconcile net loss to net
cash flows from operating activities--
Depreciation and amortization ............ 1,490 20,003
Provision for doubtful accounts .......... -- 587
Benefit for deferred taxes ............... (6,509) (25,040)
Amortization of deferred debt issuance
costs on Dish Notes and ESBC Notes ...... 945 1,759
Amortization of discount on Dish and ESBC
Notes, net of amounts capitalized ....... 17,455 40,229
Equity in earnings of joint venture ...... (39) --
Change in reserve for excess and obsolete
inventory ............................... 277 2,579
Change in long-term deferred programming
revenue ................................. -- 6,790
Change in accrued interest on convertible
subordinated debentures from SSET ....... (427) (418)
Other, net ............................... (405) 232
Changes in working capital items --
Trade accounts receivable ............. (1,284) (10,430)
Advances to affiliates ................ -- (57,747)
Inventories............................ (6,358) (8,056)
Income tax receivable ................. -- (2,657)
Other current assets .................. (685) (6,613)
Liability under cash management
program .............................. (57) --
Trade accounts payable ................ (10,441) 8,999
Deferred programming revenue .......... (719) 61,753
Accrued expenses and other current
liabilities .......................... 661 7,415
--------- ---------
Net cash flows from operating
activities ........................ (11,065) (11,630)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment
securities ................................. (18,711) (54,106)
Sales of marketable investment securities ... 41,974 12,361
Purchases of restricted marketable investment
securities ................................. (15,000) (20,761)
Funds released from restricted cash and
marketable investment securities - other ... -- 5,700
Purchases of property and equipment ......... (1,700) (8,597)
Offering proceeds and investment earnings
placed in escrow ........................... (7,570) (191,941)
Refund of launch payment placed in escrow ... -- (4,500)
Funds released from escrow accounts ......... 51,842 133,768
Payments received on convertible subordinated
debentures from SSET ....................... -- 5,252
Expenditures for satellite systems under
construction ............................... (53,984) (136,414)
Investment in subscriber acquisition costs .. -- (46,918)
Expenditures for FCC authorizations ......... -- (25)
--------- ---------
Net cash flows from investing activities.. (3,149) (306,181)
--------- ---------
The accompanying notes to consolidated financial
statements are an integral part of these statements.
3
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and
note payable .................................. $ (167) $ (4,207)
Proceeds from issuance of Common Stock ......... -- 1
Net proceeds from issuance of ESBC Notes ....... -- 336,994
--------- --------
Net cash flows from financing activities .... (167) 332,788
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ..................................... (14,381) 14,977
CASH AND CASH EQUIVALENTS, beginning of period ... 17,506 13,949
--------- --------
CASH AND CASH EQUIVALENTS, end of period ......... $ 3,125 $ 28,926
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts
capitalized ................................... $ 353 $ 2,049
Cash paid for income taxes ..................... 1,311 --
Note payable issued for deferred satellite
construction payments for EchoStar II ......... -- 28,000
Satellite launch payment for EchoStar II applied
to EchoStar I launch .......................... -- 15,000
Increase in note payable for deferred satellite
construction payments for EchoStar I .......... -- 3,167
Cumulative Series A Preferred Stock
dividends ..................................... 602 --
The accompanying notes to consolidated financial
statements are an integral part of these statements.
4
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
THIS FORM 10-Q 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.
(1) BUSINESS AND BASIS OF PRESENTATION
PRINCIPAL BUSINESS AND FINANCING ACTIVITIES
EchoStar Satellite Broadcasting Corporation and subsidiaries ("ESBC") is
a wholly owned subsidiary of EchoStar Communications Corporation
("EchoStar"), a publicly traded company on the NASDAQ National Market. Dish,
Ltd. is a wholly-owned direct subsidiary of ESBC. Substantially all of
EchoStar's operating activities are conducted by subsidiaries of Dish, Ltd.
In March 1996, ESBC completed a private offering (the "ESBC Notes Offering")
of 13 1/8% Senior Secured Discount Notes due 2004, resulting in net proceeds
of approximately $337.0 million. ESBC subsequently filed a Registration
Statement on Form S-1 to effect the exchange of those Notes for publicly
registered debentures (the "ESBC Notes") with the same terms. Proceeds from
the ESBC Notes Offering have been or will be used for: (i) continued
development, marketing and distribution of the DISH Network-SM-; (ii)
EchoStar's purchase of DBS frequencies at 148DEG. WL (the "148
Frequencies"); (iii) partial funding of the construction, launch and
insurance of the satellites DBSC I ("EchoStar III") and EchoStar IV; (iv)
additional launch costs of EchoStar II; and (v) other general corporate
purposes. The 148 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 ESBC Notes Offering, EchoStar
contributed all of the outstanding capital stock of its wholly owned
subsidiary, Dish, Ltd., to ESBC. This transaction has been accounted for as a
reorganization of entities under common control whereby Dish, Ltd. has been
treated as the predecessor to ESBC. ESBC is subject to all, and EchoStar is
subject to certain of, the terms and conditions of the Indenture related to
the ESBC Notes (the "ESBC Notes Indenture").
ESBC is one of only two direct broadcast satellite ("DBS") companies in
the United States with the capacity to provide comprehensive nationwide DBS
programming service in 1996. ESBC's DBS service (the "DISH Network-SM-")
commenced operations in March 1996 after the successful launch of its first
satellite ("EchoStar I") in December 1995. ESBC launched its second satellite
EchoStar II ("EchoStar II") on September 10, 1996. ESBC significantly
increased the channel capacity and programming offerings of the DISH
Network-SM- when EchoStar II became fully operational in November 1996. ESBC
now provides approximately 120 channels of near laser disc quality digital
video programming and over 30 channels of CD quality audio programming to the
entire continental United States ("CONUS"). In addition to its DISH
Network-SM- business, ESBC is engaged in the design, manufacture,
distribution and installation of satellite direct to home ("DTH") products
and domestic distribution of DTH programming.
ESBC's primary objective is to become one of the leading providers of
subscription television and other satellite delivered services in the
United States. ESBC had approximately 190,000 and 250,000 subscribers to DISH
Network-SM- programming as of September 30, 1996 and November 11, 1996,
respectively.
In the first quarter of 1996, EchoStar formed a wholly owned subsidiary,
Dish Network Credit Corporation ("DNCC"), for the purpose of providing
consumer financing for EchoStar's domestic DTH products and services. At that
time, ESBC's subsidiary that previously provided these services ceased new
loan origination activities. In future periods, revenue from loan origination
and participation income will continue to decline.
5
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In June 1994, Dish, Ltd. completed a public offering (the "Dish Notes
Offering") of 12 7/8% Senior Secured Discount Notes due 2004 (the "Dish Notes")
and Warrants (collectively, the "Dish Notes Offering"), resulting in net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the Dish Notes
(the "Dish Notes Indenture"). Substantially all of the Warrants issued in
connection with the Dish Notes Offering have been exercised. 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").
