ANNUAL REPORT FOR THE YEAR ENDED
DECEMBER 31, 1997
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS OF
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . N/A
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. . . . . . . . . . . 5
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 5
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . *
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . *
Item 12. Security Ownership of Certain Beneficial Owners and Management . *
Item 13. Certain Relationships and Related Transactions . . . . . . . . . *
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 6
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 General Instructions (I)(1)(a) and (b) of 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 THE COMPANY OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON ITS 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 THE COMPANY TO BE
MATERIALLY DIFFERENT FROM HISTORICAL RESULTS OR FROM ANY FUTURE RESULTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: THE
UNAVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS TO FINANCE THE
COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE, DIRECT BROADCAST
SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS AND OTHER PROVIDERS OF
SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND
COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; INCREASED SUBSCRIBER
ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE INABILITY OF THE
COMPANY TO OBTAIN NECESSARY SHAREHOLDER AND BONDHOLDER APPROVAL OF ANY STRATEGIC
TRANSACTIONS; THE INABILITY OF THE COMPANY TO OBTAIN AND RETAIN NECESSARY
AUTHORIZATIONS FROM THE FEDERAL COMMUNICATION COMMISSION ("FCC"); THE OUTCOME
OF ANY LITIGATION IN WHICH THE COMPANY MAY BE INVOLVED; GENERAL BUSINESS AND
ECONOMIC CONDITIONS; AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN THE
COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN
ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE
UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE
READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR.
IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN.
BRIEF DESCRIPTION OF BUSINESS
The following represents Echo Satellite, a combination of EchoStar
Satellite Broadcasting Corporation ("ESBC") and Direct Broadcasting Satellite
Corporation, a Colorado corporation ("DBSC"). Both ESBC and DBSC are
wholly-owned subsidiaries of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, "EchoStar"), a publicly-traded company on the
Nasdaq National Market. ESBC was formed in January 1996 for the initial
purpose of completing an offering of $580 million principal amount at
maturity of 13 1/8% Senior Secured Discount Notes (the "1996 Notes") due 2004
(the "1996 Notes Offering"). On January 8, 1997, Direct Broadcasting
Satellite Corporation, a Delaware corporation ("Old DBSC"), was merged (the
"Merger") with DBSC. This transaction was accounted for as a purchase and
the excess of the purchase price over the fair value of Old DBSC's assets was
allocated to FCC authorizations in the related purchase accounting. Upon
consummation of the Merger, Old DBSC, which was incorporated January 23, 1981
in the State of Delaware, ceased to exist and DBSC became a guarantor of the
1996 Notes. DBSC is the FCC licensee for a satellite permit and orbital slot
assignments and the owner of EchoStar III, a satelite built to become an
integral part of the DISH Network (see below), but has no operations as a
stand-alone entity. DBSC is dependent on ECC and ECC's other subsidiaries for
all necessary funding and all management and administrative functions.
The accompanying financial statements represent the combined and
consolidated financial statements of ESBC and DBSC ("Echo Satellite" or the
"Company"). Readers of this Annual Report should refer to EchoStar's Annual
Report on Form 10-K for the year ended December 31, 1997.
Substantially all of EchoStar's operations are conducted by subsidiaries
of ESBC. EchoStar's 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.
1
PART II
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
REVENUE. Total revenue in 1997 was $476 million, an increase of 141%, or
$279 million, as compared to total revenue of $197 million in 1996. The
increase in total revenue in 1997 was primarily attributable to the operation of
the DISH Network during the entirety of 1997, combined with DISH Network
subscriber growth. The Company expects this trend to continue as the number of
DISH Network subscribers increases, and as it develops its Technology and
Satellite Services businesses. Consistent with the increases in total revenue
during 1997, the Company experienced a corresponding increase in trade accounts
receivable at December 31, 1997.
DISH Network subscription television services revenue totaled $299 million
during 1997, an increase of $249 million compared to 1996. This increase was
directly attributable to the operation of the DISH Network during the entirety
of 1997, combined with the increase in the number of DISH Network subscribers.
Average monthly revenue per subscriber approximated $39 during 1997 compared to
approximately $36 in 1996. The increase in monthly revenue per subscriber was
primarily due to additional channels added upon commencement of operations of
EchoStar II. DISH Network subscription television services revenue consists
primarily of revenue from basic, premium and pay-per-view subscription
television services.
Other DISH Network revenue totaled $43 million in 1997, an increase of
$35 million compared to 1996. Other DISH Network revenue primarily consists of
incremental revenues over advertised subscription rates realized from the
Company's 1996 Promotion (as described below), as well as installation revenues.
In August 1996, the Company lowered the suggested retail price for a standard
EchoStar Receiver System to $199 (as compared to an average retail price in
March 1996 of $499), conditioned upon the consumer's one-year prepaid
subscription to the DISH Network's America's Top 50 CD programming package for
$300 (the "1996 Promotion"). In 1997, the Company recognized incremental
revenues related to the 1996 Promotion of approximately $39 million, an increase
of $34 million over 1996. The Company expects incremental revenue related to
the 1996 Promotion to decline at an accelerated rate in future periods and to
cease during the third quarter of 1998.
During 1997, DTH equipment sales and integration services totaled
$90 million. EchoStar currently has agreements for the sale of digital
satellite broadcasting equipment using EchoStar technology to two international
DTH service operators. The Company realized revenues of $74 million related to
these agreements during 1997. Of this amount, $59 million related to sales of
digital set-top boxes and other DTH equipment while $15 million resulted from
the provision of integration services (revenue from uplink center design,
construction oversight, and other project integration services). DBS accessory
sales totaled $10 million during 1997, an $8 million increase compared to 1996.
While EchoStar continues to actively pursue other distribution and
integration service opportunities, no assurance can be given that any such
additional negotiations will be successful. EchoStar's future revenue from the
sale of DTH equipment and integration services in international markets depends
largely on the success of the DBS operator in that country, which, in turn,
depends on other factors, such as the level of consumer acceptance of DBS
products and the intensity of competition for international subscription
television subscribers. No assurance can be given regarding the level of
expected future revenues which may be generated from EchoStar's alliances with
foreign DTH operators.
DTH equipment sales and integration services revenue totaled $77 million
during 1996. These revenues consisted primarily of sales of EchoStar Receiver
Systems and related accessories prior to the August 1996 nationwide rollout of
the 1996 Promotion.
2
Satellite services revenue totaled $11 million during 1997, an increase of
$5 million, or 91%, compared to 1996. These revenues include, among other
things, fees charged to content providers for signal carriage and revenues
earned from business television ("BTV") customers for the broadcast of
organizationally specific programming. The increase in satellite services
revenue was primarily attributable to an increase in the number of content
providers, increased usage by the Company's BTV customers, and an entire year of
operation in 1997.
C-band and other revenue totaled $33 million for 1997, a decrease of $23
million compared to $56 million in 1996. Other revenue principally related to
domestic and international sales of C-band products and net domestic C-band
programming revenues. This decrease resulted from the world-wide decrease in
demand for C-band products and services. Effective January 1, 1998, EchoStar
ceased operation of its C-band programming business.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled
$193 million during 1997, an increase of $151 million as compared to 1996. The
increase in DISH Network operating expenses was primarily attributable to
operation of the DISH Network during the entirety of 1997 and the increase in
the number of DISH Network subscribers. Subscriber-related expenses totaled
$144 million in 1997, an increase of $121 million compared to 1996. Such
expenses, which include programming expenses, copyright royalties, residuals
payable to retailers and distributors, and billing, lockbox and other variable
subscriber expenses, totaled 48% of subscription television services revenues,
compared to 46% of subscription television services revenues during 1996.
Satellite and transmission expenses are comprised primarily of costs associated
with the operation of EchoStar's digital broadcast center, contracted satellite
TT&C services, and costs of maintaining in-orbit insurance on EchoStar's DBS
satellites. Satellite and transmission expenses increased $8 million in 1997
compared to 1996 primarily as a result of the operation of the DISH Network
(including EchoStar II) during the entirety of 1997. Customer service center
and other operating expenses consist primarily of costs incurred in the
operation of the Company's DISH Network customer service center and expenses
associated with subscriber equipment installation. Customer service center and
other operating expenses totaled $35 million in 1997, an increase of $22 million
as compared to 1996. The increase in customer service center and other
operating expenses was directly attributable to the operation of the DISH
Network during the entirety of 1997, combined with the increase in the number of
DISH Network subscribers. The Company expects DISH Network operating expenses
to continue to increase in the future as subscribers are added. However, as its
DISH Network subscriber base continues to expand, the Company expects that such
costs as a percentage of DISH Network revenue will decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales -
DTH equipment and integration services totaled $61 million during 1997, a
decrease of $15 million, or 20%, as compared to 1996. During 1997, cost of
sales - DTH equipment and integration services principally represented costs
associated with set-top boxes and related components sold to international DTH
operators. For 1996, cost of sales - DTH equipment and integration services
totaled $76 million and represented costs of EchoStar Receiver Systems sold
prior to the August 1996 rollout of the 1996 Promotion.
COST OF SALES - C-BAND AND OTHER. Cost of sales - C-band and other totaled
$24 million during 1997, a decrease of $18 million compared to 1996. This
decrease was consistent with the decrease in related revenues and resulted from
the world-wide decrease in the demand for C-band products and services.
MARKETING EXPENSES. Marketing expenses totaled $183 million for 1997, an
increase of $130 million as compared to 1996. The increase in marketing
expenses was primarily attributable to the increase in subscriber promotion
subsidies. Subscriber promotion subsidies represent the excess of transaction
costs over transaction proceeds at the time of sale of EchoStar Receiver
Systems. These costs totaled $149 million during 1997, an increase of
$113 million over 1996. This increase resulted from the commencement of the
1997 Promotion (as described below) and the increase in the number of EchoStar
Receiver Systems sold during 1997. During 1997, EchoStar further reduced the
"up-front" costs to consumers by maintaining the suggested retail price for a
standard EchoStar Receiver System at $199 and eliminating any related prepaid
subscription commitments (the "1997 Promotion"). Advertising and other expenses
increased $17 million to $35 million during 1997 as a result of increased
marketing activity and operation of the DISH Network during the entirety of
1997.
3
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A")
expenses totaled $66 million for 1997, an increase of $17 million as compared to
1996. The increase in G&A expenses was principally attributable to increased
personnel expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 14% during 1997 as compared to 25%
during 1996. EchoStar expects that its G&A expenses as a percent of total
revenue may continue to decrease in future periods.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA") was negative
$51 million for 1997, as compared to negative EBITDA of $65 million for 1996.
This improvement in EBITDA resulted from the factors affecting revenue and
expenses discussed above. The Company believes that EBITDA results will
continue to improve in future periods as the number of DISH Network subscribers
increases. In the event that new subscriber activations exceed expectations,
the Company's EBITDA results may be negatively impacted in the near-term because
subscriber acquisition costs are expensed upon shipment of EchoStar Receiver
Systems.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
1997 (including amortization of subscriber acquisition costs of $121 million)
aggregated $173 million in 1997, an increase of $129 million, as compared to
1996. The increase in depreciation and amortization expenses principally
resulted from amortization of subscriber acquisition costs (increase of $105
million) and depreciation of EchoStar II (placed in service during the fourth
quarter of 1996).
OTHER INCOME AND EXPENSE. Other expense, net totaled $89 million during
1997, an increase of $42 million as compared to 1996. The increase in other
expense resulted primarily from increased interest expense associated with the
Company's 12 7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes") and
its 13 1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes") due to
higher accreted balances thereon. Additionally, interest income decreased $10
million as a result of a decrease in invested balances. The increase in
interest expense and the decrease in interest income were partially offset by an
increase in capitalized interest. Capitalized interest (primarily related to
satellite construction) totaled $35 million during 1997, compared to $32 million
during 1996.
INCOME TAX BENEFIT. The $55 million decrease in the income tax benefit
during 1997 principally resulted from the Company's decision to increase its
valuation allowance sufficient to fully offset net deferred tax assets arising
during the year. Realization of these assets is dependent on the Company
generating sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The Company's net deferred tax assets
($67 million at each of December 31, 1996 and 1997) principally relate to
temporary differences for amortization of original issue discount on the 1994
Notes and 1996 Notes, net operating loss carryforwards, and various accrued
expenses which are not deductible until paid. If future operating results
differ materially and adversely from the Company's current expectations, its
judgment regarding the magnitude of its valuation allowance may change.
