_____________________________________________________________________________ 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
Form-------------------------------------
FORM 10-Q
(Mark One)(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, 1999MARCH 31, 2000
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 CorporationECHOSTAR 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)
5701 S. Santa Fe Drive
Littleton, Colorado
NEVADA 88-0336997
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
Not ApplicableNOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrantINDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) has filed all reports
required to be filed by SectionHAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF
1934 during the precedingDURING THE PRECEDING 12 months (or for such shorter period that the
registrant was required to file such reports)MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), andAND (2) has been subject to
such filing requirements for the pastHAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 days. YesDAYS. YES X No
As of October 28, 1999, the Registrant's outstanding common stock
consisted of 108,628,192 shares of ClassNO
--- ---
AS OF APRIL 20, 2000, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 231,172,351 SHARES OF CLASS A Common Stock and 119,217,604 Shares
of ClassCOMMON STOCK AND 238,435,208 SHARES OF CLASS B
Common Stock.
_____________________________________________________________________________COMMON STOCK.
================================================================================
2
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 19981999 and September 30, 1999March 31, 2000 (Unaudited)........................................................................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998March 31, 1999 and 19992000 (Unaudited)......................................................... 2
Condensed Consolidated Statements of Cash Flows for the
ninethree months ended September 30, 1998March 31, 1999 and 19992000 (Unaudited)............................................................................ 3
Notes to Condensed Consolidated Financial Statements (Unaudited).................................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 13Operations.............. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................Risk......................................... None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 24Proceedings.................................................................................. 18
Item 2. Changes in Securities and Use of Proceeds.............. 26Proceeds.......................................................... None
Item 3. Defaults Upon Senior Securities........................Securities.................................................................... None
Item 4. Submission of Matters to a Vote of Security Holders....Holders................................................ None
Item 5. Other Information......................................Information.................................................................................. None
Item 6. Exhibits and Reports on Form 8-K....................... 268-K................................................................... 20
3
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In(Dollars in thousands)
December
DECEMBER 31, September 30,
1998MARCH 31,
1999 ___________________________________
Assets2000
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents..............equivalents ..................................................................... $ 106,547905,299 $ 118,771679,788
Marketable investment securities....... 217,553 79,978securities .............................................................. 348,876 371,120
Trade accounts receivable, net of allowance for uncollectible accounts of
$2,996$13,109 and $2,627, respectively.... 107,233 154,747$16,182, respectively ........................................................... 159,685 173,735
Insurance receivable................... -receivable .......................................................................... 106,000 Inventories............................ 76,708 90,421106,000
Inventories ................................................................................... 123,630 152,493
Other current assets................... 29,804 44,457
______________________________assets .......................................................................... 40,205 47,351
----------- -----------
Total current assets..................... 537,845 594,374
Restricted Assets:
Insurance receivable................... 106,000 -
Interest and satellite escrows and
other restricted cash and marketable
investment securities................. 77,657 -assets ............................................................................. 1,683,695 1,530,487
Restricted cash and marketable investment securities................. - 2,928
_______________________________
Total restricted assets.................. 183,657 2,928securities ............................................. 3,000 3,000
Property and equipment, net.............. 876,914 1,356,673net ...................................................................... 1,339,939 1,338,275
FCC authorizations, net.................. 103,434 725,598net .......................................................................... 722,402 723,816
Other noncurrent assets.................. 105,002 128,384
______________________________assets .......................................................................... 149,153 229,296
----------- -----------
Total assets...................... $1,806,852 $2,807,957
==============================
Liabilities and Stockholders' Equity
(Deficit)assets ................................................................................ $ 3,898,189 $ 3,824,874
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable................. $90,646 $145,705payable ........................................................................ $ 194,046 $ 171,481
Deferred revenue....................... 132,982 160,746revenue .............................................................................. 181,531 210,709
Accrued expenses....................... 184,470 279,362expenses .............................................................................. 499,265 545,566
Current portion of long-term debt...... 22,679 21,832
_______________________________debt ............................................................. 22,067 20,982
----------- -----------
Total current liabilities................ 430,777 607,645liabilities ........................................................................ 896,909 948,738
Long-term obligations, net of current portion:
1994 Notes............................. 571,674Notes .................................................................................... 1,503 1,503
1996 Notes............................. 497,955Notes .................................................................................... 1,097 1,097
1997 Notes............................. 375,000Notes .................................................................................... 15 15
Seven Year Notes....................... -Notes .............................................................................. 375,000 375,000
Ten Year Notes......................... -Notes ................................................................................ 1,625,000 1,625,000
Convertible Notes ............................................................................. 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion................ 43,450 30,211portion ..................................... 27,990 24,839
Long-term deferred satellite services revenue and other long-term liabilities........................... 33,498 58,476
_______________________________liabilities ................. 19,093 26,541
----------- -----------
Total long-term obligations, net of current portion......................... 1,521,577 2,091,302
______________________________portion .............................................. 3,049,698 3,053,995
----------- -----------
Total liabilities................. 1,952,354 2,698,947
12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock, $.01 par
value, 900,000 shares authorized;
225,301 and no shares issued and
outstanding, respectively............... 226,038 -liabilities ........................................................................... 3,946,607 4,002,733
Commitments and Contingencies (Note 9)5)
Stockholders' Equity (Deficit):
Preferred Stock, 20,000,000 shares
authorized (inclusive of 900,000 shares
designated as Series B Preferred Stock):
8% Series A Cumulative Preferred Stock,
1,616,681 and no shares issued and
outstanding, respectively, including
cumulative accrued dividends of $5,755
and none, respectively................ 20,807 -
6 3/4% Series C Cumulative Convertible Preferred Stock, 2,300,000908,665 and 1,042,057348,135
shares issued and outstanding, respectively.......................... 108,666 51,429respectively ................................................. 45,434 17,407
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
220,087,230 and 230,803,137 shares issued and outstanding, respectively...................... 2,200 2,308
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
61,269,520 and 108,598,354238,435,208 shares issued and outstanding respectively.. 613 1,086
Class B Common Stock, $.01 par value,
400,000,000 shares authorized,
119,217,604 shares issued and
outstanding........................... 1,192 1,192................................................... 2,384 2,384
Class C Common Stock, $.01 par value, 400,000,000800,000,000 shares authorized, none
outstanding........................... - -
Common Stock Warrants.................. 12 12outstanding ................................................................................. -- --
Additional paid-in capital............. 230,263 1,438,202capital .................................................................... 1,622,538 1,691,467
Deferred stock-based compensation ............................................................. (117,780) (104,071)
Accumulated deficit.................... (733,093) (1,382,911)
_________________________________other comprehensive income ........................................................ -- 1,463
Accumulated deficit ........................................................................... (1,603,194) (1,788,817)
----------- -----------
Total stockholders' equity (deficit)..... (371,540) 109,010
_________________________________ ............................................................. (48,418) (177,859)
----------- -----------
Total liabilities and stockholders' equity (deficit)... $1,806,852 $2,807,957
=============================== ........................................ $ 3,898,189 $ 3,824,874
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
4
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
___________________ __________________
1998
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998 1999
___________________ __________________2000
----------- -----------
Revenue:REVENUE:
DISH Network:
Subscription television services...................... $179,472 $356,439 $459,540 $923,263
Other.......................... 1,861 1,866 12,004 6,290
____________________ __________________services .......................................... $ 261,016 $ 476,874
Other ..................................................................... 2,263 1,313
--------- ---------
Total DISH Network.............. 181,333 358,305 471,544 929,553Network .......................................................... 263,279 478,187
DTH equipment sales and integration services........... 44,191 48,809 192,030 108,551services ................................ 32,669 62,704
Satellite services.............. 5,485 13,386 15,854 31,127services .......................................................... 7,974 14,250
C-band and other................ 4,398 6,996 16,256 17,507
____________________ __________________other ............................................................ 5,654 10,580
--------- ---------
Total revenue..................... 235,407 427,496 695,684 1,086,738
Costs and Expenses:revenue .................................................................. 309,576 565,721
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses.... 77,520 156,663 210,717 399,529expenses ............................................... 110,357 201,574
Customer service center and other..................... 19,539 31,778 45,654 81,153other ......................................... 24,109 56,049
Satellite and transmission..... 7,080 10,547 17,792 30,852
____________________ __________________transmission ................................................ 9,446 12,476
--------- ---------
Total DISH Network operating expenses....................... 104,139 198,988 274,163 511,434expenses ....................................... 143,912 270,099
Cost of sales - DTH equipment and integration services....... 28,887 34,405 130,289 75,927services ...................... 22,916 46,222
Cost of sales - C-band and other.......................... 3,331 4,435 12,555 11,878other ............................................ 4,050 8,116
Marketing:
Subscriber promotion subsidies..................... 57,629 180,891 159,799 451,464subsidies ............................................ 127,608 250,087
Advertising and other.......... 8,114 19,742 25,706 40,398
____________________ __________________other ..................................................... 11,689 23,170
--------- ---------
Total marketing expenses........ 65,743 200,633 185,505 491,862expenses .................................................... 139,297 273,257
General and administrative...... 24,797 40,649 67,979 102,822