As of September 30, 1996, EchoStar owned approximately 40% of the
outstanding common stock of Direct Broadcasting Satellite Corporation, a
Delaware Corporation ("DBSC"). DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5DEG. WL and eleven DBS frequencies at 175DEG.
WL (the "DBS Rights"). EchoStar intends to merge DBSC with Direct Broadcasting
Satellite Corporation, a Colorado Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). As a result of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. The DBSC Merger has
been approved by a majority of DBSC's shareholders and the FCC. EchoStar is in
the process of registering shares of its Class A Common Stock which are expected
to be issued in connection with the DBSC Merger. On October 25, 1996, EchoStar
filed Amendment No. 3 to a Registration Statement on Form S-4 under the
Securities Act covering 658,000 shares of EchoStar Class A Common Stock.
BASIS OF PRESENTATION
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 nine months ended September
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, Ltd.'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.
The accompanying consolidated financial statements include only the
accounts of ESBC and its subsidiaries and exclude all accounts of ESBC's parent,
EchoStar.
Unless otherwise stated herein, or the context otherwise requires,
references herein to ESBC shall include ESBC and all of its direct and indirect
subsidiaries, and EchoStar shall include EchoStar, ESBC and all of their direct
and indirect wholly owned subsidiaries.
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.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position when compared to its
historical results. EchoStar consummated the Dish Notes Offering, the ESBC Notes
Offering and the Equity Offering to partially satisfy the capital requirements
for the construction, launch and
6
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
operation of EchoStar I, EchoStar II, EchoStar III and EchoStar IV. Annual
interest expense on the Dish Notes and ESBC 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 1998. As of September 30, 1996, EchoStar expects to
invest approximately an additional $400 million to fund contractor financing
obligations with respect to EchoStar I and EchoStar II and to complete the
construction phase and launch of EchoStar III and EchoStar IV (Note 6).
EchoStar's plans also include the financing, construction and launch of two
fixed service satellites, additional DBS satellites and Ku-band and KuX-band
satellites, assuming receipt of all required FCC licenses and permits.
In August 1996, ESBC introduced a nationwide marketing promotion (the
"EchoStar Promotion") which offers a standard EchoStar Receiver System to
consumers for $199 (as compared to the original average retail price in March
1996 of approximately $499), conditioned upon the consumer's prepaid purchase
of one year of America's Top 40 CDSM programming package (America's Top 50
CDSM programming package effective November 1, 1996) for approximately $300.
The EchoStar Promotion has significantly increased the affordability of
EchoStar Receiver Systems for consumers. The primary purposes of the EchoStar
Promotion are to rapidly build a subscriber base, to expand retail
distribution of ESBC's products and to build consumer awareness of the DISH
Network-SM- brand. This promotion is consistent with and emphasizes ESBC's
long-term business strategy which focuses on generating the majority of its
future revenue through sales of DISH Network-SM- programming to a substantial
subscriber base. The EchoStar Promotion requires significant investment by
ESBC to acquire subscribers, but ESBC believes the investment is fully
recoverable from the DBS programming revenues expected to be generated. ESBC
receivers process only DISH Network-SM- signals because of the proprietary
encryption technology employed. Consequently, the satellite receivers and
other reception equipment can not be utilized with competitors' DBS systems,
and unlike the cellular phone industry, subscribers can not seamlessly
migrate to alternative DBS providers. Further, based on high DBS industry
consumer satisfaction ratings, initial feedback from consumers and dealers
and low ESBC subscriber turnover rates, ESBC anticipates high service renewal
rates leading to an expected average minimum subscriber life of at least
three years. However, as renewal data for subscribers to the DISH Network-SM-
is not yet available, among other things, ESBC has elected to amortize its
subscriber acquisition costs over a one year period. This amortization period
is equal to the term of the prepaid programming package under the ESBC
Promotion. As ESBC's DISH Network-SM- subscriber base matures and ESBC
develops a history of renewal rates, this amortization period may be adjusted
to reflect the expected average minimum life of a subscriber. In addition,
EchoStar's experience to date is that a majority of subscribers have
purchased premium and Pay-Per-View programming for incremental amounts above
the prepaid minimum required by the EchoStar Promotion, which reduces the
time necessary to recover the average investment per subscriber. ESBC's
present marketing strategy is based on current and anticipated competitive
conditions which may change, and such changes could be adverse to ESBC.
ESBC has agreements with two manufacturers to supply DBS receivers for
ESBC. Only one of the manufacturers has produced a receiver acceptable to
ESBC. ESBC previously deposited $10.0 million with the non-performing
manufacturer and has an additional $15.0 million in an escrow account (the
"Non-Performing Manufacturer Escrow Account") as security for ESBC's payment
obligations under that contract. ESBC has given this non-performing
manufacturer notice of its intent to terminate the contract and has filed
suit against that manufacturer. Consequently, ESBC is currently dependent on
one manufacturing source for its receivers. Since ESBC has given the
non-performing manufacturer notice of its intent to terminate the contract,
ESBC has not included amounts due under the contract in ESBC's future
purchase commitments. The performing manufacturer is presently manufacturing
receivers in sufficient quantities to meet currently expected demand. If
ESBC's sole manufacturer is unable for any reason to produce receivers in a
quantity sufficient to meet demand, ESBC's liquidity and results of
operations would be adversely affected. There can be no assurance ESBC will
be able to recover any amounts deposited with the non-performing manufacturer
or held in escrow.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar expects
negative stockholders' equity will result before December 31, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the Dish Notes and ESBC Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii)
amortization of subscriber acquisition
7
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
costs; and (iv) increases in selling, general and administrative expenses to
support the DISH Network-SM-. Although a negative equity position has
significant implications, including, but not limited to, non-compliance with
NASDAQ National Market listing criteria, EchoStar believes this event will
not materially affect the implementation and execution of its business
strategy. When EchoStar ceases to satisfy NASDAQ's National Market listing
criteria, EchoStar's Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If an
exception were not granted, trading in EchoStar Common Stock would thereafter
be conducted in the over-the-counter market. Consequently, it would be more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the EchoStar Common Stock. 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 capital to complete the construction and launch of EchoStar III and
EchoStar IV. There can be no assurance that necessary funds will be available
or, if available, that they will be available on terms favorable to EchoStar. In
anticipation of its future capital requirements and in order to fully implement
its business strategy, EchoStar regularly examines, and is currently examining,
opportunities to expand its DBS business, technology base and product lines
through means such as licenses, joint ventures, strategic alliances, strategic
investments and acquisitions of assets or ongoing businesses. Currently,
EchoStar has not made a commitment to any new strategic transaction. At any
time, however, EchoStar may agree to enter into a new strategic transaction.
Should EchoStar agree to enter into a new strategic transaction, there can be no
assurance as to the terms or timing of the transaction, whether the transaction
will be consummated or whether the transaction would improve EchoStar's
financial condition, results of operations, business or prospects in any
material manner. Further increases in the investment in subscriber acquisition
costs, inadequate supplies of DBS receivers or significant delays or launch
failures would significantly and adversely affect EchoStar's operating results
and financial condition.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
ESBC considers all investments purchased with an original maturity of
ninety days or less to be cash equivalents. Cash equivalents as of December 31,
1995, and September 30, 1996 consist of money market funds, corporate notes and
commercial paper stated at cost which equates to market value.