4
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 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 Consolidated Financial Statements are included in this report
beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
5
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) FINANCIAL STATEMENTS PAGE
Report of Independent Public Accountants . . . . . . . . . . F-2
Combined and Consolidated Balance Sheets at December 31,
1996 and 1997. . . . . . . . . . . . . . . . . . . . . . . . F-3
Combined and Consolidated Statements of Operations for the
years ended December 31, 1995, 1996 and 1997 . . . . . . . . F-4
Combined and Consolidated Statements of Changes in
Stockholder's Equity for the years ended December 31, 1995,
1996 and 1997. . . . . . . . . . . . . . . . . . . . . . . . F-5
Combined and Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997 . . . . . . . . F-6
Notes to Combined and Consolidated Financial Statements. . . F-7
(2) FINANCIAL STATEMENT SCHEDULES
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) EXHIBITS
None.
6
INDEX TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
PAGE
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . F-2
Combined and Consolidated Balance Sheets at December 31, 1996 and 1997. . F-3
Combined and Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997. . . . . . . . . . . . . . . . . . . . F-4
Combined and Consolidated Statements of Changes in Stockholder's
Equity for the years ended December 31, 1995, 1996 and 1997 . . . . . . F-5
Combined and Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997. . . . . . . . . . . . . . . . . . . . F-6
Notes to Combined and Consolidated Financial Statements . . . . . . . . . F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EchoStar Satellite Broadcasting Corporation
and Direct Broadcasting Satellite Corporation:
We have audited the accompanying combined and consolidated balance
sheets of EchoStar Satellite Broadcasting Corporation and Direct Broadcasting
Satellite Corporation (together, the "Companies" or "Echo Satellite") as of
December 31, 1996 and 1997, and the related combined and consolidated
statements of operations, changes in stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1997. These
combined and consolidated financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined and consolidated financial
position of the Companies as of December 31, 1996 and 1997, and the combined
and consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 27, 1998.
F-2
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF
ECHOSTAR COMMUNICATIONS CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31,
-------------------------------
1996 1997
-------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 38,429 $ 45,653
Marketable investment securities . . . . . . . . . . . . . . . . . . . . 18,807 -
Trade accounts receivable, net of allowance for uncollectible accounts
of $1,494 and $1,347, respectively . . . . . . . . . . . . . . . . . . 13,483 66,045
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,767 22,993
Subscriber acquisition costs, net. . . . . . . . . . . . . . . . . . . . 68,129 18,819
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 19,861 9,424
-------------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,476 162,934
Restricted Cash and Marketable Investment Securities:
1996 Notes escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,491 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,450 2,245
-------------------------------
Total restricted cash and marketable investment securities . . . . . . . . 78,941 2,245
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 499,989 597,755
Advances to affiliates, net. . . . . . . . . . . . . . . . . . . . . . . . 144,893 161,222
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,670 64,997
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 38,123 53,750
-------------------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,073,092 $1,042,903
-------------------------------
-------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,793 $ 68,800
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,095 122,215
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,859 72,605
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . 11,334 17,885
-------------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 197,081 281,505
Long-term obligations, net of current portion:
1994 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437,127 499,863
1996 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,165 438,512
Notes payable to affiliate including accumulated interest. . . . . . . . - 54,597
Mortgages and other notes payable, net of current portion. . . . . . . . 51,428 51,846
Long-term deferred satellite services revenue and other long-term
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,037 19,500
-------------------------------
Total long-term obligations, net of current portion. . . . . . . . . . . . 881,757 1,064,318
-------------------------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,078,838 1,345,823
Commitments and Contingencies (Note 9)
Stockholder's Equity (Deficit):
Common Stock, $.01 par value, 2,000 shares authorized, issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 108,839 125,162
Unrealized holding losses on available-for-sale securities, net of
deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11) -
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (114,574) (428,082)
-------------------------------
Total stockholder's equity (deficit) . . . . . . . . . . . . . . . . . . . ( 5,746) (302,920)
-------------------------------
Total liabilities and stockholder's equity (deficit) . . . . . . . . . $1,073,092 $1,042,903
-------------------------------
-------------------------------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-3
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
-----------------------------------------
REVENUE:
DISH Network:
Subscription television services . . . . . . . . . . . . . . $ - $ 49,650 $ 298,883
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8,238 42,925
-----------------------------------------
Total DISH Network . . . . . . . . . . . . . . . . . . . . . . - 57,888 341,808
DTH equipment sales and integration services . . . . . . . . . 35,816 77,390 90,263
Satellite services . . . . . . . . . . . . . . . . . . . . . . - 5,822 11,135
C-band and other . . . . . . . . . . . . . . . . . . . . . . . 112,704 56,003 32,696
-----------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 148,520 197,103 475,902
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses. . . . . . . . . . . . . . . . . - 22,840 143,529
Customer service center and other. . . . . . . . . . . . . . - 12,996 35,078
Satellite and transmission . . . . . . . . . . . . . . . . . - 6,573 14,563
-----------------------------------------
Total DISH Network operating expenses. . . . . . . . . . . . . - 42,409 193,170
Cost of sales - DTH equipment and integration services . . . . 30,404 75,984 60,918
Cost of sales - C-band and other . . . . . . . . . . . . . . . 84,846 42,345 23,909
Marketing:
Subscriber promotion subsidies . . . . . . . . . . . . . . . - 35,239 148,502
Advertising and other. . . . . . . . . . . . . . . . . . . . 1,786 17,929 34,843
-----------------------------------------
Total marketing expenses . . . . . . . . . . . . . . . . . . . 1,786 53,168 183,345
General and administrative . . . . . . . . . . . . . . . . . . 36,376 48,693 66,042
Amortization of subscriber acquisition costs . . . . . . . . . - 16,073 121,428
Depreciation and amortization. . . . . . . . . . . . . . . . . 3,114 27,296 51,408
-----------------------------------------
Total costs and expenses . . . . . . . . . . . . . . . . . . . . 156,526 305,968 700,220
-----------------------------------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . ( 8,006) (108,865) (224,318)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . . . . . 12,545 15,089 4,612
Interest expense, net of amounts capitalized . . . . . . . . . (23,985) ( 61,487) ( 92,309)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 ( 345) ( 1,347)
-----------------------------------------
Total other income (expense) . . . . . . . . . . . . . . . . . . (10,546) ( 46,743) ( 89,044)
-----------------------------------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . (18,552) (155,608) (313,362)
Income tax benefit (provision), net. . . . . . . . . . . . . . . 6,191 54,860 ( 146)
-----------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,361) $(100,748) $(313,508)
-----------------------------------------
-----------------------------------------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-4
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(In thousands)
ACCUMULATED
DEFICIT AND
COMMON STOCK COMMON ADDITIONAL UNREALIZED
---------------------- PREFERRED STOCK PAID-IN HOLDING GAINS
SHARES AMOUNT STOCK WARRANTS CAPITAL (LOSSES) TOTAL
---------------------------------------------------------------------------------------
(NOTE 1)
Balance, December 31, 1994 . . . . . . . 33,544 $336 $15,991 $26,133 $62,197 $( 849) $ 103,808
Issuance of Common Stock to ECC. . . . 1 - - - 1 - 1
8% Series A Cumulative Preferred
Stock dividends. . . . . . . . . . . - - 616 - - ( 616) -
Exercise of Common Stock Warrants. . . 2,731 26 - (25,419) 25,393 - -
Common Stock Warrants exchanged
for ECC Warrants . . . . . . . . . . - - - (714) 714 - -
Launch bonuses funded by issuance of
ECC's Class A Common Stock . . . . . - - - - 1,192 - 1,192
Unrealized holding gains on
available-for-sale securities, net . - - - - - 251 251
Net loss . . . . . . . . . . . . . . . - - - - - ( 12,361) ( 12,361)
---------------------------------------------------------------------------------------
Balance, December 31, 1995 . . . . . . . 36,276 362 16,607 - 89,497 ( 13,575) 92,891
Issuance of Common Stock (Note 1). . . 1 - - - 1 - 1
Reorganization of entities under
common control (Note 1). . . . . . . (36,275) (362) (16,607) - 16,969 - -
Income tax benefit of deduction for
income tax purposes on exercise of
Class A Common Stock options . . . . - - - - 2,372 - 2,372
Unrealized holding losses on
available-for-sale securities, net . - - - - - ( 262) ( 262)
Net loss . . . . . . . . . . . . . . . - - - - - (100,748) (100,748)
---------------------------------------------------------------------------------------
Balance, December 31, 1996 . . . . . . . 2 - - - 108,839 (114,585) ( 5,746)
Purchase price pushed-down to DBSC
by ECC (Note1) . . . . . . . . . . . - - - - 16,323 - 16,323
Unrealized holding gains on
available-for-sale securities, net . - - - - - 11 11
Net loss . . . . . . . . . . . . . . . - - - - - (313,508) (313,508)
---------------------------------------------------------------------------------------
Balance, December 31, 1997 . . . . . . . 2 $ - $ - $ - $125,162 $(428,082) $(302,920)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-5
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 12,361) $(100,748) $(313,508)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 3,114 27,296 51,408
Amortization of subscriber acquisition costs . . . . . . . . . - 16,073 121,428
Deferred income tax benefit. . . . . . . . . . . . . . . . . . ( 4,825) ( 50,522) ( 358)
Amortization of debt discount and deferred financing costs . . 23,528 61,695 81,934
Interest on notes payable to ECC added to principal. . . . . . - - 5,215
Change in reserve for excess and obsolete inventory. . . . . . 1,212 2,866 ( 1,823)
Change in long-term deferred satellite services revenue and
other long-term liabilities . . . . . . . . . . . . . . . . . - 5,949 12,056
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 608 536 407
Changes in current assets and current liabilities: . . . . . .
Trade accounts receivable, net . . . . . . . . . . . . . . . ( 1,536) ( 4,368) ( 52,562)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . ( 19,654) ( 36,864) 51,597
Subscriber acquisition costs . . . . . . . . . . . . . . . . - ( 84,202) ( 72,118)
Other current assets . . . . . . . . . . . . . . . . . . . . ( 14,088) ( 3,118) 13,442
Advances to affiliates, net. . . . . . . . . . . . . . . . . - (132,669) 5,524
Trade accounts payable . . . . . . . . . . . . . . . . . . . 4,111 21,730 28,007
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . ( 1,009) 103,511 18,120
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . ( 988) 16,871 43,141
------------------------------------------
Net cash flows from operating activities . . . . . . . . . . . . ( 21,888) (155,964) ( 8,090)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . ( 3,004) (138,328) ( 4,706)
Sales of marketable investment securities. . . . . . . . . . . . 33,816 119,730 23,524
Purchases of restricted marketable investment securities . . . . ( 15,000) ( 21,100) ( 1,495)
Funds released from escrow and restricted cash and marketable
investment securities . . . . . . . . . . . . . . . . . . . . . 122,149 235,402 78,675
Offering proceeds and investment earnings placed in escrow . . . ( 9,589) (193,972) ( 484)
Purchases of property and equipment. . . . . . . . . . . . . . . (113,555) (157,897) ( 67,389)
Payments received on convertible subordinated debentures from SSET - 6,445 834
Proceeds from sale of investment in DBSC to ECC. . . . . . . . . 4,210 - -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 458) ( 123) ( 392)
------------------------------------------
Net cash flows from investing activities . . . . . . . . . . . . 18,569 (149,843) 28,567
CASH FLOWS FROM FINANCING ACTIVITIES:. . . . . . . . . . . . . .
Net proceeds from issuance of 1996 Notes . . . . . . . . . . . . - 336,916 -
Proceeds from issuance of common stock . . . . . . . . . . . . . 1 1 -
Repayments of mortgage indebtedness and notes payable. . . . . . ( 238) ( 6,631) ( 13,253)
------------------------------------------
Net cash flows from financing activities . . . . . . . . . . . . ( 237) 330,286 ( 13,253)
------------------------------------------
Net increase in cash and cash equivalents. . . . . . . . . . . . ( 3,556) 24,479 7,224
Cash and cash equivalents, beginning of year . . . . . . . . . . 17,506 13,950 38,429
------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . . $ 13,950 $ 38,429 $ 45,653
------------------------------------------
------------------------------------------
See accompanying Notes to Combined and Consolidated Financial Statements.
