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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission file number 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
AS OF JULY 31, 1998, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
15,205,794 SHARES OF CLASS A COMMON STOCK AND 29,804,401 SHARES OF CLASS B
COMMON STOCK.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1997 and 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1998 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
1997 1998
---- ----
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $145,207 $259,571
Marketable investment securities. . . . . . . . . . . . . . . . . . . 275,307 131,289
Trade accounts receivable, net of allowance for
uncollectible accounts of $1,347 and $3,272,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,074 95,072
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,993 53,540
Subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . 18,869 1,964
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . 15,655 16,090
----------------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,105 557,526
Restricted Cash and Marketable Investment Securities:
Satellite escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . 73,233 24,284
Interest escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,284 90,599
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,245 2,245
----------------------------
Total restricted cash and marketable investment securities . . . . . . . . 187,762 117,128
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 874,859 990,395
FCC authorizations, net. . . . . . . . . . . . . . . . . . . . . . . . . . 99,388 103,682
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . 99,532 94,519
----------------------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,805,646 $1,863,250
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $67,701 $100,677
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 122,707 109,430
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 102,287 158,408
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 17,885 20,707
----------------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 310,580 389,222
Long-term obligations, net of current portion:
1994 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499,863 534,330
1996 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,512 467,005
1997 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 375,000
Mortgages and other notes payable, net of
current portion . . . . . . . . . . . . . . . . . . . . . . . . . . 51,846 53,807
Long-term deferred satellite services revenue
and other long-term liabilities . . . . . . . . . . . . . . . . . . 19,642 25,801
----------------------------
Total long-term obligations, net of current portion. . . . . . . . . . . . 1,384,863 1,455,943
----------------------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,695,443 1,845,165
12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock, $.01 par value, 900,000 shares
authorized; 200,000 and 212,239 shares issued and
outstanding, respectively; subject to mandatory
redemption on July 1, 2004 at a price of $1,000 per
share plus all accumulated and unpaid dividends . . . . . . . . . . 199,164 212,200
Commitments and Contingencies (Note 7)
Stockholders' Equity (Deficit):
Preferred Stock (Note 6). . . . . . . . . . . . . . . . . . . . . . . 121,132 125,216
Class A Common Stock, $.01 par value, 200,000,000 shares
authorized, 15,005,670 and 15,202,475 shares issued
and outstanding, respectively . . . . . . . . . . . . . . . . . . . 150 152
Class B Common Stock, $.01 par value, 100,000,000 shares
authorized, 29,804,401 shares issued and outstanding. . . . . . . . 298 298
Class C Common Stock, $.01 par value, 100,000,000 shares
authorized, none outstanding. . . . . . . . . . . . . . . . . . . . - -
Common Stock Warrants . . . . . . . . . . . . . . . . . . . . . . . . 12 12
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 226,462 229,926
Accumulated other comprehensive loss (Note 2) . . . . . . . . . . . . (19) -
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (436,996) (549,719)
----------------------------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . . (88,961) (194,115)
----------------------------
Total liabilities and stockholders' equity (deficit). . . . . . . . $1,805,646 $1,863,250
----------------------------
----------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
1
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
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1997 1998 1997 1998
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REVENUE:
DISH Network:
Subscription television services ................... $ 62,858 $ 151,527 $ 110,908 $ 280,068
Other .............................................. 12,698 3,508 21,392 10,143
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Total DISH Network ................................... 75,556 155,035 132,300 290,211
DTH equipment sales and integration services ......... 13,713 80,445 16,067 147,839
Satellite services ................................... 2,045 5,774 4,210 10,369
C-band and other ..................................... 7,377 4,584 15,638 11,858
------------------------- -------------------------
Total revenue ............................................. 98,691 245,838 168,215 460,277
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ........................ 31,505 69,388 54,575 133,197
Customer service center and other .................. 5,964 14,380 12,435 26,115
Satellite and transmission ......................... 3,452 5,460 6,234 10,712
------------------------- -------------------------
Total DISH Network operating expenses ................ 40,921 89,228 73,244 170,024
Cost of sales - DTH equipment and integration ........ 12,213 53,895 14,699 101,402
services
Cost of sales - C-band and other ..................... 5,127 3,282 11,135 9,224
Marketing:
Subscriber promotion subsidies ..................... 17,871 58,205 31,013 102,170
Advertising and other .............................. 4,038 9,339 7,318 17,592
------------------------- -------------------------
Total marketing expenses ............................. 21,909 67,544 38,331 119,762
General and administrative ........................... 15,542 23,488 31,648 43,182
Amortization of subscriber acquisition costs ......... 33,268 5,886 61,418 16,905
Depreciation and amortization ........................ 12,732 18,759 25,357 37,187
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Total costs and expenses .................................. 141,712 262,082 255,832 497,686
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Operating loss ............................................ (43,021) (16,244) (87,617) (37,409)
Other Income (Expense):
Interest income ...................................... 1,571 7,898 3,343 16,832
Interest expense, net of amounts capitalized ......... (22,197) (36,546) (42,043) (73,920)
Other ................................................ (117) (713) (294) (823)
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Total other income (expense) .............................. (20,743) (29,361) (38,994) (57,911)
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Loss before income taxes .................................. (63,764) (45,605) (126,611) (95,320)
Income tax provision, net ................................. (25) (112) (44) (283)
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Net loss .................................................. (63,789) (45,717) (126,655) (95,603)
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------------------------- -------------------------
8% Series A Cumulative Preferred Stock dividends .......... (301) (301) (602) (602)
12 1/8 % Series B Senior Redeemable Exchangeable
Preferred Stock dividends payable in-kind ............... - (6,615) - (13,036)
Accretion of 6 3/4 % Series C Cumulative Convertible
Preferred Stock.......................................... - (1,761) - (3,482)
------------------------- -------------------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ..................... $ (64,090) $ (54,394) $(127,257) $(112,723)
------------------------- -------------------------
------------------------- -------------------------
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding .............. 41,604 44,937 41,265 44,874
------------------------- -------------------------
------------------------- -------------------------
Basic and diluted loss per share .......................... $ (1.54) $ (1.21) $ (3.08) $ (2.51)
------------------------- -------------------------
------------------------- -------------------------
See accompanying Notes to Condensed Consolidated Financial Statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------
1997 1998
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................................ $(126,655) $ (95,603)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization .............................................................. 25,357 37,187
Amortization of subscriber acquisition costs ............................................... 61,418 16,905