Amortization of subscriber
acquisition costs.............. 1,964 - 18,869 -administrative .................................................. 30,023 55,577
Non-cash, stock-based compensation .......................................... -- 14,009
Depreciation and amortization... 21,896 27,841 59,083 78,841
____________________ __________________amortization ............................................... 25,060 40,458
--------- ---------
Total costs and expenses.......... 250,757 506,951 748,443 1,272,864
____________________ __________________expenses ....................................................... 365,258 707,738
--------- ---------
Operating loss.................... (15,350) (79,455) (52,759) (186,126)loss ................................................................. (55,682) (142,017)
Other Income (Expense):
Interest income................. 7,436 4,913 24,268 17,855income ............................................................. 4,936 18,998
Interest expense net of
amounts capitalized............ (44,232) (48,224) (118,152) (149,532)
Other........................... 97 (1,614) (726) 14,050
____________________ _________________............................................................ (52,510) (61,513)
Other ....................................................................... (10) (543)
--------- ---------
Total other income (expense)...... (36,699)(44,925) (94,610) (117,627)
____________________ _________________ ................................................... (47,584) (43,058)
--------- ---------
Loss before income taxes.......... (52,049)(124,380) (147,369) (303,753)taxes ....................................................... (103,266) (185,075)
Income tax provision, net......... 78 (21) (205) (109)
___________________ __________________net ...................................................... (66) (55)
--------- ---------
Net loss before extraordinary charges.......................... (51,971)(124,401) (147,574) (303,862)charges .......................................... (103,332) (185,130)
Extraordinary charge for early retirement of debt, net of tax... - - -tax .................. (268,999) ___________________ ___________________--
--------- ---------
Net loss.......................... (51,971)(124,401) (147,574) (572,861)loss ....................................................................... (372,331) (185,130)
8% Series A Cumulative Preferred Stock dividends.................. (301) - (903)dividends ............................... (124) --
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind........ (6,816) - (19,852)in-kind ............................................. (241) --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock.................. (1,792) (1,942) (5,274) (5,661)
___________________ __________________Stock ............ (1,834) --
6 3/4% Series C Cumulative Convertible Preferred Stock dividends .............. -- (493)
--------- ---------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders..................... $(60,880) $(126,343) $(173,603)$(578,887)
==================== ==================shareholders ......................................... $(374,530) $(185,623)
========= =========
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding............... 180,052 227,703 179,684 201,292
==================== ==================outstanding .................................. 361,528 465,768
========= =========
Net loss per common share:
Basic and diluted loss per share before extraordinary charge....charge ................ $ (0.34)(0.30) $ (0.55) $ (0.97) $ (1.54)(0.40)
Extraordinary charge............ - - - (1.34)
_____________________ _________________charge ........................................................ (0.74) --
--------- ---------
Basic and diluted net loss......loss .................................................. $ (0.34)(1.04) $ (0.55) $ (0.97) $ (2.88)
===================== =================(0.40)
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
5
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
______________________________
1998
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 ________________________________2000
----------- -----------
Cash Flows From Operating Activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(147,574)loss ........................................................................ $ (572,861)(372,331) $ (185,130)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt.................. -debt ............................ 268,999 Loss on disposal of assets........... - 9,770
Non-cash deferred compensation....... - 5,983--
Deferred stock-based compensation recognized ................................. -- 13,709
Depreciation and amortization........ 59,083 78,841
Amortization of subscriber
acquisition costs................... 18,869 -amortization ................................................ 25,060 40,458
Amortization of debt discount and deferred financing costs............ 89,455 12,684costs ................... 11,036 1,534
Employee benefits funded by issuance of Class A Common Stock ................. 3,184 7,280
Change in reserve for excess and obsolete inventory.................. 374 (302)inventory .......................... (298) 303
Change in long-term deferred satellite services revenue and other long-term
liabilities......... 8,453 24,978liabilities ............................................................... 5,729 7,448
Other, net........................... 2,264 3,860net ................................................................... 70 990
Changes in current assets and current liabilities, net............ (47,038) 101,442
_______________________________net ....................... 63,912 8,831
----------- -----------
Net cash flows from operating activities............................. (16,114) (66,606)
Cash Flows From Investing Activities:activities ........................................ 5,361 (104,577)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities............................. (382,083) (245,913)securities ................................... (213,594) (218,888)
Sales of marketable investment securities............................. 503,851 383,488
Purchases of restricted marketable
investment securities.................. - (2,928)securities ....................................... 229,018 198,107
Funds released from escrow and restricted cash and marketable investment
securities.................. 116,468securities ...................................................................... 77,657 Investment earnings placed in escrow.... (5,269) ---
Purchases of property and equipment..... (141,426) (65,269)equipment ............................................. (8,854) (36,900)
Investment in Eldon Technology
Limited................................ - (6,041)
Other................................... (2,262) (3,565)
_______________________________iSKY, Inc. ....................................................... -- (50,000)
Investment in Replay TV ......................................................... -- (10,000)
Other ........................................................................... (490) (694)
----------- -----------
Net cash flows from investing activities............................. 89,279 137,429
Cash Flows From Financing Activities:activities ........................................ 83,737 (118,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Seven Year Notes............................. -Notes ...................................... 375,000 --
Proceeds from issuance of Ten Year Notes............................. -Notes ........................................ 1,625,000 --
Debt issuance costs and prepayment premiums............................... - (273,987)premiums ..................................... (273,718) --
Retirement of 1994 Notes................ -Notes ........................................................ (575,674) --
Retirement of 1996 Notes................ -Notes ........................................................ (501,350) --
Retirement of 1997 Notes................ -Notes ........................................................ (378,110) --
Retirement of Senior Exchange Notes..... -Notes ............................................. (228,528) --
Redemption of Series A Preferred Stock.................................. -Stock .......................................... (90,934) --
Repayments of mortgage indebtedness and notes payable...................... (12,069) (17,019)payable ........................... (4,956) (4,236)
Net proceeds from Class A common stockCommon Stock options exercised...................... 1,294 5,499
Net proceeds fromexercised and Class A common stockCommon
Stock issued forto Employee Stock Purchase Plan and proceeds from 6 3/4% Series
C Cumulative Convertible Preferred
Stock deposit account.................. 258 1,504
________________________________................................. 1,525 2,170
Other ........................................................................... -- (493)
----------- -----------
Net cash flows from financing activities............................. (10,517) (58,599)
________________________________activities ........................................ (51,745) (2,559)
----------- -----------
Net increase (decrease) in cash and cash equivalents............................ 62,648 12,224equivalents ............................ 37,353 (225,511)
Cash and cash equivalents, beginning of period.............................. 145,207period .................................. 106,547 ________________________________905,299
----------- -----------
Cash and cash equivalents, end of period.................................period ........................................ $ 207,855143,900 $ 118,771
================================
Supplemental Disclosure of Cash
Flow Information:
Capitalized interest................. $ 21,619 $
Satellite vendor financing........... 12,950 -
Other notes payable.................. - 2,928679,788
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
8% Series A Cumulative Preferred Stock dividends..................... 903dividends ............................. 124 --
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind........... 19,852in-kind ........................................................... 241 --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock..................... 5,274 5,661
Assets acquired from News Corporation
and MCI:
FCC licenses and other............ - 626,120
Satellites........................ - 451,200
Digital broadcast operations
center........................... - 47,000Stock .......... 1,834 --
Class A Common stockStock issued related to News
Corporation and MCI.............. - 1,124,320acquisition of Kelly Broadcasting
Systems, Inc. ............................................................. -- 31,556
See accompanying Notes to Condensed Consolidated Financial Statements.
3
6
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business ActivitiesORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include three interrelated business
units:
*o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of September 30, 1999,March 31, 2000,
EchoStar had approximately 3.03.9 million DISH Network subscribers.
*o EchoStar Technologies Corporation ("ETC") - engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design and distribution of similar equipment for direct-to-home
("DTH") projects of others internationally, together with the
provision of uplink center design, construction oversight and other
project integration services for international DTH ventures.
*o Satellite Services - engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-
allocatedFCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," and "EchoStar V"), digital satellite receivers,
digital broadcast operations centers, customer service facilities, and other
assets utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States to
provide consumers with a fully competitive alternative to cable television
service.
Recent Developments
On each of July 19, 1999 and October 25, 1999,March 22, 2000, EchoStar completed a two-
for-onetwo-for-one split of its
outstanding Class A and Class B common stock. An amount equal to the par value
of the common shares issued forin the July and October
stock splitssplit was transferred from additional
paid-in capital to Class A common stock and Class B common stock. Accordingly, all shareAll references
to shares included herein retroactively give effect to the stock split competed
in March 2000.
During March 2000, EchoStar acquired Kelly Broadcasting Systems, Inc.
("KBS"), a New Jersey based provider of international and per share amounts
have been restated herein to reflect these stock splits.
On February 2, 1999, EchoStar consummatedforeign-language
programming in the acquisition of privately-
held Media4, Inc., ("Media4"), an Atlanta-based supplier of broadband
satellite networking equipment for personal computers.United States. In connection with the acquisition, EchoStar
issued approximately 680,000510,000 shares of its Class A common stock valued, at the date of issuance, at approximately $10and paid $3.5
million in cash, for 100% ownership of KBS.
During March 2000, EchoStar completed a $50 million investment in iSKY Inc.
Pursuant to the investment agreement, following the launch of iSKY's service,
currently anticipated during late 2001, EchoStar would distribute the iSKY
satellite Internet service along with DISH Network satellite TV service through
its retailers nationwide. With this investment, EchoStar acquired a 11.03%
interest in iSKY and received warrants which, subject to reaching certain iSKY
customer targets through the DISH Network, could increase its stake up to 19.26%
on an outstanding stock of Media4. The acquisition of Media4 was
accounted for as a purchase transaction.basis.