F-6
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The following represents Echo Satellite, a combination of EchoStar Satellite
Broadcasting Corporation ("ESBC") and Direct Broadcasting Satellite
Corporation, a Colorado corporation ("DBSC"). Both ESBC and DBSC are
wholly-owned subsidiaries of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, "EchoStar"), a publicly-traded company on the
Nasdaq National Market. ESBC was formed in January 1996 for the initial
purpose of completing an offering of $580 million principal amount at maturity
of 13 1/8% Senior Secured Discount Notes (the "1996 Notes") due 2004 (the
"1996 Notes Offering"). On January 8, 1997, Direct Broadcasting Satellite
Corporation, a Delaware corporation ("Old DBSC"), was merged (the "Merger")
with DBSC. This transaction was accounted for as a purchase and the excess of
the purchase price over the fair value of Old DBSC's assets was allocated to
FCC authorizations in the related purchase accounting. Upon consummation of
the Merger, Old DBSC, which was incorporated January 23, 1981 in the State of
Delaware, ceased to exist and DBSC became a guarantor of the 1996 Notes. DBSC
is the FCC licensee for a satellite permit and orbital slot assignments and
the owner of EchoStar III, a satelite built to become an integral part of the
DISH Network (see below), but has no operations as a stand-alone entity. DBSC
is dependent on ECC and ECC's other subsidiaries for all necessary funding and
all management and administrative functions.
The accompanying financial statements represent the combined and
consolidated financial statements of ESBC and DBSC ("Echo Satellite" or the
"Company"). Readers of this Annual Report should refer to EchoStar's Annual
Report on Form 10-K for the year ended December 31, 1997.
Substantially all of EchoStar's operations are conducted by subsidiaries
of ESBC. EchoStar's 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.
ORGANIZATION AND LEGAL STRUCTURE
Certain companies principally owned and controlled by Mr. Charles W. Ergen
were reorganized in 1993 into Dish, Ltd. (together with its subsidiaries, "Dish,
Ltd."). In April 1995, ECC was formed to complete an initial public offering
(the "IPO") of its Class A Common Stock. Concurrently, Mr. Ergen exchanged all
of his then outstanding shares of Class B Common Stock and 8% Series A
Cumulative Preferred Stock of Dish, Ltd. for like shares of ECC (the
"Exchange"). In December 1995, ECC merged Dish, Ltd. with a wholly-owned
subsidiary of ECC (the "Merger"). In connection with the 1996 Notes Offering
(as defined), ECC contributed all of the outstanding capital stock of Dish, Ltd.
to ESBC. This transaction was accounted for as a reorganization of entities
under common control whereby Dish, Ltd. was treated as the predecessor to ESBC.
F-7
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
SIGNIFICANT RISKS AND UNCERTAINTIES
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.
DEPENDENCE ON SINGLE RECEIVER MANUFACTURER. During 1997, EchoStar Receiver
Systems were manufactured exclusively by SCI Systems, Inc. ("SCI"), a high-
volume contract electronics manufacturer. During February 1998, EchoStar
executed two separate agreements for the manufacture of digital set-top boxes in
accordance with EchoStar's specifications. Phillips Electronics of North
America Corporation ("Phillips") and Vtech Communications Ltd. ("Vtech") are
expected to begin the manufacture of EchoStar's digital set-top boxes during the
second half of 1998. There can be no assurance that either or both of Phillips
or Vtech will be able to successfully manufacture and deliver digital set-top
boxes during 1998, or at all. EchoStar currently is negotiating with additional
brand-name consumer electronics manufacturers to produce receivers for use with
the DISH Network. No assurance can be provided regarding the ultimate success of
those negotiations. In the event that EchoStar's manufacturers of digital
set-top boxes are unable for any reason to produce receivers in a quantity
sufficient to meet its requirements, EchoStar's ability to add additional
subscribers, or its ability to satisfy delivery obligations for receiver sales
to international DTH providers, may be materially impaired and its results of
operations would be adversely affected.
TRANSACTIONS WITH MAJOR CUSTOMERS. During 1997, export sales to two
customers, ExpressVu, Inc. and Distribuidora de Television Digital S.A.,
together accounted for approximately 16% of the Company's total revenue.
Complete or partial loss of one or both of these customers could have a material
adverse effect on the Company's results of operations.
SUBSTANTIAL LEVERAGE. EchoStar is highly leveraged, which makes it
vulnerable to changes in general economic conditions. As of December 31, 1997,
EchoStar had outstanding long-term debt (including both the current and
long-term portion thereof) totaling approximately $1.4 billion. In addition,
EchoStar's long-term debt will increase by at least $266 million through March
2000, as interest on certain of its long-term debt accrues and is not payable in
cash. Substantially all of the assets of EchoStar and its subsidiaries are
pledged as collateral on its long-term debt. Further, the indentures associated
with EchoStar's long-term debt severely restrict its ability to incur additional
indebtedness. Thus, it may be difficult for EchoStar and its subsidiaries to
obtain additional debt financing if required or desired in order to implement
EchoStar's business strategy. Certain of EchoStar's subsidiaries also are
parties to other agreements which severely restrict their ability to obtain
additional debt financing for working capital, capital expenditures and general
corporate purposes.
EXPECTED OPERATING LOSSES. Due to the substantial expenditures required to
develop the EchoStar DBS System and introduce DISH Network service to consumers,
the Company has sustained significant losses in recent periods. The Company's
operating losses were $8 million, $109 million and $224 million for the years
ended December 31, 1995, 1996 and 1997, respectively. The Company had net
losses of $12 million, $101 million and $314 million during those same periods.
Improvement in the Company's results of operations is largely dependent upon the
Company's ability to expand its DISH Network subscription base, control
subscriber churn (i.e., the rate at which subscribers terminate service), and
effectively manage its operating and overhead costs. No assurance can be given
that the Company will be effective with regard to these matters. In addition,
the Company incurs
F-8
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1. ORGANIZATION AND BUSINESS ACTIVITIES - CONTINUED
significant costs to acquire DISH Network subscribers. The high cost of
obtaining new subscribers magnifies the negative effects of subscriber churn.
The Company anticipates that it will continue to experience operating losses
through at least 1999. There can be no assurance that such operating losses
will not continue beyond 1999 or that the Company's operations will generate
sufficient cash flows to pay its obligations, including its obligations on its
long-term debt, or to pay cash dividends on its common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The accompanying financial statements present the combination of DBSC and
ESBC. All significant intercompany transactions between ESBC and DBSC
(consisting primarily of capital advances by ESBC) and between ESBC and its
subsidiaries have been eliminated.
PURPOSE OF FINANCIAL STATEMENTS
Echo Satellite currently is not 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 ESBC and First
Trust National Association dated March 25, 1996 (the "Indenture"), Echo
Satellite is required to provide quarterly and annual reports comparable to that
which would have been required if Echo Satellite were subject to the
requirements of Section 13 or 15(d) of the Exchange Act. Since Echo Satellite
does not have a separate Commission File Number with the Securities and Exchange
Commission, Echo Satellite 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. Echo Satellite's management refers readers of
this Annual Report 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.
FOREIGN CURRENCY TRANSACTION GAINS AND LOSSES
The functional currency of the Company's foreign subsidiaries is the U.S.
dollar because their sales and purchases are predominantly denominated in that
currency. Transactions denominated in currencies other than U.S. dollars are
recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period-end translation) or
realized (upon settlement of the transaction). Net transaction gains (losses)
during 1995, 1996 and 1997 were not material to the Company's results of
operations.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of 90 days or less to be cash equivalents. Cash equivalents as of
December 31, 1996 and 1997 consist of money market funds, corporate notes and
commercial paper; such balances are stated at cost which approximates market
value.
F-9
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STATEMENTS OF CASH FLOWS DATA
The following presents the Company's supplemental cash flow statement
disclosure (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
----------------------------
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . $ 461 $ 3,007 $ 5,208
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . 3,203 383 209
Capitalized interest, including amounts due from affiliates. . . 25,763 31,818 34,612
8% Series A Cumulative Preferred Stock dividends . . . . . . . . 617 - -
Accrued satellite contract costs . . . . . . . . . . . . . . . . 15,000 - -
Satellite launch payment for EchoStar II applied to
EchoStar I launch . . . . . . . . . . . . . . . . . . . . . . . - 15,000 -
Satellite vendor financing . . . . . . . . . . . . . . . . . . . 32,833 31,167 14,400
Other notes payable. . . . . . . . . . . . . . . . . . . . . . . - - 5,322
The purchase price of DBSC was "pushed-down" by ECC to DBSC as
follows in the related purchase accounting:
EchoStar III satellite construction costs . . . . . . . . . . - - 51,241
FCC authorizations. . . . . . . . . . . . . . . . . . . . . . - - 16,243
Note 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)
MARKETABLE INVESTMENT SECURITIES AND RESTRICTED CASH AND MARKETABLE INVESTMENT
SECURITIES
The Company considers its marketable investment securities to be
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 stockholder's equity, net of related
deferred income taxes. The specific identification method is used to determine
cost in computing realized gains and losses. As of December 31, 1996,
marketable investment securities consisted of $16 million of commercial paper
and $3 million of government bonds. The market value of these securities
approximated cost.
Restricted cash and marketable investment securities held in escrow
accounts, as reflected in the accompanying consolidated balance sheets, include
cash restricted by the various indentures associated with certain of the
Company's debt financing transactions (see Note 4), plus investment earnings
thereon. Restricted cash and marketable investment securities are invested in
certain permitted debt and other marketable investment securities until
disbursed for the express purposes identified in the applicable indenture. As
of December 31, 1996, restricted cash and marketable investment securities
consisted of $78 million of commercial paper and $1 million of certificates of
deposit. The market value of these securities approximated cost.
As of December 31, 1996, other restricted cash included a total of $25
million held in two escrow accounts for the benefit of EchoStar Receiver System
manufacturers. These deposits were released from their respective escrow
accounts during May 1997. In addition, $6 million at December 31, 1996 was
restricted by an indenture to satisfy certain covenants pertaining to launch
insurance for EchoStar II. This covenant was satisfied during September 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values for the Company's 1994 Notes and 1996 Notes (as defined, see
Notes 1 and 4) are based on quoted market prices. The fair values of the
Company's mortgages and other notes payable are estimated using discounted
F-10
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
cash flow analyses. The interest rates assumed in such discounted cash flow
analyses reflect interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
The following table summarizes the book and fair values of the Company's
debt facilities at December 31, 1997 (in thousands):
BOOK VALUE FAIR VALUE
----------------------
1994 Notes. . . . . . . . . . . . . . . . . . . $499,863 $570,960
1996 Notes. . . . . . . . . . . . . . . . . . . 438,512 488,650
Mortgages and other notes payable . . . . . . . 69,731 69,127
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Proprietary products are
manufactured by outside suppliers to the Company's specifications. Manufactured
inventories include materials, labor and manufacturing overhead. Cost of other
inventories includes parts, contract manufacturers' delivered price, assembly
and testing labor, and related overhead, including handling and storage costs.
Inventories consist of the following (in thousands):
DECEMBER 31,
------------------------
1996 1997
------------------------
DBS receiver components. . . . . . . . . . $15,736 $12,506
EchoStar Receiver Systems. . . . . . . . . 32,799 7,649
Consigned DBS receiver components. . . . . 23,525 3,122
Finished goods - analog DTH equipment. . . 4,091 2,116
Spare parts and other. . . . . . . . . . . 2,279 1,440
Reserve for excess and obsolete inventory. (5,663) (3,840)
------------------------
$72,767 $22,993
------------------------
------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Cost includes interest
capitalized of $25 million, $20 million and $11 million during the years ended
December 31, 1995, 1996 and 1997, respectively. The costs of satellites under
construction are capitalized during the construction phase, assuming the
eventual successful launch and in-orbit operation of the satellite. If a
satellite were to fail during launch or while in-orbit, the resultant loss would
be charged to expense in the period such loss was incurred. The amount of any
such loss would be reduced to the extent of insurance proceeds received as a
result of the launch or in-orbit failure. Depreciation is recorded on a
straight-line basis for financial reporting purposes. Repair and maintenance
costs are charged to expense when incurred. Renewals and betterments are
capitalized.
