EXHIBIT 99.3
ANNUAL REPORT FOR THE YEAR ENDED
DECEMBER 31, 1997
DIRECT BROADCASTING SATELLITE CORPORATION
COLORADO 84-1328967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Telephone number, including area code)
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties None
Item 3. Legal Proceedings None
Item 4. Submission of Matters to a Vote of Security Holders *
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters N/A
Item 6. Selected Financial Data *
Item 7. Management's Narrative Analysis of Results of Operations 2
Item 8. Financial Statements and Supplementary Data 3
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 3
PART III
Item 10. Directors and Executive Officers of the Registrant *
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and
Management *
Item 13. Certain Relationships and Related Transactions *
PART IV
Item 14. Exhibits and Financial Statement Schedules 4
Index to Financial Statements F-1
DISH Network-SM- is a service mark of EchoStar Communications Corporation.
- ---------------------
* This item has been omitted pursuant to the reduced disclosure format as set
forth in the General Instructions (I)(1)(a) and (b) Form 10-K.
PART I
ITEM 1. BUSINESS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY DIRECT BROADCASTING
SATELLITE CORPORATION ("DBSC") OR BY OFFICERS, DIRECTORS OR EMPLOYEES OF DBSC
ACTING ON DBSC'S BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT,
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE THE ACTUAL RESULTS OF DBSC TO BE MATERIALLY DIFFERENT FROM THE
HISTORICAL RESULTS OF, OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY
SUCH FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: AN IN-ORBIT FAILURE OF ITS
DBS SATELLITE ("ECHOSTAR III"); THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON
SATISFACTORY TERMS TO FINANCE DBSC'S BUSINESS PLAN; THE INABILITY OF DBSC TO
OBTAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION
("FCC"); THE INABILITY OF DBSC TO EXECUTE A SATELLITE USAGE AGREEMENT FOR THE
IN-ORBIT COMMERCIAL USE OF ECHOSTAR III; GENERAL BUSINESS AND ECONOMIC
CONDITIONS, AND OTHER RISK FACTORS ASSOCIATED WITH THE OPERATION OF A
TECHNOLOGY BUSINESS. IN ADDITION TO STATEMENTS, WHICH EXPLICITLY DESCRIBE
SUCH RISKS AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS
LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS,"
"ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN AND FORWARD-LOOKING. ALL
CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL
RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION,
INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
BRIEF DESCRIPTION OF BUSINESS
On January 8, 1997, Direct Broadcasting Satellite Corporation ("Old
DBSC"), a Delaware corporation, was merged (the "Merger") with Direct
Broadcasting Satellite Corporation ("DBSC" or the "Company"), a Colorado
corporation and a wholly-owned subsidiary of EchoStar Communications
Corporation ("ECC," and together with its subsidiaries, "EchoStar"). Upon
consummation of the Merger, Old DBSC, which was incorporated January 23, 1981
in the State of Delaware, ceased to exist. DBSC's principal assets include
an FCC satellite permit and orbital slot assignments and EchoStar III, a
satellite built to become an integral part of EchoStar's DISH Network. Costs
to launch and insure EchoStar III were incurred by other ECC subsidiaries and
are not included in the cost of EchoStar III reflected on DBSC's balance
sheet.
EchoStar is a publicly-traded company on the Nasdaq National Market
and its operations include three interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States. As of December 31, 1997, EchoStar had approximately
1,040,000 DISH Network subscribers.
- TECHNOLOGY - the design, manufacture, distribution and sale of DBS
set-top boxes, antennae and other digital equipment for the DISH
Network ("EchoStar Receiver Systems"), and the design, manufacture
and distribution of similar equipment for direct-to-home ("DTH")
projects of others internationally, together with the provision of
uplink center design, construction oversight and other project
integration services for international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and data
services to business television customers and other satellite users.
These services include satellite uplink services, satellite
transponder space usage, and other services.