4
7
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
On June 24, 1999, EchoStar acquired certain high-power DBS assets from
The News Corporation Limited ("News Corporation") and MCI Telecommunications
Corporation/WorldCom ("MCI") in exchange for shares of its Class A common
stock. A total of 34,412,464 shares were issued, valued at approximately
$1.12 billion, at the date of issuance. The original purchase price was
reduced by approximately $45.6 million. The reduction consisted of $30
million as compensation to EchoStar in exchange for the elimination of a
commitment by an affiliate of News Corporation to purchase a minimum of
500,000 set-top boxes from ETC, and approximately $15.6 million of commitments
assumed by EchoStar related to the build-out of a digital broadcast center in
Gilbert, Arizona. The primary assets acquired by EchoStar from News and MCI
in the transaction are:
* the rights to 28 DBS frequencies at the 110 degree West Longitude
("WL")orbital location;
* two DBS satellites ("EchoStar V" and "EchoStar VI") to be delivered
in-orbit (including construction, launch and insurance costs);
EchoStar V was launched from Cape Canaveral, Florida on September 23,
1999 and EchoStar VI is currently expected to be launched in the
second quarter of 2000;
* a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
* a worldwide license from NDS Limited to use certain technology in
connection with the manufacture and distribution of set-top boxes
intended for use with the services of certain network operators; and
* a three-year retransmission consent agreement for the DISH Network to
rebroadcast FOX Broadcasting Company's local station signals in those
markets where FOX owns the local affiliate.
On August 27, 1999, EchoStar announced the acquisition of privately-held
Eldon Technology Limited, ("Eldon") by one of its wholly-owned subsidiaries.
Eldon is a digital electronics design firm based in the U.K. EchoStar
acquired 100% of the outstanding stock of Eldon for approximately $9 million.
In connection with the acquisition, EchoStar paid approximately $6 million in
cash upon the close of the transaction and placed the remaining $3 million, to
be paid over the next three years, in escrow. The acquisition of Eldon was
accounted for as a purchase transaction.
EchoStar V was successfully launched on September 23, 1999, from Cape
Canaveral, Florida and has reached its final orbit at 110 degree WL. The
solar panels were successfully deployed a few hours after launch and the
communication antennas were successfully deployed, as expected. During in-
orbit testing of EchoStar V, minor anomalies have been detected which are not
expected to affect service. Assuming successful completion of final in-orbit
testing, EchoStar V is expected to commence commercial service during November
1999.
2. Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim
financial information. Accordingly, these statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
ninethree months ended September 30, 1999March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in EchoStar's Annual Report on Form 10-K for the year ended
December 31, 1998.1999. Certain prior year amounts have been reclassified to conform
with the current year presentation.
5
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
--------- ---------
(Unaudited)
Net loss ............................................................ $(372,331) $(185,130)
Change in unrealized gain (loss) on available-for-sale securities ... -- 1,463
--------- ---------
Comprehensive loss .................................................. $(372,331) $(183,667)
========= =========
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gain on available-for-sale securities, net of deferred taxes.
Basic and Diluted Loss Per Share
As of September 30, 1998March 31, 2000 and 1999, options to purchase approximately 6,220,00027,861,000
and 6,357,00029,448,000 shares of Class A common stock were outstanding, respectively.
Common stock equivalents (employee stock options and warrants) are excluded from
the calculation of diluted loss per share as they are antidilutive. Securities
which are convertible into shares of Class A common stock (8% Series A Cumulative Preferred Stock and 6(6 3/4% Series C
Cumulative Convertible Preferred Stock)Stock and 4 7/8% Convertible Subordinated
Notes) also are excluded from the calculation of diluted loss per share as they
are antidilutive. Approximately 25,328,00037,720,000 and 8,551,0005,713,000 shares of Class A
common stock were issuable upon conversion of the 8% Series A Cumulative Preferred Stock and the 6 3/4% Series C Cumulative
Convertible Preferred Stock as of September 30, 1998March 31, 1999 and 1999,2000, respectively. 3. Inventories
Inventories consistAs of
March 31, 2000, the following (in thousands):
December 31, September 30,
1998 1999
__________________________________
(Unaudited)
Finished goods - DBS........... $ 44,936 $ 40,247
Raw materials.................. 8,473 22,673
Finished goods - reconditioned
and other..................... 18,406 18,697
Consignment.................... 7,654 9,019
Work-in-process................ 2,420 4,664
Reserve for excess and
obsolete inventory............ (5,181) (4,879)
______________________________
$ 76,708 $ 90,421
==============================
64 7/8% Convertible Subordinated Notes are convertible into
approximately 11 million shares of Class A common stock.
5
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
4. Property and Equipment
Property and equipment3. INVENTORIES
Inventories consist of the following (in thousands):
December
DECEMBER 31, September 30,
1998MARCH 31,
1999 _______________________________
(Unaudited)2000
--------- ---------
EchoStar I......................Finished goods - DBS ........................................................... $ 201,60763,567 $ 201,607
EchoStar II..................... 228,694 228,694
EchoStar III.................... 234,083 234,083
EchoStar IV..................... 105,005 105,005
Furniture, fixtures55,633
Raw materials .................................................................. 35,751 61,774
Finished goods - reconditioned and equipment...................... 182,747 216,761
Buildingsother ....................................... 19,509 25,281
Work-in-process ................................................................ 7,666 13,220
Consignment .................................................................... 1,084 835
Reserve for excess and improvements...... 60,867 59,554
Land............................ 6,563 6,564
Tooling and other............... 5,552 5,657
Vehicles........................ 1,288 1,234
Construction in progress........ 18,329 537,549
______________________________
Total property and
equipment................. 1,044,735 1,596,708
Accumulated depreciation........ (167,821) (240,035)
______________________________
Property and equipment,
net.......................obsolete inventory ...................................... (3,947) (4,250)
--------- ---------
$ 876,914123,630 $ 1,356,673
==============================
Construction in progress
consists of the following
(in thousands):152,493
========= =========
December 31, September 30,
1998 1999
_______________________________
(Unaudited)
Progress amounts for satellite
construction, launch, and
launch insurance:
EchoStar V.................. $ - $ 243,130
EchoStar VI................. - 208,130
Digital broadcast operations
center........................ - 47,000
Other........................... 18,329 39,289
____________________________
$ 18,329 $ 537,549
============================
5. EchoStar4. ECHOSTAR IV IMPAIRMENT
As previously announced, as a result of the partial failure of EchoStar IV solar arrays to fully deploy and
the failure of 22 transponders to date, a maximum of approximately 1816 of the 44
transponders on EchoStar IV are currently available for use at any onethis time. TheDue to
the normal degradation of the solar arrays, the number of available transponders
willmay further decrease over time. Additionally, six of the 44
transponders on EchoStar IV have failed, resulting in the loss of use of a
total of 12 transponders. In addition to transponder failures, EchoStar IV has
experienced anomalies affecting its heating systems and fuel system. Based on existingcurrent data EchoStar expectsfrom Lockheed Martin, we
expect that approximately 16at least 10 high power transponders or 5 extra-high power
transponders will probably be available over the entire expectedremaining useful life of the
satellite, absent significant additional transponder problems or other failures.
In addition to transponder failures, EchoStar IV experienced anomalies
affecting its heating systems and fuel system during 1999. As a result of the
heating system and fuel system anomalies, the estimated remaining useful life of
EchoStar IV has been reduced to approximately 4 years. This change increased
EchoStar's net loss for the three months ended March 31, 2000 by approximately
$2.4 million.
During September 1998, EchoStar recorded a $106 million provision for loss
in connection with the partial failure of EchoStar IV solar arrays to deploy.
During December 1999, EchoStar recorded an additional $13.7 million provision
for loss. The aggregate loss provision of $119.7 million represented EchoStar's
estimate, at December 31, 1999, of the asset impairment attributable to lost
transmission capacity on EchoStar IV resulting from the solar array anomaly
described above. EchoStar also recorded a $106 million gain, during September
1998, attributable to an anticipated insurance claim receivable that it believes
is probable of receipt. While there can be no assurance as to the amount of the
final insurance settlement, EchoStar believes that it will receive insurance
proceeds at least equal to the $106 million receivable recorded. To the extent
that it appears probable that EchoStar will receive insurance proceeds in excess
of the $106 million currently recorded and that no further provision for loss is
necessary, a gain will be recognized for the incremental amount in the period
that the amount of the final settlement can be reasonably estimated.
In September 1998, EchoStar filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policy related to EchoStar
IV. However, if we
receivethe Company receives $219.3 million for a constructive total
loss on the satellite, the insurers would obtain the sole right to the benefits
of salvage from EchoStar IV under the terms of the launch insurance policy.
Although we believe we have suffered a total loss of EchoStar IV under that
definition in the launch insurance policy, we intend to negotiate a settlement
with the insurers to compensate us for the reduced satellite transmission
capacity and allow us to retain title to the asset.
76
9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
EchoStar'sThe satellite insurance policy for EchoStar IV consists of separate
identical policies with different carriers for varying amounts which, in
combination, create a total insured amount of $219.3 million. We
anticipate meeting with many of our insurance carriers during late 1999.
However, twoTwo of the
participants in ourEchoStar's insurance line have notified EchoStar they believe
that EchoStar'sits alleged delay in providing required insurance claim information may
reduce their obligation to pay any settlement related to the claim.
