-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CkbPIcb/nJlrVgiWLEIYetoT86Q+y8RHg3XC+Q+oQDX/lgN0OehFruqxaNILSZNh 6V6HUJlo2Oe4mHvO8cW3Zg== 0001047469-97-006928.txt : 19971208 0001047469-97-006928.hdr.sgml : 19971208 ACCESSION NUMBER: 0001047469-97-006928 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971205 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECHOSTAR COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001001082 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 880336997 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-26176 FILM NUMBER: 97733121 BUSINESS ADDRESS: STREET 1: 90 INVERNESS CIRCLE EAST CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037998222 MAIL ADDRESS: STREET 1: 90 INVERNESS CIRCLE EAST CITY: ENGLEWOOD STATE: CO ZIP: 80112 10-Q/A 1 FORM 10-Q/A =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-Q/A-1 (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________. Commission file number 0-26176 ECHOSTAR COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0336997 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 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 --- --- AS OF NOVEMBER 10, 1997, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF 14,703,165 SHARES OF CLASS A COMMON STOCK AND 29,804,401 SHARES OF CLASS B COMMON STOCK. =============================================================================== TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1996 and September 30, 1997 (Unaudited) 1 Condensed Consolidated Statements of Operations - Three and nine months ended September 30, 1996 and 1997 (Unaudited) 2 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1997 (Unaudited) 3 Notes to Condensed Consolidated Financial Statements (Unaudited) 4* Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K 26 DISH NETWORK-SM- IS A SERVICE MARK OF ECHOSTAR COMMUNICATIONS CORPORATION. * Note 8 to Condensed Consolidated Financial Statements was revised to include prior year information. ECHOSTAR COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) DECEMBER 31, SEPTEMBER 30, 1996 1997 -------------------------- ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 39,231 $ 30,973 Marketable investment securities 18,807 31,252 Trade accounts receivable, net of allowance for uncollectible accounts of $1,494 and $2,809, respectively 13,516 54,480 Inventories 72,767 23,050 Subscriber acquisition costs, net 68,129 43,338 Other current assets 23,186 11,239 ----------- ----------- Total current assets 235,636 194,332 Restricted Cash and Marketable Investment Securities: 1996 Notes escrow 47,491 -- Satellite Escrow -- 91,945 Interest Escrow -- 110,659 Other 31,800 2,245 ----------- ----------- Total restricted cash and marketable investment securities 79,291 204,849 Property and equipment, net 590,621 810,771 FCC authorizations, net 72,667 97,072 Deferred tax assets 79,339 79,339 Other noncurrent assets 83,826 38,505 ----------- ----------- Total assets $ 1,141,380 $ 1,424,868 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Trade accounts payable $ 40,819 $ 37,928 Deferred revenue 103,100 105,699 Accrued programming 9,462 16,452 Accrued expenses and other current liabilities 21,033 70,678 Deferred tax liabilities 12,563 12,198 Current portion of long-term obligations 11,334 12,572 ----------- ----------- Total current liabilities 198,311 255,527 Long-term obligations, net of current portion: Long-term deferred satellite services revenue 5,949 7,039 1994 Notes 437,127 483,339 1996 Notes 386,165 424,431 1997 Notes -- 375,000 Mortgages and other notes payable, net of current portion 51,428 42,277 Other long-term obligations 1,203 9,423 ----------- ----------- Total long-term obligations, net of current portion 881,872 1,341,509 ----------- ----------- Total liabilities 1,080,183 1,597,036 Commitments and Contingencies (Note 10) Stockholders' Equity (Deficit): Preferred Stock, 20,000,000 shares authorized, 1,616,681 shares of 8% Series A Cumulative Preferred Stock issued and outstanding, including accrued dividends of $3,347 and $4,250, respectively 18,399 19,302 Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 11,115,582 and 11,585,028 shares issued and outstanding, respectively 111 116 Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares issued and outstanding 298 298 Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none outstanding -- -- Common Stock Warrants 16 11 Additional paid-in capital 158,113 166,549 Unrealized holding losses on available-for-sale securities, net of deferred taxes (11) -- Accumulated deficit (115,729) (358,444) ----------- ----------- Total stockholders' equity (deficit) 661,197 (172,168) ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 1,141,380 $ 1,424,868 ----------- ----------- ----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements. 1 ECHOSTAR COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1996 1997 1996 1997 -------------------------------- ------------------------------- REVENUE: DISH Network: Subscription television services $ 13,235 $ 82,078 $ 17,482 $ 192,986 Other 2,794 13,698 9,497 35,090 -------- --------- -------- --------- Total DISH Network 16,029 95,776 26,979 228,076 DTH equipment sales and integration services 9,933 22,584 72,653 38,651 Satellite services 1,994 3,669 3,819 7,879 Other 2,406 2,797 9,158 7,300 -------- --------- -------- --------- Total revenue 30,362 124,826 112,609 281,906 COSTS AND EXPENSES: DISH Network Operating Expenses: Subscriber-related expenses 7,009 42,732 9,270 97,307 Call center and other 4,418 10,754 6,859 23,189 Satellite and transmission 1,384 3,442 2,882 9,676 -------- --------- -------- --------- Total DISH Network operating expenses 12,811 56,928 19,011 130,172 Cost of sales - DTH equipment and integration services 9,466 11,943 72,955 26,642 DISH Network Marketing: Subscriber promotion subsidies 6,000 63,603 6,000 94,616 Advertising and other 3,946 16,786 11,459 24,104 -------- --------- -------- --------- Total DISH Network marketing expenses 9,946 80,389 17,459 118,720 General and administrative 13,772 17,209 31,747 48,857 Amortization of subscriber acquisition costs 3,368 34,124 3,460 95,542 Depreciation and amortization 7,897 12,958 17,561 38,315 -------- --------- -------- --------- Total costs and expenses 57,260 213,551 162,193 458,248 -------- --------- -------- --------- Operating loss (26,898) (88,725) (49,584) (176,342) Other Income (Expense): Interest income 5,335 5,559 14,718 8,902 Interest expense, net of amounts capitalized (19,996) (31,898) (53,180) (73,941) Other 91 (73) (43) (367) -------- --------- -------- --------- Total other income (expense) (14,570) (26,412) (38,505) (65,406) -------- --------- -------- --------- Loss before income taxes (41,468) (115,137) (88,089) (241,748) Income tax benefit (provision), net 14,950 (20) 31,796 (64) -------- --------- -------- --------- Net loss $(26,518) $(115,157) $(56,293) $(241,812) -------- --------- -------- --------- -------- --------- -------- --------- Loss attributable to common shares $(26,819) $(115,458) $(57,196) $(242,715) -------- --------- -------- --------- -------- --------- -------- --------- Weighted-average common shares outstanding 40,456 41,558 40,455 41,364 -------- --------- -------- --------- -------- --------- -------- --------- Loss per common and common equivalent share $ (0.66) $ (2.78) $ (1.41) $ (5.87) -------- --------- -------- --------- -------- --------- -------- ---------
See accompanying Notes to Condensed Consolidated Financial Statements. 2 ECHOSTAR COMMUNICATIONS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 1997 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (56,293) $(241,812) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 17,561 38,315 Amortization of subscriber acquisition costs 3,460 95,542 Deferred income tax benefit (27,481) (365) Amortization of debt discount and deferred financing costs 41,988 60,650 Change in reserve for excess and obsolete inventory 2,579 2,230 Change in other long-term obligations 7,168 9,310 Other, net (2,578) 60 Changes in current assets and current liabilities, net 5,168 (4,009) ------------------------------- Net cash flows used in operating activities (8,428) (40,079) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable investment securities (54,111) (33,006) Sales of marketable investment securities 27,846 20,572 Purchases of restricted marketable investment securities (20,761) (1,145) Purchases of property and equipment (13,400) (36,727) Offering proceeds and investment earnings placed in escrow (191,941) (224,858) Funds released from escrow accounts and restricted cash - other 134,968 100,445 Expenditures for satellite systems under construction (167,829) (146,831) Long-term notes receivable from DBSC (20,000) -- Expenditures for FCC authorizations (13,626) (38) Other 2,252 (1,541) ------------------------------- Net cash flows used in investing activities (316,602) (323,129) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of 1996 Notes 336,994 -- Net proceeds from issuance of 1997 Notes -- 362,500 Repayments of mortgage indebtedness and notes payable (4,207) (8,413) Stock options exercised 1,568 863 ------------------------------- Net cash flows provided by financing activities 334,355 354,950 ------------------------------- Net increase (decrease) in cash and cash equivalents 9,325 (8,258) Cash and cash equivalents, beginning of period 21,754 39,231 ------------------------------- Cash and cash equivalents, end of period $ 31,079 $ 30,973 ------------------------------- ------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest, net of amounts capitalized $ 11,192 $ 3,529 Cash paid for income taxes -- -- Capitalized interest 22,853 27,861 Class A Common Stock cancelled to foreclose on convertible subordinated debentures from DBSI -- (4,479) Note payable issued for deferred satellite construction payments for EchoStar II 28,000 -- 8% Series A Cumulative Preferred Stock dividends 903 903 Accrued satellite construction costs -- 3,500 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 -- Employee incentives funded by issuance of Class A Common Stock 207 60 The purchase price of DBSC was allocated as follows in the related purchase accounting: EchoStar III satellite under construction -- 51,241 FCC authorizations -- 16,651 Notes receivable from DBSC, including accrued interest of $3,382 -- (49,382) Investment in DBSC -- (4,044) Accounts payable and accrued expenses -- (1,974) Other notes payable -- (500) Common stock and additional paid-in capital -- (11,992)
See accompanying Notes to Condensed Consolidated Financial Statements. 3 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS ACTIVITIES PRINCIPAL BUSINESS The operations of EchoStar Communications Corporation (together with its subsidiaries, "EchoStar" or the "Company") include three interrelated business units: (i) a direct broadcast satellite ("DBS") subscription television service in the United States (the "DISH Network"); (ii) the design, manufacture, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network ("EchoStar Receiver Systems"), and the design, manufacture and distribution of similar equipment for direct-to-home ("DTH") projects of others internationally, together with the provision of uplink center design and construction oversight and other project integration services for international DTH ventures ("Technology"); and (iii) the turn-key delivery of video, audio and data, primarily from EchoStar satellites, to customers for business television and other satellite users. These services include uplink, satellite transponder space, sales and installation of ground segment equipment, and billing services ("Satellite Services"). EchoStar had approximately 350,000 and 820,000 DISH Network subscribers as of December 31, 1996 and September 30, 1997, respectively. EchoStar's C-band DTH products, programming and related services businesses are no longer material to its operations and EchoStar expects revenues from its C-band lines of business to continue to decline. RECENT DEVELOPMENTS The Company launched its third DBS satellite ("EchoStar III") on October 5, 1997. Commencing in January 1998, the Company expects to use EchoStar III to retransmit local network programming from approximately ten of the largest cities in the eastern and central time zones (assuming receipt of any required retransmission consents and copyright licenses and/or congressional or regulatory action necessary to extend and clarify the scope of the statutory compulsory license to cover local satellite retransmission of network-affiliated station signals), and to provide subscribers with additional sports, foreign language, cultural, business, educational and other niche programming. As technology advances and demand increases, the Company also expects to use EchoStar III to provide popular Internet and other computer data at high transmission speeds and to offer subscribers HDTV. While all testing of EchoStar III to date indicates the satellite is functioning properly, the ultimate success of the launch and in-orbit operation of EchoStar III will not be established until approximately December 1997. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, 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 adjustments) considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Certain prior year amounts have been reclassified to conform with the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. Actual results could differ from those estimates. 4 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) CASH AND CASH EQUIVALENTS The Company considers all liquid investments purchased with original maturities of 90 days or less to be cash equivalents. Cash equivalents as of December 31, 1996 and September 30, 1997 principally consisted of money market funds, corporate notes and commercial paper; such balances are stated at cost which equates to market value. SUBSCRIBER PROMOTION SUBSIDIES AND SUBSCRIBER ACQUISITION COSTS During August 1996, EchoStar introduced a promotion (the "1996 Promotion") which permits 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 prior to August 1996 of approximately $499), conditioned upon the consumer's prepaid one-year subscription to the DISH Network's America's Top 50 CD programming package for approximately $300. Total transaction proceeds to EchoStar are less than its aggregate costs (equipment, programming and other) for the initial prepaid subscription period are initially deferred, and recognized as revenue over the related prepaid subscription term (normally one year). The excess of EchoStar's aggregate costs over proceeds received is expensed ("subscriber promotion subsidies") upon shipment of the equipment. Remaining costs are deferred and reflected in the accompanying consolidated balance sheets as subscriber acquisition costs and amortized over the prepaid subscription term of the subscriber. Programming costs are expensed as service is provided. Excluding expected incremental revenues from premium and Pay-Per-View programming, this accounting results in revenue recognition over the initial period of service equal to the sum of programming costs and amortization of subscriber acquisition costs. Proceeds from sales made pursuant to the 1996 Promotion attributable to DISH Network subscription television services are included within the caption "DISH Network - Subscription Television Services" in the accompanying statements of operations. The portion of the proceeds from sales made pursuant to the 1996 Promotion deemed attributable to EchoStar Receiver Systems is included within the caption "DISH Network - Other" in the accompanying statements of operations. The following summarizes revenues recognized pursuant to the 1996 Promotion: THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1996 1997 1996 1997 -------------------------------- ------------------------------- Subscription television services $3,346 $36,162 $3,346 $ 93,459 EchoStar Receiver Systems 1,057 11,805 1,057 30,759 -------------------------------- ------------------------------- Total $4,403 $47,967 $4,403 $124,218 -------------------------------- ------------------------------- -------------------------------- -------------------------------
During June 1997, the 1996 Promotion was enhanced to permit independent retailers to offer a standard EchoStar Receiver System to consumers for a suggested retail price of $199 without an extended subscription commitment (the "1997 Promotion"). Net transaction costs associated with the 1997 Promotion are expensed as incurred (reported as a component of subscriber promotion subsidies) in the accompanying statements of operations. Since introduction of the 1997 Promotion, the majority of new subscriber activations have resulted therefrom. INCOME TAXES Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires that the tax benefit of net operating losses ("NOLs") for financial reporting purposes be recorded as an asset and that deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets. To the extent that management assesses the realization of deferred tax assets to be less than "more likely than not," a valuation reserve is established. EchoStar has fully reserved the 1997 additions to its deferred tax assets. 5 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NET LOSS ATTRIBUTABLE TO COMMON SHARES Net loss attributable to common shares is calculated based on the weighted-average number of shares of common stock issued and outstanding during the respective periods. Common stock equivalents (warrants and employee stock options) are antidilutive and are therefore excluded. Net loss attributable to common shares also is adjusted for cumulative dividends on the 8% Series A Cumulative Preferred Stock. 3. RESTRICTED CASH AND MARKETABLE INVESTMENT SECURITIES Restricted cash and marketable investment securities held in escrow accounts, as reflected in the accompanying condensed consolidated balance sheets, includes cash restricted by the indenture associated with the 1997 Notes (as defined) and the remaining restricted cash proceeds from a 1996 offering (the "1996 Notes Offering") of 13 1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes"), plus in both cases investment earnings thereon. A portion of the proceeds from the 1997 Notes Offering (as defined) is held in two separate escrow accounts (the "Interest Escrow" and the "Satellite Escrow") as required by the related indenture (see Note 7). Restricted cash and marketable investment securities are invested in certain permitted debt and other marketable investment securities until disbursed for the express purposes identified in the applicable indenture. Other restricted cash includes $5.7 million at December 31, 1996, which was restricted to satisfy certain covenants in the indenture associated with a 1994 offering of 12 7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes") pertaining to launch insurance for EchoStar II. These covenant requirements were satisfied during September 1997. In addition, as of December 31, 1996, a total of $25.0 million was held in two escrow accounts for the benefit of EchoStar Receiver System manufacturers. These deposits were released from their respective escrow accounts during May 1997. 4. INVENTORIES Inventories consist of the following (in thousands): DECEMBER 31, SEPTEMBER 30, 1996 1997 ---------------------------- (UNAUDITED) EchoStar Receiver Systems $ 32,799 $ 12,157 DBS receiver components 15,736 11,347 Consigned DBS receiver components 23,525 1,988 Finished goods - International 3,491 3,220 Finished goods - C-band 600 4 Spare parts and other 2,279 2,227 Reserve for excess and obsolete inventory (5,663) (7,893) ---------------------------- $ 72,767 $ 23,050 ---------------------------- ---------------------------- 6 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): DECEMBER 31, SEPTEMBER 30, LIFE 1996 1997 (IN YEARS) --------------------------- ---------- (UNAUDITED) EchoStar I 12 $ 201,607 $ 201,607 EchoStar II 12 228,694 228,694 Furniture, fixtures and equipment 2-12 72,945 81,219 Buildings and improvements 7-40 26,035 31,502 Tooling and other 2 3,253 3,820 Land -- 2,295 6,305 Vehicles 7 1,323 1,334 Construction in progress -- 89,733 329,415 ------------------------- Total property and equipment 625,885 883,896 Accumulated depreciation (35,264) (73,125) ------------------------- Property and equipment, net $ 590,621 $ 810,771 ------------------------- ------------------------- Construction in progress consists of the following (in thousands): DECEMBER 31, SEPTEMBER 30, 1996 1997 --------------------------- Progress amounts for satellite (UNAUDITED) construction, launch, launch insurance and capitalized interest: EchoStar III $29,123 $207,534 EchoStar IV 56,320 99,077 Other 4,290 22,804 --------------------------- $89,733 $329,415 --------------------------- --------------------------- 6. OTHER NONCURRENT ASSETS Other noncurrent assets consist of the following (in thousands): DECEMBER 31, SEPTEMBER 30, 1996 1997 --------------------------- (UNAUDITED) Notes receivable from DBSC, including accrued interest of $3,382 and $0, respectively $49,382 $ -- Deferred debt issuance costs 21,284 32,372 SSET convertible subordinated debentures 3,649 4,075 Investment in DBSC 4,044 -- DBSI convertible subordinated debentures 4,640 -- Other, net 827 2,058 --------------------------- $83,826 $ 38,505 --------------------------- --------------------------- During 1995 and 1996, EchoStar purchased a total of $4.6 million principal amount of convertible subordinated debentures of DBS Industries, Inc. ("DBSI"). These debentures were secured by stock of Direct Broadcasting Satellite Corporation ("DBSC") owned by DBSI. In connection with EchoStar's January 1997 merger with DBSC, DBSI exchanged its DBSC stock, which secured the debentures, for 270,414 shares of EchoStar's Class A Common Stock. As of August 1997, total principal, plus delinquent interest on the debentures, totaled $5.5 million. During August 1997, EchoStar foreclosed on the convertible subordinated debentures and retired the 270,414 shares of its Class A Common Stock, reducing the debt by approximately $4.5 million based on the market value of EchoStar's Class A Common Stock at the time. Contemporaneously, DBSI made an approximate $1.0 million cash payment to EchoStar resulting in full satisfaction and cancellation of the underlying debentures. 7 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. 1997 NOTES On June 25, 1997, EchoStar DBS Corporation ("DBS Corp"), a wholly- owned subsidiary of EchoStar, consummated an offering (the "1997 Notes Offering") of 12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997 Notes Offering resulted in net proceeds to DBS Corp of approximately $362.5 million (after payment of underwriting discounts and other issuance costs aggregating approximately $12.5 million). Interest accrues on the 1997 Notes at a rate of 12 1/2% and is payable in cash semi-annually on January 1 and July 1 of each year, with the first interest payment due January 1, 1998. Approximately $109.0 million of the net proceeds of the 1997 Notes Offering were placed in the Interest Escrow account to fund the first five semi-annual interest payments (through January 1, 2000). Additionally, approximately $112.0 million of the net proceeds of the 1997 Notes Offering were placed in the Satellite Escrow account to fund the construction launch and insurance of EchoStar's fourth DBS satellite ("EchoStar IV"). The 1997 Notes mature on July 1, 2002. The 1997 Notes were issued in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). The Company is in the process of exchanging the privately issued notes for publicly registered notes with substantially identical terms (including principal amount, interest rate, maturity, security and ranking). Prior to consummation of the 1997 Notes Offering, EchoStar contributed (the "Contribution") all of the outstanding capital stock of its wholly-owned subsidiary EchoStar Satellite Broadcasting Corporation ("ESBC") to DBS Corp. As a result of the Contribution, ESBC is a wholly-owned subsidiary of DBS Corp. The 1997 Notes rank PARI PASSU in right of payment with all senior indebtedness of DBS Corp. The 1997 Notes are guaranteed on a subordinated basis by DBS Corp's parent, EchoStar, and, contingent upon the occurrence of certain events, will be guaranteed by ESBC and Dish, Ltd. and certain other subsidiaries of DBS Corp and EchoStar. The 1997 Notes are secured by liens on the capital stock of DBS Corp, EchoStar IV, and certain other assets of DBS Corp and EchoStar. Although the 1997 Notes are titled "Senior": (i) DBS Corp has not issued, and does not have any plans to issue, any significant indebtedness to which the 1997 Notes would be senior; and (ii) the 1997 Notes are effectively subordinated to all liabilities of ECC (except liabilities to general creditors). In addition, the ability of Dish, Ltd. to make distributions to DBS Corp is severely limited by the terms of an indenture to which it is subject, and the cash flow generated by the assets and operations of DBS Corp's subsidiaries will only be available to satisfy DBS Corp's obligations on the 1997 Notes to the extent that such subsidiaries