Amortization of debt discount and deferred financing costs ................................. 38,731 56,387
Change in reserve for excess and obsolete inventory ........................................ 1,987 17
Change in long-term deferred satellite services revenue and other long-term liabilities .... 5,905 6,159
Other, net ................................................................................. (311) 2,245
Changes in current assets and current liabilities, net ..................................... (15,623) (3,864)
------------------------
Net cash flows from operating activities ........................................................ (9,191) 19,433
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ................................................... (4,706) (253,412)
Sales of marketable investment securities ....................................................... 18,561 397,440
Purchases of restricted marketable investment securities ........................................ (1,645) -
Funds released from escrow and restricted cash and marketable investment securities ............. 72,975 74,735
Offering proceeds and investment earnings placed in escrow ...................................... (221,654) (4,081)
Purchases of property and equipment ............................................................. (67,104) (110,149)
Issuance of note receivable ..................................................................... - (6,200)
Payments received on note receivable ............................................................ - 3,170
Other ........................................................................................... (1,107) 393
------------------------
Net cash flows from investing activities ........................................................ (204,680) 101,896
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 1997 Notes ........................................................ 362,500 -
Repayments of mortgage indebtedness and notes payable ........................................... (5,551) (8,167)
Net proceeds from Class A Common Stock options exercised and Class A Common Stock issued to
Employee Stock Purchase Plan .................................................................. 543 1,202
------------------------
Net cash flows from financing activities ........................................................ 357,492 (6,965)
------------------------
Net increase in cash and cash equivalents ....................................................... 143,621 114,364
Cash and cash equivalents, beginning of period .................................................. 39,231 145,207
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Cash and cash equivalents, end of period ........................................................ $ 182,852 $ 259,571
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------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest ....................................................................... $ 16,632 $ 17,868
Accrued capital expenditures ............................................................... 32,950 16,050
Satellite vendor financing ................................................................. - 12,950
8% Series A Cumulative Preferred Stock dividends ........................................... 602 602
12 1/8 % Series B Senior Redeemable Exchangeable Preferred Stock dividends payable in-kind . - 13,036
Accretion of 6 3/4 % Series C Cumulative Convertible Preferred Stock ....................... - 3,482
The purchase price of DBSC was allocated as follows in the related purchase accounting:
EchoStar III satellite under construction ............................................. 51,241 -
FCC authorizations .................................................................... 16,651 -
Notes receivable from DBSC, including accrued interest of $3,382 ...................... (49,382) -
Investment in DBSC .................................................................... (4,044) -
Accounts payable and accrued expenses ................................................. (1,974) -
Other notes payable ................................................................... (500) -
Common stock and additional paid-in capital ........................................... (11,992) -
See accompanying Notes to Condensed Consolidated Financial Statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, "EchoStar" or the "Company") include three interrelated
business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1998,
EchoStar had approximately 1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("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 DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to provide
consumers with a fully competitive alternative to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the three and six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in EchoStar's Annual Report on Form 10-K for the
year ended December 31, 1997. Certain prior year amounts have been reclassified
to conform with the current year presentation.
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.
4
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
BASIC AND DILUTED LOSS PER SHARE
As of June 30, 1997 and 1998, options to purchase approximately 1,423,000
and 1,685,000 shares of Class A Common Stock were outstanding, respectively.
Common stock equivalents (employee stock options and warrants) are excluded from
the calculation of diluted loss per share as they are antidilutive. Securities
which are convertible into shares of Class A Common Stock (8% Series A
Cumulative Preferred Stock and 6 3/4% Series C Cumulative Convertible Preferred
Stock) also are excluded from the calculation of diluted loss per share as they
are antidilutive. As of June 30, 1997 and 1998, approximately 1,617,000 shares
of Class A Common Stock were issuable upon conversion of the 8% Series A
Cumulative Preferred Stock. In addition, as of June 30, 1998, approximately
4,715,000 shares of Class A Common Stock were issuable upon conversion of the 6
3/4% Series C Cumulative Convertible Preferred Stock.
COMPREHENSIVE INCOME
EchoStar adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") effective as of the first
quarter of 1998. FAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components, however it has no impact on
the Company's net income or stockholders' equity. The components of
comprehensive loss, net of tax, are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- --------------------------
1997 1998 1997 1998
-------------------------- --------------------------
(Unaudited) (Unaudited)
Net loss......................................... $(63,789) $(45,717) $(126,655) $(95,603)
Change in unrealized gain (loss) on
available-for-sales securities................. 1 - - 19
-------- -------- --------- --------
Comprehensive loss............................... $(63,788) $(45,717) $(126,655) $(95,584)
-------- -------- --------- --------
-------- -------- --------- --------
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gain-on-available for sale securities, net of deferred taxes.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
EchoStar Receiver Systems........................ $ 7,649 $25,967
DBS receiver components.......................... 12,506 24,254
Consigned DBS receiver components................ 3,122 4,135
Finished goods - analog DTH equipment............ 2,116 1,959
Spare parts and other............................ 1,440 1,082
Reserve for excess and obsolete inventory........ (3,840) (3,857)
--------------------
$ 22,993 $53,540
--------------------
--------------------
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
LIFE DECEMBER 31, JUNE 30,
(IN YEARS) 1997 1998
--------- -----------------------
(Unaudited)
EchoStar I........................ 12 $ 201,607 $ 201,607
EchoStar II....................... 12 228,694 228,694
EchoStar III...................... 12 - 234,083
Furniture, fixtures and equipment. 2-12 92,264 108,546
Buildings and improvements........ 7-40 28,101 41,356
Land.............................. - 6,356 6,670
Tooling and other................. 2 4,336 5,182
Vehicles.......................... 7 1,320 1,290
Construction in progress.......... - 398,142 285,690
------------------------
Total property and equipment. 960,820 1,113,118
Accumulated depreciation.......... (85,961) (122,723)
------------------------
Property and equipment, net....... $ 874,859 $ 990,395
------------------------
------------------------
Construction in progress consists of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
--------------------------
(Unaudited)
Progress amounts for satellite construction, launch,
launch insurance and capitalized interest:
EchoStar III................................ $234,083 $ -
EchoStar IV................................. 119,853 208,450
Other............................................ 44,206 77,240
-----------------------
$398,142 $285,690
-----------------------
-----------------------
EchoStar III, which was launched in October 1997, commenced commercial
operation in January 1998. EchoStar IV, which was launched in May 1998, is
expected to commence commercial operation in the third quarter of 1998.
5. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
------------------------
(Unaudited)
Accrued expenses.............................. $ 31,415 $ 46,488
Accrued royalties and copyright............... 21,573 37,975
Accrued programming........................... 20,018 25,516
Accrued marketing expenses.................... 4,660 24,375
Accrued interest.............................. 24,621 24,054
---------------------
$ 102,287 $158,408
---------------------
---------------------
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
6. PREFERRED STOCK
Preferred Stock consists of the following (in thousands, except share data):
DECEMBER 31, JUNE 30,
1997 1998
-----------------------
(Unaudited)
Preferred Stock, 20,000,000 shares authorized
(inclusive of 900,000 shares designated as Series
B Preferred Stock):
8% Series A Cumulative Preferred Stock,
1,616,681 shares issued and outstanding,
including cumulative accrued dividends of
$4,551 and $5,153, respectively.............. $ 19,603 $ 20,205
6 3/4% Series C Cumulative Convertible
Preferred Stock, 2,300,000 shares issued and
outstanding.................................. 101,529 105,011
---------------------
Total Preferred Stock.......................... $ 121,132 $ 125,216
---------------------
---------------------
7. COMMITMENTS 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 is vigorously defending against the
counterclaims. The case has been set for trial commencing March 1999, but that
date could be postponed.
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.
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
In November 1998 and 1999, certain meteoroid events will occur as the
earth's orbit passes through the particulate trail of Comet 55P (Tempel-Tuttle).
These meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites, including EchoStar's DBS satellites. EchoStar is presently
evaluating the potential effects that these meteoroid events may have on its DBS
satellites. At this time, EchoStar has not finally determined the impact, if
any, these meteoroid events could have on EchoStar's DBS satellites. However,
many of the most sophisticated satellite operators have assessed the risk of
satellite damage as very small.
8. SUBSEQUENT EVENTS
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data
services to the continental United States, Alaska and Hawaii from the 119
DEG. West Longitude ("WL") orbital location. Following launch and deployment
of EchoStar IV, EchoStar I was expected to be relocated from its current
position at 119 DEG. WL to the 148 DEG. WL orbital location. As a result of
anomalies described below, EchoStar IV has instead been moved to the 148 DEG.
WL orbital location where it is expected to provide local, educational,
foreign language and other niche service to customers in the Western United
States. EchoStar I and EchoStar II will remain at 119 DEG. WL and will
continue to provide DISH Network service without interruption or change.
As previously announced, the south solar array on EchoStar IV did not
properly deploy, resulting in a reduction of power available to operate the
satellite. While final evaluations have not been completed, it now appears
likely that this anomaly will limit EchoStar to operation of a maximum of 22
transponders on the satellite. The number of available transponders will
decrease over time, but based on existing data approximately 16 transponders
should be available for the full planned 12 year life of the satellite absent
additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has resulted in
the failure of four primary transponders (transponders 5, 6, 9 and 10), and two
spare transponders on the satellite. The cause of this anomaly has not yet been
established. EchoStar recently received notification from the manufacturer of
the satellite, Lockheed Martin, that several transponders, in addition to those
which have failed, are not recommended for use until the root cause of the
anomaly has been determined and corrective procedures, if possible, are
implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the total
of 32 frequencies at the 148 DEG. WL orbital location, including frequencies 5,
6, 9 and 10, which correspond to the failed transponders. Consequently, while
power continues to be available to operate 22 transponders on the satellite, to
fully utilize the remaining available capacity of the satellite, EchoStar will
need to file an application with the FCC to obtain authorization to operate
transponders which correspond to frequencies which are not currently assigned to
EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar IV at
148 DEG. WL on a permanent basis. FCC rules require that DBS satellites
positioned at 148 DEG. WL also provide service to Alaska and Hawaii. In
April 1998, EchoStar received a waiver from the FCC with respect to this
obligation because EchoStar planned to provide DBS service to those states
via EchoStar IV from the 119 DEG. WL orbital location. As a result of moving
EchoStar IV to the 148 DEG. WL orbital location, EchoStar will not be able to
provide DBS service to Alaska and Hawaii from 119 DEG. WL and probably will
not be able to fulfill its original obligation to provide DBS service to
Alaska and Hawaii from 148 DEG. WL. Consequently, EchoStar will probably need
to obtain a waiver of its obligation to provide service to Alaska and Hawaii
in connection with its application to operate EchoStar IV at 148 DEG. WL on a
permanent basis.
While the FCC has typically shown flexibility when satellite failures
occur, there can be no assurance that EchoStar's request will be granted.