One carrier recently asserted it has no obligation to pay. We
strongly disagree withDuring April 2000, the position taken by those insurers and continue to
believe thatinsurance carriers offered EchoStar a total of
approximately $88 million, or 40% of the total policy amount, in settlement of
the EchoStar IV insurance claim. The insurers allege that all other impairment
to the satellite occurred after expiration of the policy period and is not
covered by the policy. EchoStar strongly disagrees with the position of the
insurers. As a result, EchoStar filed for arbitration to resolve its insurance
claim willfor constructive total loss with respect to the EchoStar IV satellite.
There can be resolved in a manner
satisfactory to EchoStar. However, no assurance can be given that weEchoStar will receive the amount claimed or, if
we do,it does, that weEchoStar will retain title to EchoStar IV with its reduced
capacity.
While there can be no assurance, we do not currently expect a material
adverse impact on short or medium term satellite operations. Although we have
not fully assessed the impairment to EchoStar IV from the transponder failures
and other anomalies, we continue to believe that insurance proceeds will be
sufficient to offset all write-downs of satellite assets that might ultimately
be necessary because of lost functionality. However, there can be no
assurance that additional material failures will not occur, and we can provide
no assurance as to the ultimate amount that may be received from the insurance
claim, or that coverage will be available. We will continue to evaluate
the performance of EchoStar IV and may modify our loss assessment as new events
or circumstances develop.
6. Accrued Expenses
Accrued expenses consist5. COMMITMENTS AND CONTINGENCIES
DirecTV
During February 2000 EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar merchandise and has
threatened to cause economic damage to retailers if they continued to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state anti-trust laws in
order to protect DirecTV's market share. EchoStar is seeking injunctive relief
and monetary damages. It is too early in the litigation to make an assessment of
the following (in thousands):
December 31, September 30,
1998 1999
_______________________________
(Unaudited)
Royalties and copyright fees..... $ 53,746 $ 78,638
Programming...................... 35,472 60,917
Marketing........................ 33,463 54,929
Interest......................... 24,918 31,627
Other............................ 36,871 53,251
_____________________________
$ 184,470 $ 279,362
=============================
7. Long-Term Debt
On January 25, 1999,probable outcome.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar DBS Corporation ("DBS Corp") sold $375
million principaltortuously interfered with a contract that DirecTV
allegedly had with Kelly Broadcasting Systems, Inc. (KBS). DirecTV alleges that
EchoStar "merged" with KBS, in contravention of DirecTV's contract with KBS.
DirecTV also alleges that EchoStar has falsely advertised to consumers about
EchoStar's right to offer network programming. DirecTV further alleges that
EchoStar improperly used certain marks owned by PrimeStar, now owned by DirecTV.
Finally, DirecTV alleges that EchoStar has been marketing National Football
League games in a misleading manner. The amount of 9 1/4% Senior Notes due 2006 (the "Seven Year
Notes") and $1.625 billion principal amount of 9 3/8% Senior Notes due 2009
(the "Ten Year Notes," and together with the Seven Year Notes, the "Notes").
Concurrent with the closing ofdamages DirecTV is seeking is
as yet unquantified. EchoStar intends to vigorously defend against these offerings, EchoStar used approximately
$1.658 billion of net proceeds received from the sale of the Notes to complete
tender offers for the outstanding 12 7/8% Senior Secured Discount Notes due
June 1, 2004 issued by Dish, Ltd. ("the 1994 Notes"), the 13 1/8% Senior
Secured Discount Notes due 2004 issued by EchoStar Satellite Broadcasting
Corporation ("the 1996 Notes") and the 12 1/2% Senior Secured Notes due 2002
issued by DBS Corp ("the 1997 Notes"). In February 1999, EchoStar used
approximately $268 million of net proceeds received from the sale of the Notes
to complete a tender offer related to the 12 1/8% Senior Preferred Exchange
Notes due 2004, issued on January 4, 1999,claims.
The case is currently in exchange for all of its issued
and outstanding 12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock. Substantially all of the restrictive covenants contained in each of
the respective indentures were removed upon closing of the tender offers. The
consummation of the tender offers resulted in a one-time extraordinary charge
to EchoStar's net income of $269 million (approximately $236 million of tender
premiums and consent fees and approximately $33 million associated with the
write-off of unamortized deferred financing costs and other transaction-
related costs).
8
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
8. Preferred Stock
Series A Preferred Stock
On February 8, 1999, EchoStar repurchased all outstanding shares of its
Series A Preferred Stock at $13.153 per share (the average of the preceding 20
trading day closing price of EchoStar's Class A common stock). The total
repurchase price was approximately $91 million, including accrued dividends of
approximately $6 million. The carrying value of the Series A Preferred Stock,
including accrued dividends, as of the date of repurchase was approximately
$21 million. All of the shares of Series A Preferred Stock were owned by
Charles W. Ergen, President and CEO of EchoStar, and James DeFranco,
EchoStar's Executive Vice President.
Series C Preferred Stock
As of September 30, 1999, 1,257,943 shares of EchoStar's 6 3/4% Series C
Cumulative Convertible Preferred Stock ("Series C Preferred Stock") have been
converted into approximately 10,322,000 shares of EchoStar's Class A common
stock.
9. Commitments and Contingenciesdiscovery.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately 50%
of theour outstanding capital stock of EchoStar.stock. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led to litigation which the parties
subsequently settled. In connection with the News Corporation litigation, EchoStar haswe
have a contingent fee arrangement with the attorneys who represented EchoStarus in that
litigation, which provides for the attorneys to be paid a percentage of any net
recovery obtained in the News Corporation litigation. The attorneys have
asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement. EchoStar isWe are vigorously contesting the
attorneys' interpretation of the fee arrangement, which EchoStar believeswe believe significantly
overstates the magnitude of itsour liability. IfWe also believe that the fee
arrangement is void and
7
10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
unenforceable because the attorneys who represented us are seeking a fee that we
believe is unreasonable and EchoStarexcessive, among other things. If we are unable to
resolve this fee dispute with the attorneys, it would be resolved through
arbitration or litigation. During mid-1999, we initiated litigation against the
attorneys in the District Court, Arapahoe County, Colorado, arguing that the fee
arrangement is void and unenforceable. In December 1999, the attorneys initiated
an arbitration proceeding before the American Arbitration Association. It is too
early to determine the outcome of negotiations, arbitration or litigation
regarding this fee dispute.
WIC Premium Television Ltd.
OnDuring July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an
Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
OnDuring September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
including EchoStar. WIC is a company authorized to broadcast certain copyrighted
work, such as movies and concerts, to residents of Canada. WIC alleges that the
defendants engaged in, promoted, and/or allowed satellite dish equipment from
the United States to be sold in Canada and to Canadian residents and that some
of the defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for viewing
in the United States. The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada, together with damages in excess
of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss. The Alberta Court also granted a motion to add more EchoStar parties to
the lawsuit. EchoStar Satellite Corporation, EchoStar DBS Corporation, EchoStar
Technologies Corporation, and EchoStar Satellite Broadcast Corporation have been
added as defendants in the litigation. The newly added defendants have also
challenged jurisdiction. The Court in the Federal action has stayed that case
before ruling on our motion to dismiss. We intend to vigorously defend the suits
in the event our motions are denied. It is too early to determine whether or
when any other lawsuits or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Broadcast Network Programming
Thenetwork programming
Under the Satellite Home Viewer Act, permits satellite retransmissionthe determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network signals only to "unserved households."
Thechannel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. Historically, EchoStarwe obtained distant broadcast network
signals for distribution to itsour customers through PrimeTime 24. The United
States District Court for the Southern District of Florida entered a nationwide
permanent injunction preventing PrimeTime 24 from selling its programming to
consumers unless the programming was sold in accordance with certain
stipulations in the injunction. The injunction covers "distributors"distributors as well. The
plaintiffs in the Florida litigation informed EchoStarus they considered EchoStarus a
"distributor"distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. EchoStar hasWe have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by the Company.us.
8
11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
In October 1998, EchoStarwe filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. EchoStarWe asked the court to enter a judgment declaring that itsour method of
providing distant network programming does not violate the Satellite Home Viewer
Act and hence does not infringe the networks' copyrights. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against EchoStarus in federal court in Miami alleging, among other things, copyright
infringement. The court combined the case that EchoStarwe filed in Colorado with the
case in Miami and transferred it to the Miami court.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DIRECTV, Inc.DirecTV
in Miami related to the delivery of distant network channels to DIRECTVDirecTV
customers by satellite. Under the terms of a settlement between DIRECTVDirecTV and the
networks, some DIRECTVDirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DIRECTVDirecTV
customers arewere to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule.
The networks are pursuing a Motion for Preliminary Injunction in the Miami
Court, asking the Court to enjoin EchoStarus from providing network programming except
under very limited circumstances. In general, the networks
want EchoStarcircumstances, and to turn off network programming to its customers on the same schedule
agreed to by DIRECTV.many of
our customers.
A preliminary injunction hearing was held onduring September 21, 1999. The Court
took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon the request, and
whether to hear argument on why the Satellite Home Viewer Act may be
unconstitutional, among other things. The Court did not say when a decision will
be made, or whether an additional hearing will be necessary prior to ruling on
the networks' preliminary injunction motion. Additional motions and affidavits
have been filed with the Court over the past several months and a ruling
adverse, or favorable, to us could issue at any time.