The Company reviews its long-lived assets and identifiable assets to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
assets which are held and used in operations, the asset would be impaired if the
book value of the asset exceeded the undiscounted future cash flows related to
the asset. For those assets which are to be disposed of, the assets would be
impaired to the extent the fair value does not exceed the book value. The
Company considers
F-11
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of assets can be recovered.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and amortized using the
straight-line method over a period of 40 years. Such amortization commences at
the time the related satellite becomes operational; capitalized costs are
written off at the time efforts to provide services are abandoned. FCC
authorizations include interest capitalized of $1 million, $1 million and $2
million during the years ended December 31, 1995, 1996 and 1997, respectively.
ADVANCES TO AFFILIATES
Advances to affiliates are recorded at cost and represent the net amount of
funds advanced to, or received from, unconsolidated affiliates of the Company.
Such advances principally have consisted of advances to Direct Broadcasting
Satellite Corporation and EchoStar Space Corporation to fund satellite
construction and launch expenditures.
REVENUE RECOGNITION
Revenue from the provision of DISH Network subscription television services
and satellite services is recognized as revenue in the period such services are
provided. Revenue from sales of digital set-top boxes and related accessories
is recognized upon shipment to customers. Revenue from the provision of
integration services is recognized as revenue in the period the services are
performed.
SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS
During 1996, in order to stimulate subscriber growth, EchoStar made a
strategic decision to reduce the price charged to consumers for EchoStar
Receiver Systems. Accordingly, beginning in August 1996, EchoStar began selling
its EchoStar Receiver Systems below its manufactured cost (the "1996
Promotion"). The 1996 Promotion lowered the suggested retail price charged by
independent retailers for a standard EchoStar Receiver System to $199 (as
compared to the original average retail price prior to August 1996 of
approximately $499), conditioned upon the consumer's one-year prepaid
subscription to the DISH Network's America's Top 50 CD programming package for
approximately $300. The excess of EchoStar's aggregate costs (equipment,
programming and other) over proceeds received pursuant to the 1996 Promotion was
expensed ("subscriber promotion subsidies") upon shipment of the equipment.
Remaining costs were deferred ("subscriber acquisition costs") and amortized
over the term of the prepaid subscription (normally one year). Excluding
expected incremental subscriber revenues, such as from premium and Pay-Per-View
services, this accounting treatment results in revenue recognition over the
initial prepaid period of service equal to the sum of programming costs (which
are recognized as service is provided) and amortization of subscriber
acquisition costs. During the period from August 1996 through May 1997,
substantially all new subscriber activations resulted from the 1996 Promotion.
The caption "DISH Network - Subscription Television Services" in the
accompanying statements of operations includes revenues from the 1996 Promotion
equal to the advertised subscription rates for related DISH Network services.
Incremental revenues realized from the 1996 Promotion are included in the
caption "DISH Network - Other" and amounted to approximately $5 million during
1996 and $39 million during 1997.
During June 1997, EchoStar introduced the "1997 Promotion." The 1997
Promotion maintained the suggested retail price for a standard EchoStar Receiver
System at $199, but eliminated the extended subscription
F-12
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
commitment. Net transaction costs associated with the 1997 Promotion are
expensed as incurred (reported as a component of subscriber promotion
subsidies) in the accompanying statements of operations. While some sales
continue to be made under the terms of the 1996 Promotion, the majority of new
subscriber activations have resulted from the 1997 Promotion since its
introduction. As a result, beginning in October 1997, net transaction costs
resulting from the sale of EchoStar Receiver Systems pursuant to the 1996
Promotion also are expensed as incurred. Consequently, no additional
subscriber acquisition costs will be deferred. The unamortized balance of
such costs ($19 million at December 31, 1997) is expected to be fully
amortized by September 1998.
DEFERRED DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Costs of completing the 1994 Notes Offering and the 1996 Notes Offering
(as defined, see Notes 1 and 4) were deferred and are being amortized to
interest expense over their respective terms. The original issue discounts
related to the 1994 Notes and the 1996 Notes are being accreted to interest
expense so as to reflect a constant rate of interest on the accreted balance
of the 1994 Notes and the 1996 Notes.
DEFERRED REVENUE
Deferred revenue principally consists of prepayments received from
subscribers for DISH Network programming. Such amounts are recognized as
revenue in the period the programming is provided to the subscriber.
LONG-TERM DEFERRED SATELLITE SERVICES REVENUE
Long-term deferred satellite services revenue consists of advance payments
from certain content providers for carriage of their signal on the DISH Network.
Such amounts are deferred and recognized as revenue on a straight-line basis
over the related contract terms (up to ten years).
ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
--------------------------
1996 1997
--------------------------
Accrued expenses . . . . . . . . . . . . . $11,029 $34,840
Accrued programming. . . . . . . . . . . . 9,463 20,018
Accrued royalties. . . . . . . . . . . . . 7,693 17,747
Deferred tax liabilities . . . . . . . . . 12,674 -
--------------------------
$40,859 $72,605
--------------------------
ADVERTISING COSTS
Advertising costs, exclusive of subscriber promotion subsidies, are
expensed as incurred and totaled $2 million, $18 million and $35 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-13
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 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.
RECLASSIFICATIONS
Certain amounts from the prior years' consolidated financial statements
have been reclassified to conform with the 1997 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
LIFE -----------------------
(IN YEARS) 1996 1997
----------- -----------------------
EchoStar I. . . . . . . . . . . . . 12 $201,607 $201,607
EchoStar II . . . . . . . . . . . . 12 228,694 228,694
Furniture, fixtures and equipment . 2-12 72,932 92,170
Buildings and improvements. . . . . 7-40 21,649 22,114
Tooling and other . . . . . . . . . 2 3,253 4,336
Land . . . . . . . . . . . . . . - 1,613 1,636
Vehicles. . . . . . . . . . . . . . 7 1,323 1,320
Construction in progress. . . . . . - 4,137 131,661
-----------------------
Total property and equipment . . 535,208 683,538
Accumulated depreciation. . . . . . (35,219) (85,783)
-----------------------
Property and equipment, net. . . $499,989 $597,755
-----------------------
-----------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31,
--------------------
1996 1997
--------------------
Progress amounts for satellite construction and
capitalized interest for EchoStar III. . . . . . . $ - $ 92,408
Other. . . . . . . . . . . . . . . . . . . . . . . . 4,137 39,253
--------------------
$4,137 $131,661
--------------------
--------------------
F-14
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT
1994 NOTES
In June 1994, Dish, Ltd. completed an offering of 12 7/8% Senior Secured
Discount Notes due June 1, 2004 (the "1994 Notes") and Common Stock Warrants
(the "Warrants") (collectively, the "1994 Notes Offering"). The 1994 Notes
Offering resulted in net proceeds to Dish, Ltd. of $323 million (including
amounts attributable to the issuance of the Warrants and after payment of
underwriting discounts and other issuance costs aggregating approximately $13
million).
The 1994 Notes bear interest at a rate of 12 7/8% computed on a semi-annual
bond equivalent basis. Interest on the 1994 Notes will not be payable in cash
prior to June 1, 1999, with the 1994 Notes accreting to a principal value at
stated maturity of $624 million by that date. Commencing December 1, 1999,
interest on the 1994 Notes will be payable in cash on December 1 and June 1 of
each year.
The 1994 Notes rank senior in right of payment to all subordinated
indebtedness of Dish, Ltd. and PARI PASSU in right of payment with all other
senior indebtedness of Dish, Ltd. The 1994 Notes are secured by liens on
certain assets of Dish, Ltd., including EchoStar I, EchoStar II and all other
components of the EchoStar DBS System owned by Dish, Ltd. and its subsidiaries.
The 1994 Notes are further guaranteed by each material, direct subsidiary of
Dish, Ltd. (see Note 10). Although the 1994 Notes are titled "Senior," Dish,
Ltd. has not issued, and does not have any current arrangements to issue, any
significant indebtedness to which the 1994 Notes would be senior. The 1996
Notes and the 1997 Notes are effectively subordinated to the 1994 Notes and all
other liabilities of Dish, Ltd. and its subsidiaries. Furthermore, at
December 31, 1997, the 1994 Notes were effectively subordinated to approximately
$9 million of mortgage indebtedness with respect to certain assets of Dish,
Ltd.'s subsidiaries, not including the EchoStar DBS System, and rank PARI PASSU
with the security interest of approximately $30 million of satellite vendor
financing.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1994 Notes are not redeemable at Dish, Ltd.'s
option prior to June 1, 1999. Thereafter, the 1994 Notes will be subject to
redemption, at the option of Dish, Ltd., in whole or in part, at redemption
prices ranging from 104.828% during the year commencing June 1, 1999, to 100% of
principal value at stated maturity on or after June 1, 2002, together with
accrued and unpaid interest thereon to the redemption date. On each of June 1,
2002, and June 1, 2003, Dish, Ltd. will be required to redeem 25% of the
original aggregate principal amount of 1994 Notes at a redemption price equal to
100% of principal value at stated maturity thereof, together with accrued and
unpaid interest thereon to the redemption date. The remaining principal of the
1994 Notes matures on June 1, 2004.
In the event of a change of control and upon the occurrence of certain
other events, as described in the indenture related to the 1994 Notes (the "1994
Notes Indenture"), Dish, Ltd. will be required to make an offer to each holder
of 1994 Notes to repurchase all or any part of such holder's 1994 Notes at a
purchase price equal to 101% of the accreted value thereof on the date of
purchase, if prior to June 1, 1999, or 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest thereon to the date of
purchase, if on or after June 1, 1999.
The 1994 Notes Indenture contains restrictive covenants that, among other
things, impose limitations on Dish, Ltd. and its subsidiaries with respect to
their ability to: (i) incur additional indebtedness; (ii) issue preferred stock;
(iii) apply the proceeds of certain asset sales; (iv) create, incur or assume
liens; (v) create dividend and other payment restrictions with respect to Dish,
Ltd.'s subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur
subordinated or junior debt; and (viii) enter into transactions with affiliates.
In addition, Dish, Ltd., may pay dividends on its equity securities only if (1)
no default is continuing under the 1994 Notes Indenture; and (2) after giving
effect to such dividend, Dish, Ltd.'s ratio of total indebtedness to cash flow
(calculated in accordance with the 1994 Notes Indenture) would not exceed 4.0 to
1.0. Moreover, the aggregate amount of such dividends generally may not exceed
the sum of 50% of Dish, Ltd.'s consolidated net income (calculated in accordance
with the 1994 Notes Indenture) from April 1, 1994, plus 100% of the aggregate
net proceeds to Dish, Ltd. from the issuance and sale of certain equity
interests of Dish, Ltd. (including common stock).
F-15
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT - CONTINUED
1996 NOTES
In March 1996, ESBC completed the 1996 Notes Offering, which resulted in
net proceeds to ESBC of approximately $337 million (after payment of
underwriting discounts and other issuance costs aggregating approximately $13
million). The 1996 Notes bear interest at a rate of 13 1/8%, computed on a
semi-annual bond equivalent basis. Interest on the 1996 Notes will not be
payable in cash prior to March 15, 2000, with the 1996 Notes accreting to a
principal amount at stated maturity of $580 million by that date. Commencing
September 15, 2000, interest on the 1996 Notes will be payable in cash on
September 15 and March 15 of each year. The 1996 Notes mature on March 15,
2004.
The 1996 Notes rank PARI PASSU in right of payment with all senior
indebtedness of ESBC. The 1996 Notes are guaranteed on a subordinated basis by
ECC, and are secured by liens on certain assets of ESBC, ECC and certain of
ECC's subsidiaries, including all of the outstanding capital stock of Dish,
Ltd., which currently owns substantially all of ECC's operating subsidiaries.
Although the 1996 Notes are titled "Senior:" (i) ESBC has not issued, and does
not have any current arrangements to issue, any significant indebtedness to
which the 1996 Notes would be senior; and (ii) the 1996 Notes are effectively
subordinated to all liabilities of ECC (except liabilities to general creditors)
and its other subsidiaries (except liabilities of ESBC), including liabilities
to general creditors. As of December 31, 1997, EchoStar's liabilities,
exclusive of the 1996 Notes and the 1997 Notes (as defined), aggregated
approximately $882 million. Further, net cash flows generated by the assets and
operations of ESBC's subsidiaries will be available to satisfy the obligations
of the 1996 Notes only to the extent of allowable dividend payments by Dish,
Ltd. under the 1994 Notes Indenture.
