Dish Network 1997 Annual Report Download - page 33

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DISH Network Operating Expenses. DISH Network operating expenses totaled $193 million during 1997,
an increase of $151 million as compared to 1996. The increase in DISH Network operating expenses was primarily
attributable to operation of the DISH Network during the entirety of 1997 and the increase in the number of DISH
Network subscribers. Subscriber-related expenses totaled $144 million in 1997, an increase of $121 million
compared to 1996. Such expenses, which include programming expenses, copyright royalties, residuals payable to
retailers and distributors, and billing, lockbox and other variable subscriber expenses, totaled 48% of subscription
television services revenues, compared to 46% of subscription television services revenues during 1996. Satellite
and transmission expenses are comprised primarily of costs associated with the operation of EchoStar’s digital
broadcast center, contracted satellite TT&C services, and costs of maintaining in-orbit insurance on EchoStar’s DBS
satellites. Satellite and transmission expenses increased $8 million in 1997 compared to 1996 primarily as a result
of the operation of the DISH Network (including EchoStar II) during the entirety of 1997. Customer service center
and other operating expenses consist primarily of costs incurred in the operation of EchoStar’s DISH Network
customer service center and expenses associated with subscriber equipment installation. Customer service center
and other operating expenses totaled $35 million in 1997, an increase of $22 million as compared to 1996. The
increase in customer service center and other operating expenses was directly attributable to the operation of the
DISH Network during the entirety of 1997, combined with the increase in the number of DISH Network subscribers.
EchoStar expects DISH Network operating expenses to continue to increase in the future as subscribers are added.
However, as its DISH Network subscriber base continues to expand, EchoStar expects that such costs as a
percentage of DISH Network revenue will decline.
Cost of sales – DTH equipment and Integration Services. Cost of sales – DTH equipment and integration
services totaled $62 million during 1997, a decrease of $14 million, or 19%, as compared to 1996. During 1997,
cost of sales – DTH equipment and integration services principally represented costs associated with set-top boxes
and related components sold to international DTH operators. For 1996, cost of sales – DTH equipment and
integration services totaled $76 million and represented costs of EchoStar Receiver Systems sold prior to the August
1996 rollout of the 1996 Promotion.
Cost of sales – C-band and other. Cost of sales – C-band and other totaled $24 million during 1997, a
decrease of $18 million compared to 1996. This decrease was consistent with the decrease in related revenues and
resulted from the world-wide decrease in the demand for C-band products and services.
Marketing Expenses. Marketing expenses totaled $180 million for 1997, an increase of $128 million as
compared to 1996. The increase in marketing expenses was primarily attributable to the increase in subscriber
promotion subsidies. Subscriber promotion subsidies represent the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar Receiver Systems. These costs totaled $145 million during 1997, an increase
of $111 million over 1996. This increase resulted from the commencement of the 1997 Promotion and the increase in
the number of EchoStar Receiver Systems sold during 1997. Advertising and other expenses increased $17 million to
$35 million during 1997 as a result of increased marketing activity and operation of the DISH Network during the
entirety of 1997.
General and Administrative Expenses. General and administrative (“ G&A” ) expenses totaled $69 million for
1997, an increase of $17 million as compared to 1996. The increase in G&A expenses was principally attributable to
increased personnel expenses to support the growth of the DISH Network. G&A expenses as a percentage of total
revenue decreased to 15% during 1997 as compared to 26% during 1996. EchoStar expects that its G&A expenses as a
percent of total revenue may continue to decrease in future periods.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA was negative $51 million for
1997, as compared to negative EBITDA of $66 million for 1996. This improvement in EBITDA resulted from the
factors affecting revenue and expenses discussed above. EchoStar believes that EBITDA results will continue to
improve in future periods as the number of DISH Network subscribers increases. In the event that new subscriber
activations exceed expectations, EchoStar’s EBITDA results may be negatively impacted in the near-term because
subscriber acquisition costs are expensed upon shipment of EchoStar Receiver Systems.
Depreciation and Amortization. Depreciation and amortization expenses for 1997 (including amortization
of subscriber acquisition costs of $122 million) aggregated $173 million in 1997, an increase of $130 million, as
compared to 1996. The increase in depreciation and amortization expenses principally resulted from amortization of