EXHIBIT 99.3
QUARTERLY REPORT FOR THE PERIOD ENDED
SEPTEMBER 30, 1998
DIRECT BROADCASTING SATELLITE CORPORATION
COLORADO 84-1328967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Telephone number, including area code)
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets -
December 31, 1997 and September 30, 1998 (Unaudited)........................ 1
Condensed Statements of Operations for the
three and nine months ended September 30, 1997 and 1998 (Unaudited)......... 2
Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 and 1998 (Unaudited)................... 3
Notes to Condensed Financial Statements (Unaudited)............................. 4
Item 2. Management's Narrative Analysis of Results of Operations........................ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... *
Item 2. Changes in Securities and Use of Proceeds....................................... *
Item 3. Defaults Upon Senior Securities................................................. *
Item 4. Submission of Matters to a Vote of Security Holders............................. *
Item 5. Other Information............................................................... None
Item 6. Exhibits and Reports on Form 8-K................................................ N/A
DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION.
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* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instructions (H)(1)(a) and (b) of Form 10-Q.
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ - $ 46
Other current assets ..................................................... 7 193
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Total current assets ........................................................ 7 239
EchoStar III ................................................................ 92,408 120,479
FCC authorizations .......................................................... 18,504 18,157
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Total assets ........................................................... $ 110,919 $ 138,875
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-----------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable and accrued expenses .............................. $ 545 $ 768
Advances from affiliates, net ............................................ 30,601 67,347
Current portion of notes payable ......................................... 2,961 3,135
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Total current liabilities ................................................... 34,107 71,250
Other notes payable, net of current portion ................................. 11,351 9,548
Notes payable to ECC and accumulated interest ............................... 54,597 58,497
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Total liabilities ...................................................... 100,055 139,295
Commitments and Contingencies
Stockholder's Equity:
Common Stock, $0.01 par value, 1,000 shares authorized, issued and
outstanding .............................................................. - -
Additional paid-in capital ............................................... 16,324 16,324
Accumulated deficit ...................................................... (5,460) (16,744)
-----------------------------
Total stockholder's equity .................................................. 10,864 (420)
-----------------------------
Total liabilities and stockholder's equity ............................. $ 110,919 $ 138,875
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See accompanying Notes to Condensed Financial Statements.
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DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
-------------------------------- -------------------------------
Revenue ............................... $ - $ - $ - $ -
Expenses:
Satellite and transmission ......... - 310 - 310
Depreciation and amortization ...... - 2,040 - 6,122
Interest expense ................... 1,609 1,586 4,556 4,852
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Total expenses ........................ 1,609 3,936 4,556 11,284
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Loss before income taxes .............. (1,609) (3,936) (4,556) (11,284)
Income tax provision .................. - - - -
-------------------------------- -------------------------------
Net loss .............................. $ (1,609) $ (3,936) $ (4,556) $(11,284)
-------------------------------- -------------------------------
-------------------------------- -------------------------------
See accompanying Notes to Condensed Financial Statements.
2
DIRECT BROADCASTING SATELLITE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................................. $ (4,556) $(11,284)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization ...................................................... - 6,122
Interest on notes payable to ECC added to principal ................................ 4,868 3,900
Changes in current assets and current liabilities:
Other current assets ............................................................. (7) (186)
Accounts payable and accrued expenses ............................................ (1,668) 223
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Net cash flows from operating activities .............................................. (1,363) (1,225)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for satellite systems under construction and other ....................... (16,611) -
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Net cash flows from investing activities .............................................. (16,611) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net ......................................................... 17,976 2,900
Repayment of other notes payable ...................................................... - (1,629)
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Net cash flows from financing activities .............................................. 17,976 1,271
Net increase in cash and cash equivalents ............................................. 2 46
Cash and cash equivalents, beginning of period ........................................ 1 -
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Cash and cash equivalents, end of period .............................................. $ 3 $ 46
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest, including amounts due to affiliates ............................. $ 7,944 $ -
Reclassification of satellite assets .................................................. - 33,846
Accrued capital expenditures .......................................................... 1,000 -
The purchase price of DBSC was "pushed-down" by EchoStar Communications
Corporation to DBSC as follows in the related purchase accounting:
Satellite construction costs ..................................................... 51,244 -
FCC authorization ................................................................ 16,648 -
Notes payable to EchoStar, including accrued interest of $3,382 .................. (49,382) -
Trade accounts payable and accrued expenses ...................................... (1,687) -
Other notes payable .............................................................. (500) -
Additional paid-in capital ....................................................... (16,323) -
See accompanying Notes to Condensed Financial Statements.
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DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
During 1994, EchoStar Communications Corporation ("ECC," and together with
its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar") acquired approximately 40% of the outstanding common
stock of Direct Broadcasting Satellite Corporation ("Old DBSC"), a Delaware
corporation. Old DBSC's principal assets included a Federal Communications
Commission ("FCC") conditional satellite permit and specific orbital slot
assignments for a total of 22 DBS frequencies. Through December 1996, EchoStar
advanced Old DBSC a total of $46 million in the form of notes receivable to
enable Old DBSC to make required payments under the EchoStar III construction
contract. During January 1997, EchoStar consummated the merger of Old DBSC with
a wholly-owned subsidiary of ECC ("DBSC" or the "Company"). This transaction was
accounted for as a purchase and the excess of the purchase price over the fair
value of Old DBSC's tangible assets was allocated to Old DBSC's FCC
authorizations. Upon consummation of the Merger, Old DBSC ceased to exist.
