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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q/A NO. 1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 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.)
90 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 799-8222
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. YES X NO
--- ---
ON NOVEMBER 11, 1996, REGISTRANT'S OUTSTANDING VOTING COMMON STOCK CONSISTED OF
11,022,147 SHARES OF CLASS A COMMON STOCK, 29,804,401 SHARES OF CLASS B COMMON
STOCK AND 1,616,681 SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK, EACH $0.01
PAR VALUE.
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ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q/A NO. 1
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets as of December 31, 1995
and September 30, 1996 (Unaudited and Restated) .............. 1
Statements of Operations for the three months and nine months
ended September 30, 1995 and 1996 (Unaudited and Restated).... 2
Statements of Cash Flows for the nine months
ended September 30, 1995 and 1996 (Unaudited and Restated)).... 3
Notes to Financial Statements (Unaudited and Restated) ......... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Restated).... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 28
Item 6. Exhibits and Reports on Form 8-K ............................... 29
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ ------------------------
(UNAUDITED)
(RESTATED, NOTE 1)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 21,754 $ 31,079
Marketable investment securities. . . . . . . . . . . . 15,670 42,122
Trade accounts receivable, net. . . . . . . . . . . . . 9,179 18,958
Inventories, net. . . . . . . . . . . . . . . . . . . . 38,769 44,246
Income tax receivable . . . . . . . . . . . . . . . . . 3,554 6,527
Deferred tax assets . . . . . . . . . . . . . . . . . . 1,779 2,457
Subscriber acquisition costs, net . . . . . . . . . . . -- 53,106
Other current assets. . . . . . . . . . . . . . . . . . 13,037 22,006
--------- ----------
Total current assets . . . . . . . . . . . . . . . 103,742 220,501
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES:
Dish Notes escrow . . . . . . . . . . . . . . . . . . . 73,291 --
ESBC Notes escrow . . . . . . . . . . . . . . . . . . . -- 135,449
Other . . . . . . . . . . . . . . . . . . . . . . . . . 26,400 41,461
PROPERTY AND EQUIPMENT, net. . . . . . . . . . . . . . . . . 354,000 554,243
OTHER NONCURRENT ASSETS. . . . . . . . . . . . . . . . . . . 65,658 140,471
--------- ----------
Total assets . . . . . . . . . . . . . . . . . . . $623,091 $1,092,125
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable. . . . . . . . . . . . . . . . . $ 19,063 $ 26,449
Deferred programming and product
revenue - DISH Network-SM- subscriber promotions . . . -- 77,644
Deferred programming revenue - DISH Network-SM- . . . . -- 100
Deferred programming revenue - C-band . . . . . . . . . 5,563 4,308
Accrued expenses and other current liabilities. . . . . 21,335 13,959
Notes payable and current portion of long-term debt . . 4,782 11,344
--------- ----------
Total current liabilities. . . . . . . . . . . . . 50,743 133,804
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE . . . . . . . . . -- 6,690
DISH NOTES, net. . . . . . . . . . . . . . . . . . . . . . . 382,218 422,777
ESBC NOTES, net. . . . . . . . . . . . . . . . . . . . . . . -- 372,570
LONG-TERM MORTGAGE DEBT AND NOTE PAYABLE,
excluding current portion. . . . . . . . . . . . . . . . . 33,444 53,842
OTHER LONG-TERM LIABILITIES. . . . . . . . . . . . . . . . . -- 478
--------- ----------
Total liabilities. . . . . . . . . . . . . . . . . 466,405 990,161
--------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred Stock, 20,000,000 shares authorized,
1,616,681 shares of Series A Cumulative Preferred
Stock issued and outstanding, including accrued
dividends of $2,143,000 and $3,046,000,
respectively. . . . . . . . . . . . . . . . . . . . . 17,195 18,098
Class A Common Stock, $.01 par value, 200,000,000
shares authorized, 10,535,003 and 10,996,621
shares issued and outstanding, respectively . . . . . 105 110
Class B Common Stock, $.01 par value, 100,000,000
shares authorized, 29,804,401 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . 298 298
Common Stock Purchase Warrants. . . . . . . . . . . . . 714 16
Class C Common Stock, 100,000,000 shares authorized,
none outstanding. . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . 151,674 154,142
Unrealized holding gains on available-for-sale
securities, net of deferred taxes . . . . . . . . . . 239 35
Retained earnings (deficit) . . . . . . . . . . . . . . (13,539) (70,735)
--------- ----------
Total stockholders' equity . . . . . . . . . . . . 156,686 101,964
--------- ----------
Total liabilities and stockholders' equity . . . . $ 623,091 $1,092,125
--------- ----------
--------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
1
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1995 1996 1995 1996
(RESTATED, (RESTATED,
NOTE 1) NOTE 1)
REVENUE:
DTH products and technical services . . . . . . . . . . $ 39,373 $ 21,523 $110,515 $ 118,722
DISH Network-SM- programming and
product revenues - subscriber promotions . . . . . . . -- 4,403 -- 4,403
DISH Network-SM- Programming. . . . . . . . . . . . . . -- 11,876 -- 17,922
C-band programming. . . . . . . . . . . . . . . . . . . 3,791 2,885 11,479 9,528
Loan origination and participation income . . . . . . . 442 1,715 1,277 6,818
--------- --------- -------- ----------
Total revenue. . . . . . . . . . . . . . . . . . . 43,606 42,402 123,271 157,393
--------- --------- -------- ----------
EXPENSES:
DTH products and technical services . . . . . . . . . . 30,803 19,618 87,619 109,896
DISH Network-SM- programming. . . . . . . . . . . . . . -- 6,108 -- 7,877
C-band programming. . . . . . . . . . . . . . . . . . . 3,473 2,573 10,297 8,631
Selling, general and administrative . . . . . . . . . . 8,268 23,736 23,454 53,552
Subscriber promotion subsidies. . . . . . . . . . . . . -- 6,000 -- 6,000
Amortization of subscriber acquisition costs. . . . . . -- 3,356 -- 3,448
Depreciation and amortization of property and
equipment. . . . . . . . . . . . . . . . . . . . . . . 721 7,909 1,490 17,573
--------- --------- -------- ----------
Total expenses . . . . . . . . . . . . . . . . . . 43,265 69,300 122,860 206,977
--------- --------- -------- ----------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . . . . 341 (26,898) 411 (49,584)
--------- --------- -------- ----------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . . . 4,435 5,335 11,078 14,718
Interest expense, net of amounts capitalized. . . . . . (5,859) (19,996) (18,749) (53,180)
Other, net. . . . . . . . . . . . . . . . . . . . . . . 208 91 168 (43)
--------- --------- -------- ----------
Total other income (expense) . . . . . . . . . . . (1,216) (14,570) (7,503) (38,505)
--------- --------- -------- ----------
NET LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . (875) (41,468) (7,092) (88,089)
BENEFIT FOR INCOME TAXES . . . . . . . . . . . . . . . . . . 515 14,950 2,705 31,796
--------- --------- -------- ----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . $ (360) $ (26,518) $ (4,387) $ (56,293)
--------- --------- -------- ----------
--------- --------- -------- ----------
NET LOSS ATTRIBUTABLE TO COMMON SHARES . . . . . . . . . . . $ (661) $ (26,819) $ (5,290) $ (57,196)
--------- --------- -------- ----------
--------- --------- -------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING . . . . . . . . . 37,544 40,456 34,965 40,455
--------- --------- -------- ----------
--------- --------- -------- ----------
LOSS PER COMMON AND COMMON EQUIVALENT SHARE. . . . . . . . . $ (.02) $ (.66) $ (.15) $ (1.41)
--------- --------- -------- ----------
--------- --------- -------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
(RESTATED,
NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,387) $ (56,293)
Adjustments to reconcile net loss to net cash flows from operating activities--
Depreciation and amortization of property and equipment. . . . . . . . . . . . . . . . . . . . . 1,490 17,573
Subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (56,554)
Amortization of subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,448
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 587
Benefit for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,509) (27,481)
Amortization of deferred debt issuance costs on Dish Notes and ESBC Notes. . . . . . . . . . . . 945 1,759
Amortization of discount on Dish Notes and ESBC Notes, net of amounts capitalized. . . . . . . . 17,455 40,229
Equity in (earnings) losses of joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . (39) 62
Change in reserve for excess and obsolete inventory. . . . . . . . . . . . . . . . . . . . . . . 277 2,579
Change in long-term signal carriage revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 6,690
Change in accrued interest on notes receivable from DBSC . . . . . . . . . . . . . . . . . . . . -- (2,220)
Change in accrued interest on convertible subordinated debentures from SSET. . . . . . . . . . . (427) (418)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401) 476
Changes in working capital items --
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,284) (10,366)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,358) (8,056)
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (2,973)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (846) (8,969)
Liability under cash management program. . . . . . . . . . . . . . . . . . . . . . . . . . . . (57) --
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,441) 7,386
Deferred programming and product revenue DISH Network-SM-. . . . . . . . . . . . . . . . . . . -- 77,744
Deferred programming -- C-Band . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (719) (1,255)
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,016 7,624
---------- ----------
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . (10,285) (8,428)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . (240,800) (54,111)
Sales of marketable investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,512 27,846
Purchases of restricted marketable investment securities . . . . . . . . . . . . . . . . . . . . . (15,000) (20,761)
Funds released from restricted cash and marketable investment securities - other . . . . . . . . . -- 5,700
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,727) (13,400)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 --
Offering proceeds and investment earnings placed in escrow . . . . . . . . . . . . . . . . . . . . (7,570) (191,941)
Refund of launch payment placed in escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,500)
Funds released from escrow accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,842 133,768
Payments received on convertible subordinated debentures from SSET . . . . . . . . . . . . . . . . -- 5,252
Investment in convertible subordinated debentures from DBSI. . . . . . . . . . . . . . . . . . . . (1,000) (3,000)
Long-term notes receivable from DBSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (20,000)
Expenditures for satellite systems under construction. . . . . . . . . . . . . . . . . . . . . . . (58,984) (167,829)
Deposit on FCC authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (10,459)
Expenditures for FCC authorizations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (3,167)
---------- ----------
Net cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (66,700) (316,602)
---------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1996
---------- ----------
(RESTATED,
NOTE 1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and note payable . . . . . . . . . . . . . . . . . . . . . . . $ (167) $ (4,207)
Stock options exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,568
Net proceeds from issuance of Class A Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 62,933 --
Net proceeds from issuance of ESBC Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 336,994
---------- ----------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . 62,766 334,355
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . (14,219) 9,325
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,506 21,754
---------- ----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,287 $ 31,079
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized . . . . . . . . . . . . . . . . . . . . . . . . $ 353 $ 11,192
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,739 --
Note payable issued for deferred satellite construction payments for EchoStar II . . . . . . . . . -- 28,000
Satellite launch payment for EchoStar II applied to EchoStar I launch. . . . . . . . . . . . . . . -- 15,000
Increase in note payable for deferred satellite construction payments for EchoStar I . . . . . . . -- 3,167
Cumulative Series A Preferred Stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . 903 903
Employee incentives funded by issuance of Class A Common Stock . . . . . . . . . . . . . . . . . . -- 207
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
THIS FORM 10-Q/A OF ECHOSTAR CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD
LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THOSE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THE FORM 10-Q/A AND INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF ECHOSTAR
WITH RESPECT TO, AMONG OTHER THINGS: (I) ECHOSTAR'S FINANCING PLANS;
(II) TRENDS AFFECTING ECHOSTAR'S FINANCIAL CONDITIONS OR RESULTS OF
OPERATIONS; (III) ECHOSTAR'S GROWTH STRATEGY; (IV) ECHOSTAR'S ANTICIPATED
RESULTS OF FUTURE OPERATIONS; AND (V) REGULATORY MATTERS AFFECTING ECHOSTAR.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES,
AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) BUSINESS AND BASIS OF PRESENTATION
PRINCIPAL BUSINESS AND FINANCING ACTIVITIES
EchoStar Communications Corporation and subsidiaries ("EchoStar") is one of
only two direct broadcast satellite ("DBS") companies in the United States with
the capacity to provide comprehensive nationwide DBS programming service in
1996. EchoStar's DBS service (the "DISH Network-SM-") commenced operations in
March 1996 after the successful launch of its first satellite ("EchoStar I") in
December 1995. EchoStar launched its second satellite ("EchoStar II") on
September 10, 1996. EchoStar significantly increased the channel capacity and
programming offerings of the DISH Network-SM- when EchoStar II became fully
operational in November 1996. EchoStar now provides approximately 120 channels
of near laser disc quality digital video programming and over 30 channels of CD
quality audio programming to the entire continental United States ("CONUS"). In
addition to its DISH Network-SM- business, EchoStar is engaged in the design,
manufacture, distribution and installation of satellite direct to home ("DTH")
products, domestic distribution of DTH programming and consumer financing of
EchoStar's domestic DTH products and services.