Except under certain circumstances requiring prepayment premiums, and in
other limited circumstances, the 1996 Notes are not redeemable at ESBC's option
prior to March 15, 2000. Thereafter, the 1996 Notes will be subject to
redemption, at the option of ESBC, in whole or in part, at redemption prices
ranging from 106.5625% during the year commencing March 15, 2000, to 100% on or
after March 15, 2003 of principal amount at stated maturity, together with
accrued and unpaid interest thereon to the redemption date. The entire
principal balance of the 1996 Notes will mature on March 15, 2004.
The indenture related to the 1996 Notes (the "1996 Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
ESBC with respect to its ability to: (i) incur additional indebtedness; (ii)
issue preferred stock; (iii) sell assets and apply the proceeds thereof; (iv)
create, incur or assume liens; (v) create dividend and other payment
restrictions with respect to ESBC's subsidiaries; (vi) merge, consolidate or
sell substantially all of its assets; and (vii) enter into transactions with
affiliates. The 1996 Notes Indenture permits ESBC to pay dividends and make
other distributions to its direct parent, EchoStar DBS Corporation ("DBS Corp")
without restrictions.
In the event of a change of control, as described in the 1996 Notes
Indenture, ESBC will be required to make an offer to each holder of 1996 Notes
to repurchase all of such holder's 1996 Notes at a purchase price equal to 101%
of the accreted value thereof on the date of purchase, if prior to March 15,
2000, or 101% of the aggregate principal amount at stated maturity thereof,
together with accrued and unpaid interest thereon to the date of purchase, if on
or after March 15, 2000.
CONTINGENT GUARANTEE OF DBS CORP'S 1997 NOTES
In June 1997, DBS Corp consummated an offering (the "1997 Notes Offering")
of 12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997 Notes
Offering resulted in net proceeds to DBS Corp of approximately $363 million
(after payment of underwriting discounts and other issuance costs aggregating
approximately $12 million). The 1997 Notes are guaranteed on a subordinated
basis by ECC and, contingent upon the occurrence of
F-16
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT - CONTINUED
certain events, will be guaranteed by ESBC, Dish, Ltd., and certain other
subsidiaries of DBS Corp and ECC. ESBC will become a guarantor of the 1997
Notes on the first date that ESBC is permitted under the 1996 Indenture to
guarantee the 1997 Notes and the 1996 Notes are no longer outstanding or have
been defeased.
MORTGAGES AND OTHER NOTES PAYABLE
Mortgages and other notes payable consists of the following (in thousands):
DECEMBER 31,
---------------------
1996 1997
---------------------
8.25% note payable for satellite vendor financing for EchoStar I
due in equal monthly installments of $722, including interest,
through February 2001 . . . . . . . . . . . . . . . . . . . . . . $ 30,463 $ 24,073
8.25% note payable for satellite vendor financing for EchoStar II
due in equal monthly installments of $562, including interest,
through November 2001 . . . . . . . . . . . . . . . . . . . . . . 27,161 22,489
8.25% note payable for satellite vendor financing for EchoStar III
due in equal monthly installments of $294, including interest,
through October 2002. . . . . . . . . . . . . . . . . . . . . . . - 13,812
Mortgages and other unsecured notes payable due in installments
through April 2009 with interest rates ranging from 8% to 10.5% . 5,138 9,357
---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,762 69,731
Less current portion. . . . . . . . . . . . . . . . . . . . . . . . (11,334) (17,885)
---------------------
Mortgages and other notes payable, net of current portion . . . . . $ 51,428 $ 51,846
---------------------
---------------------
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.
Future maturities of amounts outstanding under the Company's long-term debt
facilities as of December 31, 1997 are summarized as follows (in thousands):
MORTGAGES
AND OTHER
1994 1996 NOTES
NOTES NOTES PAYABLE TOTAL
-------------------------------------------------
YEAR ENDING DECEMBER 31,
1998 ................... $ - $ - $17,885 $ 17,885
1999 ................... - - 17,791 17,791
2000 ................... - - 17,828 17,828
2001 ................... - - 10,861 10,861
2002 ................... 156,000 - 2,927 158,927
Thereafter ............. 468,000 580,000 2,439 1,050,439
Unamortized discount ... (124,137) (141,488) - (265,625)
-------------------------------------------------
Total ....................... $ 499,863 $ 438,512 $69,731 $1,008,106
-------------------------------------------------
-------------------------------------------------
F-17
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. LONG-TERM DEBT - CONTINUED
SATELLITE VENDOR FINANCING
The purchase price for satellites is required to be paid in progress
payments, some of which are non-contingent payments deferred until after the
respective satellites are in orbit (satellite vendor financing). EchoStar
utilized $36 million, $28 million and $14 million of satellite vendor financing
for EchoStar I, EchoStar II and EchoStar III, respectively. The satellite
vendor financing with respect to EchoStar I and EchoStar II is secured by
substantially all assets of Dish, Ltd. and its subsidiaries (subject to certain
restrictions) and a corporate guarantee of ECC. The satellite vendor financing
for EchoStar III is secured by an ECC corporate guarantee.
5. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
----------------------------------
Current (provision) benefit:
Federal . . . . . . . . . . . . . . . . . . $1,711 $ 4,596 $( 358)
State . . . . . . . . . . . . . . . . . . . ( 44) ( 49) ( 9)
Foreign . . . . . . . . . . . . . . . . . . ( 301) ( 209) ( 137)
----------------------------------
1,366 4,338 ( 504)
Deferred benefit:
Federal . . . . . . . . . . . . . . . . . . 4,440 48,050 104,819
State . . . . . . . . . . . . . . . . . . . 385 2,472 7,878
Increase in valuation allowance . . . . . . - - (112,339)
----------------------------------
4,825 50,522 358
----------------------------------
Total benefit (provision) . . . . . . . . $6,191 $54,860 $( 146)
----------------------------------
----------------------------------
The actual tax benefit (provision) for 1995, 1996 and 1997 are reconciled
to the amounts computed by applying the statutory Federal tax rate to income
before taxes as follows:
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
----------------------------------
Statutory rate . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit . 1.2 1.8 1.6
Tax exempt interest income . . . . . . . . . 0.1 - -
Research and development and foreign tax
credits. . . . . . . . . . . . . . . . . . . 0.2 - 0.7
Non-deductible interest expense. . . . . . . (1.7) (1.4) ( 0.5)
Other. . . . . . . . . . . . . . . . . . . . (1.4) (0.2) ( 0.8)
Increase in valuation allowance. . . . . . . - - (36.0)
----------------------------------
Total benefit from income taxes. . . . . . . 33.4% 35.2% -%
----------------------------------
----------------------------------
F-18
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. INCOME TAXES - CONTINUED
The temporary differences which give rise to deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows (in thousands):
DECEMBER 31,
--------------------------
1996 1997
--------------------------
Current deferred tax assets:
Accrued royalties . . . . . . . . . . . . . . $ 3,029 $ 6,506
Inventory reserves and cost methods . . . . . 1,811 1,180
Accrued expenses. . . . . . . . . . . . . . . 1,414 6,391
Allowance for doubtful accounts . . . . . . . 674 517
Reserve for warranty costs. . . . . . . . . . 284 270
Other . . . . . . . . . . . . . . . . . . . . . 57 -
--------------------------
Total current deferred tax assets . . . . . . . 7,269 14,864
Current deferred tax liabilities:
Subscriber acquisition costs and other. . . . (19,943) ( 6,846)
--------------------------
Total current deferred tax liabilities. . . . . (19,943) ( 6,846)
--------------------------
Gross current deferred tax assets (liabilities) (12,674) 8,018
Valuation allowance . . . . . . . . . . . . . . - ( 5,013)
--------------------------
Net current deferred tax assets (liabilities) . (12,674) 3,005
Noncurrent deferred tax assets:
General business and foreign tax credits. . . - 2,224
Net operating loss carryforwards. . . . . . . 77,910 116,950
Amortization of original issue discount on
1994 Notes and 1996 Notes. . . . . . . . . . 34,912 60,831
Other . . . . . . . . . . . . . . . . . . . . 3,458 7,571
--------------------------
Total noncurrent deferred tax assets. . . . . . 116,280 187,576
Noncurrent deferred tax liabilities:
Capitalized costs deducted for tax. . . . . . (17,683) -
Depreciation. . . . . . . . . . . . . . . . . (18,927) ( 15,671)
Other . . . . . . . . . . . . . . . . . . . . - ( 230)
--------------------------
Total noncurrent deferred tax liabilities . . . (36,610) ( 15,901)
--------------------------
Gross deferred tax assets . . . . . . . . . . . 79,670 171,675
--------------------------
Valuation allowance . . . . . . . . . . . . . . - (107,326)
--------------------------
Net noncurrent deferred tax assets. . . . . . . 79,670 64,349
--------------------------
Net deferred tax assets . . . . . . . . . . . . $ 66,996 $ 67,354
--------------------------
--------------------------
As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") for Federal income tax purposes of approximately $319 million. The
NOLs expire beginning in the year 2011. The use of the NOLs is subject to
statutory and regulatory limitations regarding changes in ownership. FAS No.
109, "Accounting for Income Taxes," requires that the potential future tax
benefit of NOLs be recorded as an asset. FAS No. 109 also requires that
deferred tax assets and liabilities be recorded for the estimated future tax
effects of temporary differences between the tax basis and book value of assets
and liabilities. Deferred tax assets are offset by a valuation allowance if
deemed necessary.
In 1997, the Company increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of the
Company's net deferred tax assets is not assured and is principally dependent on
generating future taxable income prior to expiration of the NOLs. Management
believes existing net deferred tax assets in excess of the valuation allowance
will, more likely than not, be realized. The Company continuously reviews the
adequacy of its valuation allowance. Future decreases to the valuation
allowance will be
F-19
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. INCOME TAXES - CONTINUED
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.
6. STOCK COMPENSATION PLANS
STOCK INCENTIVE PLAN
In April 1994, EchoStar adopted a stock incentive plan (the "Stock
Incentive Plan") to provide incentive to attract and retain officers, directors
and key employees. EchoStar has reserved up to 10 million shares of its Class A
Common Stock for granting awards under the Stock Incentive Plan. All stock
options granted through December 31, 1997 have included exercise prices not less
than the fair market value of EchoStar's Class A Common Stock at the date of
grant, and vest, as determined by EchoStar's Board of Directors, generally at
the rate of 20% per year.
A summary of EchoStar's incentive stock option activity for the years ended
December 31, 1995, 1996 and 1997 is as follows:
1995 1996 1997
------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------- -------------------- --------------------
Options outstanding,
beginning of year . . . . 744,872 $ 9.33 1,117,133 $12.23 1,025,273 $14.27
Granted . . . . . . . . . . 419,772 17.13 138,790 27.02 779,550 17.05
Repriced. . . . . . . . . . - - - - 255,794 17.00
Exercised . . . . . . . . . ( 4,284) 9.33 (103,766) 10.24 ( 98,158) 9.64
Forfeited . . . . . . . . . (43,227) 10.55 (126,884) 13.27 (437,892) 19.46
------------------- -------------------- --------------------
Options outstanding,
end of year . . . . . . . 1,117,133 $12.23 1,025,273 $14.27 1,524,567 $14.99
------------------- -------------------- --------------------
------------------- -------------------- --------------------
Exercisable at end of year. 142,474 $ 9.33 258,368 $11.31 347,009 $12.15
------------------- -------------------- --------------------
------------------- -------------------- --------------------
Exercise prices for options outstanding as of December 31, 1997 are as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AS OF REMAINING AVERAGE AS OF AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
- --------------------------------------------------------------------------------
$ 9.333 - $11.870 429,644 4.60 $ 9.53 226,771 $ 9.48
17.000 - 17.000 1,053,683 7.11 17.00 117,990 17.00
18.290 - 26.688 41,240 4.79 20.58 2,248 26.69
- --------------------------------------------------------------------------------
$ 9.333 - $26.688 1,524,567 6.34 $14.99 347,009 $12.15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-20
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. STOCK COMPENSATION PLANS - CONTINUED
On July 1, 1997, the Board of Directors approved a repricing of
substantially all outstanding options with an exercise price greater than $17.00
per share of Class A Common Stock to $17.00 per share. The Board of Directors
would not typically consider reducing the exercise price of previously granted
options. However, these options were repriced due to the occurrence of certain
events beyond the reasonable control of the employees of EchoStar which
significantly reduced the incentive these options were intended to create. The
fair market value of the Class A Common Stock was $15.25 on the date of the
repricing. Options to purchase approximately 256,000 shares of Class A Common
Stock were affected by this repricing.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related
interpretations in accounting for its stock-based compensation plans. Under APB
25, because the exercise price of EchoStar's employee stock options is equal to
the market price of the underlying stock on the date of the grant, no
compensation expense is recognized. In October 1995, the FASB issued FAS No.