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
ESBC 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 Investment Securities in Escrow Accounts as
reflected on the accompanying consolidated balance sheets represent the
remaining net proceeds received from the Dish Notes Offering, and a portion of
the proceeds from the ESBC Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and continued
growth of the DISH Network-SM-. These proceeds are held in separate escrow
accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") for the
benefit of the holders of the Dish Notes and ESBC Notes, respectively, and are
invested in certain debt and other marketable investment securities, as
permitted by the respective Indentures, until disbursed for the express purposes
identified in the Dish Notes Offering Prospectus and the ESBC Notes Offering
Prospectus, as the case may be.
Other Restricted Cash includes $11.4 million and $5.7 million at December
31, 1995 and September 30, 1996, respectively, to satisfy certain covenants in
the Dish Notes Indenture regarding launch insurance for EchoStar I and EchoStar
II. In addition, as of December 31, 1995 and September 30, 1996, $15.0 million
was in the Non-Performing Manufacturer Escrow Account established pursuant to a
DBS receiver manufacturing contract for payment to the manufacturer as certain
milestones are reached. As of September 30, 1996, approximately $20.0
million was in a separate escrow account established pursuant to a second DBS
receiver manufacturing agreement, covering EchoStar's payment
8
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
obligations. Additionally, approximately $750,000 was in an escrow account
for the purpose of cash collateralizing standby letters of credit to a
vendor. The major components of Restricted Cash and Marketable Investment
Securities are as follows (in thousands):
DECEMBER 31, 1995 SEPTEMBER 30, 1996
-------------------------------- -------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST (LOSS) VALUE
--------- ---------- ------ --------- ---------- ------
Commercial paper ..... $ 66,214 $ -- $ 66,214 $ 115,444 $ -- $ 115,444
Government bonds ..... 32,904 420 33,324 41,040 (33) 41,007
Corporate notes ...... -- -- -- 19,111 (62) 19,049
Certificates of
deposit ............. -- -- -- 750 -- 750
Accrued interest ..... 153 -- 153 660 -- 660
------- ----- ------- --------- ------- ---------
$99,271 $ 420 $ 99,691 $ 177,005 $ (95) $ 176,910
------- ----- ------- --------- ------- ---------
------- ----- ------- --------- ------- ---------
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 ESBC's specifications. ESBC 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, SEPTEMBER 30,
1995 1996
------------ -------------
EchoStar Receiver Systems .......... $ -- $ 20,878
DBS receiver components ............ 9,615 11,544
Consigned DBS receiver components .. -- 6,633
Finished goods - C-band ............ 11,161 4,246
Finished goods - International ..... 9,297 3,518
Competitor DBS Receivers ........... 9,404 --
Spare parts ........................ 2,089 2,199
Reserve for excess and obsolete
inventory ......................... (2,797) (4,772)
-------- --------
$ 38,769 $ 44,246
-------- --------
-------- --------
SUBSCRIBER ACQUISITION COSTS
To attract subscribers to the DISH Network-SM-, ESBC has sponsored
certain sales promotions through ESBC's various distribution outlets.
Currently, ESBC has chosen to reduce the retail price of ESBC's proprietary
DBS reception equipment at less than cost when consumers subscribe to and
prepay for DISH Network-SM- programming service for a minimum of one year.
Transaction proceeds to ESBC applicable to the DISH Network-SM- programming
(a minimum of $300 per subscriber) are deferred and recognized as revenue
over the period of service. The remaining transaction proceeds are recognized
as equipment revenue on shipment and an equal amount is charged to expense.
ESBC's investment in each subscriber is equal to the cost of the equipment,
less any remaining non-programming transaction proceeds to ESBC. This amount
is deferred and is being amortized over a one year period, which is equal to
the length of the programming package available under the EchoStar Promotion.
As ESBC's DISH Network-SM- subscriber base matures and ESBC develops a
history of renewal rates, this amortization period may be adjusted to reflect
the expected average minimum life of a subscriber. Amortization of subscriber
acquisition costs for the three and nine months ended September 30, 1996 was
approximately $3.3 million and $3.4 million, respectively.
9
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 ESBC's effective borrowing rate. The major components of
property and equipment were as follows (in thousands):
ESTIMATED
USEFUL LIFE DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
----------- ------------ -------------
Construction in progress ............... -- $ 282,373 $ 225,948
EchoStar I satellite ................... 12 -- 201,607
Furniture, fixtures and equipment....... 2-12 35,127 65,309
Buildings and improvements ............. 7-40 21,006 21,620
Tooling and other ...................... 2 2,039 4,382
Land ................................... -- 1,613 1,613
Vehicles ............................... 7 1,310 1,325
--------- ---------
Total property and equipment ........ 343,468 521,804
Less-Accumulated depreciation..... (10,269) (26,749)
--------- ---------
Net property and equipment ....... $ 333,199 $ 495,055
--------- ---------
--------- ---------
Construction in progress primarily includes capitalized costs related to
the construction, insurance and launch of EchoStar II, which was launched in
September 1996 and became fully operational in November 1996. Construction in
progress consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 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 ................................... 88,634 225,948
Other ............................................... 110 --
--------- ---------
$ 282,373 $ 225,948
--------- ---------
--------- ---------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Deferred tax assets, net $ 12,109 $ 36,658
FCC authorizations, net of amortization ............. 11,309 12,450
ESBC Notes deferred debt issuance costs, net of
amortization ....................................... -- 12,240
Dish Notes deferred debt issuance costs, net of
amortization ....................................... 10,622 9,692
SSET convertible subordinated debentures and
accrued interest ................................... 9,610 4,776
Other, net .......................................... 897 1,004
-------- ---------
$ 44,547 $ 76,820
-------- ---------
-------- ---------
10
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization begins at the time the related satellite
becomes operational, or capitalized costs are written off at the time efforts to
provide services are abandoned. FCC authorization costs are amortized over 12
years, the expected useful life of the related satellite.
DEFERRED PROGRAMMING REVENUE
Deferred programming revenue consists principally of prepayments received
from subscribers to the DISH Network-SM- programming which are recognized as
revenue in the period the programming is provided. ESBC similarly defers
prepayments received from subscribers to C-band programming sold by ESBC as
an authorized distributor.
ESBC also receives advance payments from certain programming providers
for carriage on the DISH Network-SM- which are deferred and recognized as
revenue on a straight-line basis over the contract term.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying income
statements includes: (i) amortization of original issue discount on the Dish
Notes and the ESBC Notes; (ii) interest expense on contractor financing of
EchoStar I; (iii) interest expense on corporate mortgage indebtedness; and (iv)
discounts on accounts receivable for EchoStar Receiver Systems and DISH
Network-SM- programming which have been sold without credit recourse to third
party financing groups.