EchoStar's primary objective is to become one of the leading providers of
subscription television and other satellite delivered services in the United
States. EchoStar had approximately 190,000 and 250,000 subscribers to DISH
Network-SM- programming as of September 30, 1996 and November 11, 1996,
respectively.
EchoStar Satellite Broadcasting Corporation ("ESBC") is a wholly-owned
direct subsidiary of EchoStar. Dish, Ltd. is a wholly-owned direct
subsidiary of ESBC. Substantially all of EchoStar's operating activities are
conducted by subsidiaries of Dish, Ltd.
In June 1994, Dish, Ltd. completed a public offering (the "Dish Notes
Offering") of 12 7/8% Senior Secured Discount Notes due 2004 (the "Dish Notes")
and Warrants (collectively, the "Dish Notes Offering"), resulting in net
proceeds of approximately $323.3 million. Dish, Ltd. and its subsidiaries are
subject to the terms and conditions of the Indenture related to the Dish Notes
(the "Dish Notes Indenture"). Substantially all of the Warrants issued in
connection with the Dish Notes Offering have been exercised. In June 1995,
EchoStar completed an offering of its Class A Common Stock, resulting in net
proceeds of approximately $63.0 million (the "Equity Offering").
In March 1996, ESBC completed a private offering (the "ESBC Notes
Offering") of 13 1/8% Senior Secured Discount Notes due 2004, resulting in net
proceeds of approximately $337.0 million. ESBC subsequently filed a Registration
Statement on Form S-1 to effect the exchange of those Notes for publicly
registered debentures (the "ESBC Notes") with the same terms. Proceeds from the
ESBC Notes Offering have been or will be used for: (i)
5
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
continued development, marketing and distribution of the DISH Network-SM-;
(ii) EchoStar's purchase of DBS frequencies at 148 DEG. WL (the "148
Frequencies"); (iii) partial funding of the construction, launch and
insurance of the satellites DBSC I ("EchoStar III") and EchoStar IV; (iv)
additional launch costs of EchoStar II; and (v) other general corporate
purposes. The 148 Frequencies were acquired by EchoStar at a public auction
held by the Federal Communications Commission ("FCC") in January 1996 (the
"FCC Auction").
In connection with the ESBC Notes Offering, EchoStar contributed all of
the outstanding capital stock of its wholly owned subsidiary, Dish, Ltd., to
ESBC. This transaction has been accounted for as a reorganization of entities
under common control whereby Dish, Ltd. has been treated as the predecessor
to ESBC. ESBC is subject to all, and EchoStar is subject to certain of, the
terms and conditions of the Indenture related to the ESBC Notes (the "ESBC
Notes Indenture").
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1996. For further information, refer to the Combined
and Consolidated Financial Statements and footnotes thereto included in EchoStar
Communications Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995. Certain prior year amounts have been reclassified to conform
with the current year presentation.
Unless otherwise stated herein, or the context otherwise requires,
references herein to EchoStar shall include EchoStar and all of its direct and
indirect wholly owned subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses for each reporting
period. Actual results could differ from those estimates.
ECHOSTAR PROMOTIONS AND REVISION OF ACCOUNTING POLICY
Since August 1996, EchoStar has introduced several marketing promotions,
the most significant of which is a nationwide marketing promotion (the
"EchoStar Promotion") which allows independent retailers to offer a standard
EchoStar Receiver System to consumers for a suggested retail price of $199
(as compared to the original average retail price in March 1996 of
approximately $499), conditioned upon the consumer's prepaid purchase of one
year of America's Top 50 CD-SM- programming package for approximately $300.
Total transaction proceeds to EchoStar is less than EchoStar's cost of the
equipment and programming for the initial prepaid year of DISH Network-SM-
service. The excess cost represents a subsidy provided by EchoStar for the
benefit of the subscriber and is expensed upon shipment of the equipment.
Subsequent to September 30, 1996, EchoStar entered into a strategic
marketing relationship with Gateway 2000 ("Gateway"). Purchasers of certain
computer models from Gateway receive a coupon which the consumer may present
to EchoStar for a free EchoStar DBS Receiver System, conditioned upon the
consumer's prepaid purchase from EchoStar's of one year of America's Top 50
CD-SM- programming package for approximately $300 (the "Gateway Promotion").
Accounting followed for the Gateway Promotion is identical to that described
below for the EchoStar Promotion, except the amount of the per subscriber
subsidy charged to expense upon shipment of the equipment is approximately
$50 greater.
The primary purposes of EchoStar promotions are to rapidly build a
subscriber base, to expand retail distribution of EchoStar's products and to
build consumer awareness of the DISH Network-SM-brand. These promotions are
consistent with and emphasize EchoStar's long-term business strategy which
focuses on generating the majority of its future revenue through sales of
DISH Network-SM- programming to a substantial subscriber base. The promotions
have significantly increased the affordability of EchoStar Receiver Systems
for consumers. In the near term, the EchoStar promotions have had and will
continue to have a negative impact on the Company's profit margins and cash
flow as compared to the pricing of the EchoStar Receiver Systems assumed for
the Company's original business strategy and growth projections.
6
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The promotions offered by EchoStar result in EchoStar incurring
significant costs to acquire subscribers. EchoStar believes these aggregate
costs will be fully recouped from DBS programming profits expected to be
generated from subscriber renewals and incremental service offerings,
primarily because, unlike the cellular phone industry, subscribers cannot
seamlessly migrate to alternative DBS providers. EchoStar Receiver Systems
process only DISH Network-SM- signals because of the proprietary encryption
technology employed and, therefore, the reception equipment cannot be
utilized with competitors' DBS systems.
Based on high DBS industry consumer satisfaction ratings, initial
feedback from consumers and dealers and low EchoStar subscriber turnover
rates, EchoStar anticipates high service renewal rates leading to an expected
average minimum subscriber life of at least three years. In addition, a
majority of DISH Network-SM- subscribers have purchased premium and
Pay-Per-View programming for incremental amounts above the prepaid minimum
required by the EchoStar Promotion, which reduces the time necessary to
recoup the average costs incurred per subscriber. EchoStar's present
marketing strategy is based on current competitive conditions which may
change, and such changes could be adverse to EchoStar.
Total transaction proceeds to EchoStar from DISH Network-SM-programming
and equipment sold as a package under EchoStar promotions are initially
deferred and recognized in revenue over the service period (normally one
year), commencing with authorization of each new subscriber. The excess of
EchoStar's cost of the equipment and programming for the initial prepaid
period of DISH Network-SM- service over proceeds received by EchoStar
represents subscriber promotion subsidies provided by EchoStar for the
benefit of the subscriber and is expensed upon shipment of the equipment. The
cost to EchoStar of the related equipment, less the amount of the subscriber
promotion subsidies charged to expense upon shipment, is deferred as
subscriber acquisition costs and reflected as amortization over the same
period of service. Programming costs are accrued and expensed as the service
is provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of
programming costs and amortization of subscriber acquisition costs.
The accompanying financial statements as of and for the nine months
ended September 30, 1996, have been restated. The original accounting
followed by EchoStar for promotional package sales of service and equipment
did not recognize an immediate charge for the subscriber subsidy, as
described above, and transaction proceeds were allocated between service
revenues and equipment sales revenues. The revised accounting eliminates the
need to allocate transaction proceeds between programming service and
equipment revenues and places no reliance on incremental revenues from add-on
services or subscription renewals to realize deferred subscriber acquisition
costs. The restatement had no material effect on any prior periods through
June 30, 1996. Approximate effects on results of operations for the nine
month period ended September 30, 1996 were: revenues decreased from $172.0
million to $157.4 million, or $14.6 million, which amount was principally
offset by a corresponding reduction in expenses; operating (loss) increased
by a net amount of $6.0 million, from $(43.6) million to $(49.6) million,
principally due to the immediate expensing of subscriber promotion subsidies;
net loss attributable to Common Shares increased by $4.0 million from $(53.2)
million to $(57.2) million; and loss per share increased from $(1.31) to
$(1.41).
EchoStar's present marketing strategy is based on current competitive
conditions which may change, and such changes could be adverse to EchoStar.
SIGNIFICANT RISKS AND UNCERTAINTIES
The commencement of EchoStar's DBS business has dramatically changed
EchoStar's operating results and financial position when compared to its
historical results. EchoStar consummated the Dish Notes Offering, the ESBC
Notes Offering and the Equity Offering to partially satisfy the capital
requirements for the construction, launch and operation of EchoStar I, EchoStar
II, EchoStar III and EchoStar IV. Annual interest expense on the Dish Notes and
ESBC Notes and depreciation of the investment in the satellites and related
assets is of a magnitude that exceeds historical levels of income before taxes.
Consequently, beginning in 1995 EchoStar reported significant net losses and
expects net losses to continue through at least 1998. EchoStar's plans also
include the financing, construction, and launch of two fixed service satellites,
additional DBS satellites and Ku-band and KuX-band satellites, assuming receipt
of all required FCC licenses and permits.
EchoStar has agreements with two manufacturers to supply DBS receivers for
EchoStar. Only one of the manufacturers has produced a receiver acceptable to
EchoStar. EchoStar previously deposited $10.0 million with the non-performing
manufacturer and has an additional $15.0 million in an escrow account (the "Non-
Performing Manufacturer Escrow Account") as security for EchoStar's payment
obligations under that contract. EchoStar has given this non-performing
manufacturer notice of its intent to terminate the contract and has filed suit
against that manufacturer. Consequently, EchoStar is currently dependent on
one manufacturing source for its receivers. Since EchoStar has given the non-
performing manufacturer notice of its intent to terminate the contract, EchoStar
has not included amounts due under the contract in EchoStar's future purchase
commitments. The performing manufacturer is presently manufacturing receivers in
sufficient quantities to meet currently expected demand. If EchoStar's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, EchoStar's liquidity and results of operations would
be adversely affected. There can be no assurance EchoStar will be able to
recover any amounts deposited with the non-performing manufacturer or held in
escrow.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, negative
stockholders' equity will result before December 31, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the Dish Notes and ESBC Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii) increases
in subscriber promotion subsidies and amortization of subscriber
acquisition costs; and (iv) increases in selling, general and administrative
expenses to support the DISH Network-SM-. Although a negative equity position
has significant implications, including, but not limited to, non-compliance
with NASDAQ National Market listing criteria, EchoStar believes this event
will not materially affect the implementation and execution of its business
strategy. If EchoStar ceases to satisfy NASDAQ's National Market listing
criteria, EchoStar's Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If an
exception were not granted, trading in EchoStar Common Stock would thereafter
be conducted in the over-the-counter market. Consequently, it would be more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the EchoStar Common Stock. Delisting would result in a decline in EchoStar's
Common Stock trading market which could potentially depress stock and bond
prices, among other things.
As a result of the factors discussed above, EchoStar will need to raise
additional capital to complete the construction and launch of EchoStar III and
EchoStar IV. There can be no assurance that necessary funds will be available
or, if available, that they will be available on terms favorable to EchoStar. In
anticipation of its future capital requirements and in order to fully implement
its business strategy, EchoStar regularly examines, and is currently examining,
opportunities to expand its DBS business, technology base and product lines
through means such as licenses, joint ventures, strategic alliances, strategic
investments and acquisitions of assets or ongoing businesses. Currently,
EchoStar has not made a commitment to any new strategic transaction. At any
time, however, EchoStar may agree to enter into a new strategic transaction.
Should EchoStar agree to enter into a new strategic transaction, there can be no
assurance as to the terms or timing of the transaction, whether the transaction
will be consummated or whether
7
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
the transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases in
the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
(2) SUPPLEMENTAL ANALYSIS
CASH AND CASH EQUIVALENTS
EchoStar considers all investments purchased with an original maturity of
ninety days or less to be cash equivalents. Cash equivalents as of
December 31, 1995, and September 30, 1996 consist of money market funds,
corporate notes and commercial paper stated at cost which equates to market
value.
RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES
EchoStar classifies all marketable investment securities as available-for-
sale. Accordingly, these investments are reflected at market value based on
quoted market prices. Related unrealized gains and losses are reported as a
separate component of stockholders' equity, net of related deferred income
taxes. The specific identification method is used to determine cost in computing
realized gains and losses.