123, "Accounting and Disclosure of Stock-Based Compensation," ("FAS No. 123")
which established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. The Company elected to
not adopt FAS No. 123 for expense recognition purposes.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if the Company had accounted for its stock-based
compensation plans using the fair value method prescribed by that statement.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The fair value of
each option grant was estimated at the date of the grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
------------------------------------
Risk-free interest rate . . . . . 6.12% 6.80% 6.09%
Volatility factor . . . . . . . . 62% 62% 68%
Dividend yield. . . . . . . . . . 0.00% 0.00% 0.00%
Expected term of options. . . . . 6 years 6 years 6 years
Weighted-average fair value
of options granted . . . . . . . $9.86 $16.96 $10.38
The Company's pro forma net loss was $13 million, $102 million and $316
million for the years ended December 31, 1995, 1996 and 1997, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based compensation awards.
F-21
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7. EMPLOYEE BENEFIT PLAN
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Board of Directors and shareholders of ECC approved an
employee stock purchase plan (the "ESPP"), effective beginning October 1, 1997.
Under the ESPP, EchoStar is authorized to issue a total of 100,000 shares of
ECC's Class A Common Stock. Substantially all full-time employees who have been
employed by EchoStar for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made through payroll
deductions. Under the terms of the ESPP, employees may not deduct an amount
which would permit such employee to purchase capital stock of EchoStar under all
stock purchase plans of EchoStar at a rate which would exceed $25,000 in fair
market value of capital stock in any one year. The purchase price of the stock
is 85% of the closing price of ECC's Class A Common Stock on the last business
day of each calendar quarter in which such shares of ECC's Class A Common Stock
are deemed sold to an employee under the ESPP. The ESPP shall terminate upon
the first to occur of (i) October 1, 2007 or (ii) the date on which the ESPP is
terminated by the Board of Directors. During the fourth quarter of 1997,
employees of the Company purchased 4,430 shares of ECC's Class A Common Stock
through the ESPP.
401(k) EMPLOYEE SAVINGS PLAN
EchoStar sponsors a 401(k) Employee Savings Plan (the "401(k) Plan") for
eligible employees. Voluntary employee contributions to the 401(k) Plan may be
matched 50% by EchoStar, subject to a maximum annual contribution by EchoStar of
$1,000 per employee. EchoStar also may make an annual discretionary
contribution to the plan with approval by EchoStar's Board of Directors, subject
to the maximum deductible limit provided by the Internal Revenue Code of 1986,
as amended. The Company's cash contributions to the 401(k) Plan totaled
$177,000, $226,000 and $329,000 during 1995, 1996 and 1997, respectively.
Additionally, the Company contributed 55,000 shares of EchoStar's Class A Common
Stock in 1995 and 1996, (fair value of $1 million and $935,000, respectively) to
the 401(k) Plan as discretionary contributions. During 1998, the Company
expects to contribute 80,000 shares of EchoStar's Class A Common Stock (fair
value of approximately $2 million) to the 401(k) Plan related to its 1997
discretionary contribution.
8. C-BAND AND OTHER REVENUE
Effective January 1, 1998, the Company ceased operation of its C-band
programming business. Consequently, the net result of the Company's C-band
programming business is reported as "C-band and other revenue" in the
accompanying statements of operations. C-band and other revenue consists of the
following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
C-band equipment sales and other . . $110,992 $ 54,592 $32,308
C-band programming sales . . . . . . 15,232 11,921 7,100
C-band programming - cost of sales . (13,520) (10,510) (6,712)
---------------------------------
C-band and other revenue, net. . . . $112,704 $ 56,003 $32,696
---------------------------------
---------------------------------
9. OTHER COMMITMENTS AND CONTINGENCIES
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV from the Baikonur Cosmodrome in the
Republic of Kazakhstan, a territory of the former Soviet Union, utilizing a
Proton launch vehicle (the "LKE Contract"). The launch is currently expected to
occur in the Spring of
F-22
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
1998. Either party may request a delay in the 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. During 1998, EchoStar expects to expend
approximately $68 million in connection with the construction launch and
insurance of EchoStar IV. These expenditures will be funded from the
Satellite Escrow.
EchoStar has filed applications with the Federal Communications Commission
("FCC") for authorization to construct, launch and operate a two satellite FSS
(fixed satellite service) Ku-band system and a two satellite FSS Ka-band
satellite system. No assurance can be given that EchoStar's applications will
be approved by the FCC or that, if approved, EchoStar will be able to
successfully develop the FSS Ku-band or the Ka-band systems. EchoStar believes
that establishment of the FSS Ku-band system or the FSS Ka-band system would
enhance its competitive position in the DTH industry. In the event EchoStar's
FSS Ku-band or Ka-band system applications are approved by the FCC, additional
debt or equity financing would be required. No assurance can be given that such
financing will be available, or that it will be available on terms acceptable to
EchoStar.
PURCHASE COMMITMENTS
As of December 31, 1997, the Company's purchase commitments totaled
approximately $87 million. The majority of these commitments relate to EchoStar
Receiver Systems and related components. All of the purchases related to these
commitments are expected to be made during 1998. The Company expects to finance
these purchases from existing unrestricted cash balances and future cash flows
generated from operations, if any.
OTHER RISKS AND CONTINGENCIES
During February 1997, EchoStar and The News Corporation Limited ("News")
announced an agreement (the "News Agreement") pursuant to which, among other
things, News agreed to acquire approximately 50% of the outstanding capital
stock of EchoStar. News also agreed to make available for use by EchoStar the
DBS permit for 28 frequencies at 110DEG. West Longitude purchased by MCI
Communications Corporation for over $682 million following a 1996 FCC auction.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under the News Agreement.
In May 1997, EchoStar filed a Complaint requesting that the Court confirm
EchoStar's position and declare that News is obligated pursuant to the News
Agreement to lend $200 million to EchoStar without interest and upon such other
terms as the Court orders. EchoStar also filed a First Amended Complaint
significantly expanding the scope of the litigation, to include breach of
contract, failure to act in good faith, and other causes of action. EchoStar
seeks specific performance of the News Agreement and damages, including lost
profits based on, among other things, a jointly prepared ten-year business plan
showing expected profits for EchoStar in excess of $10 billion based on
consummation of the transactions contemplated by the News Agreement.
In June 1997, News filed an answer and counterclaims seeking unspecified
damages. News' answer denies all of the material allegations in the First
Amended Complaint and asserts numerous defenses, including bad faith, misconduct
and failure to disclose material information on the part of EchoStar and its
Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in
which News is joined by its subsidiary American Sky Broadcasting, L.L.C., assert
that EchoStar and Ergen breached their agreements with News and failed to act
and negotiate with News in good faith. EchoStar has responded to News' answer
and denied the allegations in their counterclaims. EchoStar also has asserted
various affirmative defenses. EchoStar intends to vigorously defend against the
counterclaims. Discovery commenced on July 3, 1997 and depositions are
currently being taken. The case has been set for trial commencing November
1998, but that date could be postponed.
F-23
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. OTHER COMMITMENTS AND CONTINGENCIES - CONTINUED
While EchoStar is confident of its position and believes it will ultimately
prevail, the litigation process could continue for many years and there can be
no assurance concerning the outcome of the litigation.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the financial position or results of operations of EchoStar.
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS
The following pages present the consolidating financial information for
EchoStar and its subsidiaries as of December 31, 1996 and 1997 and for each of
the three years in the period ended December 31, 1997. See Note 4 for a more
complete description of the subsidiary guarantors of each of the 1997 Notes, the
1996 Notes and the 1994 Notes. Because the formations of EchoStar (incorporated
in 1995), DBS Corp (incorporated in 1996), and ESBC (incorporated in 1996) were
all accounted for as reorganizations of entities under common control, the
consolidated statements of operations and cash flows of Dish, Ltd. for the year
ended December 31, 1995 also represent the consolidated statements of operations
and cash flows of EchoStar, DBS Corp and ESBC. Consolidating financial
information is presented for the following entities:
Consolidated Dish, Ltd. (referred to as "Dish")
ESBC Parent Company Only (referred to as "ESBC - PC")
Consolidating and eliminating adjustments (referred to as "C&E")
Consolidated ESBC (referred to as "ESBC")
DBS Corp Parent Company Only (referred to as "DBS Corp - PC")
Consolidated DBS Corp (referred to as "DBS Corp")
ECC Parent Company Only (referred to as "ECC - PC")
Other direct wholly-owned subs of ECC (referred to as "Other")
Consolidated ECC (referred to as "ECC")
F-24
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1996 (IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
----------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . $ 25 $ 14 $ - $ 39 $ - $ - $ 39 $ - $ - $ - $ 39
Marketable investment securities. . . . . . . - 19 - 19 - - 19 - - - 19
Trade accounts receivable, net. . . . . . . . 14 - - 14 - - 14 - - - 14
Inventories . . . . . . . . . . . . . . . . . 73 - - 73 - - 73 - - - 73
Subscriber acquisition costs, net . . . . . . 68 - - 68 - - 68 - - - 68
Other current assets. . . . . . . . . . . . . 19 - - 19 - - 19 1 3 - 23
----------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . 199 33 - 232 - - 232 1 3 - 236
Investment in subsidiary. . . . . . . . . . . - 3 ( 3) - - - - - - - -
Advances to affiliates, net . . . . . . . . . - 280 (135) 145 - (76) 69 - - (69) -
Restricted cash and marketable
investment securities. . . . . . . . . . . . 32 47 - 79 - - 79 - - - 79
Property and equipment, net . . . . . . . . . 500 - - 500 29 - 529 - 62 - 591
FCC authorizations, net . . . . . . . . . . . 12 - - 12 60 - 72 - - - 72
Other noncurrent assets . . . . . . . . . . . 88 17 - 105 - - 105 70 1 (13) 163
----------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . . . $831 $380 $(138) $1,073 $89 $(76) $1,086 $71 $66 $(82) $1,141
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . $ 41 $ - $ - $ 41 $ - $ - $ 41 $ - $ 1 $( 1) $ 41
Deferred revenue. . . . . . . . . . . . . . . 104 - - 104 - - 104 - - - 104
Accrued expenses. . . . . . . . . . . . . . . 41 - - 41 2 - 43 1 - ( 2) 42
Advances from affiliates, net . . . . . . . . 135 - (135) - 76 (76) - 2 64 (66) -
Current portion of long-term debt . . . . . . 11 - - 11 - - 11 - - - 11
----------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . 332 - (135) 197 78 (76) 199 3 65 (69) 198
Long term obligations, net of current portion:
Investment in subsidiaries. . . . . . . . . . - - - - 6 ( 6) - 7 - ( 7) -
1994 Notes. . . . . . . . . . . . . . . . . . 437 - - 437 - - 437 - - - 437
1996 Notes. . . . . . . . . . . . . . . . . . - 386 - 386 - - 386 - - - 386