(3) LONG-TERM DEBT
DISH NOTES
During June 1994, Dish, Ltd. completed the Dish Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the Dish Notes
and 3,744,000 Warrants. The Dish Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. Substantially all of the Warrants
issued in connection with the Dish Notes Offering have been exercised. Interest
on the Dish Notes currently is not payable in cash but accrues through June 1,
1999, with the Dish Notes accreting to $624.0 million by that date. Thereafter,
interest on the Dish Notes will be payable in cash semi-annually on June 1 and
December 1 of each year, commencing December 1, 1999. At September 30, 1996, the
Dish Notes were reflected in the accompanying financial statements at $422.8
million, net of unamortized discount of $201.2 million.
ESBC NOTES
During March 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount of the ESBC Notes. The ESBC Notes
Offering resulted in net proceeds to ESBC of approximately $337.0 million.
Interest on the ESBC Notes currently is not payable in cash but accrues through
March 15, 2000, with the ESBC Notes accreting to $580.0 million by that date.
Thereafter, interest on the ESBC Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At
September 30, 1996, the ESBC Notes were reflected in the accompanying financial
statements at $372.6 million, net of unamortized discount of $207.4 million.
(4) BANK CREDIT FACILITY AND LETTERS OF CREDIT
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
exceptDish, Ltd., other than EchoStar Satellite Corporation (the "Borrowers"),
were parties to an agreement with Bank of America Illinois, which provided a
revolving
11
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 intend to arrange a replacement credit facility.
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1995 1996 1995 1996
------- ------- ------- ------
Current (provision) benefit
Federal ................... $ (635) $ (493) $ (2,233) $ 3,919
State ..................... (180) (427) (549) 278
Foreign ................... (216) (67) (667) (187)
------- -------- -------- -------
(1,031) (987) (3,449) 4,010
------- -------- -------- -------
Deferred benefit
Federal ................... 1,594 12,916 5,410 23,380
State ..................... 291 1,025 1,099 1,660
------- -------- -------- -------
1,885 13,941 6,509 25,040
------- -------- -------- -------
Total benefit ........... $ 854 $ 12,954 $ 3,060 $29,050
------- -------- -------- -------
------- -------- -------- -------
ESBC's deferred tax assets (approximately $39.1 million at September 30,
1996) relate principally to temporary differences for amortization of original
issue discount on the Dish Notes and ESBC Notes, net operating loss
carryforwards and various accrued expenses which are not deductible until paid.
No valuation allowance has been provided because ESBC 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 ESBC'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 constructed 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,
includes 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. The contract for EchoStar IV contains a provision whereby,
beginning February 16, 1998, includes 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. This contract also contains an option provision which allows
EchoStar to commence the construction phase of a fifth DBS satellite
("EchoStar V").
EchoStar is utilizing $28.0 million of contractor financing for EchoStar
II. The contractor financing for EchoStar II bears interest at 8.25% and is
payable in equal monthly principal and interest installments are due over five
years following launch. Contractor financing of $15.0 million each will be used
for EchoStar III and EchoStar IV. Interest on the contractor financing for
EchoStar III and EchoStar IV will range between 7.75% and 8.25% and principal
and interest payments are, with equal monthly installments due over five years
following the launch of the respective satellite.
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
12
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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
price 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.
In July 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 issued 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.
In connection with the satellite contracts discussed above and other
related commitments, in the fourth quarter of 1996 EchoStar expects to expend:
(i) approximately $3.9 million for contractor financing on EchoStar I and
EchoStar II; (ii) approximately $19.0 million in connection with the launch of
EchoStar III; (iii) approximately $37.0 million for construction of EchoStar III
and EchoStar IV; and (iv) approximately $41.8 million for the purchase of the
148 Frequencies. Funds for these expenditures are expected to come from the ESBC
Notes Escrow Account and available cash and marketable investment securities.
Beyond 1996, EchoStar will expend approximately $68.7 million on contractor
financing debt related to EchoStar I and EchoStar II. Additionally, EchoStar has
committed to expend approximately an additional $260 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.
PURCHASE COMMITMENTS
ESBC has entered into agreements with various manufacturers to purchase DBS
receivers and related components manufactured based on ESBC's supplied
specifications. As of September 30, 1996 the remaining commitments total
approximately $148.7 million. As described previously, ESBC has agreements with
two manufacturers to supply DBS receivers for ESBC. Only one of the
manufacturers has produced a receiver acceptable to ESBC. Since ESBC has given
the non-performing manufacturer notice of its intent to terminate the contract
and has filed suit against that manufacturer, ESBC has not included amounts due
under the contract in ESBC's purchase commitments. At September 30, 1996, the
total of all outstanding purchase order commitments with domestic and foreign
suppliers was approximately $150.0 million. All but approximately $19.2 million
of the purchases related to these commitments are expected to be made during
1996 and the remainder are expected to be made during 1997. ESBC expects to
finance these purchases from available cash, marketable investment securities
and sales of its DISH Network-SM- programming.
13
ECHOSTAR SATELLITE BROADCASTING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED 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 or ESBC.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the ESBC Notes
Indenture), the ESBC Notes will be guaranteed by Dish, Ltd., which guarantee
will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd. On and
after the date upon which the DBSC Merger is consummated, the ESBC Notes will be
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $277,000 and $134,000 as of December 31, 1995 and September 30,
1996, respectively. Summarized consolidated financial information for Dish, Ltd.
is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1995 1996 1995 1996
------- ------- -------- -------
Income Statement Data --
Revenue ......................... $ 43,606 $ 55,507 $ 123,271 $ 165,887
Expenses ........................ 43,265 77,069 122,860 214,010
-------- --------- --------- ---------
Operating income (loss) ......... 341 (21,562) 411 (48,123)
Other income (expense), net ..... (2,111) (7,970) (8,440) (19,846)
-------- --------- --------- ---------
Net loss before income taxes .... (1,770) (29,532) (8,029) (67,969)
Benefit for income taxes ........ 854 11,391 3,060 25,340
-------- --------- --------- ---------
Net loss ...................... $ (916) $ (18,141) $ (4,969) $ (42,629)
-------- --------- --------- ---------
-------- --------- --------- ---------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Balance Sheet Data --
Current assets .................. $ 81,858 $ 146,940
Property and equipment, net ..... 333,199 495,055
Other noncurrent assets ......... 144,238 102,359
--------- ---------
Total assets .................. $ 559,295 $ 744,354
--------- ---------
--------- ---------
Current liabilities ............. $ 50,743 $ 210,509
Long-term liabilities ........... 415,662 483,846
Stockholder's equity ............ 92,890 49,999
--------- ---------
Total liabilities and
stockholder's equity ......... $ 559,295 $ 744,354
--------- ---------
--------- ---------
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ESBC currently operates three related businesses: (i) operation of the
DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of DTH products worldwide; and (iii)
domestic distribution of DTH programming. During March 1996 ESBC began
broadcasting and selling programming packages available from the DISH
Network-SM-. ESBC expects to derive its future revenue principally from
periodic subscription fees for DISH Network-SM- programming and, to a lesser
extent, from the sale of equipment. The growth of DBS service and equipment
sales has had and will continue to have a material negative impact on ESBC's
domestic sales of C-band DTH products; however this negative impact has been
more than offset for the nine months ended September 30, 1996 by sales of
EchoStar Receiver Systems. As sales of ESBC DBS programming and receivers
increase, ESBC expects the decline in its sales of domestic C-band DTH
products to continue at an accelerated rate.