Restricted Cash and Marketable Investment Securities in Escrow Accounts as
reflected on the accompanying consolidated balance sheets represent the
remaining net proceeds received from the Dish Notes Offering, and a portion of
the proceeds from the ESBC Notes Offering, plus interest earned, less amounts
expended to date in connection with the development, construction and continued
growth of the DISH Network-SM-. These proceeds are held in separate escrow
accounts (the "Dish Escrow Account" and the "ESBC Escrow Account") for the
benefit of the holders of the Dish Notes and ESBC Notes, respectively, and are
invested in certain debt and other marketable investment securities, as
permitted by the respective Indentures, until disbursed for the express purposes
identified in the Dish Notes Offering Prospectus and the ESBC Notes Offering
Prospectus, as the case may be.
Other Restricted Cash includes $11.4 million and $5.7 million at December
31, 1995 and September 30, 1996, respectively, to satisfy certain covenants in
the Dish Notes Indenture regarding launch insurance for EchoStar I and EchoStar
II. In addition, as of December 31, 1995 and September 30, 1996, $15.0 million
was in the Non-Performing Manufacturer Escrow Account. As of September 30,
1996, approximately $20.0 million was in a separate escrow account established
pursuant to a second DBS receiver manufacturing agreement, covering EchoStar's
payment obligations. Additionally, approximately $750,000 was in an escrow
account for the purpose of cash collateralizing standby letters of credit to a
vendor. The major components of Restricted Cash and Marketable Investment
Securities are as follows (in thousands):
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------------------- ----------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING MARKET AMORTIZED HOLDING MARKET
COST GAIN VALUE COST (LOSS) VALUE
---------- ---------- ---------- ---------- ---------- ----------
Commercial paper . . . . . . . . . $ 66,214 $ -- $ 66,214 $ 115,444 $ -- $ 115,444
Government bonds . . . . . . . . . 32,904 420 33,324 41,040 (33) 41,007
Corporate notes. . . . . . . . . . -- -- -- 19,111 (62) 19,049
Certificates of deposit. . . . . . -- -- -- 750 -- 750
Accrued interest . . . . . . . . . 153 -- 153 660 -- 660
---------- ---------- ---------- ---------- ---------- ----------
$ 99,271 $ 420 $ 99,691 $ 177,005 $ (95) $ 176,910
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
8
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out ("FIFO") method. Proprietary products
are manufactured by outside suppliers to EchoStar's specifications. EchoStar
also distributes non-proprietary products purchased from other manufacturers.
Manufactured inventories include materials, labor and manufacturing overhead.
Cost of other inventories includes parts, contract manufacturers' delivered
price, assembly and testing labor, and related overhead, including handling and
storage costs. The major components of inventory were as follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ ------------
EchoStar Receiver Systems . . . . . . . . . . . $ -- $ 20,878
DBS receiver components . . . . . . . . . . . . 9,615 11,544
Consigned DBS receiver components . . . . . . . -- 6,633
Finished goods - C-band . . . . . . . . . . . . 11,161 4,246
Finished goods - International. . . . . . . . . 9,297 3,518
Competitor DBS Receivers. . . . . . . . . . . . 9,404 --
Spare parts . . . . . . . . . . . . . . . . . . 2,089 2,199
Reserve for excess and obsolete inventory . . . (2,797) (4,772)
------------ ------------
$ 38,769 $ 44,246
------------ ------------
------------ ------------
SUBSCRIBER SUBSIDIES, SUBSCRIBER ACQUISITION COSTS, AND DEFFERED PROGRAMMING
AND PRODUCT REVENUE -- DISH NETWORK-SM- SUBSCRIBER PROMOTIONS
Total transaction proceeds to EchoStar (approximately $350 for the
EchoStar Promotion) from DISH Network-SM- programming and equipment sold as a
package under EchoStar promotions are initially deferred and recognized in
revenue over the service period (normally one year), commencing with
authorization of each new subscriber. The excess of EchoStar's cost of the
equipment and programming for the initial prepaid period of Dish Network-SM-
service over proceeds received by EchoStar represents a subsidy provided by
EchoStar for the benefit of the subscriber and is expensed upon shipment of
the equipment. The cost to EchoStar of the related equipment, less the amount
of the subsidy charged to expense upon shipment, is deferred as subscriber
acquisition costs and reflected as amortization over the same period of
service. Programming costs are accrued and expensed as the service is
provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of
programming costs and amortization of subscriber acquisition costs.
DISH Network-SM- programming and equipment which are not sold as a
package under EchoStar promotions are separately presented in the
accompanying consolidated statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation expense on fixed assets was $7.9 million and $17.6 million for the
three and nine months ended September 30, 1996. Cost includes interest
capitalized on the EchoStar DBS System during construction at EchoStar's
effective borrowing rate. The major components of property and equipment were
as follows (in thousands).
9
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
ESTIMATED
USEFUL LIFE DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
------------ ------------ ------------
Construction in progress. . . . . . . . . . . . . . . . -- $ 303,174 $ 281,353
EchoStar I satellite. . . . . . . . . . . . . . . . . . 12 -- 201,607
Furniture, fixtures and equipment . . . . . . . . . . . 2-12 35,127 65,320
Buildings and improvements. . . . . . . . . . . . . . . 7-40 21,006 25,729
Tooling and other . . . . . . . . . . . . . . . . . . . 2 2,039 4,382
Land. . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,613 2,295
Vehicles. . . . . . . . . . . . . . . . . . . . . . . . 7 1,310 1,324
------------ ------------
Total property and equipment. . . . . . . . . . . . . 364,269 582,010
Less-Accumulated depreciation . . . . . . . . . . . (10,269) (27,767)
------------ ------------
Net property and equipment. . . . . . . . . . . . . $ 354,000 $ 554,243
------------ ------------
------------ ------------
Construction in progress includes capitalized costs related to the
construction, insurance and launch of EchoStar II, which was launched in
September 1996 and became fully operational in November 1996 and EchoStar IV,
which is currently scheduled for launch prior to the end of 1998. Construction
in progress for EchoStar III includes costs related to that launch, which is
scheduled prior to the end of 1997. Construction in progress consisted of the
following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ ------------
Progress amounts for satellite construction, launch, launch
insurance, capitalized interest, launch and in-orbit
tracking, telemetry and control services:
EchoStar I. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193,629 $ --
EchoStar II . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,634 225,948
EchoStar III. . . . . . . . . . . . . . . . . . . . . . . . . . . 20,801 28,168
EchoStar IV . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 27,237
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 --
------------ ------------
$ 303,174 $ 281,353
------------ ------------
------------ ------------
OTHER NONCURRENT ASSETS
The major components of other noncurrent assets were as follows
(in thousands):
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ ------------
Long-term notes receivable from DBSC and accrued interest . . . . . . $ 16,000 $ 38,220
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . . . . . 12,109 39,036
FCC authorizations, net of amortization . . . . . . . . . . . . . . . 11,309 15,994
ESBC Notes deferred debt issuance costs, net of amortization. . . . . -- 12,240
Deposit on FCC authorization. . . . . . . . . . . . . . . . . . . . . -- 11,459
Dish Notes deferred debt issuance costs, net of amortization. . . . . 10,622 9,692
SSET convertible subordinated debentures and accrued interest . . . . 9,610 4,776
Investment in DBSC. . . . . . . . . . . . . . . . . . . . . . . . . . 4,111 4,049
DBSI convertible subordinated debentures. . . . . . . . . . . . . . . 1,000 4,000
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897 1,005
------------ ------------
$ 65,658 $ 140,471
------------ ------------
------------ ------------
10
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As of September 30, 1996, EchoStar owned approximately 40% of the
outstanding common stock of Direct Broadcasting Satellite Corporation, a
Delaware Corporation ("DBSC"). DBSC's principal assets include an FCC
conditional satellite construction permit and specific orbital slot assignments
for eleven DBS frequencies at 61.5DEG. WL and eleven DBS frequencies at 175DEG.
WL (the "DBS Rights"). EchoStar intends to merge DBSC with Direct Broadcasting
Satellite Corporation, a Colorado Corporation ("New DBSC"), a wholly owned
subsidiary of EchoStar (the "DBSC Merger"). As a result of the DBSC Merger,
EchoStar will hold, through New DBSC, DBSC's DBS Rights. The DBSC Merger has
been approved by a majority of DBSC's shareholders and the FCC. EchoStar is in
the process of registering shares of its Class A Common Stock which are expected
to be issued in connection with the DBSC Merger. On October 25, 1996, EchoStar
filed Amendment No. 3 to a Registration Statement on Form S-4 under the
Securities Act covering 658,000 shares of EchoStar Class A Common Stock.
FCC AUTHORIZATIONS
FCC authorizations are recorded at cost and are amortized using the
straight-line method. Amortization begins at the time the related satellite
becomes operational, or capitalized costs are written off at the time efforts to
provide services are abandoned. FCC authorization costs are amortized over 12
years, the expected useful life of the related satellite. The deposit on FCC
authorization represents a deposit paid by EchoStar to the FCC in January 1996,
for the 148 Frequencies plus capitalized interest thereon. The balance of $41.8
million due the FCC for the purchase of the frequencies will be drawn from the
ESBC Escrow Account, and is payable to the FCC five days after EchoStar receives
FCC approval for use of the orbital slot, which is expected to occur in the
fourth quarter of 1996.
DEFERRED PROGRAMMING REVENUE -- DISH NETWORK-SM- AND C-BAND
Deferred programming revenue consists of prepayments received
from multi-month subscriptions to DISH Network-SM- programming which are
recognized as revenue in the period the programming is provided. EchoStar
similarly defers prepayments received from subscribers to C-band programming
sold by EchoStar as an authorized distributor.
LONG-TERM DEFERRED SIGNAL CARRIAGE REVENUE
Long-term deferred signal carriage revenue consists of advance payments
from certain programming providers for carriage on the DISH Network-SM- which
are deferred and recognized as revenue on a straight-line basis over contract
terms of up to ten years.
INTEREST EXPENSE
Interest expense, net of amounts capitalized, on the accompanying income
statements includes: (i) amortization of original issue discount on the Dish
Notes and the ESBC Notes; (ii) interest expense on contractor financing of
EchoStar I; (iii) interest expense on corporate mortgage indebtedness; and (iv)
discounts on accounts receivable for EchoStar Receiver Systems and DISH
Network-SM- programming which have been sold without credit recourse to third
party financing groups.
EARNINGS PER SHARE
Earnings per share have been calculated based on the weighted average
number of shares of common stock issued and outstanding. Common stock
equivalents (warrants and employee stock options) were excluded for the three
and nine months ended September 30, 1995 and 1996 because they were not dilutive
to loss per share amounts. Net loss has been adjusted for cumulative dividends
on the 8% Series A Cumulative Preferred Stock.
(3) LONG-TERM DEBT
DISH NOTES
During June 1994, Dish, Ltd. completed the Dish Notes Offering of 624,000
units consisting of $624.0 million aggregate principal amount of the Dish Notes
and 3,744,000 Warrants. The Dish Notes Offering resulted in net proceeds to
Dish, Ltd. of approximately $323.3 million. Substantially all of the Warrants
issued in connection with the Dish Notes Offering have been exercised. Interest
on the Dish Notes currently is not payable in cash but accrues
11
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
through June 1, 1999, with the Dish Notes accreting to $624.0 million by that
date. Thereafter, interest on the Dish Notes will be payable in cash semi-
annually on June 1 and December 1 of each year, commencing December 1, 1999. At
September 30, 1996, the Dish Notes were reflected in the accompanying financial
statements at $422.8 million, net of unamortized discount of $201.2 million.
ESBC NOTES
During March 1996, ESBC completed the ESBC Notes Offering consisting of
$580.0 million aggregate principal amount of the ESBC Notes. The ESBC Notes
Offering resulted in net proceeds to ESBC of approximately $337.0 million.
Interest on the ESBC Notes currently is not payable in cash but accrues through
March 15, 2000, with the ESBC Notes accreting to $580.0 million by that date.
Thereafter, interest on the ESBC Notes will be payable in cash semi-annually on
March 15 and September 15 of each year, commencing September 15, 2000. At
September 30, 1996, the ESBC Notes were reflected in the accompanying financial
statements at $372.6 million, net of unamortized discount of $207.4 million.