Mortgages and other notes payable, net of
current portion. . . . . . . . . . . . . . . 52 - - 52 12 - 64 - - (12) 52
Long-term deferred satellite services
revenue and other long-term liabilities. . . 7 - - 7 - - 7 - - - 7
----------------------------------------------------------------------------------
Total long-term liabilities . . . . . . . . . . 496 386 - 882 18 ( 6) 894 7 - (19) 882
----------------------------------------------------------------------------------
Total liabilities . . . . . . . . . . . . . 828 386 (135) 1,079 96 (82) 1,093 10 65 (88) 1,080
Stockholder's equity (deficit). . . . . . . . . 3 (6) ( 3) (6) (7) 6 (7) 61 1 6 61
----------------------------------------------------------------------------------
Total liabilities and stockholder's
equity (deficit) . . . . . . . . . . . . . $831 $380 $(138) $1,073 $89 $(76) $1,086 $71 $66 $(82) $1,141
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
F-25
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING BALANCE SHEETS - AS OF DECEMBER 31, 1997 (IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
----------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . $ 36 $ 10 $ - $ 46 $ 16 $ - $ 62 $ 83 $ - $ - $ 145
Marketable investment securities . . . . . - - - - 4 - 4 271 - - 275
Trade accounts receivable, net . . . . . . 66 - - 66 - - 66 - - - 66
Inventories. . . . . . . . . . . . . . . . 23 - - 23 - - 23 - - - 23
Subscriber acquisition costs, net. . . . . 19 - - 19 - - 19 - - - 19
Other current assets . . . . . . . . . . . 8 - - 8 - - 8 10 3 (5) 16
----------------------------------------------------------------------------------
Total current assets. . . . . . . . . . . . . . 152 10 - 162 20 - 182 364 3 (5) 544
Advances to affiliates, net . . . . . . . . . . - 386 (194) 192 38 - 230 13 - (243) -
Restricted cash and marketable investment
securities . . . . . . . . . . . . . . . . . . 2 - - 2 186 - 188 - - - 188
Property and equipment, net . . . . . . . . . . 505 - - 505 64 - 569 - 306 - 875
FCC authorizations, net . . . . . . . . . . . . 12 - - 12 69 - 81 - 18 - 99
Other noncurrent assets . . . . . . . . . . . . 73 16 - 89 12 - 101 47 1 (49) 100
----------------------------------------------------------------------------------
Total assets . . . . . . . . . . . . . . . $ 744 $ 412 $(194) $ 962 $ 389 $ - $1,351 $ 424 $328 $(297) $1,806
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable . . . . . . . . . . $ 68 $ - $ - $ 68 $ - $ - $ 68 $ - $ - $ - $ 68
Deferred revenue . . . . . . . . . . . . . 122 - - 122 - - 122 - - 1 123
Accrued expenses . . . . . . . . . . . . . 72 - - 72 25 - 97 3 11 ( 9) 102
Advances from affiliates, net. . . . . . . 194 - (194) - - - - - 243 (243) -
Current portion of long-term debt. . . . . 15 - - 15 - - 15 - 3 - 18
----------------------------------------------------------------------------------
Total current liabilities . . . . . . . . . . . 471 - (194) 277 25 - 302 3 257 (251) 311
Long term obligations, net of current portion:
Investment in subsidiaries . . . . . . . . - 288 (288) - 314 (314) - 311 (311) -
1994 Notes . . . . . . . . . . . . . . . . 500 - - 500 - - 500 - - - 500
1996 Notes . . . . . . . . . . . . . . . . - 438 - 438 - - 438 - - - 438
1997 Notes . . . . . . . . . . . . . . . . - - - - 375 - 375 - - - 375
Mortgages and other notes payable,
net of current portion. . . . . . . . . . 41 - - 41 - - 41 - 57 ( 46) 52
Long-term deferred satellite services
revenue and other long-term liabilities . 20 - - 20 - - 20 - - - 20
----------------------------------------------------------------------------------
Total long-term liabilities . . . . . . . . . . 561 726 (288) 999 689 (314) 1,374 311 57 (357) 1,385
----------------------------------------------------------------------------------
Total liabilities. . . . . . . . . . . . . 1,032 726 (482) 1,276 714 (314) 1,676 314 314 (608) 1,696
12 1/8 Series B Senior Redeemable
Exchangeable Preferred Stock . . . . . . . . . - - - - - - - 199 - - 199
Stockholder's equity (deficit). . . . . . . . . (288) (314) 288 (314) (325) 314 (325) ( 89) 14 311 (89)
----------------------------------------------------------------------------------
Total liabilities and stockholder's
equity (deficit) . . . . . . . . . . . . $ 744 $ 412 $(194) $ 962 $ 389 $ - $1,351 $ 424 $328 $(297) $1,806
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
F-26
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
DISH ECC - PC C&E ECC
-----------------------------------------------
REVENUE:
DTH equipment sales and integration services . . . . . $ 36 $ - $ - $ 36
C-band and other . . . . . . . . . . . . . . . . . . . 112 - - 112
-----------------------------------------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . 148 - - 148
COSTS AND EXPENSES:
Cost of sales - DTH equipment and integration services 30 - - 30
Cost of sales - C-band and other . . . . . . . . . . . 85 - - 85
Advertising and other. . . . . . . . . . . . . . . . . 2 - - 2
General and administrative . . . . . . . . . . . . . . 36 - - 36
Depreciation and amortization. . . . . . . . . . . . . 3 - - 3
-----------------------------------------------
Total costs and expenses. . . . . . . . . . . . . . . . . . 156 - - 156
-----------------------------------------------
Operating loss. . . . . . . . . . . . . . . . . . . . . . . ( 8) - - ( 8)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . . . . 13 1 - 14
Interest expense, net of amounts capitalized . . . . . (24) - - (24)
Other. . . . . . . . . . . . . . . . . . . . . . . . . 1 - - 1
Equity in losses of subsidiaries . . . . . . . . . . . - (12) 12 -
-----------------------------------------------
Total other income (expense). . . . . . . . . . . . . . . . (10) (11) 12 ( 9)
-----------------------------------------------
Loss before income taxes. . . . . . . . . . . . . . . . . . (18) (11) 12 (17)
Income tax benefit (provision), net . . . . . . . . . . . . 6 - - 6
-----------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(12) $(11) $12 $(11)
-----------------------------------------------
-----------------------------------------------
F-27
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
----------------------------------------------------------------------------------
REVENUE:
DISH Network:
Subscription television services .. . . . . . $ 50 $ - $ - $ 50 $ - $ - $ 50 $ - $ - $ - $ 50
C-band and other . . . . . . . . .. . . . . . 8 - - 8 - - 8 - 2 - 10
----------------------------------------------------------------------------------
Total DISH Network . . . . . . . . . . . . . . 58 - - 58 - - 58 - 2 - 60
DTH equipment sales and integration services . 77 - - 77 - - 77 - 7 (6) 78
Satellite services . . . . . . . . . . . . . . 6 - - 6 - - 6 - - - 6
Other. . . . . . . . . . . . . . . . . . . . . 56 - - 56 - - 56 - 1 (2) 55
----------------------------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . 197 - - 197 - - 197 - 10 (8) 199
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses . . . . . . . . . 23 - - 23 - - 23 - - - 23
Customer service center and other . . . . . . 13 - - 13 - - 13 - 1 (1) 13
Satellite and transmission. . . . . . . . . . 7 - - 7 - - 7 - - - 7
----------------------------------------------------------------------------------
Total DISH Network operating expenses. . . . . 43 - - 43 - - 43 - 1 (1) 43
Cost of sales - DTH equipment and
integration services. . . . . . . . . . . . . 76 - - 76 - - 76 - 6 (6) 76
Cost of sales - C-band and other . . . . . . . 42 - - 42 - - 42 - - - 42
Marketing:
Subscriber promotion subsidies. . . . . . . . 35 - - 35 - - 35 - - (1) 34
Advertising and other . . . . . . . . . . . . 18 - - 18 - - 18 - - - 18
----------------------------------------------------------------------------------
Total marketing expenses. . . . . . . . . . . . 53 - - 53 - - 53 - - (1) 52
General and administrative . . . . . . . . . . 49 - - 49 - - 49 - 3 - 52
Amortization of subscriber acquisition costs . 16 - - 16 - - 16 - - - 16
Depreciation and amortization. . . . . . . . . 27 - - 27 - - 27 - - - 27
----------------------------------------------------------------------------------
Total costs and expenses . . . . . . . . . . . . 306 - - 306 - - 306 - 10 (8) 308
----------------------------------------------------------------------------------
Operating loss . . . . . . . . . . . . . . . . . (109) - - (109) - - (109) - - - (109)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . 4 10 - 14 - - 14 1 - - 15
Interest expense, net of amounts. . . . . . . ( 37) ( 24) - ( 61) ( 1) - ( 62) - (1) 1 ( 62)
capitalized
Equity in losses of subsidiaries . . . . . . . - ( 92) 92 - (101) 101 - (101) - 101 -
----------------------------------------------------------------------------------
Total other income (expense) . . . . . . . . . . ( 33) (106) 92 ( 47) (102) 101 ( 48) (100) (1) 102 ( 47)
----------------------------------------------------------------------------------
Loss before income taxes . . . . . . . . . . . . (142) (106) 92 (156) (102) 101 (157) (100) (1) 102 (156)
Income tax benefit (provision), net. . . . . . . 50 5 - 55 - - 55 ( 1) 1 - 55
----------------------------------------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . $( 92) $(101) $92 $(101) $(102) $101 $(102) $(101) $ - $102 $(101)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
F-28
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
----------------------------------------------------------------------------------
Revenue:
DISH Network:
Subscription television services. . . . . . . $ 299 $ - $ - $ 299 $ - $ - $ 299 $ - $ - $ - $ 299
Other . . . . . . . . . . . . . . . . . . . . 43 - - 43 - - 43 - 1 1 45
----------------------------------------------------------------------------------
Total DISH Network . . . . . . . . . . . . . . 342 - - 342 - - 342 - 1 1 344
DTH equipment sales and integration services . 90 - - 90 - - 90 - 15 (13) 92
Satellite services . . . . . . . . . . . . . . 11 - - 11 - - 11 - - - 11
C-band and other . . . . . . . . . . . . . . . 33 - - 33 - - 33 - 1 ( 4) 30
----------------------------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . . . . . 476 - - 476 - - 476 - 17 (16) 477
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses . . . . . . . . . 144 - - 144 - - 144 - - - 144
Customer service center and other . . . . . . 35 - - 35 - - 35 - 3 ( 3) 35
Satellite and transmission. . . . . . . . . . 14 - - 14 - - 14 - - - 14
----------------------------------------------------------------------------------
Total DISH Network operating expenses. . . . . 193 - - 193 - - 193 - 3 ( 3) 193
Cost of sales - DTH equipment and
integration services. . . . . . . . . . . . . 61 - - 61 - - 61 - 9 ( 8) 62
Cost of sales - C-band and other . . . . . . . 24 - - 24 - - 24 - 1 ( 1) 24
Marketing:
Subscriber promotion subsidies. . . . . . . . 149 - - 149 - - 149 - - ( 4) 145
Advertising and other . . . . . . . . . . . . 35 - - 35 - - 35 - - - 35
----------------------------------------------------------------------------------
Total marketing expenses . . . . . . . . . . . 184 - - 184 - - 184 - - ( 4) 180
General and administrative . . . . . . . . . . 66 - - 66 - - 66 1 2 - 69
Amortization of subscriber
acquisition costs. . . . . . . . . . . . . . 121 - - 121 - - 121 - - 1 122
Depreciation and amortization. . . . . . . . . 51 - - 51 - - 51 - - - 51
----------------------------------------------------------------------------------
Total costs and expenses . . . . . . . . . . . . 700 - - 700 - - 700 1 15 (15) 701
----------------------------------------------------------------------------------
Operating loss . . . . . . . . . . . . . . . . . (224) - - (224) - - (224) ( 1) 2 ( 1) (224)
Other Income (Expense):
Interest income. . . . . . . . . . . . . . . . . 3 2 - 5 8 - 13 11 - ( 7) 17
Interest expense, net of amounts
capitalized . . . . . . . . . . . . . . . . . . ( 68) ( 19) - ( 87) ( 18) - (105) - ( 5) 6 (104)
Other. . . . . . . . . . . . . . . . . . . . . . ( 2) - - ( 2) - - ( 2) - - - ( 2)
Equity in losses of subsidiaries. . . . . . . . - (291) 291 - (308) 308 - (323) - 323 -
----------------------------------------------------------------------------------
Total other income (expense) . . . . . . . . . . ( 67) (308) 291 ( 84) (318) 308 ( 94) (312) ( 5) 322 ( 89)
----------------------------------------------------------------------------------