EchoStar III was launched on October 5, 1997 and became operational in
January 1998 allowing the DISH Network to expand its service offerings to
include a total of over 200 channels. EchoStar III primarily is being used
to implement the initial phase of EchoStar's "Local Strategy" (i.e.,
retransmitting the NBC, ABC, CBS and Fox affiliates from New York City,
Washington D.C., Atlanta, Boston, Chicago, Dallas, and up to potentially five
additional markets, to "unserved households" (as defined by applicable laws
and regulations) in the local areas from which those channels originate) and
to provide certain religious programming services. DBSC is the FCC licensee
and owner of EchoStar III but has no operations as a stand-alone entity.
EchoStar III is an integral part of the DISH
1
Network and DBSC is dependent on ECC and ECC's other subsidiaries for all
necessary funding and all management and administrative functions.
Certain of the electric power converters ("EPC") on EchoStar III are
operating at temperatures slightly outside of engineering specifications, but
within qualified limits for those EPCs. EPCs supply power to the satellite
transponders. This difference in operational performance could potentially
shorten the expected life of the affected transponders, thereby potentially
reducing the capacity or useful life of EchoStar III. To date, EchoStar III
has not experienced any negative effects resulting from this variation in
operational performance. Lockheed Martin currently is developing a
contingency plan to minimize any potential negative effects resulting from
the temperature deviations described above. There can be no assurance
regarding the ultimate success of this contingency plan. EchoStar expects
that any loss of capacity or satellite life that may result from the
potential impairment of EchoStar III would be covered by insurance. However,
insurance would not compensate for lost revenue.
PART II
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
DBSC is the FCC licensee and owner of EchoStar III but has no operations
as a stand-alone entity. EchoStar III is an integral part of the DISH
Network and DBSC is dependent on ECC and ECC's other subsidiaries for all
necessary funding and all management and administrative functions. Interest
expense totaled $5 million for 1997 and represents interest incurred on the
notes payable to ECC.
IMPACT OF YEAR 2000 ISSUE
EchoStar has assessed and continues to assess the impact of the Year
2000 Issue on its computer systems and operations. The Year 2000 Issue
exists because many computer systems and applications currently use two-digit
date fields to designate a year. Thus, as the century date approaches, date
sensitive systems may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the Year 2000 may cause computer
systems to process critical financial and operational information incorrectly.
EchoStar presently believes that with modifications to existing software
and conversions to new software, the Year 2000 Issue can be mitigated.
EchoStar is utilizing both internal and external resources to identify,
correct or reprogram, and test all affected systems for Year 2000 compliance.
EchoStar has also initiated formal communications with all of its
significant suppliers to determine the extent to which EchoStar is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue.
EchoStar believes its costs to successfully mitigate the Year 2000 Issue will
not be material.
If EchoStar's remediation plan is not successful or is not completed in
a timely manner, the Year 2000 Issue could significantly disrupt EchoStar's
ability to transact business with its customers and suppliers, and could have
a material impact on its operations. In addition, there can be no assurance
that the systems of other companies with which EchoStar's systems interact
also will be timely converted, or that any such failure to convert by another
company would not have an adverse effect on EchoStar's systems.
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income" ("FAS No. 130"), which
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. In June 1997, the FASB issued FAS No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("FAS No. 131") which establishes standards for reporting information about
operating segments in annual financial statements of public business
enterprises and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders
and for related disclosures about products and services, geographic areas,
and major customers. FAS No. 130 and FAS No. 131 are effective for financial
statements for
2
periods beginning after December 15, 1997. The adoption of FAS No. 130 and
FAS No. 131 may require additional disclosure in the Company's financial
statements.
INFLATION
Inflation has not materially affected the Company's operations during
the past three years. The Company believes that its ability to increase the
prices charged for its products and services in future periods will depend
primarily on competitive pressures. The Company does not have any material
backlog of its products.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements are included in this report beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
3
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS PAGE
----
Report of Independent Public Accountants 5
Balance Sheet at December 31, 1997 6
Statement of Operations for the year ended December 31, 1997 7
Statement of Changes in Stockholder's Equity for the year
ended December 31, 1997 8
Statement of Cash Flows for the year ended December 31, 1997 9
Notes to Financial Statements 10
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Financial
Statements or Notes thereto.
(3) EXHIBITS
None.