(4) BANK CREDIT FACILITY
From May 1994 to May 1996, the principal subsidiaries of Dish, Ltd., other
than EchoStar Satellite Corporation (the "Borrowers"), were parties to an
agreement with Bank of America Illinois, which provided a revolving credit
facility (the "Credit Facility") for working capital advances and for letters of
credit necessary for inventory purchases and satellite construction payments.
The Credit Facility expired in May 1996 and EchoStar does not currently intend
to arrange a replacement credit facility.
(5) INCOME TAXES
The components of the benefit for income taxes were as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1995 1996 1995 1996
-------- -------- -------- -------
Current (provision) benefit
Federal . . . . . . . . . . . . $ (939) $ (262) $(2,551) $ 4,204
State . . . . . . . . . . . . . (215) (668) (586) 298
Foreign . . . . . . . . . . . . (216) (67) (667) (187)
-------- -------- -------- -------
(1,370) (997) (3,804) 4,315
-------- -------- -------- -------
Deferred benefit
Federal . . . . . . . . . . . . 1,594 14,591 5,410 25,692
State . . . . . . . . . . . . . 291 1,356 1,099 1,789
-------- -------- -------- -------
1,885 15,947 6,509 27,481
-------- -------- -------- -------
Total benefit . . . . . . . . $ 515 $14,950 $ 2,705 $31,796
-------- -------- -------- -------
-------- -------- -------- -------
EchoStar's deferred tax assets (approximately $41.5 million at
September 30, 1996) relate principally to temporary differences for amortization
of original issue discount on the Dish Notes and ESBC Notes, net operating loss
carryforwards, temporary differences for depreciation of property and equipment
and various accrued expenses which are not deductible until paid. No valuation
allowance has been provided because EchoStar currently believes it is more
likely than not that these deferred tax assets will ultimately be realized. If
future operating results differ materially and adversely from EchoStar's current
expectations, its judgment regarding the need for a valuation allowance may
change.
12
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) OTHER COMMITMENTS AND CONTINGENCIES
SATELLITE CONTRACTS
EchoStar has contracted with Lockheed Martin Corporation ("Martin") for the
construction and delivery of high powered DBS satellites and for related
services. Martin constructed both EchoStar I and EchoStar II and is in the
construction phase on EchoStar III and EchoStar IV. The construction contract
for EchoStar III includes a PER DIEM penalty of $3,333, to a maximum of
$100,000, if EchoStar III is not delivered by July 31, 1997. Beginning
September 1, 1997, additional delays in the delivery of EchoStar III would
result in additional PER DIEM penalties of $33,333, up to a maximum of $5.0
million in the aggregate. The contract for EchoStar IV includes a PER DIEM
penalty of $50,000, to a maximum of $5.0 million in the aggregate, if EchoStar
IV is not delivered by February 15, 1998. The contract also contains a provision
whereby Martin is entitled to an early delivery incentive payment of $50,000 for
each day before February 15, 1998 the satellite is delivered to the launch site
of Baikonur, Kazakhstan, up to a maximum of $5.0 million in the aggregate. This
contract also contains an option provision which allows EchoStar to commence the
construction phase of a fifth DBS satellite ("EchoStar V").
EchoStar is utilizing $28.0 million of contractor financing for EchoStar
II. The financing bears interest at 8.25% and is payable in equal monthly
principal and interest installments over five years following launch. Contractor
financing of $15.0 million each will be used for EchoStar III and EchoStar IV.
Interest on the contractor financing for EchoStar III and EchoStar IV will range
between 7.75% and 8.25%, with equal monthly installments due over five years
following the launch of the respective satellite.
EchoStar has entered into a contract for launch services with Lockheed
Martin Commercial Launch Services, Inc. ("Lockheed") for the launch of EchoStar
III from Cape Canaveral Air Station, Florida during the fall of 1997, subject to
delay or acceleration in certain circumstances (the "Lockheed Contract"). The
Lockheed Contract provides for launch of the satellite utilizing an Atlas IIAS
launch vehicle. EchoStar has made an initial payment to Lockheed of $5.0 million
and the remaining price is payable in installments in accordance with the
payment schedule set forth in the Lockheed Contract, which requires that
substantially all payments be made to Lockheed prior to the launch.
In July 1996, EchoStar and Martin amended the contracts for the
construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount of
$10 million (increasing to more than $40 million by 1999) and the principal
stockholder of EchoStar pledged all of his Preferred Stock to Martin ("Preferred
Stock Guarantee"). Under the amended agreements, EchoStar issued a corporate
guarantee covering all obligations to Martin with respect to the contractor
financing for EchoStar I and EchoStar II. In consideration for the receipt of
the corporate guarantee by EchoStar, Martin has agreed to eliminate the letter
of credit requirements, and to release the Preferred Stock Guarantee in
accordance with a specified formula based on the then outstanding contractor
financing debt and the market value of EchoStar's Class A Common Stock. This
transaction has been approved by EchoStar's board of directors with EchoStar's
principal stockholder abstaining from the vote. Additionally, EchoStar will
issue a corporate guarantee covering all obligations to Martin with respect to
the contractor financing for EchoStar III and EchoStar IV.
EchoStar has contracted with Lockheed-Khrunichev-Energia-International,
Inc. ("LKE") for the launch of EchoStar IV during 1998 from the Kazakh Republic,
a territory of the former Soviet Union, utilizing a Proton launch vehicle (the
"LKE Contract"). Either party may request a delay in the launch period, subject
to the payment of penalties based on the length of the delay and the proximity
of the request to the launch date. EchoStar has paid LKE $20.0 million pursuant
to the LKE Contract. No additional payments are currently required to be made to
LKE until 1997.
In connection with the satellite contracts discussed above and other
related commitments, in the fourth quarter of 1996 EchoStar expects to expend:
(i) approximately $3.9 million for contractor financing on EchoStar I and
EchoStar II; (ii) approximately $19.0 million in connection with the launch of
EchoStar III; (iii) approximately $37.0 million for construction of EchoStar III
and EchoStar IV; and (iv) approximately $41.8 million for the purchase of the
148 Frequencies. Funds for these expenditures are expected to come from the ESBC
Notes Escrow Account and available cash and marketable investment securities.
Beyond 1996, EchoStar will expend approximately $68.7 million on contractor
financing debt related to EchoStar I and EchoStar II. Additionally, EchoStar has
committed to expend
13
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
approximately an additional $260 million to build, launch and support EchoStar
III and EchoStar IV in 1997 and beyond. In order to continue to build, launch
and support EchoStar III and EchoStar IV beyond the first quarter of 1997,
EchoStar will need additional capital. Even if EchoStar terminates the
construction contracts with Martin for the construction of EchoStar III and
EchoStar IV, EchoStar will still need additional capital as a result of
termination penalties contained in the contracts. There can be no assurances
that additional capital will be available, or, if available, that it will be
available on terms favorable to EchoStar.
PURCHASE COMMITMENTS
EchoStar has entered into agreements with various manufacturers to purchase
DBS receivers and related components manufactured based on EchoStar's supplied
specifications. As of September 30, 1996 the remaining commitments total
approximately $148.7 million. As described previously, EchoStar has agreements
with two manufacturers to supply DBS receivers for EchoStar. Only one of the
manufacturers has produced a receiver acceptable to EchoStar. Since EchoStar has
given the non-performing manufacturer notice of its intent to terminate the
contract and has filed suit against that manufacturer, EchoStar has not included
amounts due under the contract in EchoStar's purchase commitments. At September
30, 1996, the total of all outstanding purchase order commitments with domestic
and foreign suppliers was approximately $150.0 million. All but approximately
$19.2 million of the purchases related to these commitments are expected to be
made during 1996 and the remainder are expected to be made during 1997. EchoStar
expects to finance these purchases from available cash, marketable investment
securities and sales of its DISH Network-SM- programming.
OTHER RISKS AND CONTINGENCIES
EchoStar is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of EchoStar.
(7) SUMMARY FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
The Dish Notes are fully, unconditionally and jointly and severally
guaranteed by all subsidiaries of Dish, Ltd. (collectively, the "Dish Notes
Guarantors"), except for certain de minimis domestic and foreign subsidiaries.
The ESBC Notes are initially guaranteed by EchoStar on a subordinated
basis. On and after the Dish Guarantee Date (as defined in the ESBC Notes
Indenture), the ESBC Notes will be guaranteed by Dish, Ltd., which guarantee
will rank PARI PASSU with all senior unsecured indebtedness of Dish, Ltd. On and
after the date upon which the DBSC Merger is consummated, the ESBC Notes will be
guaranteed by New DBSC, which guarantee will rank PARI PASSU with all senior
unsecured indebtedness of New DBSC.
The consolidated net assets of Dish, Ltd., including the non-guarantors,
exceeded the consolidated net assets of the Dish Notes Guarantors by
approximately $277,000 and $134,000 as of December 31, 1995 and September 30,
1996, respectively. Summarized consolidated financial information for Dish, Ltd.
is as follows (in thousands).
14
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1995 1996 1995 1996
-------- -------- -------- -------
Income Statement Data --
Revenue . . . . . . . . . . . . $43,606 $ 40,871 $123,271 $151,251
Expenses. . . . . . . . . . . . 43,265 68,433 122,860 205,374
-------- -------- -------- -------
Operating income (loss) . . . . 341 (27,562) 411 (54,123)
Other income (expense), net . . (2,111) (7,970) (8,440) (19,846)
-------- -------- -------- -------
Net loss before income taxes. . (1,770) (35,532) (8,029) (73,969)
Benefit for income taxes. . . . 854 13,391 3,060 27,340
-------- -------- -------- -------
Net loss. . . . . . . . . . . $ (916) $(22,141) $ (4,969) $(46,629)
-------- -------- -------- -------
-------- -------- -------- -------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
Balance Sheet Data --
Current assets. . . . . . . . . . . . . . . . $ 81,858 $155,576
Property and equipment, net . . . . . . . . . 333,199 495,055
Other noncurrent assets . . . . . . . . . . . 144,238 104,359
------------ -------------
Total assets. . . . . . . . . . . . . . . . $559,295 $754,990
------------ -------------
------------ -------------
Current liabilities . . . . . . . . . . . . . $ 50,743 $225,145
Long-term liabilities . . . . . . . . . . . . 415,662 483,846
Stockholder's equity. . . . . . . . . . . . . 92,890 45,999
------------ -------------
Total liabilities and stockholder's
equity. . . . . . . . . . . . . . . . . . $559,295 $754,990
------------ -------------
------------ -------------
15
ECHOSTAR COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relates to the consolidated
financial condition and results of operations of EchoStar Communications
Corporation, and should be read in conjunction with the financial statements
and notes thereto included elsewhere in this Form 10-Q/A
THIS FORM 10-Q/A OF ECHOSTAR CONTAINS STATEMENTS WHICH CONSTITUTE
FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THE FORM 10-Q/A
AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS
OF ECHOSTAR WITH RESPECT TO, AMONG OTHER THINGS: (I) ECHOSTAR'S FINANCING
AND STRATEGIC TRANSACTION PLANS; (II) TRENDS AFFECTING ECHOSTAR'S FINANCIAL
CONDITIONS OR RESULTS OF OPERATIONS; (III) ECHOSTAR'S GROWTH STRATEGY; (IV)
ECHOSTAR'S ANTICIPATED RESULTS OF FUTURE OPERATIONS; AND (V) REGULATORY
MATTERS AFFECTING ECHOSTAR. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
SUCH FORWARD LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE SIGNIFICANT RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS.
OVERVIEW
EchoStar currently operates four related businesses: (i) operation
of the DISH Network-SM- and the EchoStar DBS System; (ii) design, manufacture,
marketing, installation and distribution of DTH products worldwide; (iii)
domestic distribution of DTH programming; and (iv) consumer financing of
EchoStar's domestic products and services. During March 1996 EchoStar began
broadcasting and selling programming packages available from the DISH
Network-SM-. EchoStar expects to derive its future revenue principally from
periodic subscription fees for DISH Network-SM- Programming and, to a lesser
extent, from the sale of equipment. The growth of DBS service and equipment
sales has had and will continue to have a material negative impact on
EchoStar's domestic sales of C-band DTH products; however this negative
impact has been more than offset for the nine months ended September 30, 1996
by sales of EchoStar Receiver Systems. As sales of EchoStar DBS programming
and receivers increase, EchoStar expects the decline in its sales of domestic
C-band DTH products to continue at an accelerated rate.