Further, it is likely that EchoStar will encounter opposition from certain
parties, including those attempting to enforce the obligation to serve Alaska
and Hawaii. To minimize potential opposition, EchoStar intends to enter into
an agreement with a third-party to provide DTH programming services to Alaska
and Hawaii on an interim basis on an FSS satellite. EchoStar also intends to
construct and launch
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS- CONTINUED
(UNAUDITED)
a replacement satellite at 119 DEG. WL which would provide service to Alaska and
Hawaii. If the FCC were to deny EchoStar's request, EchoStar's ability to
provide DBS service from EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in the
near future. The Company expects to use insurance proceeds, together with other
funds, to launch a new DBS satellite to its 119 DEG. WL orbital location in
approximately three years or less. EchoStar also expects to file an insurance
claim with respect to EchoStar III, which was launched October 5, 1997. Certain
of EchoStar III's electric power converters ("EPC") are operating at
temperatures slightly outside of engineering specifications. The high EPC
temperatures may require certain transponders on EchoStar III to be turned off
for several weeks during summer and winter solstice seasons to avoid
overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its satellite
assets that are required because of lost transmission capacity caused by these
anomalies. However, no assurance can be provided as to the ultimate amount that
may be received from these insurance claims. EchoStar will continue to evaluate
the operating performance of EchoStar III and EchoStar IV and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY ECHOSTAR OR BY OFFICERS,
DIRECTORS OR EMPLOYEES OF ECHOSTAR 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 ECHOSTAR 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: A TOTAL OR PARTIAL LOSS OF A SATELLITE
DUE TO OPERATIONAL FAILURES, SPACE DEBRIS OR OTHERWISE; A DECREASE IN SALES OF
DIGITAL EQUIPMENT AND RELATED SERVICES TO INTERNATIONAL DIRECT-TO-HOME ("DTH")
SERVICE PROVIDERS; A DECREASE IN DISH NETWORK SUBSCRIBER GROWTH; AN INCREASE IN
SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; AN UNEXPECTED
PRODUCT SHORTAGE; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR DISTANT
BROADCAST NETWORK SIGNALS; LOWER THAN EXPECTED DEMAND FOR ECHOSTAR'S DELIVERY OF
LOCAL BROADCAST NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE
FAILURE OF THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; THE INABILITY OF
ECHOSTAR TO RETAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS
COMMISSION ("FCC"); AN INCREASE IN 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; THE OUTCOME OF ANY
LITIGATION IN WHICH ECHOSTAR MAY BE INVOLVED; GENERAL BUSINESS AND ECONOMIC
CONDITIONS; AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN ECHOSTAR'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.
OVERVIEW
The operations of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, "EchoStar" or the "Company") include three
interrelated business units:
- THE DISH NETWORK - a DBS subscription television service in the
United States. As of June 30, 1998, EchoStar had approximately
1.4 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("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 DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV"), digital satellite receivers, digital
broadcast operations center, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the U.S. to provide
consumers with a fully competitive alternative to cable television service.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
RECENT DEVELOPMENTS
SATELLITE ANOMALIES
EchoStar IV was launched on May 8, 1998 from the Baikonur Cosmodrome,
Kazakhstan and was originally expected to provide video, audio and data services
to the continental United States, Alaska and Hawaii from the 119 DEG. West
Longitude ("WL") orbital location. Following launch and deployment of EchoStar
IV, EchoStar I was expected to be relocated from its current position at 119
DEG. WL to the 148 DEG. WL orbital location. As a result of anomalies described
below, EchoStar IV has instead been moved to the 148 DEG. WL orbital location
where it is expected to provide local, educational, foreign language and other
niche service to customers in the Western United States. EchoStar I and
EchoStar II will remain at 119 DEG. WL and will continue to provide DISH Network
service without interruption or change.
As previously announced, the south solar array on EchoStar IV did
not properly deploy, resulting in a reduction of power available to operate
the satellite. While final evaluations have not been completed, it now
appears likely that this anomaly will limit EchoStar to operation of a
maximum of 22 transponders on the satellite. The number of available
transponders will decrease over time, but based on existing data
approximately 16 transponders should be available for the full planned 12
year life of the satellite absent additional failures.
An unrelated anomaly discovered subsequent to June 30, 1998 has
resulted in the failure of four primary transponders (transponders 5, 6, 9 and
10), and two spare transponders on the satellite. The cause of this anomaly has
not yet been established. EchoStar recently received notification from the
manufacturer of the satellite, Lockheed Martin, that several transponders, in
addition to those which have failed, are not recommended for use until the root
cause of the anomaly has been determined and corrective procedures, if possible,
are implemented to avoid further failures.
While EchoStar IV is equipped with 32 transponders, EchoStar is only
licensed by the Federal Communications Commission ("FCC") to use 24 of the total
of 32 frequencies at the 148 DEG. WL orbital location, including frequencies 5,
6, 9 and 10, which correspond to the failed transponders. Consequently, while
power continues to be available to operate 22 transponders on the satellite, to
fully utilize the remaining available capacity of the satellite, EchoStar will
need to file an application with the FCC to obtain authorization to operate
transponders which correspond to frequencies which are not currently assigned to
EchoStar by the FCC.
EchoStar will also need to obtain FCC approval to operate EchoStar
IV at 148 DEG. WL on a permanent basis. FCC rules require that DBS
satellites positioned at 148 DEG. WL also provide service to Alaska and
Hawaii. In April 1998, EchoStar received a waiver from the FCC with respect
to this obligation because EchoStar planned to provide DBS service to those
states via EchoStar IV from the 119 DEG. WL orbital location. As a result of
moving EchoStar IV to the 148 DEG. WL orbital location, EchoStar will not be
able to provide DBS service to Alaska and Hawaii from 119 DEG. WL and
probably will not be able to fulfill its original obligation to provide DBS
service to Alaska and Hawaii from 148 DEG. WL. Consequently, EchoStar will
probably need to obtain a waiver of its obligation to provide service to
Alaska and Hawaii in connection with its application to operate EchoStar IV
at 148 DEG. WL on a permanent basis.
While the FCC has typically shown flexibility when satellite
failures occur, there can be no assurance that EchoStar's request will be
granted. Further, it is likely that EchoStar will encounter opposition from
certain parties, including those attempting to enforce the obligation to
serve Alaska and Hawaii. To minimize potential opposition, EchoStar intends
to enter into an agreement with a third-party to provide DTH programming
services to Alaska and Hawaii on an interim basis on an FSS satellite.
EchoStar also intends to construct and launch a replacement satellite at 119
DEG. WL which would provide service to Alaska and Hawaii. If the FCC were to
deny EchoStar's request, EchoStar's ability to provide DBS service from
EchoStar IV would be significantly reduced.