are able to make distributions, directly or indirectly, to DBS Corp. Except under certain circumstances requiring prepayment premiums, and in other limited circumstances, the 1997 Notes are not redeemable at DBS Corp's option prior to July 1, 2000. Thereafter, the 1997 Notes will be subject to redemption, at the option of DBS Corp, in whole or in part, at redemption prices decreasing from 106.25% during the year commencing July 1, 2000 to 100% on or after July 1, 2002, together with accrued and unpaid interest thereon to the redemption date. The 1997 Notes Indenture contains restrictive covenants that, among other things, impose limitations on the ability of DBS Corp to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) apply the proceeds of certain asset sales; (iv) create, incur or assume liens; (v) create dividend and other payment restrictions with respect to DBS Corp's subsidiaries; (vi) merge, consolidate or sell assets; (vii) incur subordinated or junior debt; and (viii) enter into transactions with affiliates. In addition, DBS Corp may pay dividends on its equity securities only if: (1) no default is continuing under the 1997 Notes Indenture; and (2) after giving effect to such dividend and the incurrence of any indebtedness (the proceeds of which are used to finance the dividend), DBS Corps's ratio of total indebtedness to cash flow (calculated in accordance with the 1997 Notes Indenture) would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends generally may not exceed the sum of the difference of cumulative consolidated cash flow (calculated in accordance with the 1997 Notes Indenture) minus 150% of consolidated interest expense of DBS Corp (calculated in accordance with the 1997 Notes Indenture) plus an amount equal to 100% of the aggregate net cash proceeds received by DBS Corp and its subsidiaries from the issuance or sale of equity interests of DBS Corp or EchoStar (other than equity interests sold to a subsidiary of DBS Corp or EchoStar, since June 25, 1997). In the event of a change of control, as defined in the 1997 Notes Indenture, DBS Corp will be required to make an offer to repurchase all of the 1997 Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon, to the date of repurchase. 8 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 8. RECLASSIFICATIONS TO THE STATEMENTS OF OPERATIONS Beginning with this Quarterly Report, EchoStar has revised its statements of operations to reflect them in a manner that management believes will help investors to more easily follow EchoStar's operations as they expand and change moving forward. If EchoStar had presented its statements of operations for the quarterly periods ended March 31, 1997 and June 30, 1997 in this revised format, the statements of operations would have appeared as follows: THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ---------------- MARCH 31, 1997 JUNE 30, 1997 JUNE 30, 1997 -------------- ------------- ---------------- REVENUE: DISH Network: Subscription television services $ 48,050 $ 62,858 $110,908 Other 8,694 12,698 21,392 -------- -------- -------- Total DISH Network 56,744 75,556 132,300 DTH equipment sales and integration services 2,354 13,713 16,067 Satellite services 2,165 2,045 4,210 Other 2,253 2,250 4,503 -------- -------- -------- Total revenue 63,516 93,564 157,080 COSTS AND EXPENSES: DISH Network Operating Expenses: Subscriber-related expenses 23,070 31,505 54,575 Call center and other 6,471 5,964 12,435 Satellite and transmission 2,782 3,452 6,234 -------- -------- -------- Total DISH Network operating expenses 32,323 40,921 73,244 Cost of sales - DTH equipment and integration services 2,486 12,213 14,699 DISH Network Marketing: Subscriber promotion subsidies 13,142 17,871 31,013 Advertising and other 3,280 4,038 7,318 -------- -------- -------- Total DISH Network marketing expenses 16,422 21,909 38,331 General and administrative 16,106 15,542 31,648 Amortization of subscriber acquisition costs 28,150 33,268 61,418 Depreciation and amortization 12,625 12,732 25,357 -------- -------- -------- Total costs and expenses 108,112 136,585 244,697 -------- -------- -------- Operating loss $(44,596) $(43,021) $(87,617) -------- -------- -------- -------- -------- --------
If EchoStar had presented its statements of operations for the quarterly periods ended March 31, 1996 and June 30, 1996 and for the six months ended June 30, 1996 in this revised format, the statements of operations would have appeared as follows:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ---------------- MARCH 31, 1996 JUNE 30, 1996 JUNE 30, 1996 -------------- ------------- ---------------- REVENUE: DISH Network: Subscription television services $ 110 $ 4,137 $ 4,247 Other 1,379 5,324 6,703 -------- -------- -------- Total DISH Network 1,489 9,461 10,950 DTH equipment sales and integration services 17,330 45,390 62,720 Satellite services 375 1,450 1,825 Other 3,892 2,860 6,752 -------- -------- -------- Total revenue 23,086 59,161 82,247 COSTS AND EXPENSES: DISH Network Operating Expenses: Subscriber-related expenses 88 2,173 2,261 Call center and other 652 1,789 2,441 Satellite and transmission 748 750 1,498 -------- -------- -------- Total DISH Network operating expenses 1,488 4,712 6,200 Cost of sales - DTH equipment and integration services 16,249 47,240 63,489 DISH Network Marketing: Subscriber promotion subsidies -- -- -- Advertising and other 1,058 6,455 7,513 -------- -------- -------- Total DISH Network marketing expenses 1,058 6,455 7,513 General and administrative 9,590 8,385 17,975 Amortization of subscriber acquisition costs -- 92 92 Depreciation and amortization 3,330 6,334 9,664 -------- -------- -------- Total costs and expenses 31,715 73,218 104,933 -------- -------- -------- Operating loss $ (8,629) $(14,057) $(22,686) -------- -------- -------- -------- -------- --------
9 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 10. COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS The Company has entered into agreements with various manufacturers to purchase DBS satellite receivers and related components manufactured to its specifications. As of September 30, 1997, these commitments totaled approximately $205.4 million and the total of all outstanding purchase order commitments with domestic and foreign suppliers was $206.1 million. All of the purchases related to these commitments are expected to be made during 1997. The Company expects to finance these purchases from unrestricted cash and additional cash flows generated from sales of DISH Network programming and related DBS inventory. In addition to the above, EchoStar will expend $93.4 million between October 1, 1997 and the second quarter of 1998 related to the construction, launch and insurance of EchoStar IV. NEWS CORPORATION LITIGATION On February 24, 1997, EchoStar and The News Corporation Limited ("News") announced an agreement (the "News Agreement") pursuant to which, among other things, News agreed to acquire approximately 50% of the outstanding capital stock of EchoStar. News also agreed to make available for use by EchoStar the DBS permit for 28 frequencies at 110DEG. West Longitude ("WL") purchased by MCI Communications Corporation ("MCI") for over $682 million at a Federal Communications Commission ("FCC") auction during 1996. During late April 1997, substantial disagreements arose between the parties regarding their obligations under the News Agreement. During May 1997, EchoStar initiated litigation alleging, among other things, breach of contract, failure to act in good faith, and other causes of action. News has denied all of EchoStar's material allegations and has asserted numerous counterclaims against EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The case has been set for a five week trial commencing in June 1998. While EchoStar is confident of its position and believes it will ultimately prevail, the litigation process could continue for many years and there can be no assurance concerning the outcome of the litigation. An adverse decision could have a material adverse effect on EchoStar's financial position and results of operations. OTHER RISKS AND CONTINGENCIES The Company is subject to various other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. 11. SUBSEQUENT EVENTS SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK OFFERING On October 2, 1997, EchoStar consummated an offering (the "Series B Preferred Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock due 2004, par value $0.01 per share (including any additional shares of such stock issued from time to time in lieu of cash dividends, the "Series B Preferred Stock"). The Series B Preferred Offering resulted in net proceeds to EchoStar of approximately $193.0 million. The Series B Preferred Stock was issued in a private placement pursuant to Rule 144A of the Securities Act. On November 10, 1997, EchoStar filed a Registration Statement on Form S-4 (the "Registration Statement") to exchange the privately issued Series B Preferred Stock for publicly registered preferred stock (the "New Series B Preferred Stock") with substantially identical terms (including liquidation preference, dividend rate, and ranking). Upon the effectiveness of the Registration Statement, EchoStar will make an offer to exchange the Series B Preferred Stock for the New Series B Preferred Stock. Each share of Series B Preferred Stock has a liquidation preference of $1,000 per share. Dividends on the Series B Preferred Stock are payable quarterly in arrears, commencing on January 1, 1998. EchoStar may, at its option, pay dividends in cash or by issuing additional shares of Series B Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. 10 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED EchoStar may, at its option, exchange all, but not less than all, of the shares of Series B Preferred Stock then outstanding for EchoStar's 12 1/8% Senior Exchange Notes due 2004 (including any such senior notes issued from time to time in lieu of cash interest, the "Senior Exchange Notes"). The Senior Exchange Notes will bear interest at a rate of 12 1/8% per annum, payable semiannually in arrears on April 1 and October 1 of each year, commencing with the first such date to occur after the date of the exchange. Interest on the Senior Exchange Notes may, at the option of EchoStar, be paid in cash or by issuing additional Senior Exchange Notes in an aggregate principal amount equal to the amount of such interest. SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING On November 4, 1997, EchoStar consummated an offering (the "Series C Preferred Offering") of 2.3 million shares of 6 3/4% Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock"). The Series C Preferred Offering, after exercise by the underwriters of the 15% over-allotment option, resulted in net proceeds to EchoStar of approximately $96.5 million. Simultaneously with the closing of the Series C Preferred Offering, the purchasers of the Series C Preferred Stock placed approximately $14.6 million into an account (the "Deposit Account"). The Deposit Account will provide a quarterly cash payment of approximately $0.844 per share of Series C Preferred Stock (the "Quarterly Return Amount") commencing February 1, 1998 and continuing until November 1, 1999. After that date, dividends on the Series C Preferred Stock will begin to accrue. EchoStar may, prior to the date on which any Quarterly Return Amount would otherwise be payable, deliver a notice instructing the deposit agent: (i) to purchase from EchoStar, for transfer to each holder of Series C Preferred Stock, in lieu of the Quarterly Return Amount, that number of whole shares of Class A Common Stock determined by dividing the Quarterly Return Amount by 95% of the market value of the Class A Common Stock as of the date of such notice; or (ii) defer delivery of the Quarterly Return Amount to holders of Series C Preferred Stock on such quarterly payment date until the next quarterly payment date or any subsequent payment date. However, no later than November 1, 1999 (the "Deposit Expiration Date"), any amounts remaining in the Deposit Account, as of such date, including amounts which have previously been deferred, will be (i) paid to the holders of Series C Preferred Stock; or (ii) at EchoStar's option, used to purchase from EchoStar for delivery to each holder of Series C Preferred Stock that number of whole shares of Class A Common Stock determined by dividing the balance remaining in the Deposit Account by 95% of the market value of the shares of Class A Common Stock as of the date of EchoStar's notice. Each share of Series C Preferred Stock has a liquidation preference of $50 per share. Dividends on the Series C Preferred Stock will accrue from November 2, 1999, and holders of the Series C Preferred Stock will be entitled to receive cumulative dividends at an annual rate of 6 3/4% of the liquidation preference, payable quarterly in arrears commencing February 1, 2000. Dividends may, at the option of EchoStar, be paid in cash, by delivery of fully paid and nonassessable shares of Class A Common Stock, or a combination thereof. Each share of Series C Preferred Stock is convertible at any time, unless previously redeemed, at the option of the holder thereof, into approximately 2.05 shares of Class A Common Stock, subject to adjustment upon the occurrence of certain events. The Series C Preferred Stock is redeemable at any time on or after November 1, 2000, in whole or in part, at the option of EchoStar, in cash, by delivery of fully paid and nonassessable shares of Class A Common Stock, or a combination thereof, initially at a price of $51.929 per share and thereafter at prices declining to $50.000 per share on or after November 1, 2004, plus in each case all accumulated and unpaid dividends to the redemption date. On October 30, 1997, the Series C Preferred Stock commenced trading on the Nasdaq National Market under the symbol "DISHP." CLASS A COMMON STOCK OFFERING Also on November 4, 1997, EchoStar consummated an offering of 3.1 million shares of its Class A Common Stock (the "Common Stock Offering"). The Common Stock Offering resulted in net proceeds to EchoStar of approximately $57.7 million. 