EchoStar is a publicly-traded company on the Nasdaq National Market and its
operations include three interrelated business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of September 30, 1998,
EchoStar had approximately 1.6 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("TECHNOLOGY") - engaged in 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 - engaged in the turn-key delivery of video, audio
and data services to business television customers and other satellite
users. These services may include satellite uplink services, satellite
transponder space usage, billing, customer service 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 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. Operating results for the three and nine months
ended September 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 financial statements and footnotes thereto included in the
Company's Annual Report filed as Exhibit 99.3 to EchoStar Satellite
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DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Broadcasting Corporation'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.
PURPOSE OF FINANCIAL STATEMENTS
DBSC is not currently subject to the reporting requirements of Section 13
or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act").
However, pursuant to the terms of an indenture between ESBC and First Trust
National Association dated March 25, 1996 (the "Indenture"), DBSC is required to
provide quarterly and annual reports comparable to that which would have been
required if DBSC were subject to the requirements of Section 13 or 15(d) of the
Exchange Act. Since DBSC does not have a separate Commission File Number with
the Securities and Exchange Commission, DBSC has made these financial
statements, complete with Management's Narrative Analysis of Results of
Operations, publicly available. These financial statements were prepared solely
to comply with the reporting requirements under the Indenture. For further
information, refer to the consolidated financial statements and footnotes
thereto included in 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.
COMPREHENSIVE INCOME
The Company 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 stockholder's equity. For the periods reported, the
Company's comprehensive income is equal to its net income.
3. SUBSEQUENT EVENTS
ECHOSTAR III DEVELOPMENTS
During July 1998, EchoStar announced that certain of the electronic power
converters ("EPC") on EchoStar's third DBS satellite, EchoStar III, were
operating at higher than expected temperatures. In August 1998, Lockheed Martin,
the satellite manufacturer, notified EchoStar that it had re-qualified the EPC's
at the higher temperatures. As a result, EchoStar does not expect that this
anomaly will have a material impact on EchoStar III's transmission capacity.
During October 1998, Lockheed Martin advised EchoStar that EchoStar III had
experienced an anomaly which, to date, has resulted in the loss of six TWTAs.
The satellite is equipped with a total of 44 TWTAs. Only 11 TWTAs are necessary
to fully utilize EchoStar's 11 frequencies at 61.5(degree) WL, where the
satellite is located. While there has been no interruption of service for
EchoStar customers and no interruption of service is expected, EchoStar is
presently working with Lockheed Martin to investigate the cause and potential
implications of the anomaly. Lockheed Martin has informally advised EchoStar
that it is possible the anomaly may result in the loss of additional
transponders in the future.
As a result of the anomaly related to the TWTAs, EchoStar has instructed
its broker to notify its insurance carriers of an occurrence under the terms of
the EchoStar III launch insurance policy. The EchoStar III launch insurance
policy provides for insurance of $219.3 million covering the period from launch
of the satellite (October 5, 1997) through October 5, 1998. Under that policy,
EchoStar has until early 1999 to file a claim for either a constructive total or
partial loss. It may be several months before all of the data required in
connection with the filing of a claim can
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DIRECT BROADCASTING SATELLITE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
be accumulated. Pending completion of the anomaly investigation, EchoStar has
transitioned to a 60-day, $200 million in-orbit insurance policy on EchoStar
III at standard industry rates. However, the policy contains an exclusion for
future TWTA losses based on similar anomalies. As a result of the exclusion,
and in the event that comprehensive coverage for similar TWTA anomalies is
ultimately denied under the launch insurance policy, EchoStar could
potentially experience uninsured losses of capacity on EchoStar III in the
future, up to and including a total loss of capacity. While there can be no
assurance, the Company and its insurers expect that in-orbit insurance can be
procured on more traditional terms in the future if the anomaly investigation
is satisfactorily concluded and no further failures occur in the interim.
Based on information currently available, management has evaluated the
potential financial statement impact of this satellite anomaly in accordance
with its stated accounting policies. EchoStar has not completed its assessment
of the impairment to EchoStar III, but currently believes that insurance
proceeds will be sufficient to offset any write-down of satellite assets that
may be required because of lost transmission capacity caused by this anomaly.
However, no assurance can be provided as to the ultimate amount that may be
received from the insurance claim, or that coverage will be available. EchoStar
will continue to evaluate the performance of EchoStar III and may modify its
loss assessment as new events or circumstances develop. EchoStar does not
maintain insurance for lost profit opportunity.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997.
Direct Broadcasting Satellite Corporation ("DBSC") is the Federal
Communications Commission ("FCC") licensee and owner of EchoStar III but has no
operations as a stand-alone entity. EchoStar III is an integral part of the DISH
Network and DBSC is dependent on EchoStar Communications Corporation ("ECC") and
ECC's other subsidiaries for all necessary funding and all management and
administrative functions. Depreciation on EchoStar III totaled $2 million for
the three months ended September 30, 1998. EchoStar III was placed into service
in January 1998. Interest expense totaled $2 million for the three months ended
September 30, 1998 and 1997. Interest expense represents interest incurred on
the notes payable to ECC.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1997.
Depreciation on EchoStar III totaled $6 million for the nine months ended
September 30, 1998. Interest expense totaled $5 million for the nine months
ended September 30, 1998 and 1997.
7