EchoStar will file an insurance claim with respect to EchoStar IV in
the near future. The Company expects to use insurance proceeds, together with
other funds, to launch a new DBS satellite to its 119 DEG. WL orbital location
in approximately three years or less. EchoStar also expects to file an
insurance claim with respect to EchoStar III,
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
which was launched October 5, 1997. Certain of EchoStar III's electric power
converters ("EPC") are operating at temperatures slightly outside of engineering
specifications. The high EPC temperatures may require certain transponders on
EchoStar III to be turned off for several weeks during summer and winter
solstice seasons to avoid overheating.
Based on information currently available, management has evaluated the
potential financial statement impact of these satellite anomalies in accordance
with its stated accounting policies. The Company has not completed its
assessment of the impairment of these satellites, but currently believes
insurance proceeds will be sufficient to offset any write-downs of its satellite
assets that are required because of lost transmission capacity caused by these
anomalies. However, no assurance can be provided as to the ultimate amount that
may be received from these insurance claims. EchoStar will continue to evaluate
the operating performance of EchoStar III and EchoStar IV and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
PRIMETIME 24
Section 119 of the Satellite Home Viewer Act ("SHVA") authorizes
EchoStar to sell satellite delivered network signals (ABC, NBC, CBS Fox, etc.)
to EchoStar subscribers, but only if those subscribers qualify as "unserved"
households as that term is defined in the SHVA. Historically, EchoStar obtained
broadcast network signals for distribution to its subscribers through PrimeTime
24, Joint Venture ("PrimeTime 24"). PrimeTime 24 also distributes network
signals to certain of EchoStar's competitors in the satellite industry.
Recently, a federal court in Florida issued a nationwide injunction in
CBS INC., FOX BROADCASTING CO., ET. AL. V. PRIMETIME 24, JOINT VENTURE, NO.
96-3650-CIV-NESBITT (S.D. FLA. JULY 10, 1998), severely restricting the ability
of PrimeTime 24 and its distributors to sell Fox and CBS programming, and
requiring the disconnection of significant numbers of existing PrimeTime 24
subscribers nationwide by early October 1998. The order also imposed other
obligations on PrimeTime 24 and its distributors with respect to future sales of
Fox and CBS programming nationwide. Additionally, in a federal court suit in
North Carolina, ABC, INC., V. PRIMETIME 24, JOINT VENTURE, NO. 1:97CV00090
(M.D.N.C. JULY 16, 1998), a judge recently granted summary judgement to ABC
severely restricting the ability of PrimeTime 24 to sell ABC programming in
Raleigh-Durham.
As a result of: (a) these rulings; (b) EchoStar's determination to
sell local network channels back into the area from which they originate; (c)
1997 adjustments to copyright royalties payable in connection with delivery of
network signals by satellite; and (d) a number of other regulatory, political,
legal, contractual and business factors, during July 1998, EchoStar ceased
delivering PrimeTime 24 programming, and began uplinking and distributing
network signals directly. EchoStar has also implemented Section 119 compliance
procedures which will materially restrict the market for the sale of network
signals by EchoStar. It is also possible that some or all of the networks,
and/or their affiliates, will bring copyright infringement actions against
EchoStar, similar to those described above, in the near future. In the event of
a decision adverse to EchoStar in any such litigation, significant damage awards
and additional material restrictions on the sale of network signals by EchoStar
could result. Among other things, EchoStar may be required to terminate
delivery of network signals to a material portion of its subscriber base. The
compliance program implemented by EchoStar, and any further restrictions on sale
of network channels imposed in the future, may result in decreases in subscriber
activations and subscription television services revenue and an increase in
subscriber churn.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1997.
REVENUE. Total revenue for the three months ended June 30, 1998 was
$246 million, an increase of $147 million or 149%, as compared to total revenue
for the three months ended June 30, 1997 of $99 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth combined
with increased revenue from EchoStar's Technology business unit. EchoStar
expects that its revenues will continue to increase as
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
the number of DISH Network subscribers increases. Consistent with the increases
in total revenue and the number of DISH Network subscribers during the three
months ended June 30, 1998, EchoStar experienced a corresponding increase in
trade accounts receivable at June 30, 1998.
DISH Network subscription television services revenue totaled $152
million for the three months ended June 30, 1998, an increase of $89 million, or
141% compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the three months ended June
30, 1998 increased approximately 160%, as compared to the same period in 1997.
Monthly revenue per subscriber approximated $39 during each of the three-month
periods ended June 30, 1998 and 1997. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. DISH Network subscription
television services revenue will continue to increase to the extent EchoStar is
successful in increasing the number of DISH Network subscribers.
For the three months ended June 30, 1998, DTH equipment sales and
integration services totaled $80 million, an increase of $66 million compared to
the three months ended June 30, 1997. DTH equipment sales consist of sales of
digital set-top boxes and other digital satellite broadcasting equipment by
EchoStar to international DTH service operators. EchoStar currently has
agreements to provide equipment to DTH service operators in Spain and Canada.
Sales pursuant to these agreements totaled $74 million for the three months
ended June 30, 1998, an increase of $62 million, as compared to $12 million for
the three months ended June 30, 1997. Revenue for the three months ended June
30, 1998 primarily related to sales of digital set-top boxes and other equipment
while revenue for the same period in 1997 resulted from the provision of
integration services. The increase in DTH equipment sales and integration
services revenue was primarily attributable to an increase in the volume of
set-top boxes sold.
A substantial portion of EchoStar's Technology revenues have resulted
from sales to two DTH providers. As a result, EchoStar's Technology business
currently is economically dependent on these two DTH providers. EchoStar's
future revenue from the sale of DTH equipment and integration services in
international markets depends largely on the success of these DTH operators and
continued demand for EchoStar's digital set-top boxes. Due to several factors,
EchoStar expects that its DTH equipment and integration services revenue may
decline during the third and fourth quarters of 1998 by as much as 30% to 40% as
compared to such revenue reported during the first and second quarters of 1998.