If this case is decided against EchoStar,us, or a preliminary injunction is issued,
significant material restrictions on the sale of distant ABC, NBC, CBS and Fox
channels by EchoStarus could result. Amongresult, including potentially a nationwide permanent
prohibition on our broadcast of ABC, NBC, CBS and Fox network channels by
satellite. The litigation and the new legislation discussed above, among other
things, the
litigation, together with legislation pending in Congress, could also require the
Companyus to terminate delivery of network signals to a
material portion of itsour subscriber base, which could cause many of these
subscribers to cancel EchoStar'stheir subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. EchoStar has commenced
sendingWe have sent letters to some of itsour subscribers warning
that their access to distant broadcast network channels might be terminated this year. Such
terminations would result in a small reduction in average monthly revenue per
subscribersoon
and could result in increased subscriber turnover.
10have terminated ABC, NBC, CBS and Fox programming to many customers.
In November 1999, Congress passed new legislation regarding the satellite
delivery of network programming and it was signed into law by President Clinton.
This new law has the potential of reducing the number of customers whose network
channels EchoStar may otherwise be required to terminate, as the law
"grandfathers" many subscribers to continue to receive network channels by
satellite.
9
12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ContinuedCONTINUED
(Unaudited)
Under the Satellite Home Viewer Act, the determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network channel depends, in part, on whether that household can
receive a signal of "Grade B intensity" as defined6. SEGMENT REPORTING
Financial Data by the FCC.
In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it
adopted a method for measuring it at particular households. The FCC also
endorsed a method for predicting Grade B intensity at particular households.
The FCC recently denied in part and granted in part EchoStar's petition for
reconsideration, allowing EchoStar some additional flexibility in the method
for measuring Grade B intensity but denying the Company's requests on other
matters. EchoStar cannot be sure whether these methods are favorable to the
Company or what weight, if any, the courts will give to the FCC's decision.
EchoStar also cannot be certain whether the application of these methods by
the courts will result in termination of distant signal delivery to a material
portion of its subscribers and decreases in future subscriber activations.
In addition, the Satellite Home Viewer Act is set to expire at the end of
1999. While proposed legislation being considered in conference by Congress
would extend the satellite companies' ability to retransmit distant network
signals subject to many limitations, EchoStar cannot be sure whether or when
such legislation will be enacted or whether it would be favorable to EchoStar.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect the Company's financial position or results of operations.
11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Meteoroid Events
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). EchoStar
believes that its DBS satellites did not incur any significant damage as a
result of these events. Similar meteoroid events are expected to occur again
in November 1999. These meteoroid events continue to pose a potential threat
to all in-orbit geosynchronous satellites, including EchoStar's DBS
satellites. While the probability that EchoStar's spacecraft will be damaged
by space debris is very small, that probability will increase by several
orders of magnitude during the November 1999 meteoroid events. EchoStar is
presently evaluating the potential effects that the November 1999 meteoroid
events may have on its DBS satellites. While there can be no assurance, due
to its significant satellite capacity, EchoStar is relatively well positioned
to avoid any material interruption of service due to any potential damage
resulting from these meteoroid events.
10. Segment Reporting
EchoStar adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements of public business enterprises and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders.Business Unit
EchoStar Eliminations
Dish Technologies Satellite and Consolidated
Network Corporation Services Other Total
_______ ___________ __________ _______ ___________
Nine Months
Ended
September
30, 1998
_____________
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
--------- ----------- --------- ------------ ------------
Revenue........THREE MONTHS ENDED MARCH 31, 1999
Revenue .......................... $ 497,155269,189 $ 186,37726,517 $ 16,9139,110 $ (4,761)4,760 $ 695,684
Net income
(loss)........ (233,008) 25,461 14,283 45,690 (147,574)
Nine Months
Ended
September
30, 1999
_____________
Revenue........ $ 962,854 $ 94,306 $ 43,497 $ (13,919) $ 1,086,738309,576
Net income (loss) before
extraordinary charges....... (562,740) (8,086) 22,028 244,936 (303,862)charges ......... (495,439) (3,776) 4,962 390,921 (103,332)
THREE MONTHS ENDED MARCH 31, 2000
Revenue .......................... $ 484,448 $ 52,469 $ 17,661 $ 11,143 $ 565,721
Net income (loss) ................ (534,017) (4,494) 11,062 342,319 (185,130)
127. SUBSEQUENT EVENTS
During April 2000, EchoStar announced an investment of $50 million in
Gilat-To-Home Inc. Gilat-To-Home, a joint venture whose partners now include
EchoStar, Gilat Satellite Networks Ltd., and Microsoft, plans to provide
consumer, two-way satellite, broadband Internet service later this year. With
the investment, EchoStar will hold approximately a 17.6% stake in Gilat-To-Home.
EchoStar and Gilat previously announced an agreement to jointly offer
consumers two-way, Ku-band, high-speed satellite Internet access along with DISH
Network satellite television programming via a single small consumer dish. Under
the terms of the agreement, EchoStar will distribute the Gilat-To-Home broadband
satellite Internet service powered by MSN along with DISH Network satellite TV
service through its retailers nationwide. The Gilat-To-Home services are
expected to be available during late 2000.
10
Item13
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 us or by officers, directors or
employees acting on our 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 our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of a satellite due to operational
failures, space debris or otherwise; an unsuccessful launch or deployment of our
fifth or sixth satellite, EchoStar V and EchoStar VI,
respectively;VI; delays in the construction of our seventh, eighth
or ninth satellites; a decrease in sales of digital equipment and related
services to international direct-to-home or DTH service providers; a decrease in
DISH Network subscriber growth; an increase in subscriber turnover; an increase
in subscriber acquisition costs; impedimentsan inability to theobtain certain retransmission
of local or
distant broadcast network signals which could result from pending litigation
or legislation; lower than expected demand for our delivery of local broadcast
network signals; an unexpected business interruption due to the failure of
third-parties to remediate Year 2000 issues;consents; our inability to retain necessary authorizations from the FCC; an
increase in competition from cable, direct broadcast satellite, other satellite
system operators, and other providers of subscription television services; the
introduction of new technologies and competitors into the subscription
television business; a change in the regulations governing the subscription
television service industry; the outcome of any litigation in which we may be
involved; general business and economic conditions; and other risk factors
described from time to time in our reports filed with the Securities and
Exchange Commission. In addition to statements that explicitly describe such
risks and uncertainties, readers are urged to consider statements that include
the terms "believes," "belief," "expects," "plans," "anticipates," "intends" or
the like to be uncertain and forward-looking. All cautionary statements made
herein should be read as being applicable to all forward-looking statements
wherever they appear. In this connection, investors should consider the risks
described herein and should not place undue reliance on any forward-looking
statements.
Results of OperationsRESULTS OF OPERATIONS
Three Months Ended September 30, 1999March 31, 2000 Compared to the Three Months Ended September 30, 1998.March 31,
1999.
Revenue. Total revenue for the three months ended September 30, 1999March 31, 2000 was $427$566
million, an increase of $192$256 million compared to total revenue for the three
months ended September 30, 1998March 31, 1999 of $235$310 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth. We expect that our
revenues will continue to increase as the number of DISH Network subscribers
increases.
DISH Network subscription television services revenue totaled $356$477 million
for the three months ended September 30, 1999,March 31, 2000, an increase of $177$216 million or 99% compared
to the same period in 1998. This increase was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber. Average DISH Network subscribers for the three months ended September 30, 1999March 31,
2000 increased approximately 86%71% compared to the same period in 1998.1999. As of September 30,
1999,March
31, 2000, we had approximately 3.03.9 million DISH Network subscribers compared to
1.62.3 million at September 30, 1998.March 31, 1999. The strong subscriber growth reflects the impact
of aggressive marketing promotions, including our free installation program,
together with increased interest in satellite television resulting from the
availability of local network channels by satellite, together with generally
good economic conditions and positive momentum for the DISH Network generally.
Monthly revenue per subscriber approximated $43 and $40was approximately $43.85 during the three months
ended September 30, 1999March 31, 2000 and 1998, respectively.approximately $41.50 during the same period during
1999. DISH Network subscription television services revenue principally consists
of revenue from basic, premium and pay-per-view subscription television
services. DISH Network subscription television services revenue will continue to
increase to the extent we are successful in increasing the number of DISH
Network subscribers and maintaining or increasing revenue per subscriber.
For the three months ended September 30, 1999,March 31, 2000, DTH equipment sales and
integration services totaled $49$63 million, an increase of $5$30 million compared to
the same period during 1998.1999. DTH equipment sales consist of sales of digital
set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. TheThis increase
in DTH equipment sales and integration services revenue was primarily
attributable to an increase in sales of DBS accessories, partially offset by a
decrease in shipments to international DTH service operators during the three
months ended September 30, 1999demand for digital set-top boxes as
compared to the same period in 1998.
13during 1999.
11
Item14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - ContinuedCONTINUED
Substantially all of our EchoStar Technologies Corporation, or ETC,
revenues have resulted from sales to two international DTH providers. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. As a result, our ETC business currently is economically dependent on
these two DTH providers. Our future revenue from the sale of DTH equipment and
integration services in international markets depends largely on the success of
these DTH operators and continued demand for our digital set-
topset-top boxes. Due to increasing competition and the continued decrease in the
sales price of digital set-top boxes,Although
there can be no assurance, we expect that our DTH equipment and integration
services revenue for the year ended December 31, 1999 may decline
as much as 50% as compared to 1998.2000 will approximate DTH
equipment and integration services revenue during 1999. Although we continue to
actively pursue additional distribution and integration service opportunities
internationally, no assurance can be given that any such efforts will be
successful.