EchoStar generally bills for DISH Network-SM- programming periodically
in advance and recognizes revenue as service is provided. DISH Network-SM-
revenue is a function of: (i) the number of subscribers; (ii) the mix of
programming packages selected by subscribers; (iii) the rates charged
subscribers; (iv) revenue from ancillary programming activities (such as
Pay-Per-View) ; and (v) revenue from satellite usage time agreements. DBS
programming costs are generally based upon the number of subscribers to each
programming offering.
ECHOSTAR PROMOTIONS AND REVISION OF ACCOUNTING POLICY
Since August 1996, EchoStar has introduced several marketing promotions,
the most significant of which is the EchoStar Promotion which allows
independent retailers to offer a standard EchoStar Receiver System to
consumers for a suggested retail price of $199 (as compared to the original
average retail price in March 1996 of approximately $499), conditioned upon
the consumer's prepaid purchase of one year of America's Top 50 CD-SM-
programming package for approximately $300. Total transaction proceeds to
EchoStar (approximately $350 for the EchoStar Promotion) are less than
EchoStar's cost of the equipment and programming for the initial prepaid year
of DISH Network-SM- service. The excess cost represents a subsidy provided by
EchoStar for the benefit of the subscriber and is expensed upon shipment of
the equipment. For the three and nine months ended September 30, 1996,
subscriber promotion subsidies for the EchoStar Promotion and other smaller
EchoStar promotions totalled approximately $6.0 million. See "Notes 1 and 2
of EchoStar's Notes to Condensed Consolidated Financial Statements as of
September 30, 1996."
Subsequent to September 30, 1996, EchoStar entered into a strategic
marketing relationship with Gateway 2000 ("Gateway"). Purchasers of certain
computer models from Gateway receive a coupon which the consumer may present
to EchoStar for a free EchoStar DBS Receiver System, conditioned upon the
consumer's prepaid purchase from EchoStar of one year of America's Top CD-SM-
programming package for approximately $300 (the "Gateway Promotion").
Accounting followed for the Gateway Promotion is identical to that described
above for the EchoStar Promotion, except the amount of the per subscriber
subsidy charged to expense upon shipment of the equipment is approximately
$50 greater. EchoStar has conducted other promotions which are similar to the
EchoStar Promotion, on a limited basis.
The primary purposes of the EchoStar Promotion are to rapidly build a
subscriber base, to expand retail distribution of EchoStar's products and to
build consumer awareness of the DISH Network-SM- brand. This promotion is
consistent with and emphasizes EchoStar's long-term business strategy which
focuses on generating the majority of its future revenue through sales of
DISH Network-SM- programming to a substantial subscriber base. The EchoStar
16
Promotion, the Gateway Promotion, and other promotions offered by EchoStar
result in EchoStar incurring significant costs to acquire subscribers.
EchoStar believes these aggregate costs will be fully recouped from DBS
programming profits expected to be generated from subscriber renewals and
incremental service offerings, primarily because, unlike the cellular phone
industry, the reception equipment cannot be utilized with competitors'
systems and, therefore, the subscribers cannot seamlessly migrate to
alternative DBS providers after the initial prepaid year of DISH Network-SM-
service. EchoStar Receiver Systems process only DISH Network-SM- signals
because of the proprietary encryption technology employed.
Based on high DBS industry consumer satisfaction ratings, initial feedback
from consumers and dealers and low EchoStar subscriber turnover rates, EchoStar
anticipates high service renewal rates leading to an expected average minimum
subscriber life of at least three years. In addition, a majority of DISH
Network-SM- subscribers have purchased premium and Pay-Per-View programming for
incremental amounts above the prepaid minimum required by the EchoStar
Promotion, which reduces the time necessary to recoup the average costs
incurred per subscriber.
Total transaction proceeds to EchoStar from DISH Network-SM- programming
and equipment sold as a package under the EchoStar promotions are initially
deferred and recognized in revenue over the service period (normally one
year), commencing with authorization of each new subscriber. The excess of
EchoStar's cost of the equipment and programming for the initial prepaid
period of DISH Network-SM- service over proceeds received by EchoStar
represents subscriber promotion subsidies provided by EchoStar for the
benefit of the subscriber and is expensed upon shipment of the equipment. The
cost to EchoStar of the related equipment, less the amount of the subscriber
promotion subsidies charged to expense upon shipment, is deferred as
subscriber acquisition costs and reflected as amortization over the same
period of service. Programming costs are accrued and expensed as the service
is provided. Excluding expected incremental revenues from premium and
Pay-Per-View programming, the accounting followed results in revenue
recognition over the initial period of service equal to the sum of
programming costs and amortization of subscriber acquisition costs.
The accompanying financial statements as of and for the nine months
ended September 30, 1996, have been restated. The original accounting followed
by EchoStar for promotional package sales of service and equipment did not
recognize an immediate charge for the subscriber subsidy, as described above,
and transaction proceeds were allocated between service revenues and
equipment sales revenues. The revised accounting eliminates the need to
allocate transaction proceeds between programming service and equipment
revenues and places no reliance on incremental revenues from add-on services
or subscription renewals to realize deferred subscriber acquisition costs.
The restatement had no material effect on any prior periods through June 30,
1996. Approximate effects on results of operations for the nine month period
ended September 30, 1996 were: revenues decreased from $172.0 million to
$157.4 million, or $14.6 million, which amount was principally offset by a
corresponding reduction in expenses; operating (loss) increased by a net
amount of $6.0 million, from $(43.6) million to $(49.6) million, principally
due to the immediate expensing of subscriber promotion subsidies; net loss
attributable to Common Shares increased by $4.0 million from $(53.2) million
to $(57.2) million; and loss per share increased from $(1.31) to $(1.41).
EchoStar's present marketing strategy is based on current competitive
conditions which may change, and such changes could be adverse to EchoStar.
Future changes in marketing strategy may include additional promotions,
including promotions geared toward further increasing the affordability of
EchoStar Receiver Systems and related accessories which, among other things,
could increase EchoStar's cost of acquiring new subscribers.
17
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1995
REVENUE. Total revenue for the three and nine months ended September
30, 1996 was $42.4 million and $157.4 million, respectively, a decrease of
$1.2 million, or 3%, and an increase of $34.1 million, or 28%, respectively,
as compared to total revenue for the three and nine months ended September
30, 1995 of $43.6 million and $123.3 million, respectively. Revenue from
domestic sales of DTH products for the three and nine months ended September
30, 1996 was $13.5 million and $88.4 million, respectively, a decrease of
$12.3 million, or 48%, and an increase of $22.7 million, or 34%,
respectively, as compared to the same periods in 1995. There was $6.7
million and $58.4 million in domestic revenue from the sale of EchoStar
Receiver Systems included in revenue from domestic sales of DTH products
during the three and nine months ended September 30, 1996, respectively.
There were no EchoStar Receiver System sales during the comparable periods in
1995. During both of the three months and nine months ended September 30,
1996 "DISH Network-SM- programming and product revenues--subscriber
promotions" were $4.4 million compared to no revenues in 1995. Virtually the
entire amounts of these revenues are revenue recognition of deferred
transaction proceeds from the EchoStar Promotion. These proceeds are
recognized ratably over a one year period from commencement of service to the
subscriber. In addition to the decrease in domestic revenues for the three
months ended September 30, 1996, sales of C-band satellite receivers also
decreased by $5.7 million or 48% as compared to the same period in 1995. The
increase in domestic revenues for the nine months ended September 30, 1996
was partially offset by a decrease in sales of C-band satellite receivers of
$14.5 million or 32% as compared to the same period in 1995. Domestic
revenue generated from satellite receivers sold for a competitor's DBS system
("Competitor DBS Receivers") decreased approximately $10.2 million, or 100%,
and $15.0 million, or 65%, for the three and nine months ended September 30,
1996, respectively, compared to the same periods in 1995. There was no
revenue and $8.0 million of revenue from Competitor DBS Receiver sales for
the three and nine months ended September 30, 1996, respectively, as compared
to $10.2 million and $23.0 million for the same periods in 1995. Domestic
revenue also decreased by $3.0 million, or 82%, and $6.6 million, or 63%,
from sales of non-proprietary descrambler modules, during the three and nine
months ended September 30, 1996, as compared to the same periods in 1995. The
domestic market for C-band DTH products continued to decline during the three
and nine months ended September 30, 1996, and this decline will continue to
accelerate with the growth of DBS service and equipment sales. Consistent
with the increases in revenue noted above, EchoStar has experienced a
corresponding increase in trade accounts receivable at September 30, 1996,
and expects this trend to continue as EchoStar develops additional channels
of equipment distribution.
Domestically, EchoStar sold approximately 160,000 and 315,000
satellite receivers in the three and nine months ended September 30, 1996,
respectively, an increase of 321% and 246%, respectively, as compared to
approximately 38,000 and 91,000 satellite receivers, respectively, for the
same periods in 1995. Of the total number of satellite receivers sold for
the three and nine months ended September 30, 1996, approximately 154,000 and
274,000, respectively, were EchoStar Receiver Systems. EchoStar Receiver
System revenue represented approximately 52% and 47%, respectively, of total
revenue for the three and nine months ended September 30, 1996. Although
there was a significant increase in the number of satellite receivers sold in
1996 as compared to 1995, overall revenue did not increase proportionately as
a result of the revenue recognition policy being applied to satellite
receivers sold under the EchoStar Promotion combined with an approximate 26%
reduction in the average selling price of C-band satellite receivers.
Currently, EchoStar has chosen to reduce the retail price of EchoStar's
proprietary DBS reception equipment when consumers subscribe to and prepay
for DISH Network-SM- programming service for a minimum of one year. Total
transaction proceeds to EchoStar from DISH Network-SM- programming service
and equipment sold as a package under EchoStar promotions are initially
deferred and recognized in revenue over the initial year of service,
commencing with authorization of each new subscriber. The excess of
EchoStar's equipment and programming costs for the initial prepaid period of
DISH Network-SM- service over proceeds received by EchoStar represents
subscriber promotional subsidies provided by EchoStar for the benefit of the
subscriber and is expensed upon shipment of the equipment. The cost to
EchoStar of the related equipment, less the amount of the subscriber
promotional subsidies charged to expense upon shipment, is deferred as
subscriber acquisition costs and reflected as amortization over the same
period of service.
Also included in the number of satellite receivers sold for the nine months
ended September 30, 1996 are approximately 19,000 Competitor DBS Receivers as
compared to 40,000, for the same period in 1995. During the nine months
ended September 30, 1996, the Competitor DBS Receivers were sold at an
approximate 25% reduction in the average selling price as compared to the nine
months ended September 30, 1995. Competitor DBS
18
Receiver revenue represented approximately 5% of total revenue for the nine
months ended September 30, 1996. EchoStar's agreement to distribute
Competitor DBS Receiver systems terminated on December 31, 1995 and during
the first half of 1996, EchoStar sold all of its remaining inventory of
Competitor DBS Receivers. The elimination of Competitor DBS Receiver
inventory has been more than offset by a substantial increase in inventory of
EchoStar Receiver Systems and related components, the sale of which has more
than offset the elimination of revenue derived from the sale of Competitor
DBS Receivers.
DISH Network-SM- programming and promotional products revenue was $16.3
million and $22.3 million for the three and nine months ended September 30,
1996, respectively. Since EchoStar did not begin broadcasting and selling
programming packages available on the DISH Network-SM- service until March
1996, there was no DISH Network-SM- programming revenue generated during the
comparable periods in 1995. DISH Network-SM- programming and promotional
products revenue represented 38% and 14% of total revenue for the three and
nine months ended September 30, 1996, respectively. In future periods,
EchoStar expects these percentages to continue to increase as EchoStar
expands its DISH Network-SM- subscriber base. EchoStar had approximately
190,000 and 315,000 subscribers to DISH Network-SM-programming as of
September 30, 1996 and December 20, 1996, respectively.
C-band programming revenue was $2.9 million and $9.5 million for the
three and nine months ended September 30, 1996, respectively, a decrease of
$906,000, or 24%, and $2.0 million, or 17%, compared to the same periods in
1995. The decrease is attributable to the industry-wide decline in domestic
C-band equipment sales and the related decline in domestic C-band
programming revenue. This decline in C-band equipment sales and the related
programming revenue is expected to continue and accelerate for the
foreseeable future. The decline in C-band programming revenue in 1996
has been more than offset by sales of DISH Network-SM- programming.
Loan origination and participation income for the three and nine months
ended September 30, 1996 was $1.7 million and $6.8 million, respectively, an
increase of $1.3 million, or 288%, and $5.5 million, or 434%, respectively,
compared to the same periods in 1995. The increase in loan origination and
participation income for the three and nine months ended September 30, 1996
was primarily due to increased financed volume, including the financing of
EchoStar Receiver Systems.