These factors include an expected decrease in demand resulting from the
fulfillment of initial stock orders combined with a decrease in the sales price
of digital set-top boxes due to increased competition from other providers of
DTH equipment. Further, during July 1998 Telefonica S.A. ("Telefonica"), one of
the two DTH service providers described above, announced its intention to merge
with Sogecable ("Canal Plus Satellite"), one of its primary competitors. In
addition to providing competitive DTH services in Spain, the Canal Plus system
in Spain has more set-top boxes in the field than Telefonica, and its
conditional access and compression systems are not compatible with the equipment
manufactured by EchoStar for Telefonica. EchoStar can not yet determine the
possible impact that such a merger might have on future sales to Telefonica.
EchoStar has binding purchase orders from Telefonica for additional 1998 and
1999 deliveries of DTH equipment. While EchoStar continues to actively pursue
additional distribution and integration service opportunities, no assurance can
be given that any such additional negotiations will be successful.
Satellite services revenue totaled $6 million for the three months
ended June 30, 1998, an increase of $4 million as compared to the same period in
1997. These revenues include, among other things, fees charged to content
providers for signal carriage and revenues earned from business television
("BTV") customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $89 million for the three months ended June 30, 1998, an increase of $48
million as compared to the same period in 1997. The increase in DISH Network
operating expenses was consistent with, and primarily attributable to, the
increase in the number of DISH Network subscribers. For the three months ended
June 30, 1998, DISH Network operating expenses represented 59% of subscription
television services revenue compared to 65% of subscription television revenue
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
during the corresponding period in 1997. While EchoStar expects DISH Network
operating expenses as a percentage of subscription television services revenue
to approximate this level in future periods, there can be no assurance that this
expense to revenue ratio will not increase.
Subscriber-related expenses totaled $69 million for the three months
ended June 30, 1998, an increase of $37 million compared to the same period in
1997. Such expenses, which include programming expenses, copyright royalties,
residuals payable to retailers and distributors, and billing, lockbox and other
variable subscriber expenses, totaled 46% of subscription television services
revenues for the three months ended June 30, 1998, compared to 50% of
subscription television services revenues for the three months ended June 30,
1997. The decrease in subscriber-related expenses as a percentage of
subscription television services revenue resulted primarily from a decrease in
programming expenses, which resulted from a change in product mix combined with
price discounts received from certain content providers.
Customer service center and other expenses principally consist of
costs incurred in the operation of EchoStar's DISH Network customer service
center, such as personnel and telephone expenses, as well as subscriber
equipment installation and other operating expenses. Customer service center
and other expenses totaled $14 million for the three months ended June 30, 1998,
an increase of $8 million as compared to the three months ended June 30, 1997.
The increase in customer service center and other expenses resulted from
increased personnel expenses to support the growth of the DISH Network.
Customer service center and other expenses totaled 9% of subscription television
services revenue during each of the three-month periods ended June 30, 1998 and
1997. While EchoStar expects customer service center and other expenses as a
percentage of subscription television services revenue to approximate this level
for the remainder of 1998, there can be no assurance that this expense to
revenue ratio will not increase.
Satellite and transmission expenses include expenses associated with
the operation of EchoStar's digital broadcast center, contracted satellite
tracking, telemetry and control ("TT&C") services, and in-orbit insurance on
EchoStar's DBS satellites. Satellite and transmission expenses increased $2
million during the three months ended June 30, 1998, as compared to the same
period during 1997. This increase resulted from higher TT&C services expenses
and other digital broadcast center operating expenses due to an increase in the
number of operational EchoStar satellites. EchoStar 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,
EchoStar expects that such costs as a percentage of DISH Network revenue may
decline.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $54 million for the three
months ended June 30, 1998, an increase of $42 million, as compared to the three
months ended June 30, 1997. This increase is consistent with the increase in
DTH equipment revenue. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators.
MARKETING EXPENSES. Marketing expenses totaled $68 million for the
three months ended June 30, 1998, an increase of $46 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Subscriber
promotion subsidies include the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar Receiver Systems, activation allowances
paid to retailers, and other promotional incentives. EchoStar recognizes
subscriber promotion subsidies as incurred. These expenses totaled $58 million
for the three months ended June 30, 1998, an increase of $40 million over the
same period in 1997. This increase resulted from increased subscriber
activations and the immediate recognition of all subscriber promotion subsidies
incurred in 1998, whereas during the three-month period ended June 30, 1997, a
portion of such expenses were initially deferred and amortized over the related
prepaid subscription term (generally one year). This accelerated expense
recognition resulted from the introduction of the "1997 Promotion" in June 1997.
The 1997 Promotion maintained the suggested retail price for a standard EchoStar
Receiver System at $199, but eliminated the requirement for the coincident
purchase of an extended subscription commitment. For the three months ended
June 30, 1998, EchoStar's subscriber acquisition costs, inclusive
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
of acquisition marketing expenses, totaled $66 million (approximately $280 per
new subscriber activation). Comparatively, EchoStar's subscriber acquisition
costs, inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $43 million (in excess of $300 per new subscriber
activation) during the same period in 1997. The decrease in EchoStar's
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from decreases in the manufactured cost of EchoStar
Receiver Systems. EchoStar expects that its subscriber acquisition costs, on a
per new subscriber activation basis, may increase during the remainder of 1998
as a result of increased competition for DBS subscribers. Advertising and other
expenses totaled $9 million for the three months ended June 30, 1998, an
increase of $5 million over the same period in 1997, as a result of increased
marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
("G&A") expenses totaled $23 million for the three-month period ended June 30,
1998, an increase of $7 million as compared to the same period in 1997. The
increase in G&A expenses was principally attributable to increased personnel
expenses to support the growth of the DISH Network. G&A expenses as a
percentage of total revenue decreased to 10% for the three months ended June 30,
1998 compared to 16% for the corresponding period in 1997. While EchoStar
expects that G&A expenses as a percentage of total revenue will approximate this
level for the remainder of 1998, there can be no assurance that this expense to
revenue ratio will not increase.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
("EBITDA"). EBITDA for the three months ended June 30, 1998 improved to $8
million compared to $3 million for the same period in 1997. This improvement in
EBITDA principally resulted from increases in Technology (i.e., DTH equipment
sales and integration services) and DISH Network revenues. Due to expected
increases in new subscriber activations, increased marketing activity and a
decrease in Technology revenue (as previously described), EchoStar expects that
EBITDA results during the third and fourth quarters of 1998 may decline. To the
extent that new subscriber activations exceed expectations or subscriber
acquisition costs materially increase, EchoStar's EBITDA results may be
negatively impacted in the near-term because subscriber acquisition costs are
expensed as incurred.