4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Direct Broadcasting Satellite Corporation:
We have audited the accompanying balance sheet of Direct Broadcasting
Satellite Corporation (a Colorado corporation) as of December 31, 1997, and
the related statements of operations, changes in stockholder's equity and
cash flows for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Direct
Broadcasting Satellite Corporation as of December 31, 1997, and the results
of its operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1998.
5
DIRECT BROADCASTING SATELLITE CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ -
Other current assets 7
--------
Total current assets 7
Satellite ("EchoStar III") construction costs 92,408
FCC authorizations 18,504
--------
Total assets $110,919
--------
--------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable and accrued expenses $ 545
Advances from affiliates, net 30,601
Current portion of notes payable 2,961
--------
Total current liabilities 34,107
Other notes payable, net of current portion 11,351
Notes payable to ECC and accumulated interest 54,597
--------
Total liabilities 100,055
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $0.01 par value, 1,000 shares
authorized, issued and outstanding -
Additional paid-in capital 16,324
Accumulated deficit (5,460)
--------
Total stockholder's equity 10,864
--------
Total liabilities and stockholder's equity $110,919
--------
--------
See accompanying Notes to Financial Statements.
6
DIRECT BROADCASTING SATELLITE CORPORATION
STATEMENT OF OPERATIONS
DECEMBER 31, 1997
(In thousands)
Revenue $ -
Expenses:
Interest expense 5,460
--------
Loss before income taxes (5,460)
Income tax provision -
--------
Net loss $(5,460)
--------
--------
See accompanying Notes to Financial Statements.
7
DIRECT BROADCASTING SATELLITE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------------------------------------------------
(Note 1)
Balance, December 31, 1996 1 $ - $ 1 $ - $ 1
Purchase price pushed-down to DBSC by
ECC (Note 1) 16,323 16,323
Net loss - - - (5,460) (5,460)
-------------------------------------------------------
Balance, December 31, 1997 1 $ - $16,324 $(5,460) $10,864
------------------------------------------------------
------------------------------------------------------
See accompanying Notes to Financial Statements.
8
DIRECT BROADCASTING SATELLITE CORPORATION
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,460)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Interest on notes payable to ECC added to principal 5,215
Changes in current assets and current liabilities:
Other current assets (7)
Accounts payable and accrued expenses (734)
--------
Net cash flows from operating activities (986)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for satellite systems under construction and
other (17,969)
--------
Net cash flows from investing activities (17,969)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 19,542
Repayment of other notes payable (588)
--------
Net cash flows from financing activities 18,954
--------
Net decrease in cash and cash equivalents (1)
Cash and cash equivalents, beginning of period 1
--------
Cash and cash equivalents, end of period $ -
--------
--------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 293
Cash paid for income taxes -
Satellite vendor financing 14,400
Capitalized interest, including amounts due to affiliates 11,059
The purchase price of DBSC was "pushed-down" by ECC to
DBSC as follows in the related purchase accounting:
Echo III satellite construction costs 51,241
FCC authorizations 16,243
Notes payable to ECC, including accrued interest
of $3,382 (49,382)
Trade accounts payable and accrued expenses (1,279)
Other notes payable (500)
Additional paid in capital (16,323)
See accompanying Notes to Financial Statements.
9
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
During 1994, EchoStar Communications Corporation ("ECC," and together with
its subsidiaries, "EchoStar") acquired approximately 40% of the outstanding
common stock of Direct Broadcasting Satellite Corporation ("Old DBSC"), a
Delaware corporation. Old DBSC's principal assets included an FCC conditional
satellite permit and specific orbital slot assignments for a total of 22 DBS
frequencies.
Through December 1996, EchoStar advanced Old DBSC a total of $46 million in
the form of notes receivable to enable Old DBSC to make required payments under
the satellite construction contract for EchoStar III. As of December 31, 1996,
these notes receivable totaled $49 million, including accrued interest of
$3 million. On January 8, 1997, EchoStar consummated the merger of Old DBSC
with a wholly-owned subsidiary of ECC ("DBSC" or the "Company"). ECC issued
approximately 650,000 shares of its Class A Common Stock to acquire the
remaining 60% of Old DBSC that it did not previously own (the "Merger"). This
transaction was accounted for as a purchase and the excess of the purchase
price over the fair value of Old DBSC's tangible assets was allocated to Old
DBSC's FCC authorizations (approximately $16 million). Upon consummation of
the Merger, Old DBSC ceased to exist.