ESBC generally bills for DISH Network-SM- programming periodically in
advance and recognizes revenue as service is provided. DISH Network-SM-
revenue is a function of: (i) the number of subscribers; (ii) the mix of
programming packages selected by subscribers; (iii) the rates charged
subscribers; (iv) revenue from ancillary programming activities (such as
Pay-Per-View) and; and (v) revenue from satellite usage time agreements. DBS
programming costs are generally based upon the number of subscribers to each
programming offering; however, certain programmers pay EchoStar for carriage
of their signals. Since August 1996, ESBC has introduced several marketing
promotions, the most significant of which is a nationwide marketing promotion
(the "EchoStar Promotion") which offers a standard EchoStar Receiver System
to consumers for $199 (as compared to the original average retail costprice
in March 1996 of approximately $499), conditioned upon the consumer's prepaid
purchase of one year of America's Top 40 CDSM programming package (America's
Top 50 CDSM programming package effective November 1, 1996) for approximately
$300. The EchoStar Promotion has significantly increased the affordability of
EchoStar Receiver Systems for consumers. The primary purposes of the EchoStar
Promotion are to rapidly build a subscriber base, to expand retail
distribution of ESBC's products and to build consumer awareness of the DISH
Network-SM- brand. This promotion is consistent with and emphasizes ESBC's
long-term business strategy which focuses on generating the majority of its
future revenue through sales of DISH Network-SM- programming to a substantial
subscriber base. The EchoStar Promotion requires significant investment by
ESBC to acquire subscribers, ESBC believes the investment is fully
recoverable from the DBS programming revenues expected to be generated. ESBC
receivers process only DISH Network-SM- signals because of the proprietary
encryption technology employed. Consequently, the satellite receivers and
other reception equipment can not be utilized with competitors' DBS systems,
and unlike the cellular phone industry, subscribers can not seamlessly
migrate to alternative DBS providers. Further, based on high DBS industry
consumer satisfaction ratings, initial feedback from consumers and dealers
and low ESBC subscriber turnover rates, ESBC anticipates high service renewal
rates leading to an expected average minimum subscriber life of at least
three years. However, as renewal data for subscribers to the DISH Network-SM-
is not yet available, among other things, ESBC has elected to amortize its
subscriber acquisition costs over a one year period. This amortization period
is equal to the term of the prepaid programming package under the EchoStar
Promotion. As ESBC's DISH Network-SM- subscriber base matures and ESBC
develops a history of renewal rates, this amortization period may be adjusted
to reflect the expected average minimum life of a subscriber. In addition,
EchoStar's experience to date is that a majority of subscribers have
purchased premium and Pay-Per-View programming for incremental amounts above
the prepaid minimum required by the EchoStar Promotion, which reduces the
time necessary to recover the average investment per subscriber. ESBC's
present marketing strategy is based on current and anticipated competitive
conditions which may change, and such changes could be adverse to ESBC.
Future changes in marketing strategy may include additional promotions,
including promotions geared toward further increasing the affordability of
EchoStar Receiver Systems and related accessories, which, among other
things, which could increase ESBC's investment in its subscriber base.
15
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
REVENUE. Total revenue for the three and nine months ended September 30,
1996 was $55.5 million and $165.9 million, respectively, an increase of $11.9
million, or 27%, and $42.6 million, or 35%, respectively, as compared to total
revenue for the three and nine months ended September 30, 1995 of $43.6 million
and $123.3 million, respectively. Revenue from domestic sales of DTH products
for the three and nine months ended September 30, 1996 was $29.1 million and
$104.0 million, respectively, an increase of $3.3 million, or 13%, and $38.3
million, or 58%, respectively, as compared to the same periods in 1995. The
increase in domestic revenue was primarily due to $22.3 million and $74.0
million in revenue from the sale of EchoStar Receiver Systems during the three
and nine months ended September 30, 1996, respectively. There were no EchoStar
Receiver System sales during the comparable periods in 1995. The increases in
domestic revenue were offset by a decrease of $5.7 million, or 48%, and $14.1
million, or 44%, in revenue from sales of C-band satellite receivers and related
accessories, during the three and nine months ended September 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 $10.2 million, or 100%, and
$15.0 million, or 65%, for the three and nine months ended September 30, 1996,
respectively, compared to the same periods in 1995. There was no revenue and
$8.0 million of revenue from Competitor DBS Receiver sales for the three and
nine months ended September 30, 1996, respectively, as compared to $10.2 million
and $23.0 million for the same periods in 1995. The increases in domestic
revenue were also partially offset by a decrease of $3.0 million, or 82%, and
$6.6 million, or 63%, in revenue from sales of non-proprietary descrambler
modules, during the three and nine months ended September 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 nine months ended September 30, 1996,
and this decline will continue to accelerate with the growth of DBS service and
equipment sales. Consistent with the increases in revenue noted above, ESBC has
experienced a corresponding increase in trade accounts receivable at September
30, 1996, and expects this trend to continue as ESBC develops additional
channels of equipment distribution.
Domestically, ESBC sold approximately 160,000 and 315,000 satellite
receivers in the three and nine months ended September 30, 1996,
respectively, an increase of 321% and 246%, respectively, as compared to
approximately 38,000 and 91,000 satellite receivers, respectively, for the
same periods in 1995. Of the total number of satellite receivers sold for the
three and nine months ended September 30, 1996, approximately 154,000 and
274,000, respectively, were EchoStar Receiver Systems. EchoStar Receiver
System revenue represented approximately 39% and 43%, respectively, of total
revenue for the three and nine months ended September 30, 1996. Although
there was a significant increase in the number of satellite receivers sold in
1996 as compared to 1995, overall revenue did not increase proportionately as
a result of the revenue recognition policy being applied to satellite
receivers sold under the EchoStar Promotion combined with an approximate 26%
reduction in the average selling price of C-band satellite receivers. During
the promotional period, ESBC is recognizing substantially less DTH product
revenue and expense related to EchoStar Receiver Systems sold pursuant to the
EchoStar Promotion. EchoStar effectively allows consumers to buyCurrently,
ESBC has chosen to reduce the retail price of ESBC's proprietary DBS
reception equipment at less than cost if theywhen consumers subscribe to and
prepay for DISH Network-SM- programming service for a minimum of one year.
Transaction proceeds to ESBC applicable to the DISH Network-SM- programming (a
minimum of $300 per subscriber) are deferred and recognized as revenue over
the period of service. The remaining transaction proceeds are recognized as
equipment revenue on shipment and an equal amount is charged to expense.