EchoStar expects to begin production of its next generation of
digital set-top boxes during the third quarter of 1998. While there can be no
assurance, EchoStar expects that the introduction of these digital set-top
boxes may result in manufacturing cost reductions, thereby reducing subscriber
acquisition costs. Previous delays in the design of this new digital set-top
box will have a negative impact on EBITDA during the third quarter of 1998. In
the event EchoStar experiences further delays in the production of its next
generation digital set-top boxes, its inventory of digital set-top boxes, and
consequently, its future new subscriber activations, subscriber acquisition
costs and EBITDA results may be negatively impacted. While further delays are
not expected, new product introductions often involve schedule risks that can
not be anticipated or precisely quantified.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the three months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $6 million) aggregated $25 million, a decrease of $21
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease in
amortization of subscriber acquisition costs (decrease of $27 million),
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III and other depreciable assets placed in service during
1998. Beginning in October 1997, net subscriber acquisition costs are expensed
as incurred. Consequently, no additional subscriber acquisition costs are being
deferred. The unamortized balance of such costs is expected to be fully
amortized by September 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $29 million for
the three months ended June 30, 1998, an increase of $8 million as compared to
the same period in 1997. The increase in other expense resulted primarily from
interest expense associated with EchoStar's 12 1/2% Senior Secured Notes due
2002 (the "1997 Notes"), which were issued in June of 1997, and increases in
interest expense associated with increased accreted balances on EchoStar's 12
7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes") and EchoStar's 13
1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes").
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997.
REVENUE. Total revenue for the six months ended June 30, 1998 was
$460 million, an increase of $292 million as compared to total revenue for the
six months ended June 30, 1997 of $168 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth combined with
increased revenue from EchoStar's Technology business unit.
DISH Network subscription television services revenue totaled $280
million for the six months ended June 30, 1998, an increase of $169 million, or
153%, compared to the same period in 1997. This increase was directly
attributable to the increase in the number of DISH Network subscribers. The
average number of DISH Network subscribers during the six months ended June 30,
1998 increased approximately 154% as compared to the same period in 1997.
For the six months ended June 30, 1998, DTH equipment sales and
integration services totaled $148 million, an increase of $132 million compared
to the six months ended June 30, 1997. The increase in DTH equipment sales and
integration services revenue was primarily attributable to an increase in the
volume of set-top boxes sold. DTH equipment and integration services revenue
for the six months ended June 30, 1998 principally resulted from sales of
digital set-top boxes and other equipment while revenue for the same period in
1997 related to the provision of integration services.
Satellite services revenue totaled $10 million for the six months
ended June 30, 1998, an increase of $6 million as compared to the same period in
1997. The increase in satellite services revenue was primarily attributable to
increased BTV revenue.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $170 million for the six months ended June 30, 1998, an increase of $97
million as compared to the same period in 1997. The increase in DISH Network
operating expenses was consistent with, and primarily attributable to, the
increase in the number of DISH Network subscribers. For the six months ended
June 30, 1998, DISH Network operating expenses represented 61% of subscription
television services revenue compared to 66% of subscription television revenue
during the corresponding period in 1997.
Subscriber-related expenses totaled $133 million for the six months
ended June 30, 1998, an increase of $78 million compared to the same period in
1997. Subscriber-related expenses totaled 48% of subscription television
services revenues for the six months ended June 30, 1998, compared to 49% during
the six months ended June 30, 1997.
Customer service center and other expenses totaled $26 million for the
six months ended June 30, 1998, an increase of $14 million as compared to the
six months ended June 30, 1997. The increase in customer service center and
other expenses resulted from increased personnel expenses to support the growth
of the DISH Network. Customer service center and other expenses totaled 9% of
subscription television services revenue during the six months ended June 30,
1998, compared to 11% of subscription television services revenue during the
same period of the prior year.
Satellite and transmission expenses increased $5 million during the
six months ended June 30, 1998, as compared to the same period during 1997. This
increase resulted from higher TT&C services expenses and other digital broadcast
center operating expenses due to an increase in the number of EchoStar's
operational DBS satellites.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales
- - DTH equipment and integration services totaled $101 million for the six months
ended June 30, 1998, an increase of $86 million, as compared to the six months
ended June 30, 1997. This increase is consistent with the increase in DTH
equipment revenue.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
MARKETING EXPENSES. Marketing expenses totaled $120 million for the
six months ended June 30, 1998, an increase of $82 million as compared to the
same period in 1997. The increase in marketing expenses was primarily
attributable to the increase in subscriber promotion subsidies. These expenses
totaled $102 million for the six months ended June 30, 1998, an increase of $71
million over the same period in 1997. The increase in subscriber promotion
subsidies resulted from increased subscriber activations and the introduction of
the 1997 Promotion in June 1997. Advertising and other expenses totaled $18
million for the six months ended June 30, 1998, an increase of $11 million over
the same period in 1997, as a result of increased marketing activity.
GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $43 million
for the six-month period ended June 30, 1998, an increase of $11 million as
compared to the same period in 1997. The increase in G&A expenses was
principally attributable to increased personnel expenses to support the growth
of the DISH Network. G&A expenses as a percentage of total revenue decreased to
9% for the six months ended June 30, 1998 compared to 19% for the corresponding
period in 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION.