The principal assets of DBSC include an FCC satellite permit and orbital
slot assignments and EchoStar III, a satellite built to become an integral
part of the DISH Network (see below). DBSC has no operations as a
stand-alone entity and is dependent on ECC and ECC's other subsidiaries for
all necessary funding and all management and administrative functions.
EchoStar is a publicly-traded company on the Nasdaq National Market and
its operations include three interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States. As of December 31, 1997, EchoStar had approximately
1,040,000 DISH Network subscribers.
- TECHNOLOGY - the design, manufacture, distribution and sale of DBS
set-top boxes, antennae and other digital equipment for the DISH
Network ("EchoStar Receiver Systems"), and the design, manufacture
and distribution of similar equipment for direct-to-home ("DTH")
projects of others internationally, together with the provision of
uplink center design, construction oversight and other project
integration services for international DTH ventures.
- SATELLITE SERVICES - the turn-key delivery of video, audio and data
services to business television customers and other satellite users.
These services include satellite uplink services, satellite
transponder space usage, and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's FCC-
allocated orbital spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV," respectively), digital satellite receivers,
digital broadcast operations center, customer service facilities, and other
assets utilized in its operations. EchoStar's principal business strategy is
to continue developing its subscription television service in the U.S. to
provide consumers with a fully viable alternative to cable television service.
SIGNIFICANT RISKS AND UNCERTAINTIES
SATELLITE USAGE AGREEMENT. When EchoStar III, which was launched on October
5, 1997, became operational in January 1998, the DISH Network expanded its
service offerings to include a total of over 200 channels. EchoStar III
primarily is being used to implement the initial phase of EchoStar's "Local
Strategy" (i.e., retransmitting the NBC, ABC, CBS and Fox affiliates from New
York City, Washington D.C., Atlanta, Boston, Chicago, Dallas, and up to
potentially five additional markets, to "unserved households" (as defined by
applicable
10
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
laws and regulations) in the local areas from which those channels originate)
and to provide certain religious programming services. DBSC's future
viability is dependent upon the success achieved by EchoStar.
Certain of the electric power converters ("EPC") on EchoStar III are
operating at temperatures slightly outside of engineering specifications, but
within qualified limits for those EPCs. EPCs supply power to the satellite
transponders. This difference in operational performance could potentially
shorten the expected life of the affected transponders, thereby potentially
reducing the capacity or useful life of EchoStar III. To date, EchoStar III
has not experienced any negative effects resulting from this variation in
operational performance. Lockheed Martin currently is developing a contingency
plan to minimize any potential negative effects resulting from the temperature
deviations described above. There can be no assurance regarding the ultimate
success of this contingency plan. EchoStar expects that any loss of capacity
or satellite life that may result from the potential impairment of EchoStar III
would be covered by insurance. However, insurance would not compensate for
lost revenue.
COMPETITION. The subscription television industry is highly competitive.
EchoStar faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than EchoStar.
EchoStar's ability to effectively compete in the subscription television market
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong
competitors), the level of consumer demand for such services, the availability
of EchoStar Receiver Systems, and EchoStar's ability to obtain necessary
regulatory changes and approvals.
2. SIGNIFICANT ACCOUNTING POLICIES
PURPOSE OF FINANCIAL STATEMENTS
DBSC is not currently subject to the reporting requirements of Section
13 or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act").
However, pursuant to the terms of an indenture between EchoStar Satellite
Broadcasting Corporation ("ESBC"), a wholly-owned subsidiary of ECC, and
First Trust National Association dated March 25, 1996 (the "Indenture"), DBSC
is required to provide quarterly and annual reports comparable to that which
would have been required if DBSC were subject to the requirements of Section
13 or 15(d) of the Exchange Act. Since DBSC does not have a separate
Commission File Number with the Securities and Exchange Commission, DBSC has
made these financial statements, complete with Management's Narrative
Analysis of Results of Operations, publicly available. These financial
statements were prepared solely to comply with the reporting requirements
under the Indenture. Readers of this Annual Report should refer to
EchoStar's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents.