11 ECHOSTAR COMMUNICATIONS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED PRO FORMA FINANCIAL INFORMATION The following table sets forth certain historical balance sheet data as of September 30, 1997, along with pro forma balance sheet data which gives effect to the Series B Preferred Offering, the Series C Preferred Offering, and the Common Offering (in thousands, except share data): AS OF SEPTEMBER 30, 1997 ------------------------ ACTUAL PRO FORMA ---------- ---------- Cash, cash equivalents and marketable investment securities $ 62,225 $ 409,407 ------------------------ ------------------------ Total liabilities $1,597,036 $1,597,036 Series B Preferred Stock -- 193,000 Stockholders' Equity (Deficit): Preferred Stock, 20,000,000 shares authorized: 8% Series A Cumulative Preferred Stock, 1,616,681 shares issued and outstanding, including accrued dividends of $4,250 19,302 19,302 6 3/4% Series C Preferred Stock, none and 2,300,000 (pro forma) shares issued and outstanding, respectively -- 100,400 Class A Common Stock, $.01 par value, 200,000,000 shares authorized, 11,585,028 and 14,685,028 (pro forma) shares issued and outstanding, respectively 116 147 Class B Common Stock, $.01 par value, 100,000,000 shares authorized, 29,804,401 shares issued and outstanding 298 298 Class C Common Stock, $.01 par value, 100,000,000 shares authorized, none outstanding -- -- Common Stock Warrants 11 11 Additional paid-in capital 166,549 220,300 Unrealized holding losses on available-for-sale securities, net of deferred taxes -- -- Accumulated deficit (358,444) (358,444) ------------------------ Total stockholders' equity (deficit) (172,168) (17,986) ------------------------ Total liabilities and stockholders' equity (deficit) $1,424,868 $1,772,050 ------------------------ ------------------------
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY THE COMPANY OR BY OFFICERS, DIRECTORS OR EMPLOYEES OF THE COMPANY ACTING ON THE COMPANY'S BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM THE HISTORICAL RESULTS OF OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: THE UNAVAILABILITY OF SUFFICIENT CAPITAL ON SATISFACTORY TERMS TO FINANCE THE COMPANY'S BUSINESS PLAN; INCREASED COMPETITION FROM CABLE, DIRECT BROADCAST SATELLITE ("DBS"), OTHER SATELLITE SYSTEM OPERATORS, AND OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; INCREASED SUBSCRIBER ACQUISITION COSTS AND SUBSCRIBER PROMOTION SUBSIDIES; THE INABILITY OF THE COMPANY TO OBTAIN NECESSARY SHAREHOLDER AND BOND-HOLDER APPROVAL OF ANY STRATEGIC TRANSACTIONS; THE INABILITY OF THE COMPANY TO OBTAIN NECESSARY AUTHORIZATIONS FROM THE FEDERAL COMMUNICATIONS COMMISSION ("FCC"); GENERAL BUSINESS AND ECONOMIC CONDITIONS, AND OTHER RISK FACTORS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"). IN ADDITION TO STATEMENTS, WHICH EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES, READERS ARE URGED TO CONSIDER STATEMENTS LABELED WITH THE TERMS "BELIEVES," "BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," OR "INTENDS" TO BE UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR. IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED HEREIN. OVERVIEW The operations of EchoStar Communications Corporation (together with its subsidiaries, "EchoStar" or the "Company") include three interrelated business units: (i) a direct broadcast satellite ("DBS") subscription television service in the United States (the "DISH Network"); (ii) the design, manufacture, distribution and sale of DBS set-top boxes, antennae and other digital equipment for the DISH Network ("EchoStar Receiver Systems"), and the design, manufacture and distribution of similar equipment for direct-to-home ("DTH") projects of others internationally, together with the provision of uplink center design and construction oversight and other project integration services for international DTH ventures ("Technology"); and (iii) the turn-key delivery of video, audio and data, primarily from EchoStar satellites, to customers for business television and other satellite users. These services include uplink, satellite transponder space, sales and installation of ground segment equipment, and billing services ("Satellite Services"). EchoStar's C-band DTH products, programming and related services businesses are no longer material to its operations and EchoStar expects revenues from its C-band lines of business to continue to decline. EchoStar's Technology and Satellite Services businesses result from development of the DISH Network, and EchoStar's revenues are, and will continue to be, derived principally from subscription fees for DISH Network programming. While there can be no assurance, EchoStar believes that revenue from its Technology and Satellite Services businesses may increase in the future assuming, among other things, the successful launch of EchoStar's third and fourth DBS satellites ("EchoStar III" and "EchoStar IV," respectively). Further those businesses are expected to continue to support and create revenue opportunities for the DISH Network. For example, the design of digital set-top equipment for international DTH customers is performed by the same employees who design EchoStar Receiver Systems. Consequently, international Technology projects may result in improvements in design and economies of scale in the production of EchoStar Receiver Systems for the DISH Network. Further, since Satellite Services customers have DISH Network set-top equipment in their homes and businesses, they are more likely than the general population to subscribe to DISH Network programming. EchoStar III was launched on October 5, 1997. Commencing in January 1998, the Company expects to use EchoStar III to retransmit local network programming from approximately ten of the largest cities in the eastern and central time zones (assuming receipt of any required retransmission consents and copyright licenses and/or congressional or regulatory action necessary to extend and clarify the scope of the statutory compulsory license to cover local satellite retransmission of network-affiliated station signals), and to provide subscribers with additional sports, foreign language, cultural, business, educational and other niche programming. As technology advances and demand increases, the Company also expects to use EchoStar III to provide popular Internet and other computer data at high transmission speeds and to offer subscribers HDTV. While all testing of EchoStar III to date indicates the satellite is functioning properly, the ultimate success of the launch and in-orbit operation of EchoStar III will not be established until approximately December 1997. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED KEY OPERATING AND FINANCIAL STATISTICS. As of September 30, 1997, EchoStar had approximately 820,000 DISH Network subscribers compared to approximately 190,000 subscribers at September 30, 1996. During the three and nine months ended September 30, 1997, EchoStar added approximately 230,000 and 470,000 DISH Network subscribers, respectively. While EchoStar's factory manufacturing capacity is adequate to meet demand, subscriber activations during the third quarter exceeded EchoStar's expectations. As a result of stronger than expected sales and because certain components of EchoStar Receiver Systems must be ordered as much as 120 days in advance, certain models of EchoStar Receiver Systems will have limited availability during the fourth quarter and EchoStar expects that its fourth quarter subscriber growth will be limited to approximately the same number of subscribers added during the third quarter. EchoStar believes that it has ordered, or can timely order, sufficient quantities of components to meet reasonably expected demand during 1998. During the three and nine months ended September 30, 1997, subscriber churn approximated 1.2% per month. EchoStar's subscriber acquisition costs, inclusive of advertising expenses, for the three and nine months ended September 30, 1997 approximated $300 and $350, respectively. ECHOSTAR MARKETING PROMOTIONS. During August 1996, EchoStar introduced a promotion (the "1996 Promotion") which permitted 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 prior to August 1996 of approximately $499), conditioned upon the consumer's prepaid one-year subscription to the DISH Network's America's Top 50 CD programming package for approximately $300. Total transaction proceeds to EchoStar are less than its aggregate costs (equipment, programming and other) for the initial prepaid subscription are initially deferred, and recognized as revenue over the related prepaid subscription period (normally one year). During the period from August 1996 through May 1997, substantially all new subscriber activations resulted from the 1996 Promotion. During June 1997, the 1996 Promotion was enhanced to permit independent retailers to offer a standard EchoStar Receiver System to consumers for a suggested retail price of $199 without an extended subscription commitment (the "1997 Promotion"). Net transaction costs associated with the 1997 Promotion are expensed as incurred (reported as a component of subscriber promotion subsidies) in the accompanying statements of operations. Since introduction of the 1997 Promotion, the majority of new subscriber activations have resulted therefrom. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1996. REVENUE. Total revenue for the three months ended September 30, 1997 was $124.8 million, an increase of $94.4 million as compared to total revenue for the three months ended September 30, 1996 of $30.4 million. The increase in total revenue in 1997 was primarily attributable to DISH Network subscriber growth. The Company expects this trend to continue as the number of DISH Network subscribers increases, and as EchoStar develops its Technology and Satellite Services businesses. Consistent with the increases in total revenue during the three months ended September 30,1997, EchoStar experienced a corresponding increase in trade accounts receivable at September 30, 1997. DISH Network subscription television services revenue totaled $82.1 million for the three months ended September 30, 1997, an increase of $68.8 million compared to the three months ended September 30, 1996. This increase was directly attributable to the increase in the number of DISH Network subscribers as of September 30, 1997 as compared to September 30, 1996. Average monthly revenue per subscriber approximated $39.50 for the three months ended September 30, 1997 compared to approximately $34.50 for the same period in 1996. The increase in monthly revenue per subscriber was primarily due to additional channels added upon commencement of operations of EchoStar's second DBS satellite ("EchoStar II") in November 1996. DISH Network subscription television services revenue consists primarily of revenue from basic, premium and pay-per-view subscription television services. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Other DISH Network revenue totaled $13.7 million for the three months ended September 30, 1997, an increase of $10.9 million compared to the three months ended September 30, 1996. Other DISH Network revenue consists primarily of the recognition of revenue related to EchoStar Receiver Systems sold pursuant to the 1996 Promotion, DBS system installation revenue, and loan origination and participation income. During the three months ended September 30, 1997, EchoStar recognized approximately $11.8 million of revenue relating to EchoStar Receiver Systems sold pursuant the 1996 Promotion, an increase of $10.7 million as compared to the three months ended September 30, 1996. EchoStar expects revenue related to the 1996 Promotion to decline at an accelerated rate in future periods and to end entirely in 1998, one year following the last sale pursuant to the 1996 Promotion. For the three months ended September 30, 1997, DTH equipment sales and integration services was comprised primarily of revenue from set-top boxes and other DTH equipment sold to international DTH service operators. For the three months ended September 30, 1997, DBS equipment sales and integration services totaled $22.6 million. EchoStar currently has agreements with two international DBS service operators for the distribution of digital satellite broadcasting equipment. EchoStar recognized revenues of approximately $18.5 million related to these agreements during the three months ended September 30, 1997. Approximately $17.0 million of this revenue related to the sale of set-top boxes and other DTH equipment and approximately $1.5 million of revenue related to the provision of integration services (revenue from uplink center design and construction oversight and other project integration services for international DTH ventures). While EchoStar continues to actively pursue other similar distribution and integration service opportunities, no assurance can be given that any such additional negotiations will be successful. Although EchoStar expects its Technology business may grow at an accelerated rate, EchoStar's future revenue from the sale of DTH equipment and integration services in international markets depends largely on the success of the DBS operator in that country, which, in turn, depends on other factors, such as the level of consumer acceptance of DBS products and the intensity of competition for international subscription television subscribers. No assurance can be given regarding the level of expected future revenues which may be generated from EchoStar's alliances with foreign DTH operators. For the three months ended September 30, 1996, DTH equipment sales and integration services consisted primarily of EchoStar Receiver Systems and related accessories sold prior to the August 1996 nationwide rollout of the 1996 Promotion. DTH equipment sales and integration services revenue for the three months ended September 30, 1996 totaled $9.9 million. Satellite services revenue totaled $3.7 million for the three months ended September 30, 1997, an increase of $1.7 million, or 84%, compared to the three months ended September 30, 1996. Satellite services revenue primarily consists of signal carriage revenues from content providers and business television service revenue for the broadcast of organization specific telecasts. The increase in satellite services revenue was primarily attributable to an increase in the number of content providers combined with increased usage by EchoStar's business television customers. DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled $56.9 million for the three months ended September 30, 1997, an increase of $44.1 million as compared to the same period in 1996. The increase in DISH Network operating expenses was primarily attributable to the increase in the number of DISH Network subscribers. Subscriber-related expenses totaled $42.7 million for the three months ended September 30, 1997, an increase of $35.7 million compared to the same period in the prior year. Such expenses, which include programming expenses, copyright royalties, residuals payable to retailers and distributors, and billing, lockbox and other variable subscriber expenses, totaled 52% of subscription television services revenues, compared to 53% of subscription television services revenues during the same period in 1996. Satellite and transmission expenses are comprised primarily of costs associated with the operation of EchoStar's digital broadcast center and costs of maintaining in-orbit insurance on EchoStar's DBS satellites. Satellite and transmission expenses increased $2.1 million compared to the same period in 1996 primarily as a result of the September 1996 launch of EchoStar II. Call center and other operating expenses consist primarily of costs incurred in the operation of EchoStar's DISH Network call center and expenses associated with subscriber equipment installation. Call Center and other operating expenses totaled $10.8 million for the three months ended September 30, 1997, an increase of $6.3 million as compared to the same period in 1996. The increase in call center and other operating expenses was directly attributable to the increase in the number of DISH Network subscribers. EchoStar expects DISH Network operating 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED expenses to continue to increase in the future as subscribers are added. However, as its DISH Network subscriber base continues to expand, EchoStar expects that such costs as a percentage of DISH Network revenue will decline. COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales - - DTH equipment and integration services totaled $11.9 million for the three months ended September 30, 1997 (net of the reclassification of freight expenses of $1.7 million incurred during the first six months of 1997 associated with shipment of EchoStar Receiver Systems), an increase of $2.5 million, or 26%, as compared to the same period in 1996. For the three months ended September 30, 1997, cost of sales - DTH equipment and integration services represents costs associated with set-top boxes and related components sold to international DTH operators. For the three months ended September 30, 1996, cost of sales - DTH equipment and integration services totaled $9.5 million and represent costs of EchoStar Receiver Systems sold prior to the August 1996 rollout of the 1996 Promotion. DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled $80.4 million for the three months ended September 30, 1997, an increase of $70.4 million as compared to the same period in 1996. The increase in DISH Network marketing expenses was primarily attributable to the increase in subscriber promotion subsidies. Subscriber promotion subsidies represent the excess of transaction costs over transaction proceeds at the time of sale associated with EchoStar's various promotions. Such costs totaled approximately $63.6 million (including a $1.7 million reclassification of freight expenses described above), an increase of $57.6 million as compared to the same period in 1996. The increase in subscriber promotion subsidies was primarily attributable to the commencement of the 1997 Promotion and an increase in the number of EchoStar Receiver Systems sold during the three months ended September 30, 1997 as compared to the same period in 1996. Advertising and other expenses increased $12.8 million to $16.8 million during the three months ended September 30, 1997 as a result of increased marketing activity. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative ("G&A") expenses totaled $17.2 million for the three months ended September 30, 1997, an increase of $3.4 million as compared to the same period in 1996. The increase in G&A expenses was principally attributable to increased personnel expenses to support the growth of DISH Network. G&A expenses as a percentage of total revenue decreased to 14% during the three months ended September 30, 1997 as compared to 45% during the same period in 1996. EchoStar expects that its G&A expenses as a percent of total revenue will continue to decrease in future periods. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. Earnings before interest, taxes, depreciation and amortization (including amortization of subscriber acquisition costs) ("EBITDA") was negative $41.6 million for the three months ended September 30, 1997 as compared to negative EBITDA of $15.6 million during the same period of 1996. This decrease in EBITDA resulted from the factors affecting revenue and expenses discussed above. EchoStar believes that EDITDA results will improve in future periods as its subscriber acquisition costs decrease and the number of DISH Network subscribers increases. In the event that new subscriber activations exceed expectations, EchoStar's EBITDA results would be negatively impacted (as a result of the accounting treatment applied to the 1997 Promotion whereby net subscriber acquisition costs are expensed upon subscriber activation). DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the three months ended September 30, 1997 (including amortization of subscriber acquisition costs of $3.4 million and $34.1 million for the three months ended September 30, 1996 and September 30, 1997, respectively), aggregated $47.1 million, an increase of $35.8 million, as compared to the same period 1996. The increase in depreciation and amortization expenses principally resulted from amortization of subscriber acquisition costs and depreciation of EchoStar II (placed in service during the fourth quarter of 1996). OTHER INCOME AND EXPENSE. Other expense, net totaled $26.4 million for the three months ended September 30, 1997, an increase of $11.8 million as compared to the same period during 1996. The increase in other expense in the third quarter of 1997 resulted primarily from interest expense associated with the 1997 Notes (as defined), which were issued in June 1997, and increases in interest expenses associated with EchoStar's 12 7/8% Senior Secured Discount Notes due 2004 (the "1994 Notes") and its 13 1/8% Senior Secured Discount Notes due 2004 (the "1996 Notes") due to higher accreted balances thereon. These increases in interest expenses were partially offset by increases in capitalized interest. Capitalized interest (principally attributable to satellite construction) approximated 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED $11.2 million during the three months ended September 30, 1997, compared to approximately $8.5 million during the three months ended September 30, 1996. INCOME TAX BENEFIT. The decrease in the income tax benefit of $15.0 million (from $15.0 million for the three months ended September 30, 1996 to an income tax provision of $20,000 for the three months ended September 30, 1997) principally resulted from EchoStar's decision to fully reserve the third quarter addition to its net deferred tax asset. EchoStar's net deferred tax assets (approximately $67.1 million at September 30, 1997) relate to temporary differences for amortization of original issue discount on the 1994 Notes and 1996 Notes, net operating loss carryforwards, and various accrued expenses which are not deductible until paid. If future operating results differ materially and adversely from EchoStar's current expectations, its judgment regarding the magnitude of its reserve may change. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1996. REVENUE. Total revenue for the nine months ended September 30, 1997 was $281.9 million, an increase of $169.3 million, or 150%, as compared to total revenue for the nine months ended September 30, 1996 of $112.6 million. This increase was primarily attributable to the increase in the number of DISH Network subscribers. DISH Network subscription television services revenue totaled $193.0 million for the nine months ended September 30, 1997, an increase of $175.5 million compared to the nine months ended September 30, 1996. This increase resulted from operation of the DISH Network during the entirety of the nine months ended September 30, 1997 (DISH Network operations commenced in March 1996) as well as from the increase in the number of DISH Network subscribers. During the nine months ended September 30, 1997, EchoStar added 470,000 DISH Network subscribers and average revenue per subscriber approximated $39.00. Other DISH Network revenue totaled $35.1 million for the nine months ended September 30, 1997, an increase of $25.6 million compared to the nine months ended September 30, 1996. Other DISH Network revenue consists primarily of the recognition of revenue related to EchoStar Receiver Systems sold pursuant to the 1996 Promotion, DBS system installation revenue, and loan origination and participation income. During the nine months ended September 30, 1997, EchoStar recognized approximately $30.0 million of revenue relating to EchoStar Receiver Systems sold pursuant to the 1996 Promotion, an increase of $29.0 million as compared to the nine months ended September 30, 1996. EchoStar expects revenue related to the 1996 Promotion to decline at an accelerated rate in future periods and to end entirely in 1998, one year following the last sale pursuant to the 1996 Promotion. During the nine months ended September 30, 1997, DTH equipment sales and integration services revenue was comprised primarily of revenue from the sale of set-top boxes and other DTH equipment sold to international DBS service operators. These revenues totaled $38.7 million of which approximately $17.0 million was related to the sale of set-top boxes and other DTH equipment. EchoStar also recognized revenues of approximately $13.4 million relating to the provision of integration services. During the nine months ended September 30, 1996, DTH equipment sales and integration services revenue resulted from the sale, prior to the August 1996 nationwide introduction of the 1996 Promotion, of EchoStar Receiver Systems. DTH equipment sales totaled $72.7 million during the nine months ended September 30, 1996. Satellite services revenue totaled $7.9 million for the nine months ended September 30, 1997, an increase of $4.1 million, or 106%, compared to the same period in 1996. The increase in satellite services revenue primarily resulted from operation of EchoStar I and EchoStar II during the entirety of 1997, an increase in the number of content providers, and increased usage by EchoStar's business television customers. DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses totaled $130.2 million for the nine months ended September 30, 1997, an increase of $111.2 million as compared to the same period in 1996. The increase in DISH Network operating expenses was primarily attributable to operation of the DISH Network during the entirety of 1997 and the increase in the number of DISH Network subscribers. Subscriber-related expenses totaled $97.3 million for the nine months ended September 30, 1997, an increase of $88.0 million as compared to the same period in the prior year. Such expenses as a percent of subscription television services revenues were 50%, compared to 53% of subscription television services revenues during the same period in 1996. Satellite and transmission expenses increased $6.8 million compared to the same period in 1996, primarily as a result of operation of the DISH Network during the entirety of 1997 and the commencement of operation of EchoStar II. Call center and other operating expenses totaled $23.2 million for the nine months ended September 30, 1997, an increase of $16.3 million as compared to the same period in 1996. The increase in these expenses was attributable to operation of the DISH Network during the entirety of 1997 and from the increase in the number of DISH Network subscribers. COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales - - DTH equipment and integration services totaled $26.6 million for the nine months ended September 30, 1997, a decrease of $46.3 million, or 63%, 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED compared to the same period in 1996. For the nine months ended September 30, 1997, cost of sales - DTH equipment and integration services principally consisted of costs associated with the sale of EchoStar Receiver Systems and related components and the provision of integration services to international DTH operators. During the nine months ended September 30, 1996, cost of sales - - DTH equipment and integration services represented costs of EchoStar Receiver Systems and related components sold prior to the August 1996 nationwide rollout of the 1996 Promotion. As previously described, EchoStar Receiver Systems sold pursuant to the 1996 Promotion are not included within this caption on the accompanying statements of operations but are deferred (i.e., subscriber acquisition costs) and amortized over the prepaid subscription period. DISH NETWORK MARKETING EXPENSES. DISH Network marketing expenses totaled $118.7 million for the nine months ended September 30, 1997, an increase of $101.3 million as compared to the same period in 1996. The increase in DISH Network marketing expenses was primarily the result of the increase in subscriber promotion subsidies. Such costs totaled approximately $94.6 million, an increase of $88.6 million, compared to the same period in 1996. The increase in subscriber promotion subsidies was primarily attributable to the commencement of the 1997 Promotion. Advertising and other expenses increased $12.6 million, or 110%, to $24.1 million during the nine months ended September 30, 1997, principally due to the operation of the DISH Network during the entirety of 1997. GENERAL AND ADMINISTRATIVE EXPENSES. G&A expenses totaled $48.9 million for the nine months ended September 30, 1997, an increase of $17.1 million as compared to the same period in 1996. The increase in G&A expenses resulted from increased personnel expenses to support the growth of DISH Network. G&A expenses as a percentage of total revenue decreased to 17% for the nine months ended September 30, 1997, compared to 28% during the same period in 1996. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA was negative $42.5 million for the nine months ended September 30, 1997, compared to negative EBITDA of $28.6 million for the same period in 1996. This decrease in EBITDA of $13.9 million resulted from the factors affecting revenue and expenses discussed above. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the nine months ended September 30, 1997 (including amortization of subscriber acquisition costs of $3.5 million and $95.5 million for the nine months ended September 30, 1996 and September 30, 1997, respectively) aggregated $133.9 million, an increase of $112.8 million, as compared to the same period in 1996. The increase in depreciation and amortization expenses resulted from amortization of subscriber acquisition costs and depreciation of EchoStar II. OTHER INCOME AND EXPENSE. Other expense, net totaled $65.4 million for the nine months ended September 30, 1997, an increase of $26.9 million, as compared to the same period 1996. The increase in other expense during the nine months ended September 30, 1997 resulted from an increase in interest expenses associated with the 1994 Notes, the 1996 Notes, and the 1997 Notes. Additionally, interest income decreased approximately $5.8 million as a result of a decrease in invested balances. EchoStar capitalized $27.9 million and $22.9 million of interest during the nine months ended September 30, 1997 and 1996, respectively. INCOME TAX BENEFIT. The decrease in the income tax benefit of $31.9 million (from $31.8 million for the nine months ended September 30, 1996 to an income tax provision of $64,000 for the nine months ended September 30, 1997) was the result of EchoStar's decision to fully reserve the 1997 additions to its net deferred tax asset. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures, including expenditures for satellite systems under construction, totaled $181.2 million and $183.6 million during the nine months ended September 30, 1996 and 1997, respectively. During the nine months ended September 30, 1997, net cash flows used in operations totaled $40.1 million compared to $8.4 million used in operations during the same period of 1996. EchoStar anticipates that its working capital and capital expenditure requirements will increase during the fourth quarter of 1997 and first half of 1998 as it continues to aggressively build its DISH Network subscriber base, and as it constructs and prepares to launch and deploy EchoStar IV. EchoStar's capital requirements during 1997 principally have been funded by the proceeds from the 1996 Notes Offering and EchoStar DBS Corporation's ("DBS Corp") June 1997 offering (the "1997 Notes Offering") of 12 1/2% Senior Secured Notes due 2002 (the "1997 Notes"). The 1997 Notes Offering resulted in net 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED proceeds to the Company of approximately $362.5 million, including approximately $109.0 million restricted to fund interest payments on the 1997 Notes through January 1, 2000. In accordance with an agreement (the "News Agreement") with The News Corporation Limited ("News"), EchoStar had expected to meet its short- and medium-term capital needs through financial commitments from News. As a result of the failure by News to honor its obligations under the News Agreement, EchoStar was required to raise additional capital to continue its contemplated business plan. Accordingly, EchoStar consummated the 1997 Notes Offering and the offerings described below (collectively, the "1997 Offerings"). EchoStar intends to seek recovery from News for any costs of financing, including those costs associated with the 1997 Offerings, in excess of the costs of the financing committed to by News under the News Agreement. RECENT FINANCING ACTIVITIES SERIES B SENIOR REDEEMABLE EXCHANGEABLE PREFERRED STOCK OFFERING. On October 2, 1997, EchoStar consummated an offering (the "Series B Preferred Offering") of 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock due 2004, par value $0.01 per share (including any additional shares of such stock issued from time to time in lieu of cash dividends, the "Series B Preferred Stock"). The Series B Preferred Offering resulted in net proceeds to EchoStar of approximately $193.0 million. The Series B Preferred Stock was issued in a private placement pursuant to Rule 144A of the Securities Act. On November 10, 1997, EchoStar filed a Registration Statement on Form S-4 (the "Registration Statement") to exchange the privately issued Series B Preferred Stock for publicly registered preferred stock (the "New Series B Preferred Stock") with substantially identical terms (including liquidation preference, dividend rate, and ranking). Upon the effectiveness of the Registration Statement, EchoStar will make an offer to exchange the Series B Preferred Stock for the New Series B Preferred Stock. Each share of Series B Preferred Stock has a liquidation preference of $1,000 per share. Dividends on the Series B Preferred Stock are payable quarterly in arrears, commencing on January 1, 1998. EchoStar may, at its option, pay dividends in cash or by issuing additional shares of Series B Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. EchoStar may, at its option, exchange all, but not less than all, of the shares of Series B Preferred Stock then outstanding for EchoStar's 12 1/8% Senior Exchange Notes due 2004 (including any such senior notes issued from time to time in lieu of cash interest, the "Senior Exchange Notes"). The Senior Exchange Notes will bear interest at a rate of 12 1/8% per annum, payable semiannually in arrears on April 1 and October 1 of each year, commencing with the first such date to occur after the date of the exchange. Interest on the Senior Exchange Notes may, at the option of EchoStar, be paid in cash or by issuing additional Senior Exchange Notes in an aggregate principal amount equal to the amount of such interest. SERIES C CUMULATIVE CONVERTIBLE PREFERRED STOCK OFFERING. On November 4, 1997, EchoStar consummated an offering (the "Series C Preferred Offering") of 2.3 million shares of 6 3/4% Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock"). The Series C Preferred Offering, after exercise by the underwriters of the 15% over-allotment option, resulted in net proceeds to EchoStar of approximately $96.5 million. Simultaneously with the closing of the Series C Preferred Offering, the purchasers of the Series C Preferred Stock placed approximately $14.6 million into an account (the "Deposit Account"). The Deposit Account will provide a quarterly cash payment of approximately $0.844 per share of Series C Preferred Stock (the "Quarterly Return Amount") commencing February 1, 1998 and continuing until November 1, 1999. After that date, dividends on the Series C Preferred Stock will begin to accrue. EchoStar may, prior to the date on which any Quarterly Return Amount would otherwise be payable, deliver notice instructing the deposit agent: (i) to purchase from EchoStar, for transfer to each holder of Series C Preferred Stock, in lieu of the Quarterly Return Amount, that number of whole shares of Class A Common Stock determined by dividing the Quarterly Return Amount by 95% of the market value of the Class A Common Stock as of the date of such notice; or (ii) defer delivery of the Quarterly Return Amount to holders of Series C Preferred Stock on such quarterly payment date until the next quarterly payment date or any subsequent payment date. However, no later than November 1, 1999 (the "Deposit Expiration Date"), any amounts remaining in the Deposit Account, as of such date, including amounts which have previously been deferred, will be: (i) paid to the holders of Series C Preferred Stock; or (ii) at EchoStar's option, used to purchase from EchoStar for delivery to each holder of Series C Preferred Stock that number of whole shares of Class A Common Stock determined by dividing the balance remaining in the Deposit Account by 95% of the market value of the shares of Class A Common Stock as of the date of EchoStar's notice. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED Each share of Series C Preferred Stock has a liquidation preference of $50 per share. Dividends on the Series C Preferred Stock will accrue from November 2, 1999, and holders of the Series C Preferred Stock will be entitled to receive cumulative dividends at an annual rate of 6 3/4% of the liquidation preference, payable quarterly in arrears commencing February 1, 2000. Dividends may, at the option of EchoStar, be paid in cash, by delivery of fully paid and nonassessable shares of Class A Common Stock, or a combination thereof. Each share of Series C Preferred Stock is convertible at any time, unless previously redeemed, at the option of the holder thereof, into approximately 2.05 shares of Class A Common Stock, subject to adjustment upon the occurrence of certain events. The Series C Preferred Stock is redeemable at any time on or after November 1, 2000, in whole or in part, at the option of EchoStar, in cash, by delivery of fully paid and nonassessable shares of Class A Common Stock, or a combination thereof, initially at a price of $51.929 per share and thereafter at prices declining to $50.000 per share on or after November 1, 2004, plus in each case all accumulated and unpaid dividends to the redemption date. On October 30, 1997, the Series C Preferred Stock commenced trading on the Nasdaq National Market under the symbol "DISHP." CLASS A COMMON STOCK OFFERING. Also on November 4, 1997, EchoStar consummated an offering of 3.1 million shares of its Class A Common Stock (the "Common Stock Offering"). The Common Stock Offering resulted in net proceeds to EchoStar of approximately $57.7 million. EFFECTS OF CAMPAIGNS TO ACQUIRE SUBSCRIBERS The 1997 Promotion has significantly increased EchoStar's working capital requirements. Transaction proceeds associated with the 1997 Promotion vary dependent on the type of EchoStar Receiver System and the number of additional outlet receivers purchased, but, on average approximate $225 to $275 per new subscriber. Transaction costs, consisting of costs of goods sold, activation fees paid to dealers and distributors, and other promotional costs, range from $425 to $500 per new subscriber. Thus, each subscriber initially added pursuant to the 1997 Promotion results in a net use of cash of between approximately $200 to $275. Comparatively, the 1996 Promotion (which requires an annual prepaid DISH Network subscription and continues to be available to consumers) results in approximately breakeven net cash flows at the time of subscriber activation. EchoStar expects that transaction costs associated with both the 1996 and 1997 Promotions will decrease during the remainder of 1997 as additional cost reductions associated with the cost to manufacture EchoStar Receiver Systems are realized, thereby reducing the initial net cash outflow per new subscriber. From time to time, EchoStar offers other promotions and incentives to attract additional DISH Network subscribers. Costs associated with these additional promotions and incentives are expensed as incurred (reported as a component of subscriber promotion subsidies). After giving effect to these other promotions and incentives, EchoStar expects that its aggregate net use of cash to acquire subscribers will approximate $300 per activation (inclusive of advertising expenses). The excess of transaction costs over related proceeds from the 1996 Promotion and net transaction costs resulting from the 1997 Promotion are recognized as subscriber promotion subsidies in the Company's statements of operations. EBITDA in future periods will be negatively affected as a larger portion of future subscriber additions will result from the 1997 Promotion rather than from the 1996 Promotion. A majority of EchoStar's third quarter subscriber additions resulted from the 1997 Promotion. The adverse EBITDA impact of the 1997 Promotion (relative to the 1996 Promotion) results from the immediate recognition of all transaction costs at the time of subscriber activation. Comparatively, a portion of 1996 Promotion transaction costs are deferred and amortized over the initial prepaid subscription period. FUTURE CAPITAL REQUIREMENTS In addition to the working capital requirements discussed above, during the remainder of 1997 EchoStar expects to expend: (i) approximately $28.9 million in connection with the construction launch, insurance and deployment of EchoStar III ($6.1 million) and EchoStar IV ($22.8 million). Additionally, EchoStar will expend approximately $1.3 million per month to meet debt service requirements relative to deferred satellite construction payments for EchoStar I and EchoStar II. Beginning in November 1997, these deferred satellite construction payments will increase to approximately $1.6 million per month as a result of the launch of EchoStar III on October 5, 1997. Capital expenditures related to EchoStar IV may increase in the event of delays, cost overruns, increased 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED costs associated with certain potential change orders under the Company's satellite or launch contracts, or a change in launch provider. During 1998 EchoStar anticipates that it will expend approximately $64.5 million to construct, launch and support EchoStar IV, which is expected to be launched during the first quarter of 1998. These expenditures are expected to be funded from an escrow account established in connection with the 1997 Notes Offering (the "Satellite Escrow"). EchoStar's debt service requirements relative to the deferred satellite construction payments will increase to approximately $1.9 million per month following the launch of EchoStar IV (currently scheduled for launch in the first quarter of 1998). Additionally, beginning in January 1998, EchoStar will be required to make semi-annual interest payments of $23.4 million on the 1997 Notes. The first five such semi-annual interest payments will be funded from an escrow account established in connection with the 1997 Notes Offering (the "Interest Escrow"). EchoStar's working capital, capital expenditure and debt service requirements are expected to be funded from existing cash and investment balances, the Satellite and Interest Escrows, cash generated from operations, and the proceeds of the Series B Preferred, Series C Preferred and Common Stock Offerings. Increases in subscriber acquisition costs, inadequate supplies of DBS receivers, or significant launch delays or failures would significantly and adversely affect EchoStar's operating results and financial condition. EchoStar may require additional funds if subscriber growth increases more rapidly than expected. In addition, EchoStar has applications pending with the FCC for a two satellite FSS Ku-band satellite system, a two satellite FSS Ka-band satellite system, a two satellite extended Ku-band satellite system and a six satellite low earth orbit ("LEO") satellite system. EchoStar will need to raise additional funds for the foregoing purposes. Further, there may be a number of factors, some of which are beyond EchoStar's control or ability to predict, that could require EchoStar to raise additional capital. These factors include unexpected increases in operating costs and expenses, a defect in or the loss of any satellite, or an increase in the cost of acquiring subscribers due to additional competition, among other things. There can be no assurance that additional debt, equity or other financing will be available on terms acceptable to EchoStar, or at all. AVAILABILITY OF OPERATING CASH FLOW TO ECHOSTAR Since all of EchoStar's, DBS Corp's, EchoStar Satellite Broadcasting Corporation's ("ESBC") and Dish Ltd.'s ("Dish") operations are conducted through subsidiaries, the cash flow of EchoStar, DBS Corp, ESBC and Dish and their ability to service debt, including the 1994 Notes, the 1996 Notes and the 1997 Notes are dependent upon the earnings of their respective subsidiaries and, in general, the payment of funds by such subsidiaries to Dish, by the payment of funds by Dish to ESBC, by the payment of funds by ESBC to DBS Corp and by the payment of funds by DBS Corp to EchoStar in the form of loans, dividends or other payments. Although EchoStar may, at its option, elect to pay dividends on the Series B Preferred Stock in additional shares of Series B Preferred Stock and interest on the Senior Exchange Notes in additional Senior Exchange Notes, the ability of EchoStar to redeem the Series B Preferred Stock, or to retire the Senior Exchange Notes, at maturity, or to pay cash dividends or cash interest, primarily will depend upon the receipt of funds by EchoStar from its subsidiaries. The cash flow generated by subsidiaries of Dish will only be available if and to the extent that Dish is able to make such cash available to ESBC in the form of dividends, loans or other payments. The indentures related to the 1994 Notes and the 1996 Notes impose various restrictions on the transfer of funds among EchoStar and its subsidiaries. The 1994 Notes Indenture contains restrictive covenants that, among other things, impose limitations on Dish and its subsidiaries with respect to their ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur or assume liens; (v) create dividend and other payment restrictions with respect to Dish's subsidiaries; (vi) merge, consolidate or sell assets; and (vii) enter into transactions with affiliates. In addition, Dish, may pay dividends on its equity securities only if (1) no default exists under the 1994 Notes Indenture; and (2) after giving effect to such dividends, Dish's ratio of total indebtedness to cash flow (calculated in accordance with the 1994 Notes Indenture) would not exceed 4.0 to 1.0. Moreover, the aggregate amount of such dividends generally may not exceed the sum of 50% of Dish's consolidated net income (less 100% of consolidated net losses) from April 1, 1994, plus 100% of the aggregate net proceeds to Dish from the sale and issuance of certain equity interests of Dish (including common stock). 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED The indenture associated with the 1997 Notes (the "1997 Notes Indenture") and the certificate of designation for the Series B Preferred Stock contain restrictive covenants that, among other things, impose limitations on DBS Corp with respect to its ability to: (i) incur additional indebtedness; (ii) issue preferred stock; (iii) sell assets; (iv) create, incur or assume liens; (v) create dividend and other payment restrictions with respect to the EchoStar's subsidiaries; (vi) merge, consolidate or sell substantially all of its assets; (vii) enter into transactions with affiliates; and (viii) pay dividends. In general, DBS Corp may pay dividends on its equity securities only if: (i) no default exists under the 1997 Notes Indenture; and (ii) after giving effect to such dividends, DBS Corp's ratio of total indebtedness to cash flow would not exceed 6.0 to 1.0. Moreover, the aggregate amount of such dividends generally may not exceed the sum of (A) the difference of consolidated cash flow (less 100% of such deficit) minus 150% of consolidated interest expense, in each case from July 1, 1997, plus (B) 100% of the aggregate net proceeds to DBS Corp and its subsidiaries from the sale of certain equity interests of DBS Corp or EchoStar. The indenture associated with the Senior Exchange Notes issuable upon the exchange of the Series B Preferred Stock contains restrictive covenants that, among other things, impose limitations that restrict the ability of EchoStar and certain of its subsidiaries to: (i) pay dividends with the proceeds from the Series B Preferred Offering, (ii) pay cash dividends on any junior or parity securities, and (iii) incur indebtedness or pledge the stock of certain subsidiaries as collateral. The certificate of designation associated with the Series B Preferred Stock also restricts the ability of DBS Corp and its subsidiaries to (i) make restricted payments, (ii) incur certain indebtedness or issue disqualified stock or preferred equity interests, (iii) create payment restrictions affecting subsidiaries, (iv) engage in transactions with affiliates or (v) engage in certain asset sales. A majority of the covenants contained in the certificate of designation associated with the Series B Preferred Stock and the indenture related to the Senior Exchange Notes are applicable solely to DBS Corp and its subsidiaries and do not impose limitations on EchoStar or any of EchoStar's subsidiaries which are not also subsidiaries of DBS Corp. If cash generated from operation of the DISH Network is not sufficient to meet the debt service requirements of the 1994 Notes, the 1996 Notes and the 1997 Notes, EchoStar would be required to obtain additional financing. There can be no assurance that such financing would be available on terms acceptable to EchoStar, or if available, that the proceeds of such financing would be sufficient to enable EchoStar to meet all of its obligations. EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In March 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), which supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB No. 15"). SFAS No. 128 simplifies the requirements for reporting earnings per share ("EPS") by requiring companies only to report "basic" and "diluted" EPS. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997 but requires retroactive restatement upon adoption. EchoStar will adopt SFAS No. 128 in the fourth quarter of 1997. EchoStar does not believe such adoption will have a material effect on either its previously reported or future EPS. In March 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" (SFAS No. 129), which continues the existing requirements of APB No. 15 but expands the number of companies subject to portions of its requirements. Specifically, SFAS No. 129 requires that entities previously exempt from the requirements of APB No. 15 disclose the pertinent rights and privileges of all securities other than ordinary common stock. SFAS No. 129 is effective for periods ending after December 15, 1997. EchoStar was not exempt from APB No. 15; accordingly, the adoption of SFAS No. 129 will not have any effect on EchoStar. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that the enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 will require additional disclosure in EchoStar's financial statements. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CONTINUED In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131") which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise," but retains the requirement to report information about major customers. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating statements. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS No. 131 will require additional disclosure in EchoStar's financial statements. 23 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 24, 1997, EchoStar Communications Corporation ("EchoStar") and The News Corporation Limited ("News") announced an agreement (the "News Agreement") pursuant to which, among other things, News agreed to acquire approximately 50% of the outstanding capital stock of EchoStar. News also agreed to make available for use by EchoStar the DBS permit for 28 frequencies at 110 West Longitude ("WL") purchased by MCI Communications Corporation ("MCI") for over $682 million following a 1996 Federal Communications Commission ("FCC") auction. During late April 1997, substantial disagreements arose between the parties regarding their obligations under the News Agreement. On May 8, 1997, EchoStar filed a Complaint in the U.S. District Court for the District of Colorado (the "Court"), Civil Action No. 97-960, requesting that the Court confirm EchoStar's position and declare that News is obligated pursuant to the News Agreement to lend $200 million to EchoStar without interest and upon such other terms as the Court orders. On May 9, 1997, EchoStar filed a First Amended Complaint significantly expanding the scope of the litigation, to include breach of contract, failure to act in good faith, and other causes of action. EchoStar seeks specific performance of the News Agreement and damages, including lost profits based on, among other things, a jointly prepared a ten-year business plan showing expected profits for EchoStar in excess of $10 billion based on consummation of the transactions contemplated by the News Agreement. On June 9, 1997, News filed an answer and counterclaims seeking unspecified damages. News' answer denies all of the material allegations in the First Amended Complaint and asserts twenty defenses, including bad faith, misconduct and failure to disclose material information on the part of EchoStar and its Chairman and Chief Executive Officer, Charles W. Ergen. The counterclaims, in which News is joined by its subsidiary American Sky Broadcasting LLC ("AskyB") assert that EchoStar and Ergen breached their agreements with News and failed to act and negotiate with News in good faith. EchoStar has responded to News' answer and denied the allegations in their counterclaims. EchoStar also has asserted various affirmative defenses. EchoStar intends to diligently defend against the counterclaims. The parties are now in discovery. The case has been set for a five week trial commencing June 1998, but that date could be postponed. The litigation process could continue for many years and there can be no assurance concerning the outcome of the litigation. An adverse decision could have a material adverse effect on EchoStar's financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The annual meeting of shareholders of EchoStar Communications Corporation was held September 12, 1997. b) At the annual meeting of shareholders, a vote was held on the election of Charles W. Ergen, James DeFranco, R. Scott Zimmer, Alan M. Angelich and Raymond L. Friedlob as directors to serve until the 1998 annual meeting of shareholders. c) Other matters voted on at the meeting included (i) approval of the 1997 Employee Stock Purchase Plan and the reservation of 100,000 shares of EchoStar's Class A Common Stock, $0.01 par value, thereunder (collectively, "Approval of the 1997 Employee Stock Purchase Plan"); and (ii) ratification of the appointment of Arthur Andersen LLP as independent auditors for the Company for 1997. 24 The director nominees were elected and all proposals were approved. The voting results were as follows: Votes ------------------------------------------ Proposal For Against Withheld -------- ----------- ------- -------- ELECTION AS DIRECTOR: Charles W. Ergen 323,058,635 -- 44,761 James DeFranco 323,059,165 -- 44,231 R. Scott Zimmer 323,060,393 -- 43,003 Alan M. Angelich 323,056,543 -- 46,853 Raymond L. Friedlob 323,057,354 -- 46,042 APPROVAL OF THE 1997 EMPLOYEE STOCK PURCHASE PLAN 322,923,259 149,624 30,513 RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS FOR THE COMPANY FOR 1997 323,078,030 7,082 18,284
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1(a)* Articles of Incorporation of EchoStar DBS Corporation, a Colorado corporation ("DBS Corp.") (incorporated by reference to Exhibit 3.4(a) to the Registration Statement on Form S-4 of DBS Corp., Registration No. 333-31929). 3.1(b)* Bylaws of DBS Corp. (incorporated by reference to Exhibit 3.4(b) to the Registration Statement on Form S-4 of DBS Corp., Registration No. 333-31929). 4.1* Registration Rights Agreement, dated as of June 25, 1997, by and among DBS Corp., EchoStar Communications Corporation, a Nevada corporation formed in April 1995 ("EchoStar"), EchoStar Satellite Broadcasting Corporation, a Colorado corporation, Dish, Ltd. (formerly EchoStar Communications Corporation, a Nevada corporation formed in December 1993), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Lehman Brothers Inc. ("Lehman Brothers") (incorporated by reference to Exhibit 4.15 to the Registration Statement on Form S-4 of DBS Corp., Registration No. 333-31929). 4.2* Indenture of Trust, dated as of June 25, 1997, between DBS Corp. and First Trust National Association ("First Trust"), as Trustee (incorporated by reference to Exhibit 4.16 to Amendment No. 1 to the Registration Statement on Form S-4 of DBS Corp., Registration No. 333-31929). 4.3* 12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock Certificate of Corrrection for the Certificate of Designation of EchoStar (incorporated by reference to Exhibit 4.17 to Amendment No. 1 to the Registration Statement on Form S-3 of EchoStar, Registration No. 333-37683). 4.4* Registration Rights Agreement, dated as of October 2, 1997, by and among EchoStar, DLJ and Lehman Brothers ((incorporated by reference to Exhibit 4.18 to Amendment No. 1 to the Registration Statement on Form S-3 of EchoStar, Registration No. 333-37683). 4.5* 6 3/4% Series C Cumulative Convertible Preferred Stock Certificate of Designation of EchoStar (incorporated by reference to Exhibit 4.19 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). 4.6* Form of Deposit Agreement between EchoStar and American Securities Transfer & Trust, Inc. (incorporated by reference to Exhibit 4.20 to Amendment No. 1 to the Registration Statement on Form S-3 of EchoStar, Registration No. 333-37683). 25 4.7(a)* Form of Underwriting Agreement for 6 3/4% Series C Cumulative Convertible Preferred Stock by and between EchoStar, DLJ and Lehman Brothers (incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the Registration Statement on Form S-3 of EchoStar, Registration No. 333-37683). 4.7(b)* Form of Underwriting Agreement for Class A Common Stock by and between EchoStar, DLJ, BT Alex. Brown Incorporated and Unterberg Harris (incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the Registration Statement on Form S-3 of EchoStar, Registration No. 333-37683). 4.8+ Form of Indenture for EchoStar's 12 1/8% Senior Exchange Notes due 2004. 10.1* Amendment No. 9 to Satellite Construction Contract, effective as of July 18, 1996, between Direct Satellite Broadcasting Corporation, a Delaware corporation ("DBSC") and Martin Marrieta Corporation (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of EchoStar for the quarterly period ended June 30, 1997, Commission File No. 0-26176). 10.2* Amendment No. 10 to Satellite Construction Contract, effective as of May 31, 1996, between DBSC and Lockheed Martin Corporation (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of EchoStar for the quarterly period ended June 30, 1997, Commission File No. 0-26176). 10.3* Contract for Launch Services, dated April 5, 1996, between Lockheed Martin Commercial Launch Services, Inc. and EchoStar Space Corporation (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of EchoStar for the quarterly period ended June 30, 1997, Commission File No. 0-26176). 27+ Financial Data Schedule. 99.1* Form of Letter of Transmittal (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). 99.2* Form of Notice of Guaranteed Delivery (incorporated by reference to Exhibit 99.2 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). 99.3* Form of Letter to Securities Dealers, Commercial Banks, Trust Companies and Other Nominees (incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). 99.4* Form of Letter to Clients (incorporated by reference to Exhibit 99.4 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). 99.5* Guidelines for Certification of Taxpayer Identification Number on Form W-9 (incorporated by reference to Exhibit 99.5 to the Registration Statement on Form S-4 of EchoStar, Registration No. 333-39901). - -------------------- * Incorporated by reference. + Previously filed. (b) REPORTS ON FORM 8-K. On September 5, 1997, a Current Report on Form 8-K was filed to report, under Item 5, that EchoStar had received written confirmation from the Nasdaq Stock Market, Inc. that EchoStar's Class A Common Stock will continue to be listed on the Nasdaq National Market notwithstanding EchoStar's technical non- compliance with Nasdaq National Market maintenance standards. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ECHOSTAR COMMUNICATIONS CORPORATION By: /s/ STEVEN B. SCHAVER ----------------------------------- Steven B. Schaver Chief Operating Officer and Chief Financial Officer (PRINCIPAL FINANCIAL OFFICER) By: /s/ JOHN R. HAGER ----------------------------------- John R. Hager Treasurer and Controller (PRINCIPAL ACCOUNTING OFFICER) Date: December 4, 1997 -----END PRIVACY-ENHANCED MESSAGE-----