Revenue from international sales of DTH products for the three and nine
months ended September 30, 1996 was $8.0 million and $30.3 million,
respectively, a decrease of $5.5 million, or 41%, and $14.5 million, or 32%,
respectively, as compared to the same periods in 1995. The decrease is directly
attributable to a decrease in the number of analog satellite receivers sold
combined with decreasing margins on products sold. Internationally, EchoStar
sold approximately 53,000 and 180,000 analog satellite receivers during the
three and nine months ended September 30, 1996, a decrease of 34% and 31%,
respectively, compared to approximately 80,000 and 261,000 units sold during
the same periods in 1995. Overall, EchoStar's international markets for analog
DTH products declined during the three and nine months ended September 30,
1996 as anticipation for new international digital
19
services continued to increase. This international decline in demand for
analog satellite receivers is similar to the decline which has occurred in
the United States and was expected by EchoStar. To offset this anticipated
decline in demand for analog satellite receivers, EchoStar has been
negotiating with digital service providers to distribute their proprietary
receivers in EchoStar's international markets. While EchoStar is actively
pursuing these distribution opportunities, no assurance can be given that
such negotiations will be successful.
OPERATING EXPENSES. Costs of DTH products sold were $19.7 million and
$109.9 million for the three and nine months ended September 30, 1996,
respectively, a decrease of $11.2 million, or 36%, and an increase of $22.3
million, or 25%, respectively, as compared to the same periods in 1995. The
decrease for the three months ended September 30, 1996 resulted primarily
from the accounting treatment of the EchoStar promotion discussed above. The
increase in DTH operating expenses for the nine months ended September 30,
1996 resulted primarily from the increase in sales of EchoStar Receiver
Systems. Operating expenses for DTH products as a percentage of DTH product
revenue were 91% and 93% for the three and nine months ended September 30,
1996, respectively, compared to 78% and 79% for the same periods in 1995,
respectively. This increase is principally attributable to an approximate
26% reduction in the average worldwide selling price of C-band satellite
receivers and a 25% reduction in the average selling price of Competitor DBS
Receivers, as described above.
The costs of DISH Network-SM- programming were $6.1 million and $7.9
million for the three and nine months ended September 30, 1996, respectively.
Since EchoStar did not begin broadcasting and selling DISH Network-SM-
programming packages until March 4, 1996, there were no DISH Network-SM-
programming expenses incurred during the comparable periods in 1995.
The costs of C-band programming were $2.6 million and $8.6 million for
the three and nine months ended September 30, 1996, respectively, a decrease
of $900,000, or 26%, and $1.7 million, or 16%, respectively, as compared to
the same periods in 1995. This decrease is mainly attributable to the
decrease in C-band programming revenue. Although there was a decrease in
C-band programming revenue, gross profit margins earned on C-band programming
remained relatively consistent. As previously discussed, the domestic market
for C-band DTH products has continued to decline with the growth of DBS
service and equipment sales.
SUBSCRIBER PROMOTIONAL SUBSIDIES. Subcriber promotional subsidies,
determined as previously described, were approximately $6.0 million for the
three and nine months ended September 30, 1996. EchoStar introduced these
promotions in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23.7 million and $53.6 million for the three
and nine months ended September 30, 1996, respectively, an increase of $15.5
million, or 187%, and $30.1 million, or 128%, respectively, as compared to
the same periods in 1995. This increase was principally due to: (i)
increased personnel in all areas of the organization to support the DISH
Network-SM-; (ii) marketing and advertising prior to and in conjunction with
the introduction of DISH Network-SM- service; (iii) costs related to the
Digital Broadcast Center, which commenced operations in the third quarter of
1995; and (iv) costs associated with operation of the DISH Network-SM- Call
Centers and subscription management related services. In future periods,
EchoStar believes that although total selling, general and administrative
expenses will continue to increase, the increase as a percentage of future
revenue will decrease as subscribers are added and additional revenue from
sales of DISH Network-SM-programming is recognized.
20
Research and development costs totaled $1.6 million and $4.2 million for
the three and nine months ended September 30, 1996, respectively, as compared
to $1.5 million and $4.0 million for the same periods in 1995. The increase
was principally due to research and development costs related to digital DBS
receivers for domestic and international markets, principally offset by a
reduction in research related to C-band receivers for domestic and
international markets. EchoStar expenses research and development costs as
incurred and includes these costs in selling, general and administrative
expenses.
EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION, AMORTIZATION OF
SUBSCRIBER ACQUISITION COSTS AND OTHER AMORTIZATION. As expected, EchoStar
incurred operating losses for the three and nine months ended September 30,
1996. Earnings before interest, income taxes, depreciation, amortization of
subscriber acquisition costs and other amortization for the three and nine
months ended September 30, 1996 was a negative $15.6 million and a negative
$28.6 million, respectively, a decrease of $16.7 million and $30.5 million,
respectively, compared to the same periods in 1995. The decreases resulted
from the factors affecting revenue and expenses discussed above. This
calculation is not intended to represent cash flows for the period, nor has
it been presented as an alternative to operating income as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. EchoStar expects to continue to report
operating losses through at least 1998.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization for
the three and nine months ended September 30, 1996 was $11.3 million and
$21.0 million, respectively, an increase of $10.5 million and $19.5 million,
respectively, as compared to the same periods in 1995. The overall increase
primarily resulted from depreciation on EchoStar I and the Digital Broadcast
Center which were placed in service during the first quarter of 1996 and the
fourth quarter of 1995, respectively, and the amortization of subscriber
acquisition costs. Depreciation of fixed assets for the three and nine
months ended September 30, 1996 was approximately $7.9 million and $17.6
million, respectively. Amortization of subscriber acquisition costs were
approximately $3.4 million for the three and nine months ended September 30,
1996. As a result of the EchoStar Promotion, in future periods, amortization
expense will be of a magnitude which significantly exceeds historical levels.
OTHER INCOME AND EXPENSE. Other expense, net for the three and nine
months ended September 30, 1996 was $14.6 million and $38.5 million,
respectively, an increase of $13.4 million and $31.0 million, respectively,
as compared to the same periods in 1995. The increase in other expense for
the three and nine month periods ending September 30, 1996 resulted primarily
from an increase in interest expense resulting from the issuance of the ESBC
Notes. The increase has been partially offset by an increase in interest
income attributable to increases in the balances of the ESBC Escrow Account,
cash and marketable investment securities accounts as a result of proceeds
received from the issuance of the ESBC Notes.
21
INCOME TAX BENEFIT. Income tax benefit for the three and nine months
ended September 30, 1996 was $15.0 million and $31.8 million, respectively,
compared to income tax benefit of $515,000 and $2.7 million during the same
periods in 1995. This increase is principally the result of changes in
components of income and expenses discussed above during the three and nine
months ended September 30, 1996. EchoStar's deferred tax assets
(approximately $41.5 million at September 30, 1996) relate principally to
temporary differences for amortization of original issue discount on the 1994
and 1996 Notes, net operating loss carryforwards and various accrued expenses
which are not deductible until paid. No valuation allowance has been
provided because EchoStar currently believes it is more likely than not that
these deferred tax assets will ultimately be realized. If future operating
results differ materially and adversely from EchoStar's current expectations,
its judgment regarding the need for a valuation allowance may change.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used by operations totaled approximately $8.4 million for the
nine months ended September 30, 1996, as compared to $10.3 million used by
operations for the same period in 1995. The cash used by operations for the
nine months ended September 30, 1996 was mainly a result of increases in
subscriber acquisition costs, accounts receivable, inventory and other
current assets offset by an increase in deferred programming and promotional
product revenue related to the EchoStar Promotion.
From May 1994 to May 1996, the principal subsidiaries of Dish, Ltd.,
other than EchoStar Satellite Corporation (the "Borrowers"), were parties to
an agreement with Bank of America Illinois, which provided a revolving credit
facility (the "Credit Facility") for working capital advances and for letters
of credit necessary for inventory purchases and satellite construction
payments. The Credit Facility expired in May 1996 and EchoStar does not
currently intend to arrange a replacement credit facility.
During June 1994, EchoStar issued 624,000 units consisting of $624.0
million principal amount of the Dish Notes and 3,744,000 Warrants
(representing 2,808,000 shares of EchoStar Class A Common Stock) for
aggregate net proceeds of approximately $323.3 million, which were placed in
the Dish Notes Escrow Account. As of September 30, 1996, substantially all
of the Warrants issued in connection with the Dish Notes Offering had been
exercised. Through September 30, 1996, $353.6 million had been withdrawn
from the Dish Notes
22
Escrow Account. At September 30, 1996, approximately $328.7 million of these
proceeds had been applied to development and construction of the EchoStar DBS
System and approximately $24.9 million had been applied to other permitted
uses.
In March 1996, ESBC consummated a private placement of the ESBC Notes
which were subsequently registered with the Securities and Exchange
Commission. ESBC was formed in January 1996 for the purpose of the ESBC
Notes Offering. In connection with the ESBC Notes Offering, EchoStar has
contributed all of the outstanding capital stock of its wholly owned
subsidiary, Dish, Ltd., to ESBC. ESBC issued $580.0 million principal amount
of the ESBC Notes for aggregate net proceeds of approximately $337.0 million
of which $177.3 million was placed in the ESBC Notes Escrow Account and the
remaining $159.7 million was placed in cash and cash equivalents or
marketable investment securities. Through September 30, 1996, $46.3 million
had been withdrawn from the ESBC Notes Escrow Account for development and
construction of EchoStar III and EchoStar IV. As of September 30, 1996,
approximately $135.4 million remained in the ESBC Escrow Account, which
included investment earnings. Subsequent to September 30, 1996, an
additional $25.5 million has been withdrawn from the ESBC Notes Escrow
Account. Total cash on hand and marketable investment securities at
September 30, 1996 were approximately $73.2 million. EchoStar guarantees the
ESBC Notes on a subordinated basis.
EchoStar's Equity Offering in June 1995 resulted in net proceeds of
approximately $63.0 million. EchoStar's assets at September 30, 1996
included assets purchased with those proceeds. Substantially all of the
proceeds from the Equity Offering were used: (i) to secure launches for
EchoStar III and EchoStar IV; (ii) to support, through loans to DBSC,
construction of EchoStar III; (iii) to purchase, for $4.0 million,
convertible subordinated secured debentures from DBS Industries, Inc.; and
(iv) for general corporate purposes, including the down payment for the
frequencies at 148DEG. WL purchased at the FCC Auction in January 1996, which
will be reimbursed with the proceeds of the 1996 Notes Offering at the time
the final payment for the frequencies is made to the FCC.
EchoStar anticipates expending an additional $35 million in working
capital during the fourth quarter of 1996, including investment in subscriber
acquisition costs. This cash requirement could increase if any of the
following occur, among other things: (i) subscriptions to DISH Network-SM-
programming differ from anticipated levels; (ii) actual expenses exceed
present estimates; or (iii) investment in subscriber acquisition costs
continue to increase beyond planned levels. In addition to the working
capital requirements discussed above, during the fourth quarter of 1996,
EchoStar expects to expend: (i) approximately $3.9 million for contractor
financing on EchoStar I and EchoStar II; (ii) approximately $19.0 million in
connection with the launch of EchoStar III; (iii) approximately $37.0 million
for construction of EchoStar III and EchoStar IV; and (iv) approximately
$41.8 million for the purchase of the frequencies at 148DEG. WL. Funds for
these expenditures are expected to come from the ESBC Notes Escrow Account
and available cash and marketable investment securities. Beyond 1996,
EchoStar will expend approximately $68.7 million to repay contractor
financing debt related to EchoStar I and EchoStar II. Additionally, EchoStar
has committed to expend approximately an additional $260 million to build,
launch and support EchoStar III and EchoStar IV in 1997 and beyond. In order
to continue to build, launch and support EchoStar III and EchoStar IV beyond
the first quarter of 1997, EchoStar will need additional capital. Even if
EchoStar terminates the construction contracts with Lockheed Martin for the
construction of
23
EchoStar III and EchoStar IV, EchoStar will still need additional capital as
a result of termination penalties contained in the contracts. There can be
no assurances that additional capital will be available, or, if available,
that it will be available on terms favorable to EchoStar.