Loss before income taxes . . . . . . . . . . . . (291) (308) 291 (308) (318) 308 (318) (313) ( 3) 321 (313)
Income tax benefit (provision), net. . . . . . . - - - - - - - - - - -
----------------------------------------------------------------------------------
Net loss . . . . . . . . . . . . . . . . . . . . $(291) $(308) $291 $(308) $(318) $308 $(318) $(313) $( 3) $321 $(313)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
F-29
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS)
DISH ECC - PC Other C&E ECC
-------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $( 12) $(11) $ - $ 12 $( 11)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Equity in (earnings) losses of subsidiaries. . . . . . . . . - 12 - (12) -
Depreciation and amortization. . . . . . . . . . . . . . . . 3 - - - 3
Deferred income tax benefit. . . . . . . . . . . . . . . . . ( 5) - - - ( 5)
Amortization of debt discount and deferred financing costs . 24 - - - 24
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 1 - - - 1
Changes in current assets and current liabilities, net . . . ( 33) (20) 20 - ( 33)
-------------------------------------------------------------------
Net cash flows from operating activities . . . . . . . . . . . ( 22) (19) 20 - ( 21)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . ( 3) (22) - - ( 25)
Sales of marketable investment securities. . . . . . . . . . . 34 7 - - 41
Purchases of restricted marketable investment securities . . . ( 15) - - - ( 15)
Purchases of property and equipment. . . . . . . . . . . . . . (114) - (20) - (134)
Offering proceeds and investment earnings placed in escrow . . ( 10) - - - ( 10)
Funds released from escrow accounts. . . . . . . . . . . . . . 122 - - - 122
Investment in convertible subordinated debentures from DBSI. . - ( 1) - - ( 1)
Investment in DBSC . . . . . . . . . . . . . . . . . . . . . . 5 ( 5) - - -
Long-term notes receivable from and investment in DBSC . . . . - (16) - - ( 16)
-------------------------------------------------------------------
Net cash flows from investing activities . . . . . . . . . . . 19 (37) (20) - ( 38)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock . . . . . . - 63 - - 63
-------------------------------------------------------------------
Net cash flows from financing activities . . . . . . . . . . . - 63 - - 63
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents . . . . . ( 3) 7 - - 4
Cash and cash equivalents, beginning of year . . . . . . . . . 18 - - - 18
-------------------------------------------------------------------
Cash and cash equivalents, end of year . . . . . . . . . . . . $ 15 $ 7 $ - $ - $ 22
-------------------------------------------------------------------
-------------------------------------------------------------------
F-30
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . $( 92) $(101) $ 92 $(101) $(102) $ 101 $(102) $(101) $ - $ 102 $(101)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Equity in (earnings) losses of subsidiaries . - 92 (92) - 101 (101) - 101 - (101) -
Depreciation and amortization . . . . . . . . 27 - - 27 - - 27 - - - 27
Amortization of subscriber acquisition costs. 16 - - 16 - - 16 - - - 16
Deferred income tax benefit . . . . . . . . . ( 45) ( 5) - ( 50) - - ( 50) - - - ( 50)
Amortization of debt discount and deferred
financing costs. . . . . . . . . . . . . . . 34 24 3 61 - - 61 - - - 61
Other, net. . . . . . . . . . . . . . . . . . 10 - - 10 - - 10 ( 2) - - 8
Changes in current assets and current
liabilities, net . . . . . . . . . . . . . . 152 (268) ( 3) (119) 70 - ( 49) 26 38 ( 4) 11
----------------------------------------------------------------------------------
Net cash flows from operating activities. . . . 102 (258) - (156) 69 - ( 87) 24 38 ( 3) ( 28)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities . - (138) - (138) - - (138) - - - (138)
Sales of marketable investment securities . . . - 120 - 120 - - 120 15 - - 135
Purchases of restricted marketable investment
securities . . . . . . . . . . . . . . . . . . ( 21) - - ( 21) - - ( 21) - - - ( 21)
Funds released from escrow and restricted cash
and marketable investment securities . . . . . 100 136 - 236 - - 236 - - - 236
Purchases of property and equipment . . . . . . (158) - - (158) ( 26) - (184) - (38) - (222)
Offering proceeds and investment earnings
placed in escrow . . . . . . . . . . . . . . . ( 11) (183) - (194) - - (194) - - - (194)
Payments received on convertible subordinated
debentures from SSET . . . . . . . . . . . . . 6 - - 6 - - 6 - - - 6
Long-term notes receivable from DBSC. . . . . . - - - - - - - ( 30) - - ( 30)
Long-term note receivable from DBS Corp . . . . - - - - - - - ( 12) - 12 -
Expenditures for FCC authorizations . . . . . . - - - - ( 55) - (55) - - - ( 55)
Other . . . . . . . . . . . . . . . . . . . . . - - - - - ( 6) - 3 ( 3)
----------------------------------------------------------------------------------
Net cash flows from investing activities. . . . ( 84) ( 65) - (149) ( 81) - (230) ( 33) (38) 15 (286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1996 Notes. . . . - 337 - 337 - - 337 - - - 337
Proceeds from note payable to ECC . . . . . . . - - - - 12 - 12 - - ( 12) -
Repayments of mortgage indebtedness and
notes payable. . . . . . . . . . . . . . . . . ( 8) - - ( 8) - - ( 8) - - - ( 8)
Stock options exercised . . . . . . . . . . . . - - - - - - - 2 - - 2
----------------------------------------------------------------------------------
Net cash flows from financing activities. . . . ( 8) 337 - 329 12 - 341 2 - ( 12) 331
----------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . 10 14 - 24 - - 24 ( 7) - - 17
Cash and cash equivalents, beginning of year. . 15 - - 15 - - 15 7 - - 22
----------------------------------------------------------------------------------
Cash and cash equivalents, end of year. . . . . $ 25 $ 14 $ - $ 39 $ - $ - $ 39 $ - $ - $ - $ 39
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
F-31
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. PARENT COMPANY ONLY AND CONSOLIDATION OF SUBSIDIARY GUARANTORS - CONTINUED
CONSOLIDATING STATEMENTS OF CASH FLOWS - YEAR ENDED DECEMBER 31, 1997
(IN MILLIONS)
DBS
ESBC- Corp- DBS ECC-
DISH PC C&E ESBC PC C&E CORP PC Other C&E ECC
-------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . $(291) $(308) $ 291 $(308) $(318) $ 308 $(318) $(313) $( 3) $ 321 $(313)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Equity in (earnings) losses of subsidiaries. . . - 291 (291) - 308 (308) - 323 - (323) -
Depreciation and amortization. . . . . . . . . . 51 - - 51 - - 51 - - - 51
Amortization of subscriber acquisition costs . . 121 - - 121 - - 121 - - - 121
Amortization of debt discount and deferred
financing costs . . . . . . . . . . . . . . . . 63 19 - 82 1 - 83 - - - 83
Other, net . . . . . . . . . . . . . . . . . . . 11 - - 11 - - 11 - - - 11
Changes in current assets and current
liabilities, net . . . . . . . . . . . . . . . 88 ( 71) - 17 (106) - ( 89) ( 18) 158 ( 4) 47
-------------------------------------------------------------------------------
Net cash flows from operating activities . . . . . 43 ( 69) - ( 26) (115) - (141) ( 8) 155 ( 6) -
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . - ( 5) - ( 5) ( 32) - ( 37) (271) - - (308)
Sales of marketable investment securities. . . . . - 23 - 23 29 - 52 - - - 52
Purchases of restricted marketable
investment securities . . . . . . . . . . . . . . ( 1) - - ( 1) - - ( 1) - - - ( 1)
Funds released from escrow and restricted
cash and marketable investment securities . . . . 31 48 - 79 41 - 120 - - - 120
Purchases of property and equipment. . . . . . . . ( 49) - - ( 49) ( 30) - ( 79) - (153) - (232)
Offering proceeds and investment earnings
placed in escrow. . . . . . . . . . . . . . . . . - - - - (228) - (228) - - - (228)
Other. . . . . . . . . . . . . . . . . . . . . . . - ( 1) - ( 1) - - ( 1) 8 ( 2) ( 6) ( 1)
-------------------------------------------------------------------------------
Net cash flows from investing activities . . . . . ( 19) 65 - 46 (220) - (174) (263) (155) ( 6) (598)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class A Common Stock - - - - - - - 63 - - 63
Net proceeds from issuance of 1997 Notes . . . . . - - - - 363 - 363 - - - 363
Net proceeds from issuance of 12 1/8 % .Series B
Senior Redeemable Exchangeable .Preferred . . . . - - - - - - - 193 - - 193
Net proceeds from issuance of 6 3/4 % Series C
Cumulative Convertible Preferred Stock. . . . . . - - - - - - - 97 - - 97
Repayment of note payable to ECC . . . . . . . . . - - - - ( 12) - ( 12) - - 12 -
Repayments of mortgage indebtedness
and notes payable . . . . . . . . . . . . . . . . ( 13) - - ( 13) - - ( 13) - - - ( 13)
Net proceeds from Class A Common Stock options
exercised and Class A Common Stock issued to
Employee . . . . . . . . . . . . . . . . . . . . - - - - - - - 1 - - 1
Stock Purchase Plan
-------------------------------------------------------------------------------
Net cash flows from financing activities . . . . . ( 13) - - ( 13) 351 - 338 354 - 12 704
-------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . 11 ( 4) - 7 16 - 23 83 - - 106
Cash and cash equivalents, beginning of year . . . 25 14 - 39 - - 39 - - - 39
-------------------------------------------------------------------------------
Cash and cash equivalents, end of year . . . . . . $ 36 $ 10 $ - $ 46 $ 16 $ - $ 62 $ 83 $ - $ - $ 145
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
F-32
ECHO SATELLITE
(A COMBINATION OF CERTAIN WHOLLY-OWNED SUBSIDIARIES OF ECHOSTAR COMMUNICATIONS
CORPORATION, AS DEFINED IN NOTE 1)
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. OPERATIONS IN GEOGRAPHIC AREAS
The Company sells certain of its products on a worldwide basis and has
operations in Europe and the Pacific Rim. Information about the Company's
operations in different geographic areas as of December 31, 1995, 1996 and
1997 and for the years then ended, is as follows (in thousands):
OTHER
UNITED STATES EUROPE INTERNATIONAL TOTAL
------------- -------- ------------- ----------
1995
- ----
Total revenue. . . . . . . . . . . $ 95,259 $ 31,351 $ 21,910 $ 148,520
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
Export sales . . . . . . . . . . . $ 6,317
-------------
-------------
Operating income (loss). . . . . . $ (7,895) $146 $ (257) $ (8,006)
------------- ---------- ----------
------------- ---------- ----------
Other income (expense), net. . . . $ (10,546)
----------
Net loss before income taxes . . . $ (18,552)
----------
----------
Identifiable assets. . . . . . . . $ 63,137 $ 10,088 $ 3,788 $ 77,013
------------- ---------- ----------
------------- ---------- ----------
Corporate assets . . . . . . . . . $ 482,283
----------
Total assets . . . . . . . . . . . $ 559,296
----------
----------
1996
- ----
Total revenue. . . . . . . . . . . $ 159,611 $ 26,984 $ 10,508 $ 197,103
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
Export sales . . . . . . . . . . . $1,536
-------------
-------------
Operating loss . . . . . . . . . . $(106,695) $( 1,274) $ (896) $ (108,865)
------------- ---------- ----------
------------- ---------- ----------
Other income (expense), net. . . . $ ( 46,743)
----------
Net loss before income taxes . . . $ (155,608)
----------
----------
Identifiable assets. . . . . . . . $ 836,597 $ 5,795 $ 1,871 $ 844,263
------------- ---------- ----------
------------- ---------- ----------
Corporate assets . . . . . . . . . $ 228,829
----------
Total assets . . . . . . . . . . . $1,073,092
----------
----------
1997
- ----
Total revenue. . . . . . . . . . . $ 446,461 $ 20,592 $ 8,849 $ 475,902
------------- ---------- ---------- ----------
------------- ---------- ---------- ----------
Export sales . . . . . . . . . . . $ 74,065
-------------
-------------
Operating loss . . . . . . . . . . $(222,692) $( 1,224) $ (402) $ (224,318)
------------- ---------- ----------
------------- ---------- ----------
Other income (expense), net. . . . $ (89,044)
----------
Net loss before income taxes . . . $ (313,362)
----------
----------
Identifiable assets. . . . . . . . $ 720,390 $ 5,696 $ 2,682 $ 728,768
------------- ---------- ----------
------------- ---------- ----------
Corporate assets . . . . . . . . . $ 314,135
----------
Total assets . . . . . . . . . . . $1,042,903
----------
----------
F-33