As previously reported, since 1998, Telefonica, one of the two DTH service
providers described above, has had recurrent discussions and negotiations for a
possible merger with Sogecable (Canal Plus Satellite), one of its primary
competitors. Currently,While we are not currently aware of any ongoingformal negotiations between
Telefonica and Canal Plus Satellite.Satellite, there are again rumors of a potential
merger in the marketplace. Although we have binding purchase orders from
Telefonica for 1999 deliveries of DTH equipment in 2000, we cannot predict the
impact, if any, eventual consummation of this possible merger might have on our
future sales to Telefonica.
Satellite services revenue totaled $13$14 million during the three months
ended September 30, 1999,March 31, 2000, an increase of $8$6 million as compared to the same period
during 1998.1999. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television, or
BTV customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time BTV
customers. Satellite services revenue for the year ended December 31, 2000 is
expected to increase duringas compared to the remainder ofyear ended December 31, 1999, to the
extent we are successful in increasing the number of our BTV customers and
developing and implementing new services.
In order, among other things, to prepare for a potential adverse result in
our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning that
their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber and possibly increased subscriber
turnover. While there can be no assurance, any such decreases could be offset by
increases in average monthly revenue per subscriber resulting from the delivery
of local network channels by satellite, and increases in other programming
offerings that will follow the scheduled operation of EchoStar V later this
year and launch of EchoStar VI during 2000. While there can be no assurance,
legislation pending in the Senate would, if passed into law, reduce the number
of customers whose network channels we may otherwise be required to terminate.this summer.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$199$270 million during the three months ended September 30, 1999,March 31, 2000, an increase of $95$126
million or 91%88%, compared to the same period in 1998.1999. The increase in DISH
Network operating expenses was consistent with, and primarily attributable to,
the increase in the number of DISH Network subscribers. DISH Network operating
expenses represented 56%57% and 58%55% of subscription television services revenue
during the three months ended September 30,March 31, 2000 and 1999, respectively. The
percentage increase is primarily attributable to operating inefficiencies
resulting from our rapid growth including upgrades to our installation and 1998,
respectively.call
center infrastructure. We believe these issues will be resolved shortly and will
provide long term efficiency improvement.
Subscriber-related expenses totaled $157$202 million during the three months
ended September 30, 1999,March 31, 2000, an increase of $79$92 million compared to the same period in
1998.1999. Such expenses, which include programming expenses, copyright royalties,
residuals currently payable to retailers and distributors, and billing, lockbox
and other variable subscriber expenses, represented 44%42% of subscription
television services revenues during each of the three months ended September 30, 1999 compared to 43% during the same period in 1998.March 31,
2000 and 1999. Although we do not currently expect subscriber-related expenses
as a percentage of subscription television services revenue to increase
materially in future periods, there can be no assurance this expense to revenue
ratio will not materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$32$56 million during the
12
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
three months ended September 30, 1999,March 31, 2000, an increase of $12$32 million as compared to the
same period in 1998.1999. The increase in customer service center and other expenses
primarily resulted from increased personnel and telephone expenses to support
the growth of the DISH Network.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - ContinuedNetwork and from installation expenses related to the
expansion of our installation business. Customer service center and other
expenses totaled 9%12% of subscription television services revenue during the
three months ended September 30, 1999,March 31, 2000, as compared to 11%9% during the same period in
1998. Although we do not expect
customer service center1999. These expenses in total, and other expenses as a percentage of subscription television
services revenue, may continue to increase materially in future periods there
can be no assurance this expenseas we continue to
revenue ratio will not materially
increase.develop and expand our customer service centers and installation business to
provide additional customer support and help us better accommodate anticipated
subscriber growth, resulting in long term efficiency improvements.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite and
transmission expenses totaled $11$12 million during the three months ended September 30, 1999,March
31, 2000, a $4$3 million increase compared to the same period in 1998.1999. This
increase resulted from higher satellite and other digital broadcast center
operating expenses due to an increase in the number of operational satellites.
We expect satellite and transmission expenses to continue to increase in the
future as additional satellites or digital broadcast centers are placed in
service. Satellite and transmission expenses totaled 3% and 4% of subscription
television services revenue during the three months ended September 30,March 31, 2000 and
1999, and 1998, respectively. While we can provide no assurance,
we expect this expense to revenue ratio to decline to the extent we are
successful in increasing the number of DISH Network subscribers and
maintaining or increasing revenue per subscriber.
Cost of sales - DTH equipment and Integration Services. Cost of sales - DTH
equipment and integration services totaled $34$46 million during the three months
ended September 30, 1999,March 31, 2000, an increase of $5$23 million compared to the same period in
1998. This increase is consistent with the increase in DTH
equipment revenue.1999. Cost of sales - DTH equipment and integration services principally
includes costs associated with digital set-top boxes and related components sold
to international DTH operators and DBS accessories. This increase in cost of
sales - DTH equipment and integration services is consistent with the increase
in DTH equipment sales and integration services revenue. Cost of sales - DTH
equipment and integration services represented 70%74% and 65%70% of DTH equipment
revenue, during the three months ended September 30,March 31, 2000 and 1999, and 1998,
respectively.
We expect that cost of sales DTH equipment and integration
services mayThe increase as a percentage of DTH equipment revenue in the future,
due toreflects price pressure resulting from increased competition from
other providers of DTH equipment.
Marketing Expenses. Marketing expenses totaled $201$273 million during the
three months ended September 30, 1999,March 31, 2000, an increase of $135$134 million compared to the
same period in 1998.1999. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Subscriber
promotion subsidies include the excess of transaction costs over transaction
proceeds at the time of sale of EchoStar receiver systems, activation allowances
paid to retailers, and other promotional incentives. Advertising and other
expenses totaled $20$23 million and $8$12 million during the three months ended September 30,March
31, 2000 and 1999, respectively.
We subsidize the purchase and 1998, respectively.installation of EchoStar receiver systems in
order to attract new DISH Network subscribers. Consequently, our subscriber
acquisition costs are significant. In connection with our plans to encourage as
many new subscribers as possible to be ready for the additional services that
will become available at the 110(Degree) WL orbital location, and as a result of
continuing competition and our plans to attempt to continue to drive rapid
subscriber growth, we expect our subscriber acquisition costs for 2000 may
average as much as $450 or more for the full year.
During the three months ended September 30, 1999,March 31, 2000, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
$195 million, or approximately $390 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
September 30, 1998, inclusive of acquisition marketing expenses and deferred
subscriber acquisition costs, totaled $64 million, or approximately $240 per
new subscriber activation. The increase in our subscriber acquisition costs,
on a per new subscriber activation basis, principally resulted from the
introduction of several aggressive marketing promotions
to acquire new
subscribers.
During the third quarter of 1999, we continuedincluded our DISH Network One-Rate Plan, C-band bounty program,
our Great Rewards
program (PrimeStar bounty), cable bounty and our DISH Network One-Rate
Plan.a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our other marketing programs.programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive a
rebate that ranges from $100 up to $299 on the purchase of certain EchoStar
receiver systems. To be eligible for this rebate, a subscriber must make a
one-year commitment to subscribe to our America's Top 100 CD programming package
plus additional channels. The amount of the monthly programming commitment
determines the amount of the rebate. Although subscriber acquisition costs are
materially higher under this plan compared to previous promotions, DISH Network
One-Rate Plan customers generally provide materially greater average revenue per
subscriber than a typical DISH Network subscriber. In addition, we believe that
these customers represent lower credit risk and therefore may be marginally less
likely to
disconnect their service than other DISH Network
subscribers. Under the DISH Network One-Rate Plan, we presently expect the
participation rate to approximate 20% to 30% of new subscriber activations
during the duration of the promotion. To the extent that actual consumer
1513
Item16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - ContinuedCONTINUED
disconnect their service than other DISH Network subscribers. To the extent that
actual consumer participation levels exceed present expectations, subscriber
acquisition costs may materially increase. Although there can be no assurance as to the
ultimate duration of the DISH Network One-Rate Plan, it will continue through at
least December 1999.April 2000.
Under our bounty programs, current cable, C-band and PrimeStar customers
are eligible to receive a free base-level EchoStar receiver system and free
installation andinstallation. In addition, PrimeStar customers are eligible to receive six
months of our America's Top 40 programming (which retailsor our DISH Latino programming (both
packages retail for $19.99 per month) without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40, our DISH Latino
programming package or our America's Top 100 CD programming package and prove
that they are a current cable, C-band or PrimeStar customer to be eligible for
this program.
Based uponthese programs.
Under our current promotions we expectfree installation program all customers who purchase an EchoStar
receiver system through April 30, 2000 are eligible to receive a modestfree
professional installation. The free installation program was responsible, in
part, for the strong subscriber growth during the first quarter of 2000. The
free installation program was also largely responsible for the increase in average
subscriber acquisition costs during the first quarter. While there can be no
assurance, we expect that subscriber acquisition costs may be lower during the
remainder of 1999. However2000 following expiration of the free installation program and
commencement of other less expensive programs including our new Digital Home
Plan. That plan provides consumers with the use of two receivers plus
installation, in home service and our America's Top 150 programming package for
only $49.99, plus a $99 up front fee.
During the three months ended March 31, 2000, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
approximately $273 million, or approximately $467 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
March 31, 1999, inclusive of acquisition marketing expenses, totaled $142
million, or approximately $355 per new subscriber activation. The increase in
our subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the impact of several aggressive marketing promotions
to acquire new subscribers, including most significantly our free installation
offer which commenced in January and is scheduled to conclude during the second
quarter.