As a result of the factors discussed above, EchoStar will need to raise
additional capital to complete the construction and launch of EchoStar III
and EchoStar IV. There can be no assurance that necessary funds will be
available or, if available, that they will be available on terms favorable to
EchoStar. In anticipation of its future capital requirements and in order to
fully implement its business strategy, EchoStar regularly examines, and is
currently examining, opportunities to expand its DBS business, technology
base and product lines through means such as licenses, joint ventures,
strategic alliances, strategic investments and acquisitions of assets or
ongoing businesses. Currently, EchoStar has not made a commitment to any new
strategic transaction. At any time, however, EchoStar may agree to enter into
a new strategic transaction. Should EchoStar agree to enter into a new
strategic transaction, there can be no assurance as to the terms or timing of
the transaction, whether the transaction will be consummated or whether the
transaction would improve EchoStar's financial condition, results of
operations, business or prospects in any material manner. Further increases
in the investment in subscriber acquisition costs, inadequate supplies of DBS
receivers or significant delays or launch failures would significantly and
adversely affect EchoStar's operating results and financial condition.
EchoStar expects net losses to continue as it builds its subscription
television business, and therefore, absent additional capital, negative
stockholders' equity will result before June 30, 1997. EchoStar's
expected net losses will result primarily from: (i) the amortization of the
original issue discount on the Dish Notes and ESBC Notes; (ii) increases in
depreciation expense on the satellites and other fixed assets; (iii)
increases in subscriber promotional subsidies and amortization of subscriber
acquisition costs; and (iv) increases in selling, general and administrative
expenses to support the DISH Network-SM-. Although a negative equity position
has significant implications, including, but not limited to, non-compliance
with NASDAQ National Market listing criteria, EchoStar believes this event
will not materially affect the implementation and execution of its business
strategy. When EchoStar ceases to satisfy NASDAQ's National Market listing
criteria, EchoStar's Common Stock will be subject to being delisted unless an
exception is granted by the National Association of Securities Dealers. If
an exception were not granted, trading in EchoStar Common Stock would
thereafter be conducted in the over-the-counter market. Consequently, it
would be more difficult to dispose of, or to obtain accurate quotations as to
the price of, the EchoStar Common Stock. Delisting would result in a decline
in EchoStar's Common Stock trading market which could potentially depress
stock and bond prices, among other things.
EchoStar has entered into a contract with Lockheed Martin to begin the
construction phase of EchoStar IV. This contract also allows EchoStar to
begin the construction phase of EchoStar V. Concurrent with execution of this
contract, EchoStar waived all penalties due from Lockheed Martin for the late
delivery of EchoStar I and EchoStar II.
In July 1996, EchoStar and Lockheed Martin amended the contracts for
the construction of EchoStar I and EchoStar II. As collateral security for
contractor financing of EchoStar I and EchoStar II, EchoStar was required to
provide a letter of credit prior to the launch of EchoStar II in the amount
of $10 million (increasing to more than $40 million by 1999) and the
principal stockholder of EchoStar pledged all of his Preferred Stock to
Lockheed Martin ("Preferred Stock Guarantee"). Under the amended agreements,
EchoStar issued a corporate guarantee covering all obligations to Lockheed
Martin with respect to the contractor financing for EchoStar I and EchoStar
II. In consideration for the receipt of the corporate guarantee by EchoStar,
Lockheed Martin has agreed to eliminate the letter of credit requirements,
and to release the Preferred Stock Guarantee in accordance with a specified
formula based on the then outstanding contractor financing debt and the
market value of EchoStar's Class A Common Stock. This transaction has been
approved by EchoStar's board of directors with EchoStar's principal
stockholder
24
abstaining from the vote. Additionally, EchoStar will issue a corporate
guarantee covering all obligations to Lockheed Martin with respect to the
contractor financing for EchoStar III and EchoStar IV.
In addition to the commitments described above, EchoStar has entered
into agreements with various manufacturers to purchase DBS receivers and
related components manufactured based on EchoStar's supplied specifications.
As of September 30, 1996 the remaining commitments total approximately $148.7
million. As described previously, EchoStar has agreements with two
manufacturers to supply DBS receivers for EchoStar. Only one of the
manufacturers has produced a receiver acceptable to EchoStar. Since EchoStar
has given the non-performing manufacturer notice of its intent to terminate
the contract, EchoStar has not included amounts due under the contract in
EchoStar's purchase commitments. At September 30, 1996, the total of all
outstanding purchase order commitments with domestic and foreign suppliers
was approximately $150.0 million. All but approximately $19.2 million of the
purchases related to these commitments are expected to be made during 1996
and the remainder is expected to be made during 1997. EchoStar expects to
finance these purchases from available cash, marketable investment securities
and sales of its DISH Network-SM- programming.
EchoStar had outstanding $415.7 million and $849.2 million of long-term
debt (including the Dish Notes and ESBC Notes, deferred satellite contract
payments on EchoStar I and EchoStar II and mortgage indebtedness) as of
December 31, 1995 and September 30, 1996, respectively. In addition, because
interest on the Dish Notes is not payable currently in cash but accrues
through June 1, 1999, the Dish Notes will accrete by $201.2 million through
that date. Similarly, because interest on the ESBC Notes is not payable in
cash but accrues through March 15, 2000, the ESBC Notes will accrete by
$207.4 million through that date. EchoStar is utilizing $28.0 million of
contractor financing for EchoStar II. The financing bears interest at 8.25%
and is payable in equal monthly principal and interest installments over five
years following launch. Contractor financing of $15.0 million and $12.0
million will be used for EchoStar III and EchoStar IV, respectively.
Interest on the contractor financing for EchoStar III and EchoStar IV will
range between 7.75% and 8.25%, with equal monthly installments due over five
years following the launch of the respective satellite.
AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR
The Dish Notes Indenture and ESBC Notes Indenture impose various
restrictions on the transfer of funds among EchoStar and its subsidiaries.
Although the ESBC Notes are collateralized by the stock of Dish, Ltd.,
various assets expected to form an integral part of the EchoStar DBS System
(and not otherwise encumbered by the Dish Notes Indenture), and guarantees of
EchoStar and certain of its other subsidiaries, ESBC's ability to fund
interest and principal payments on the ESBC Notes will depend on successful
operation and the acquisition of an adequate number of subscribers to the
DISH Network-SM-and ESBC having access to available cash flows generated by
the DISH Network-SM-, which in turn will depend on EchoStar's success in
attracting subscribers to the DISH Network-SM-. If cash available to ESBC is
not sufficient to service the ESBC Notes, EchoStar would be required to
obtain cash from other sources such as issuance of equity securities, new
borrowings or asset sales. There can be no assurance that those alternative
sources would be available, or available on favorable terms, or sufficient to
meet debt service requirements on the ESBC Notes.
OTHER
DISH NOTES AND ESBC NOTES
Three DBS orbital locations licensed by the FCC are generally
recognized as capable of providing satellite service to the entire
continental United States ("CONUS"). EchoStar has the right to utilize at
least 21 DBS frequencies at one of those CONUS slots. In the event the number
of frequencies EchoStar has the right to use at a CONUS orbital location is
reduced to less than 21, then ESBC will be required to make an offer to
repurchase all of the outstanding ESBC Notes, and Dish, Ltd. will be required
to make an offer to repurchase one half of the outstanding Dish Notes. In
the event the number of frequencies
25
EchoStar has the right to use at a full CONUS orbital location falls below
11, then Dish, Ltd. will be required to make an offer to repurchase all of
the outstanding Dish Notes, rather than only half. Additionally, in the
event that EchoStar DBS, a wholly owned subsidiary of EchoStar, fails to
obtain authorization from the FCC for frequencies purchased at the FCC
Auction in January 1996, or in the event that such authorization is revoked
or rescinded, ESBC will be required under the ESBC Notes Indenture to
repurchase up to $52.3 million of principal amount of the 1996 Notes.
If the DBSC Merger or similar transaction does not occur on or before
March 1, 1997, ESBC will be required to repurchase at least $83.0 million
principal amount of the ESBC Notes. Further, in the event that EchoStar
incurs more than $7.8 million in expenses (as defined in the 1996 Notes
Indenture) in connection with the DBSC Merger, ESBC will be required to apply
an amount equal to such expenses minus $7.8 million to an offer to repurchase
the maximum principal amount of the ESBC Notes that may be purchased out of
such proceeds.
If any of the above described events were to occur, EchoStar's plan of
operations, including its liquidity, would be adversely affected and its
current business plan may not be fully implemented. Further, EchoStar's
short-term liquidity would be adversely affected in the event of: (i)
significant delay in the delivery of certain products and equipment necessary
for operation of the EchoStar DBS System; (ii) shortfalls in estimated levels
of operating cash flows; or (iii) unanticipated expenses in connection with
development of the EchoStar DBS System.
RECEIVER MANUFACTURERS
EchoStar has agreements with two manufacturers to supply DBS receivers
for EchoStar. Only one of the manufacturers has produced a receiver
acceptable to EchoStar. EchoStar previously deposited $10.0 million with the
non-performing manufacturer and has an additional $15.0 million in an escrow
account as security for EchoStar's payment obligations under that contract.
EchoStar has given this non-performing manufacturer notice of its intent to
terminate the contract and has filed suit against that manufacturer.
Consequently, EchoStar is currently dependent on one manufacturing source for
its receivers. Since EchoStar has given the non-performing manufacturer
notice of its intent to terminate the contract, EchoStar has not included
amounts due under the contract in EchoStar's future purchase commitments.
The performing manufacturer is presently manufacturing receivers in
sufficient quantities to meet currently expected demand. If EchoStar's sole
manufacturer is unable for any reason to produce receivers in a quantity
sufficient to meet demand, EchoStar's liquidity and results of operations
would be adversely affected. There can be no assurance EchoStar will be able
to recover any amounts deposited with the non-performing manufacturer or held
in escrow.
26
EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment Of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No.
121"). EchoStar has adopted SFAS No. 121 in the first quarter of 1996 and
its adoption has not had a material impact on EchoStar's financial position,
results of operations or cash flows.
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by FASB in October 1995
and effective for fiscal years beginning after December 15, 1995, encourages,
but does not require, a fair value based method of accounting for employee
stock options or similar equity instruments. It also allows an entity to
elect to continue to measure compensation cost under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No.
25"), but requires pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied. EchoStar
intends to continue to measure compensation cost under APB No. 25 and to
comply with the pro forma disclosure requirements. Therefore, this statement
has had no impact on EchoStar's results of operations.
IMPACT OF INFLATION; BACKLOG
Inflation has not materially affected EchoStar's operations during the
past three years. EchoStar believes that its ability to increase charges for
products and services in future periods will depend primarily on competitive
pressures. EchoStar does not have any material backlog of its products.
27
PART II
ITEM 1. LEGAL PROCEEDINGS
EchoStar is a party to certain legal proceedings arising in the
ordinary course of its business. EchoStar does not believe that any of these
proceedings will have a material adverse affect on EchoStar's financial
position or results of operations.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1* Amended and Restated Agreement for Exchange of Stock and Merger,
dated as of May 31, 1995, by and among EchoStar Communications
Corporation, a Nevada corporation formed in April 1995
("EchoStar"), Charles W. Ergen and EchoStar (incorporated herein
by reference to Exhibit 2.2 to the Registration Statement Form
S-1, Registration No. 33-91276).
2.2* Agreement regarding purchase of debentures between Dish, Ltd.
(formerly EchoStar Communications Corporation, a Nevada
corporation formed in December 1993 ("Dish")), SSE Telecom, Inc.
("SSET"), dated March 14, 1994, including Plan and Agreement of
Merger, by and among Dish, DirectSat Merger Corporation,
DirectSat Corporation and SSET (incorporated herein by reference
to Exhibit 2.2 to the Registration Statement on Form S-1,
Registration No. 33-76450).
2.3* Plan and Agreement of Merger made as of December 21, 1995 by and
among EchoStar, Direct Broadcasting Satellite Corporation, a
Colorado Corporation ("MergerCo") and Direct Broadcasting
Satellite Corporation, a Delaware Corporation ("DBSC")
(incorporated herein by reference to Exhibit 2.3 to the
Registration Statement on Form S-4, Registration No. 333-03584).
2.4* Merger Trigger Agreement entered into as of December 21, 1995 by
and among EchoStar, MergerCo and Direct Broadcasting Satellite
Corporation, a Delaware Corporation ("DBSC") (incorporated
herein by reference to Exhibit 2.3 to the Registration Statement
on Form S-4, Registration No. 333-03584).
3.1(a)* Amended and Restated Articles of Incorporation of EchoStar
(incorporated herein by reference to Exhibit 3.1(a) to the
Registration Statement on Form S-1, Registration No. 33-91276).