11
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's other notes payable are estimated using
discounted cash flow analyses. The interest rates assumed in such discounted
cash flow analyses reflect interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. As of December
31, 1997, the book value of the Company's other notes payable approximated
fair market value.
SATELLITE UNDER CONSTRUCTION
EchoStar III is stated at cost. Cost includes interest capitalized of
$9 million during 1997, including amounts incurred by and due to affiliates.
All satellite construction costs are capitalized during the construction
phase, assuming the eventual successful launch and in-orbit operation of the
satellite. Costs to launch and insure EchoStar III (approximately $142
million) were incurred by other ECC subsidiaries and are not included in the
cost of EchoStar III reflected on DBSC's balance sheet. If the satellite
were to fail in-orbit, the resultant loss would be charged to expense in the
period such loss was realized. Since the in-orbit operation of the satellite
is insured, the amount of the loss would be reduced to the extent of
insurance proceeds received as a result of the in-orbit failure. Echo III
became operational during January 1998. Depreciation is recorded on a
straight-line basis over a 12 year useful life for financial reporting
purposes.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost. Cost includes approximately
$17 million representing the excess of EchoStar's purchase price over Old
DBSC's tangible assets and $2 million of interest capitalized during 1997.
FCC authorizations will be amortized using the straight-line method over a
period of 40 years. Such amortization commences at the time the related
satellite becomes operational; all such capitalized costs would be written
off in the event efforts to provide services were abandoned.
ADVANCES FROM AFFILIATES
Advances from affiliates are recorded at cost and represent the net
amount of funds received from, or advances to, affiliates of DBSC. Such
advances principally have consisted of advances from ECC, EchoStar DBS
Corporation and EchoStar Satellite Broadcasting Corporation to fund satellite
construction costs.
3. OTHER NOTES PAYABLE
Other notes payable consists of the following (in thousands):
DECEMBER 31,
1997
------------
8.25% note payable for satellite vendor financing for
EchoStar III due in equal monthly installments of $294,
including interest, through October 2002 (secured by an
ECC corporate guarantee) $ 13,812
Other 9.5%, unsecured note payable 500
---------
Total 14,312
Less current portion (2,961)
---------
Other notes payable, net of current portion $ 11,351
---------
---------
During 1995 and 1996, ECC advanced DBSC $46 million in the form of notes
payable to enable DBSC to make required payments under its Echo III
construction contract. The notes payable bear interest at 11.25%, which is
being added to principal.
12
DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO FINANCIAL STATEMENTS - CONTINUED
3. OTHER NOTES PAYABLE - CONTINUED
Future maturities of amounts outstanding under the Company's other notes
payable as of December 31, 1997 are summarized as follows (in thousands):
OTHER
NOTES
PAYABLE
-------
YEAR ENDING DECEMBER 31,
1998 $ 2,961
1999 2,690
2000 2,920
2001 3,170
2002 2,571
Thereafter -
-------
Total $14,312
-------
-------
4. INCOME TAXES
DBSC is included in the consolidated income tax returns of ECC and its
subsidiaries.
As of December 31, 1997, the Company's share of the consolidated net
operating loss carryforward ("NOL") for Federal income tax purposes was
approximately $5 million. The NOL expires in the year 2012. The use of the NOL
is subject to statutory and regulatory limitations regarding changes in
ownership. FAS No. 109, "Accounting for Income Taxes," requires that the
potential future tax benefit of NOL be recorded as an asset. FAS No. 109 also
requires that deferred tax assets and liabilities be recorded for the estimated
future tax effects of temporary differences between the tax basis and book value
of assets and liabilities. Deferred tax assets are offset by a valuation
allowance if deemed necessary.
During 1997, DBSC provided a valuation allowance sufficient to fully offset
net deferred tax assets of $2 million (NOL carryforward) arising during the
year. Realization of the Company's net deferred tax assets is not assured and
is principally dependent on generating consolidated future taxable income prior
to expiration of the NOL. The Company continuously reviews the adequacy of its
valuation allowance. Future decreases to the valuation allowance will be made
only as changed circumstances indicate that it is more likely that not the
additional benefits will be realized. Any future adjustments to the valuation
allowance will be recognized as a separate component of the Company's provision
for income taxes.
13