In connection with the launch of EchoStar V and EchoStar VI, we will
utilize the 110(Degree) orbital location to enhance revenue opportunities with
new value added services for our current and future subscribers, and maintain
our primary DBS service at the 119(Degree) orbital location. Our existing
subscribers will need to upgrade their dish and receiver systems in order to
take advantage of all of the services we offer. To encourage existing
subscribers to upgrade their systems and remain subscribers, we are currently
subsidizing upgrades by existing subscribers to our DISH 500 system. The cost of
this program could be significant if utilized by a large number of our existing
subscribers. The anticipated date for the launch of EchoStar VI, previously
scheduled for June 2000, is now expected in July as a result of a delay of an
Atlas launch scheduled prior to EchoStar VI.
Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase further to the extent that
we continue or expand our bounty programs, our "free system/free installation"
program, or the DISH Network One-Rate Plan, or if we determine that other more
aggressive promotions are necessary to respond to competition, or for other
reasons.
General and Administrative Expenses. General and administrative expenses
totaled $41$56 million during the three months ended September 30, 1999,March 31, 2000, an increase of
$16$26 million as compared to the same period in 1998.1999. 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 percentagerepresented 10% of total revenue decreased to 10% during
each of the three months ended September 30, 1999 compared to 11% during the same period in 1998.March 31, 2000 and 1999. Although we expect G&A
expenses as a percentage of total revenue to remain near the current level or
decline modestly in future periods, this expense to revenue ratio could
increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an incentive
plan which provided certain key employees a contingent incentive including stock
options. The payment of these incentives was contingent upon our achievement of
certain financial and other goals. We met certain of these goals during 1999.
Accordingly, we recorded approximately $179 million of deferred compensation
related to post-grant appreciation of stock
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
options granted pursuant to the 1999 incentive plan. The related deferred
compensation will be recognized over the five-year vesting period. As a result
of substantial post-grant appreciation of options, during the three months ended
March 31, 2000 we recognized $14 million of the total of $179 million of
deferred stock-based compensation under this performance based plan. The
remainder will be recognized over the remaining vesting period.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash, deferredstock-based compensation. EBITDA was negative $47$88
million during the three months ended September 30, 1999March 31, 2000 compared to $7negative $31
million during the three months ended September 30, 1998. EBITDA, as adjusted
to exclude amortization of subscriber acquisition costs, was negative
$47 million for the three months ended September 30, 1999 compared to
$9 million for the same period in 1998.1999. This decline in EBITDA principally
resulted from an increase in DISH Network operating andsubscriber acquisition costs due to the success of
several aggressive marketing expenses.promotions to acquire new subscribers, as well as
other previously described factors. It is important to note that EBITDA does not
represent cash provided or used by operating activities. Further, our
calculation of EBITDA for the three months ended September 30, 1999March 31, 2000 does not include
approximately $4.3$14 million of non-cash compensation expense resulting from
post-grant appreciation of employee stock options granted to
employees.options. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with generally accepted accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our EBITDA
results will be negatively impacted because subscriber acquisition costs are
expensed as incurred.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $28$40 million during the three months ended September 30, 1999,March 31, 2000, a $4$15
million increase compared to the same period in 1998, during which
subscriber acquisition costs were amortized. Commencing October 1997, we
instead expensed all of these costs at the time of sale.1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar IVV in August of 1998November
1999 and other depreciable assets placed in service during 1998,
partially offset by subscriber acquisition costs becoming fully amortized
during the third quarter of 1998.1999.
Other Income and Expense. Other expense, net totaled $45$43 million during the
three months ended September 30, 1999, an increaseMarch 31, 2000, a decrease of $8$5 million compared to the same
period in 1998.1999. This increasedecrease resulted from a decreasean increase in interest income
andpartially offset by an increase in interest expense.
In JanuaryLIQUIDITY AND CAPITAL RESOURCES
Cash Sources
As of March 31, 2000, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.051 billion compared to $1.254
billion as of December 31, 1999. For the three months ended March 31, 1999 and
2000, we refinancedreported net cash flows from operating activities of $5 million and
negative $105 million, respectively. The increase in net cash flows reflects,
among other things, the significant increase in subscriber acquisition costs
associated with our outstanding 12 1/2% Senior Secured Notes due 2002 issued in
June 1997, referred to herein as the 1997 notes; our 12 7/8% Senior Secured
Discount Notes due 2004 issued in 1994, referred to herein as the 1994 notes;rapid subscriber growth and our 13 1/8% Senior Secured Discount Notes due 2004 issued"free installation"
promotion.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to rapidly expand our DISH Network subscriber base, retain existing
DISH Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in 1996,
referredachieving
our goals. The amount of capital required to herein asfund our 2000 working capital and
capital expenditure needs will vary, depending, among other things, on the 1996 notes,rate
at more favorable interest rateswhich we acquire new subscribers and terms. In connectionthe cost of subscriber acquisition. Our
working capital and capital expenditure requirements could increase materially
in the event of increased competition for subscription television customers,
significant satellite failures, or in the event of a general economic downturn,
among other factors. These factors could require that we raised additional
capital in the future.
Subscriber Turnover
Our churn increased during 1999, but did not further increase during the
three months ended March 31, 2000. We believe that our average churn continues
to be lower than satellite industry averages. Our maturing subscriber base,
together with the refinancing, we consummated an offeringeffects of 16rapid growth, were responsible for the increase in
churn during 1999. Rapid growth resulted
15
Item18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
9 1/4% Senior Notes due 2006, referredCONTINUED
in customer installation delays, and the effectiveness of our customer service
has also been impacted. We are rapidly expanding our customer service and
installation capabilities in response to herein asour increased business, but churn may
increase until we have completed the seven year notes, and
9 3/8% Senior Notes due 2009, referredupgrades to herein asour infrastructure. Further,
our litigation with the ten year notes.
Although the seven and ten year notes have lower interest rates than the debt
securities we repurchased, interest expense increased by approximately $4
million because we raised additional debt to cover tender premiums and consentnetworks in Miami, and other fees relatedfactors, including our
inability to the refinancing.
Nine Months Ended September 30, 1999 Comparedobtain retransmission consents from local network stations on or
before May 29, 2000, could require us to the Nine Months Ended
September 30, 1998.
Revenue. Total revenue for the nine months ended September 30, 1999 was
$1.09 billion, an increaseterminate delivery of $394 million comparednetwork channels
to total revenue for the
nine months ended September 30, 1998a material portion of $696 million. The increaseour subscriber base, which could cause many of those
customers to cancel their subscription to our other services. Any such
terminations could result in total
revenue was primarily attributable to DISH Network subscriber growth and
highera small reduction in average monthly revenue per
subscriber.
DISH Network subscription television services revenue totaled
$923 million forsubscriber and could result in increased churn. While there can be no assurance,
notwithstanding the nine months ended September 30, 1999, an increase of
$463 million or 101%, compared to the same period in 1998. This increase was
directly attributable to the increase in the number of DISH Network
subscribers and higher average revenue per subscriber. Average DISH Network
subscribers for the nine months ended September 30, 1999 increased
approximately 87% compared to the same period in 1998.
For the nine months ended September 30, 1999, DTH equipment sales and
integration services totaled $109 million, a decrease of $83 million compared
to the same period during 1998. This expected decrease in DTH equipment sales
and integration services revenue was primarily attributable to a decrease in
demand combined with a decrease in the sales price of digital set-top boxes
attributable to increased competition.
Satellite services revenue totaled $31 million during the nine months
ended September 30, 1999, an increase of $15 million as compared to the same
period during 1998. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time BTV
customers.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$512 million during the nine months ended September 30, 1999, an increase of
$238 million or 87%, compared to the same period in 1998. The increase in
DISH Network operating expenses was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers. DISH
Network operating expenses represented 55% and 60% of subscription television
services revenue during the nine months ended September 30, 1999 and 1998,
respectively.
Subscriber-related expenses totaled $400 million during the nine months
ended September 30, 1999, an increase of $189 million compared to the same
period in 1998. Such expenses represented 43% of subscription television
services revenues during the nine months ended September 30, 1999 compared to
46% during the same period in 1998. The decrease in this expense to revenue
ratio resulted from subscription television services revenue increasing at a
greater rate than subscriber-related expenses, due to greater premium channel
penetration and subscription price increases. Although we expect subscriber-
related expenses as a percentage of subscription television services revenue
to remain near this level in future periods, this expense to revenue ratio
could increase.
Customer service center and other expenses totaled $81 million during the
nine months ended September 30, 1999, an increase of $35 million as compared
to the same period in 1998. The increase in customer service center and other
expenses resulted from increased personnel and telephone expenses to support
the growth of the DISH Network. Customer service center and other expenses
totaled 9% and 10% of subscription television services revenue during the nine
months ended September 30, 1999 and 1998, respectively.
Satellite and transmission expenses totaled $31 million during the nine
months ended September 30, 1999, a $13 million increase compared to the same
period in 1998. This increase resulted from higher satellite and other
digital broadcast center operating expenses due to an increase in the number
of operational satellites. Satellite and transmission expenses represented 3%
and 4% of subscription television services revenue during the nine months
ended September 30, 1999 and 1998, respectively.
17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Cost of sales DTH equipment and Integration Services. Cost of sales
DTH equipment and integration services totaled $76 million during the nine
months ended September 30, 1999, a decrease of $54 million or 42% compared to
the same period in 1998. This decrease is consistent with the decrease in DTH
equipment revenue. Cost of sales DTH equipment and integration services
represented 70% of DTH equipment revenue during the nine months ended
September 30, 1999 as compared to 68% during the same period in 1998.
Marketing Expenses. Marketing expenses totaled $492 million during the
nine months ended September 30, 1999, an increase of $306 million compared to
the same period in 1998. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Advertising
and other expenses totaled $40 million during the nine months ended September
30, 1999, an increase of $14 million over the same period in 1998.