EBITDA for the six months ended June 30, 1998 improved to $17 million compared
to negative EBITDA of $1 million during the same period in 1997. This
improvement in EBITDA principally resulted from increases in Technology and DISH
Network revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the six months ended June 30, 1998 (including amortization of subscriber
acquisition costs of $17 million) aggregated $54 million, a decrease of $33
million as compared to the corresponding period in 1997. The decrease in
depreciation and amortization expenses principally resulted from the decrease in
amortization of subscriber acquisition costs (decrease of $44 million),
partially offset by an increase in depreciation related to the commencement of
operation of EchoStar III and other depreciable assets placed in service during
1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $58 million for
the six months ended June 30, 1998, an increase of $19 million as compared to
the same period in 1997. The increase in other expense resulted primarily from
interest expense associated with the 1997 Notes, and increases in interest
expense associated with increased accreted balances on the 1994 Notes and the
1996 Notes.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, net cash flows provided by
operations totaled $19 million compared to net cash flows used in operations of
$9 million for the same period in 1997. Capital expenditures totaled $110
million and $67 million during those same periods. EchoStar's capital
expenditures during the first six months of 1998 principally related to the
ongoing construction and launch of EchoStar IV, the expansion of EchoStar's
digital broadcast operations center, and building improvements to EchoStar's new
corporate headquarters. Capital expenditures related to the construction and
launch of EchoStar IV were funded primarily from the Satellite Escrow. While
EchoStar expects its capital expenditures to decline during the remainder of
1998, there can be no assurance that these expenditures will not increase.
EchoStar expects that its future working capital, capital expenditure
(excluding additional satellite expenditures) and debt service requirements will
be satisfied from existing cash and investment balances and from cash generated
from operations. EchoStar's ability to generate positive future operating and
net cash flows is dependent upon its ability to continue to rapidly expand its
DISH Network subscriber base, and to a lesser extent on its ability to grow its
Technology and Satellite Services businesses. The amount of capital required to
fund EchoStar's remaining 1998 working capital and capital expenditure needs
will vary dependent upon the level of EchoStar's success relative to its goals.
There can be no assurance that EchoStar will be successful in achieving its
goals. EchoStar's working capital requirements could increase materially in the
event of increased subscriber acquisition costs, or in the event of a general
economic downturn, among other factors.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
FUTURE CAPITAL REQUIREMENTS
As a result of the anomalies experienced by EchoStar III and EchoStar
IV (as previously described), and in order to fully-exploit certain of its
remaining FCC-allocated DBS frequencies, EchoStar will be required to deploy
additional DBS satellites. Further, EchoStar has applications pending with, or
licenses granted by, the FCC for a two satellite FSS Ku-band satellite system, a
two satellite FSS Ka-band satellite system, a two satellite extended Ku-band
satellite system, and a six satellite low earth orbit ("LEO") satellite system.
EchoStar does not expect insurance proceeds received from claims filed on
EchoStar III and EchoStar IV to be sufficient to deploy additional DBS
satellites and to exploit its other FCC-allocated spectrum. Therefore, EchoStar
will need to raise additional capital to fund the construction and launch of
additional satellites. Further, there may be a number of factors, some of which
are beyond EchoStar's control or ability to predict, that could require EchoStar
to raise additional capital. These factors include unexpected increases in
operating costs and expenses, a defect in or the loss of any satellite,
subscriber growth in excess of that currently expected, or an increase in the
cost of acquiring subscribers due to additional competition, among other things.
There can be no assurance that additional debt, equity or other financing will
be available on terms acceptable to EchoStar, or at all.
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 is currently engaged in the remediation and testing of its
critical computer systems to ensure Year 2000 compliance thereof. In connection
with this effort, EchoStar has segregated its computer systems and corresponding
Year 2000 compliance risk into three categories: internal financial and
administrative systems, service-delivery systems, and third-party systems. With
respect to EchoStar's internal financial and administrative systems, the Company
has completed the identification, modification (as necessary) and testing of all
such systems. As a result, EchoStar currently believes that its internal
financial and administrative systems are Year 2000 compliant. EchoStar
currently is completing a similar effort with respect to its service-delivery
systems and expects all such systems to be fully Year 2000 compliant by the end
of 1998. The Company also is currently assessing its vulnerability to
unexpected business interruptions due to the failure of external third-parties
to remediate their Year 2000 compliance issues. In connection with this
assessment, the Company is in the process of communicating with all of its
significant third-party business partners, suppliers and vendors to determine
the extent to which EchoStar is vulnerable to those third parties' failure to
remediate their own Year 2000 issues.
EchoStar believes its costs to successfully mitigate the Year 2000
Issue will not be material to its operations. If EchoStar's 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. 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 business or its
operations.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 110 DEG. 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 is vigorously
defending against the counterclaims. The case has been set for trial commencing
March 1999, but that date could be postponed.
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.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of
shareholders of EchoStar Communications Corporation held on May 22, 1998:
a. The election of Charles W. Ergen, James DeFranco, David K.
Moskowitz, Raymond L. Friedlob and O. Nolan Daines as directors
to serve until the 1999 annual meeting of shareholders, and
b. The ratification of the appointment of Arthur Andersen LLP as
independent auditors for the Company for the year ending December
31, 1998.
The director nominees were elected and the appointment of Arthur
Andersen as independent auditors was approved. The voting results were as
follows:
Votes
-------------------------------------
Proposal For Against Withheld
-------- ----------- ----------- -----------
ELECTION AS DIRECTOR:
Charles W. Ergen 325,153,643 - 17,800
James DeFranco 325,152,554 - 18,889
David K. Moskowitz 325,153,573 - 17,870
Raymond L. Friedlob 325,153,483 - 17,960
O. Nolan Daines 325,152,672 - 18,771
RATIFICATION OF THE APPOINTMENT OF
ARTHUR ANDERSEN LLP AS INDEPENDENT
AUDITORS FOR THE COMPANY FOR THE YEAR
ENDING DECEMBER 31, 1998 325,162,133 2,340 6,970
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.1* Agreement to form NagraStar LLC, dated as of June 23, 1998,
by and between Kudelski S.A., EchoStar Communications
Corporation and EchoStar Satellite Corporation.
27+ Financial Data Schedule.
- --------------------------------
* Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for
confidential treatment. A confirming electronic copy is being
filed herewith.
+ Filed herewith.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the second quarter of 1998.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ DAVID K. MOSKOWITZ
----------------------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary and Director
By: /s/ JOHN R. HAGER
----------------------------------------------------------------
John R. Hager
Vice President - Controller
(PRINCIPAL ACCOUNTING OFFICER)
Date: August 6, 1998