ESBC's investment in each subscriber is equal to the cost of the equipment,
less any remaining non-programming transaction proceeds to ESBC, measures
EchoStar's investment in each new subscriber. This amount is deferred and is
being amortized over a one year period, which is equal to the term of the
prepaid programming package under the EchoStar Promotion. As ESBC's DISH
Network-SM- subscriber base matures and ESBC develops a history of renewal
rates, this amortization period may be adjusted to reflect the expected
average minimum life of a subscriber. This promotion is consistent with and
emphasizes ESBC's long-term business strategy which focuses on generating the
majority of its future revenue through sales of DISH Network-SM- programming
to a substantial subscriber base.
16
Also included in the number of satellite receivers sold for the nine months
ended September 30, 1996 are approximately 19,000 Competitor DBS Receivers as
compared to 40,000, for the same period in 1995. During the nine months ended
September 30, 1996, the Competitor DBS Receivers were sold at an approximate 25%
reduction in the average selling price as compared to the nine months ended
September 30, 1995. Competitor DBS Receiver revenue represented approximately 5%
of total revenue for the nine months ended September 30, 1996. ESBC's agreement
to distribute Competitor DBS Receiver systems terminated on December 31, 1995
and during the first half of 1996, ESBC sold all of its remaining 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.
DISH Network-SM- programming revenue was $15.3 million and $21.3 million
for the three and nine months ended September 30, 1996, respectively. Since
ESBC 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. DISH
Network-SM- programming revenue represented 27% and 12% of total revenue for
the three and nine months ended September 30, 1996, respectively. In future
periods, ESBC expects these percentages to continue to increase as ESBC
expands its DISH Network-SM- subscriber base. ESBC had approximately 190,000
and 250,000 subscribers to DISH Network-SM- programming as of September 30,
1996 and November 11, 1996, respectively.
C-band programming revenue was $2.9 million and $9.5 million for the three
and nine months ended September 30, 1996, respectively, a decrease of $906,000,
or 24%, and $2.0 million, or 17%, 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 domestic C-band programming revenue.
This decline in C-band equipment sales and the related programming revenue is
expected to continue and accelerate for the foreseeable future. The 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 nine months
ended September 30, 1996 was $184,000 and $676,000, respectively, a decrease of
$258,000, or 58%, and $601,000, or 47%, respectively, compared to the same
periods in 1995. The decrease in loan origination and participation income for
the three and nine months ended September 30, 1996 was primarily due to the
formation of DNCC, a wholly owned 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,
ESBC'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 nine
months ended September 30, 1996 was $8.0 million and $30.3 million,
respectively, a decrease of $5.5 million, or 41%, and $14.5 million, or 32%,
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, ESBC sold
approximately 53,000 and 180,000 analog satellite receivers during the three and
nine months ended September 30, 1996, a decrease of 34% and 31%, respectively,
compared to approximately 80,000 and 261,000 units sold during the same periods
in 1995. Overall, ESBC's international markets for analog DTH products declined
during the three and nine months ended September 30, 1996 as anticipation for
new international digital services continuesd 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 ESBC. To offset this
anticipated decline in demand for analog satellite receivers, ESBC has been
negotiating with digital service providers to distribute their proprietary
receivers in ESBC's international markets. While ESBC is actively pursuing these
distribution opportunities, no assurance can be given that such negotiations
will be successful.
17
OPERATING EXPENSES. Costs of DTH products sold were $35.3 million and
$125.5 million for the three and nine months ended September 30, 1996,
respectively, an increase of $4.5 million, or 14%, and $37.9 million, or 43%,
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
EchoStar Receiver Systems. Operating expenses for DTH products as a
percentage of DTH product revenue were 95% and 93% for the three and nine
months ended September 30, 1996, respectively, compared to 78% and 79% for
the same periods in 1995, respectively. This increase is principally
attributable to the accounting treatment applied to satellite receivers sold
under the EchoStar Promotion combined with an approximate 26% reduction in
the average worldwide selling price of C-band satellite receivers and a 25%
reduction in the average selling price of Competitor DBS Receivers, as
described above.
The costs of DISH Network-SM- programming were $6.1 million and $7.9
million for the three and nine months ended September 30, 1996, respectively.
Since ESBC did not begin broadcasting and selling DISH Network-SM- 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.
The costs of C-band programming were $2.6 million and $8.6 million for
the three and nine months ended September 30, 1996, respectively, a decrease
of $900,000, or 26%, and $1.7 million, or 16%, respectively, as compared to
the same 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 nine months ended
September 30, 1996 were 89% and 91%, respectively, as compared to 92% and
90%, respectively for each of the same periods in 1995. Although there was a
decrease in C-band programming revenue, gross profit margins earned on C-band
programming remained relatively consistent. As previously discussed, the
domestic market for C- 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 $22.9 million and $52.0 million for the three
and nine months ended September 30, 1996, respectively, an increase of $14.7
million, or 177%, and $28.6 million, or 122%, respectively, as compared to
the same periods in 1995. This increase was principally due to: (i) increased
personnel in all areas of the organization to support the DISH Network-SM-;
(ii) marketing and advertising prior to and in conjunction with the
introduction of DISH Network-SM- service; (iii) costs related to the Digital
Broadcast Center, which commenced operations in the third quarter of 1995;
and (iv) costs associated with operation of the DISH Network-SM- Call Center
and related services which have been out-sourceds and subscription management
related services. In future periods, EchoStar believes that although total
selling, general and administrative expenses will continue to increase, the
increase as a percentage of future revenue will decrease as subscribers are
added and additional revenue from sales of DISH Network-SM- programming is
recognized.
Research and development costs totaled $1.6 million and $4.2 million for
the three and nine months ended September 30, 1996, respectively, as compared
to $1.5 million and $4.0 million for the same periods in 1995. The increase
was principally due to research and development costs related to digital DBS
receivers for domestic and international markets, principally offset by a
reduction in research related to C-band receivers for domestic and
international markets. ESBC expenses research and development costs as
incurred and includes these costs in selling, general and administrative
expenses.
EBITDA. As expected, ESBC incurred operating losses for the three and
nine months ended September 30, 1996. EBITDA for the three and nine months
ended September 30, 1996 was a negative $11.4 million and a negative $28.2
million, respectively, a decrease of $12.4 million and $30.1 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. ESBC expects to continue to report operating losses through at
least 1997.
18
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three and nine months ended September 30, 1996 was $10.3 million and $20.0
million, respectively, an increase of $9.5 million and $18.5 million,
respectively, as compared to the same periods in 1995. The overall increase
primarily resulted from depreciation on EchoStar I and the Digital Broadcast
Center which were placed in service during the first quarter of 1996 and the
fourth quarter of 1995, respectively, and the amortization of subscriber
acquisition costs. Amortization of subscriber acquisition costs for the three
and nine months ended September 30, 1996 was approximately $3.3 million and
$3.4 million, respectively. As a result of the EchoStar Promotion, in future
periods, amortization expense will be of a magnitude which significantly
exceeds historical levels.