3.1(b)* Bylaws of EchoStar (incorporated herein by reference to Exhibit
3.1(b) to the Registration Statement on Form S-1, Registration
No. 33-91276).
4.1* Indenture of Trust between Dish and First Trust National
Association ("First Trust"), as Trustee (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.2* Warrant Agreement between EchoStar and First Trust, as Warrant
Agent (incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
4.3* Security Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Registration
No. 33-76450).
4.4* Escrow and Disbursement Agreement between Dish and First Trust
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
4.5* Pledge Agreement in favor of First Trust, as Trustee under the
Indenture filed as Exhibit 4.1 herein (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Registration No. 33-76450).
4.6* Intercreditor Agreement among First Trust, Continental Bank,
N.A. and Martin Marietta Corporation ("Martin Marietta")
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Registration No. 33-76450).
4.7* Series A Preferred Stock Certificate of Designation of EchoStar
(incorporated herein by reference to Exhibit 4.7 to the
Registration Statement on Form S-1 of EchoStar, Registration
No. 33-91276).
29
EXHIBIT NO. DESCRIPTION
----------- -----------
4.8* Registration Rights Agreement by and between EchoStar and
Charles W. Ergen (incorporated herein by reference to Exhibit
4.8 to the Registration Statement on Form S-1 of EchoStar,
Registration No. 33-91276).
4.9* Indenture of Trust between ESB and First Trust, as Trustee
(incorporated herein by reference to Exhibit 4.9 to the Annual
Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.10* Security Agreement of ESB in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein
by reference to Exhibit 4.10 to the Annual Report on Form 10-K
of Echostar, Commission File No. 0-26176).
4.11* Escrow and Disbursement Agreement between ESB and First Trust
(incorporated herein by reference to Exhibit 4.11 to the Annual
Report on Form 10-K of EchoStar, Commission File No. 0-26176).
4.12* Pledge Agreement of ESB in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein
by reference to Exhibit 4.12 to the Annual Report on Form 10-K
of EchoStar, Commission File No. 0-26176).
4.13* Pledge Agreement of EchoStar in favor of First Trust, as Trustee
under the Indenture filed as Exhibit 4.9 (incorporated herein by
reference to Exhibit 4.13 to the Annual Report on Form 10-K of
EchoStar, Commission File No. 0-26176).
4.14* Registration Rights Agreement by and between the Issuer,
EchoStar, Dish, New DBSC and Donald, Lufkin & Jenrette
Securities Corporation (incorporated herein by reference to
Exhibit 4.14 to the Annual Report on Form 10-K of EchoStar,
Commission File No. 0-26176).
10.1(a)* Satellite Construction Contract, dated as of February 6, 1990,
between EchoStar Satellite Corporation ("ESC") and Martin
Marietta Corporation as successor to General Electric
EchoStar, Astro-Space Division ("General Electric")
(incorporated herein by reference to the Registration
Statement on Form S-1 of Dish, Registration No. 33-76450).
10.1(b)* First Amendment to the Satellite Construction Contract, dated as
of October 2, 1992, between ESC and Martin Marietta as successor
to General Electric (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.1(c)* Second Amendment to the Satellite Construction Contract, dated
as of October 30, 1992, between ESC and Martin Marietta as
successor to General Electric (incorporated herein by reference
to the Registration Statement on Form S-1 of Dish, Ltd.
Registration No. 33-76450).
10.1(d)* Third Amendment to the Satellite Construction Contract, dated
as of April 1, 1993, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.1(e)* Fourth Amendment to the Satellite Construction Contract, dated
as of August 19, 1993, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.1(f)* Form of Fifth Amendment to the Satellite Construction Contract,
between ESC and Martin Marietta (incorporated herein by
reference to the Registration Statement on Form S-8 of EchoStar,
Registration No. 33-81234).
30
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1(g)* Sixth Amendment to the Satellite Construction Contract, dated
as of June 7, 1994, between ESC and Martin Marietta
(incorporated herein by reference to the Registration Statement
on Form S-8 of EchoStar, Registration No. 33-81234).
10.1(h)* Eighth Amendment to the Satellite Construction Contract, dated
as of July 18, 1996, between ESC and Martin Marietta
(incorporated herein by reference to Exhibit 10.1(h) to the Form
10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.2* Satellite Launch Contract, dated as of September 27, 1993,
between ESC and the China Great Wall Industry Corporation
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.3* Distributor Agreement, dated as of July 30, 1993, between
Echosphere Corporation ("Echosphere") and Thomson Consumer
Electronics, Inc. (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.4* Master Purchase and License Agreement, dated as of August 12,
1986, between Houston Tracker Systems, Inc. ("HTS") and Cable/
Home Communications Corp. (a subsidiary of General Instruments
Corporation) (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.5* Master Purchase and License Agreement, dated as of June 18,
1986, between Echosphere and Cable/Home Communications Corp.
(a subsidiary of General Instruments Corporation) (incorporated
herein by reference to the Registration Statement on Form S-1 of
Dish, Ltd. Registration No. 33-76450).
10.6* Merchandising Financing Agreement, dated as of June 29, 1989,
between Echo Acceptance Corporation ("EAC") and Household Retail
Services, Inc. (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.7* Key Employee Bonus Plan, dated as of January 1, 1994
(incorporated herein by reference to the Registration Statement
on Form S-1 of Dish, Ltd. Registration No. 33-76450).
10.8* Consulting Agreement, dated as of February 17, 1994, between
ESC and Telesat Canada (incorporated herein by reference to the
Registration Statement on Form S-1 of Dish, Ltd. Registration
No. 33-76450).
10.9* Form of Satellite Launch Insurance Declarations (incorporated
herein by reference to the Registration Statement on Form S-1
of Dish, Ltd. Registration No. 33-76450).
10.10* Dish, Ltd. 1994 Stock Incentive Plan (incorporated herein by
reference to the Registration Statement on Form S-1 of Dish,
Ltd., Registration No. 33-76450).
10.11* Form of Tracking, Telemetry and Control Contract between AT&T
Corp. and ESC (incorporated herein by reference to the
Registration Statement on Form S-8 of EchoStar, Registration
No. 33-81234).
10.12* Manufacturing Agreement, dated as of March 22, 1995, between
HTS and SCI Technology (incorporated herein by reference to
Exhibit 10.12 to the Registration Statement as Form S-1 of
Dish, Ltd., Commission File No. 33-81234).
10.13* Manufacturing Agreement dated as of April 14, 1995 by and
between ESC and Sagem Group (incorporated herein by reference
to Exhibit 10.13 to the Registration Statement on Form S-1 of
EchoStar, Registration No. 33-91276).
31
EXHIBIT NO. DESCRIPTION
----------- -----------
10.14* Statement of Work, dated January 31, 1995 from EchoStar
Satellite Corporation Inc. to Divicom Inc. (incorporated herein
by reference to Exhibit 10.14 to the Registration Statement on
Form S-1, Registration No. 33-91276).
10.15* Launch Services Contract, dated as of June 2, 1995, by and
between EchoStar Satellite Corporation and Lockheed-Khrunichev-
Energia International, Inc. (incorporated herein by reference to
Exhibit 10.15 to the Registration Statement on Form S-1,
Registration No. 33-91276).
10.16* EchoStar 1995 Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.16 to the Registration Statement on
Form S-1, Registration No. 33-91276).
10.17(a)* Eighth Amendment to Satellite Construction Contract, dated as
of February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated herein by reference to
Exhibit 10.17(a) to the Form 10-Q of EchoStar as of June 30,
1996, Commission File No. 0-26176).
10.17(b)* Ninth Amendment to Satellite Construction Contract, dated as of
February 1, 1994, between DirectSat Corporation and Martin
Marietta Corporation (incorporated herein by reference to
Exhibit 10.15 to the Registration Statement of Form S-4,
Registration No. 333-03584).
10.17(c)* Tenth Amendment to Satellite Construction Contract, dated as of
July 18, 1996, between DirectSat Corporation and Martin Marietta
Corporation incorporated herein by reference to Exhibit 10.17(b)
to the Form 10-Q of EchoStar as of June 30, 1996, Commission
File No. 0-26176).
10.18* Satellite Construction Contract, dated as of July 18, 1996,
between EchoStar DBS Corporation and Lockheed Martin
Corporation (incorporated herein by reference to the Form
10-Q of EchoStar as of June 30, 1996, Commission File
No. 0-26176).
10.19* Confidential Amendment to Satellite Construction Contract
between DBSC and Martin Marietta Corporation, dated as of May
31, 1995 (incorporated herein by reference to Exhibit 10.15 to
the Registration Statement of Form S-4, Registration No.
333-03584).
11 Computation of Earnings Per Share for the three and nine months
ended September 30, 1996.
27 Financial Data Schedule
- --------------
* Incorporated by reference pursuant to Rule 12D-32 under the Securities and
Exchange Act of 1934, as amended.
(b) REPORTS ON FORM 8-K.
No current reports on Form 8-K were filed by EchoStar during the period
covered by this Quarterly Report on Form 10-Q.
32
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EchoStar Communications Corporation
Date: December 24, 1996 /s/ J. ALLEN FEARS
-----------------------------------------
J. Allen Fears
Vice President, Treasurer and Corporate
Controller
/s/ J. ALLEN FEARS
-----------------------------------------
J. Allen Fears
Principal Accounting Officer
33
EXHIBIT 11
PAGE 1 OF 2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRIMARY EARNINGS PER SHARE CALCULATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- ------------
(RESTATED) (RESTATED)
INCOME DATA:
Net loss................................. $ (360) $(26,518) $(4,387) $(56,293)
Preferred stock dividends................ (301) (301) (903) (903)
------- -------- ------- -------
Net loss attributable to common shares... $ (661) $(26,819) $(5,290) $(57,196)
------- -------- ------- -------
------- -------- ------- -------
COMMON AND COMMON EQUIVALENT SHARES:
Weighted average common shares .......... 37,544 40,456 34,965 40,455
Equivalent common shares from warrants... -- (a) -- (a) -- (a) -- (a)
Equivalent common shares from
stock options........................... -- (a) -- (a) -- (a) -- (a)
------- -------- ------- -------
Common and common equivalent shares...... 37,544 40,456 34,965 40,455
------- -------- ------- -------
------- -------- ------- -------
EARNINGS PER COMMON SHARE:
Net loss per common and common
equivalent shares....................... $ (.02) $ (.66) $ (.15) $ (1.41)
------- -------- ------- -------
------- -------- ------- -------
(a) Excludes common stock equivalents which are antidilutive.
EXHIBIT 11
PAGE 2 OF 2
ECHOSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FULLY DILUTED EARNINGS PER SHARE CALCULATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- ------------
(RESTATED) (RESTATED)
INCOME DATA:
Net loss attributable to common shares... $ (661) $(26,819) $(5,290) $(57,196)
------- -------- ------- -------
------- -------- ------- -------
COMMON AND COMMON EQUIVALENT SHARES:
Weighted average common shares........... 37,544 40,456 34,965 40,455
Equivalent common shares from warrants... -- (a) -- (a) -- (a) -- (a)
Equivalent common shares from
stock options........................... -- (a) -- (a) -- (a) -- (a)
Weighted average common shares from
conversion of preferred stock........... -- (a) -- (a) -- (a) -- (a)
------- -------- ------- -------
Common and common equivalent shares...... 37,544 40,456 34,965 40,455
------- -------- ------- -------
------- -------- ------- -------
EARNINGS PER COMMON SHARE:
Net loss per common and common
equivalent shares....................... $ (.02) $ (.66) $ (.15) $ (1.41)
------- -------- ------- -------
------- -------- ------- -------
(a) Excludes common stock equivalents and convertible preferred stock which
are antidilutive.
5
1,000
3-MOS 9-MOS
DEC-31-1996 DEC-31-1996
SEP-30-1996 SEP-30-1996
31,079 31,079
42,122 42,122
20,075 20,075
(1,117) (1,117)
44,246 44,246
220,501 220,501
582,010 582,010
(27,767) (27,767)
1,092,125 1,092,125
133,804 133,804
849,189 849,189
18,098 18,098
0 0
408 408
83,458 83,458
1,092,125 1,092,125
40,687 150,575
42,402 157,393
28,299 126,404
69,300 206,977
14,570 38,505
521 587
19,996 53,180
(41,468) (88,089)
14,950 31,796
(26,518) (56,293)
0 0
0 0
0 0
(26,518) (56,293)
(.66) (1.41)
(.66) (1.41)
Includes sales of programming.
Inlcudes the cost of providing programming.
Net of amounts capitalized.