OTHER INCOME AND EXPENSE. Other expense, net for the three and nine
months ended September 30, 1996 was $13.9 million and $31.9 million,
respectively, an increase of $11.8 million and $23.4 million, respectively,
as compared to the same periods in 1995. The increase in other expense for
the three and nine month periods ending September 30, 1996 resulted primarily
from an increase in interest expense resulting from the issuance of the ESBC
Notes. The increase has been partially offset by an increase in interest
income attributable to increases in the balances of the ESBC Escrow Account,
cash and marketable investment securities accounts as a result of proceeds
received from the issuance of the ESBC Notes.
INCOME TAX BENEFIT. Income tax benefit for the three and nine months
ended September 30, 1996 was $13.0 million and $29.1 million, respectively,
compared to income tax benefit of $854,000 and $3.1 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 nine
months ended September 30, 1996. ESBC's deferred tax assets (approximately
$39.1 million at September 30, 1996) relate principally to temporary
differences for amortization of original issue discount on the Dish Notes and
ESBC Notes, net operating loss carryforwards and various accrued expenses
which are not deductible until paid. No valuation allowance has been provided
because ESBC currently believes it is more likely than not that these
deferred tax assets will ultimately be realized. If future operating results
differ materially and adversely from ESBC's current expectations, its
judgment regarding the need for a valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
ESBC used approximately $11.6 million for operations for the nine months
ended September 30, 1996, as compared to $11.1 million used by operations for
the same period in 1995. The cash used by operations for the nine months
ended September 30, 1996 was mainly a result of increases in advances to
affiliates, accounts receivable, inventory and other current assets all
partially offset by deferred programming revenue related to the EchoStar
Promotion and increases in trade accounts payable and accrued expenses and
other current liabilities.
From May 1994 to May 1996, the principal subsidiaries of EchoStar,
exceptDish, Ltd., other than EchoStar Satellite Corporation (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 intend to arrange a replacement
credit facility.
During June 1994, Dish, Ltd. issued 624,000 units consisting of $624.0
million principal amount of the Dish 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 Dish Notes Escrow Account. As of September 30, 1996, substantially all of
the Warrants issued in connection with the Dish Notes Offering had been
exercised. Through September 30, 1996, $353.6 million had been withdrawn from
the Dish Notes Escrow Account. At September 30, 1996, approximately $328.7
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. During
In March 1996, ESBC consummated a private placement of the ESBC Notes
which were subsequently registered with the Securities and Exchange
Commission. ESBC was formed in January 1996 for the purpose of the
19
ESBC Notes Offering. In connection with the ESBC Notes Offering, EchoStar has
contributed all of the outstanding capital stock of its wholly owned
subsidiary, Dish, Ltd., to ESBC. ESBC issued $580.0 million principal amount
of the ESBC Notes for aggregate net proceeds of approximately $337.0 million
of which $177.3 million was placed in the ESBC Notes Escrow Account and the
remaining $159.7 million was placed in cash and cash equivalents or
marketable investment securities. Through September 30, 1996, $46.3 million
had been withdrawn from the ESBC Notes Escrow Account for development and
construction of EchoStar III and EchoStar IV. As of September 30, 1996,
approximately $135.4 million remained in the ESBC Escrow Account, which
included investment earnings. Subsequent to September 30, 1996, an additional
$25.5 million has been withdrawn from the ESBC Notes Escrow Account. Total
cash on hand and marketable investment securities at September 30, 1996 were
approximately $71.0 million. EchoStar guarantees the ESBC Notes on a
subordinated basis.
EchoStar anticipates expending an additional $35 million in working
capital during the fourth quarter of 1996, including 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 differ from anticipated levels; (ii) actual expenses exceed
present estimates; or (iii) investment in subscriber acquisition costs
continue to increase beyond planned levels. In addition to the working
capital requirements discussed above, during the fourth quarter of 1996,
EchoStar expects to expend: (i) approximately $3.9 million for contractor
financing on EchoStar I and EchoStar II; (ii) approximately $19.0 million in
connection with the launch of EchoStar III; (iii) approximately $37.0 million
for construction of EchoStar III and EchoStar IV; and (iv) approximately
$41.8 million for the purchase of the 148 Frequencies. Funds for these
expenditures are expected to come from the ESBC Notes Escrow Account and
available cash and marketable investment securities. Beyond 1996, EchoStar
will expend approximately $68.7 million to repay contractor financing debt
related to EchoStar I and EchoStar II. Additionally, EchoStar has committed
to expend approximately an additional $260 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.
As a result of the factors discussed above, EchoStar will need to raise
additional capital to complete the construction and launch of EchoStar III
and EchoStar IV. There can be no assurance that necessary funds will be
available or, if available, that they will be available on terms favorable to
EchoStar. In anticipation of its future capital requirements and in order to
fully implement its business strategy, EchoStar regularly examines, and is
currently examining, opportunities to expand its DBS business, technology
base and product lines through means such as licenses, joint ventures,
strategic alliances, strategic investments and acquisitions of assets or
ongoing businesses. Currently, EchoStar has not made a commitment to any new
strategic transaction. At any time, however, EchoStar may agree to enter into
a new strategic transaction. Should EchoStar agree to enter into a new
strategic transaction, there can be no assurance as to the terms or timing of
the transaction, whether the transaction will be consummated or whether the
transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases
in the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, EchoStar
expects negative stockholders' equity towill result before December 31, 1997.
EchoStar's expected net losses will result primarily from: (i) the
amortization of the original issue discount on the Dish Notes and ESBC Notes;
(ii) increases in depreciation expense on the satellites and other fixed
assets; (iii) amortization of subscriber acquisition costs; and (iv)
increases in selling, general and administrative expenses to support the DISH
Network-SM-. Although a negative equity position has significant
implications, including, but not limited to, non-compliance with NASDAQ
National Market listing criteria, EchoStar believes this event will not
materially affect the implementation and execution of its business strategy.
When EchoStar ceases to satisfy NASDAQ's National Market listing criteria,
20
EchoStar's Common Stock will be subject to being delisted unless an exception
is granted by the National Association of Securities Dealers. If an exception
were not granted, trading in EchoStar Common Stock would thereafter be
conducted in the over-the-counter market. Consequently, it an investor may
find itwould be more difficult to dispose of, or to obtain accurate
quotations as to the price of, the EchoStar Common Stock. 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 IV. This contract also allows EchoStar to
begin the construction phase of EchoStar V. Concurrent with execution of this
contract, EchoStar waived all penalties due from Martin for the late delivery
of EchoStar I and EchoStar II.
In July 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
issued 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.
In addition to the commitments described above, ESBC has entered into
agreements with various manufacturers to purchase DBS receivers and related
components manufactured based on ESBC's supplied specifications. As of
September 30, 1996 the remaining commitments total approximately $148.7
million. As described previously, ESBC has agreements with two manufacturers
to supply DBS receivers for ESBC. Only one of the manufacturers has produced
a receiver acceptable to ESBC. Since ESBC has given the non-performing
manufacturer notice of its intent to terminate the contract, ESBC has not
included amounts due under the contract in ESBC's purchase commitments. At
September 30, 1996, the total of all outstanding purchase order commitments
with domestic and foreign suppliers was approximately $150.0 million. All but
approximately $19.2 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. ESBC expects to finance these purchases from available cash,
marketable investment securities and sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $849.2 million of long-term
debt (including the Dish Notes and ESBC Notes, deferred satellite contract
payments on EchoStar I and EchoStar II and mortgage indebtedness) as of
December 31, 1995 and September 30, 1996, respectively. In addition, because
interest on the Dish Notes is not payable currently in cash but accrues
through June 1, 1999, the Dish Notes will accrete by $201.2 million through
that date. Similarly, because interest on the ESBC Notes is not payable in
cash but accrues through March 15, 2000, the ESBC Notes will accrete by
$207.4 million through that date. EchoStar is utilizing $28.0 million of
contractor financing for EchoStar II. The contractor financing for EchoStar
II bears interest at 8.25% and is payable in equal monthly principal and
interest installments are due over five years following launch. Contractor
financing of $15.0 million each will be used for EchoStar III and EchoStar
IV. Interest on the contractor financing for EchoStar III and EchoStar IV
will range between 7.75% and 8.25% and principal and interest payments are,
with equal monthly installments due over five years following the launch of
the respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The Dish Notes and ESBC Notes Indentures impose various restrictions on
the transfer of funds among EchoStar and its subsidiaries. Although the ESBC
Notes are collateralized by the stock of Dish, Ltd., various assets expected
to form an integral part of the EchoStar DBS System (and not otherwise
encumbered by the Dish Notes Indenture), and guarantees of EchoStar and
certain of its other subsidiaries, ESBC's ability to fund interest and
principal
21
payments on the ESBC Notes will depend on successful operation and the
acquisition of an adequate number of subscribers to the DISH Network-SM- and
ESBC having access to available cash flows generated by the DISH Network-SM-,
which in turn, will depend on ESBC's success in attracting subscribers to the
DISH Network-SM-. If cash available to ESBC is not sufficient to service the
ESBC 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
ESBC Notes.
OTHER
DISH NOTES AND ESBC NOTES
Three DBS orbital locations licensed by the FCC are generally recognized
as capable of providing satellite service to the entire continental United
States ("CONUS"). EchoStar has the right to utilize at least 21 DBS
frequencies at one of those CONUS slots. In the event the number of
frequencies EchoStar has the right to use at a CONUS orbital location is
reduced to less than 21, then ESBC will be required to make an offer to
repurchase all of the outstanding ESBC Notes, and Dish, Ltd. will be required
to make an offer to repurchase one half of the outstanding Dish Notes. In the
event the number of frequencies EchoStar has the right to use at a full CONUS
orbital location falls below 11, then Dish, Ltd. will be required to make an
offer to repurchase all of the outstanding Dish Notes, rather than only half.
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, ESBC will be required under
the ESBC Notes Indenture to repurchase up to $52.3 million of principal
amount of the ESBC Notes.
If the DBSC Merger or similar transaction does not occur on or before
March 1, 1997, ESBC will be required to repurchase at least $83.0 million
principal amount of the ESBC Notes. Further, in the event that EchoStar
incurs more than $7.8 million in expenses (as defined in the ESBC Notes
Indenture) in connection with the DBSC Merger, ESBC 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 ESBC 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
ESBC has agreements with two manufacturers to supply DBS receivers for
ESBC. Only one of the manufacturers has produced a receiver acceptable to
ESBC. ESBC previously deposited $10.0 million with the non-performing
manufacturer and has an additional $15.0 million in an escrow account as
security for ESBC's payment obligations under that contract. ESBC has given
this non-performing manufacturer notice of its intent to terminate the
contract and has filed suit against that manufacturer. Consequently, ESBC is
currently dependent on one manufacturing source for its receivers. Since ESBC
has given the non-performing manufacturer notice of its intent to terminate
the contract, ESBC has not included amounts due under the contract in ESBC's
future purchase commitments. The performing manufacturer is presently
manufacturing receivers in sufficient quantities to meet currently expected
demand. If ESBC's sole manufacturer is unable for any reason to produce
receivers in a quantity sufficient to meet demand, ESBC's liquidity and
results of operations would be adversely affected. There can be no assurance
ESBC will be able to recover any amounts deposited with the non-performing
manufacturer or held in escrow.
22
FORWARD LOOKING STATEMENTS
This Form 10-Q 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.
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.
23
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.
24
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).
2.3* Plan and Agreement of Merger made as of December 21, 1995 by and
among EchoStar, Direct Broadcasting Satellite Corporation, a
Colorado Corporation ("MergerCo") and Direct Broadcasting
Satellite Corporation, a Delaware Corporation ("DBSC")
(incorporated herein by reference to Exhibit 2.3 to the
Registration Statement on Form S-4, Registration No. 333-03584).
2.4* Merger Trigger Agreement entered into as of December 21, 1995 by
and among EchoStar, MergerCo and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC") (incorporated herein
by reference to Exhibit 2.3 to the Registration Statement on Form
S-4, Registration No. 333-03584).
3.1(a)* Articles of incorporation of EchoStar Satellite Broadcasting
Corporation ("ESBC") (incorporated herein by reference to Exhibit
3.1(a) to the Registration Statement on Form S-1, Registration No.
333-3980).
3.1(b)* Bylaws of ESBC (incorporated herein by reference to Exhibit 3.1(f)
to the Registration Statement on Form S-1, Registration No.
333-3980).
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).
25
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 ESBC 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).
4.10* Security Agreement of ESBC 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 ESBC 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 ESBC 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).
4.14* Registration Rights Agreement by and between the Issuer, EchoStar,
Dish, 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, 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).
26
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).
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, Ltd. 1994 Stock Incentive Plan (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish, Ltd.,
Registration No. 33-76450).
27
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).
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)* Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated herein by reference to Exhibit
10.15 to the Registration Statement of Form S-4, Registration No.
333-03584).
10.17(c)* 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).
10.19* Confidential Amendment to Satellite Construction Contract between
DBSC and Martin Marietta Corporation, dated as of May 31, 1995
(incorporated herein by reference to Exhibit 10.15 to the
Registration Statement of Form S-4, Registration No. 333-03584).
27 Financial Data Schedule
- ---------------
* Incorporated by reference pursuant to Rule 12D-32 under the Securities and
Exchange Act of 1934, as amended.
28
(b) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by ESBC during the period covered
by this Quarterly Report on Form 10-Q.
29
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.
EchoStar Satellite Broadcasting Corporation
Date: November 14, 1996 / / STEVEN B. SCHAVER
-----------------------------------------
Steven B. Schaver
Vice President and Chief Financial Officer
/ / STEVEN B. SCHAVER
-----------------------------------------
Steven B. Schaver
Principal Financial Officer
30