During the nine months ended September 30, 1999, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
$488 million. Comparatively, our subscriber acquisition costs during the nine
months ended September 30, 1998, inclusive of acquisition marketing expenses
and deferred subscriber acquisition costs, totaled $160 million. The increase
in our subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the introduction of several aggressive marketing
promotions to acquire new subscribers.
General and Administrative Expenses. General and administrative expenses
totaled $103 million during the nine months ended September 30, 1999, an
increase of $35 million as compared to the same period in 1998. 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 totaled 9% and 10% during the nine months ended September 30,
1999 and 1998, respectively.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and other non-cash deferred compensation. EBITDA was negative
$101 million and $6 million, during the nine months ended September 30, 1999
and 1998, respectively. EBITDA, as adjusted to exclude amortization of
subscriber acquisition costs, was negative $101 million for the nine months
ended September 30, 1999 compared to $25 million for the same period in 1998.
This decline in EBITDA principally resulted from a decrease in DTH equipment
revenue and an increase in subscriber promotion subsidies. It is important to
note that EBITDA does not represent cash provided or used by operating
activities. Further, our calculation of EBITDA for the nine months ended
September 30, 1999 does not include approximately $6.0 million of non-cash
compensation resulting from appreciation of stock options granted to
employees. EBITDA should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
Depreciation and Amortization. Depreciation and amortization expenses
aggregated $79 million during the nine months ended September 30, 1999, a
$1 million increase compared to the same period in 1998, during which
subscriber acquisition costs were amortized. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar IV in August of 1998 and
other depreciable assets placed in service during 1998, offset by subscriber
acquisition costs becoming fully amortized during the third quarter of 1998.
Other Income and Expense. Other expense, net totaled $118 million
during the nine months ended September 30, 1999, an increase of $23 million as
compared to the same period in 1998. The increase in other expense resulted
primarily from an increase in interest expense associated with our seven and
ten year notes, partially offset by a gain on the sale of the investments.
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
Cash Sources
During January 1999, we sold $375 million principal amount of the seven
year notes and $1.625 billion principal amount of the ten year notes, together
referred to as the notes. Concurrent with the closing of these offerings, we
used approximately $1.658 billion of net proceeds received from the sale of
the notes to complete tender offers for our outstanding 1994 notes, 1996 notes
and 1997 notes. In February 1999, we used approximately $268 million of net
proceeds received from the sale of the notes to complete a tender offer for
our 12 1/8% Senior Preferred Exchange Notes, referred to herein as the
Exchange Notes. The Exchange Notes were issued on January 4, 1999 in exchange
for all issued and outstanding 12 1/8% Series B Senior Redeemable Exchangeable
Preferred Stock.
As of September 30, 1999, our unrestricted cash, cash equivalents and
marketable investment securities totaled $199 million compared to $324 million
as of December 31, 1998. For the nine months ended September 30, 1999 and
1998, we reported a net use of cash from operating activities of $68 million
and $16 million, respectively.
Subscriber Turnover
During 1999, we have experienced an increase in subscriber turnover, or
churn. If our churn rate increases materially, it could adversely affect our
financial condition and results of operations. Whileissues discussed above we expect to be able to continue to
manage churn in line with our internal benchmark for the remainder
of this year, we can provide no assurance that churn will not increase in the
future. Further, our benchmark could increase in the future as our subscriber
base, and theto a level at or below satellite industry generally, mature.averages during 2000.
Subscriber Acquisition Costs
As previously described, we subsidize the costpurchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. DuringOur average
subscriber acquisition cost was $467 during the nine months ended
September 30, 1999,first quarter of 2000. While
there can be no assurance, we expect that our aggregateper subscriber acquisition costs
which includefor the remainder of 2000 will be less than during the first quarter, unless
competition, the desire to drive stronger subscriber promotion subsidiesgrowth or other factors
require relatively more costly promotions than those presently planned, or
result in the extension of our free installation program beyond the currently
scheduled second quarter expiration.
In connection with our plans to encourage as many new subscribers as
possible to be ready for the additional services that will become available at
the 110(Degree) WL orbital location, and as a result of continuing competition
and our plans to attempt to continue to drive rapid subscriber growth, we expect
our subscriber acquisition marketing expenses,
approximated $370 per new subscriber activation.costs for 2000 may average as much as $450 or more
for the full year. Our subscriber acquisition costs, both in the aggregate and
on a per new subscriber activation basis, may materially increase further to the
extent that we continue or expand our bounty programs, our "free system/free
installation" program, or the DISH Network One-Rate Plan, or if we determine
that more aggressive promotions are necessary to respond to competition, or for
other reasons.
Funds necessary to meet these subscriber acquisition costs will be satisfied from
existing cash and investment balances to the extent available. We may, however,
be required to raise additional capital in the future to meet these
requirements. ThereIf we were required to raise capital today a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all.
We have previously indicated thatall, if needed in connection with the launch of
EchoStar V and EchoStar VI we expected to incur material one-time expenses,
primarily during 2000, associated with repositioning existing subscribers'
satellite dishes from the 119 degree West Longitude orbital locationfuture.
Conditional Access System
The access control system is central to the 110 degree West Longitude orbital location. Since the launchsecurity network that prevents
unauthorized viewing of EchoStar VI
is now expected during the second quarterprogramming. Theft of 2000, we do not anticipate any
repositioning expenses prior to that time. Further, while we will re-evaluate
our plans as the launch of EchoStar VI approaches, we have tentatively
determined to utilize the 110 degree West Longitude orbital location to
enhance revenue opportunities with new value added services for our currentcable and future subscribers, and to maintain our primary DBS service at the 119
degree orbital location. Consequently, while there can be no assurance that
our intentions will not change, we presently do not expect to incur the $100
million or more in repositioning costs previously indicated. However, in
connection with our plans to encourage as many new subscribers as possible to
be ready for the additional services that will become available at the 110
degree West Longitude orbital location, and as a result of continuing
competitionsatellite programming
has been widely reported and our planssignal encryption has been pirated and could be
further compromised in the future. If other measures are not successful, it
could be necessary to attempt to continue to drive rapid subscriber
growth, we expectreplace the credit card size card that our subscriber acquisition costs during 2000 could
increase by as much as $25 per subscriber or more.
Obligations
Interest accrues atcontrols the
rate of 9 1/4% and 9 3/8% on the seven and ten year
notes, respectively. Interest on the seven and ten year notes is payable
semi-annually in cash in arrears on February 1 and August 1security of each year,
commencing August 1, 1999. Although the sevenconsumer set top box at a material cost to us.
Obligations and ten year notes have lower
interest rates than the debt securities we repurchased, reported interest
expense will increase because we raised additional debt to cover tender
premiums and consent and other fees related to the refinancing. Future Capital Requirements
As of September 30, 1999,March 31, 2000, we had approximately $2.1$3.0 billion of outstanding
long-term debt (including the current portion), which includes $2.6 million of
1994outstanding notes 1996 notes, 1997 notes, and Senior Exchange notes which
remain outstanding.that were not tendered during our January 1999 refinancing. We
are required to retire these remaining notes when they mature, and the
indentures governing the 1994, 1996 and 1997these notes will remain outstanding (although substantially
all of the restrictive covenants have been eliminated) until each series of
notes has been retired in full.
Additionally, our semi-annualSemi-annual cash debt service requirements of approximately $94 million
related to our 9 1/4% Senior Notes due 2006 (seven year notes) and our 9 3/8%
Senior Notes due 2009 (ten year notes), is payable in arrears on February 1 and
August 1 each year. Semi-annual cash debt service requirements of approximately
$24 million related to our 4 7/8% Convertible Subordinated Notes due 2007
(convertible notes) is payable
16
19
ItemITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
$94 million related to the sevenCONTINUED
in arrears on January 1 and tenJuly 1 of each year, notes commenced in August 1999.commencing July 1, 2000. There
are no scheduled principal payment or sinking fund requirements prior to
maturity of any of these notes.
We utilized $91 million of satellite vendor financing for our first four
satellites. As of September 30, 1999,March 31, 2000, approximately $44$36 million of that satellite
vendor financing remained outstanding. The satellite vendor financing bears
interest at 8 1/4% and is payable in equal monthly installments over five years
following launch of the satellite to which it relates. A portion of the contract
price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
willbegan to accrue fromon November 2, 1999, and holders1999. Holders of the Series C Preferred Stock will beare
entitled to receive cumulative dividends at an annual rate of 6 3/4% of the
Liquidation Preference of $50 per share. Dividends are payable quarterly in
arrears, commencing February 1, 2000, when, as, and if declared by our Board of
Directors. All accumulated and unpaid dividends may, at our option, be paid in
cash, Class A common stock, or a combination thereof upon conversion or
redemption. We declared a cash dividend of approximately $290,000 or $0.84375
per share, payable on May 1, 2000 to Series C Preferred Stock shareholders of
record on April 21, 2000.
During the remainder of 1999,2000, we anticipate total capital expenditures of
approximately $20$300-$425 million. This amount includes approximately $5$180-$240
million related to the construction and launch of EchoStar VI, EchoStar VII,
EchoStar VIII and EchoStar IX, approximately $50-$100 million related to
EchoStar receiver systems to be provided under our Digital Home program and $40
million for capital expenditures related to the build-out required by the Cheyenneof our digital
broadcast center to accommodate expansion to approximately 500 video and audio
channels, as a result of the consummation of the 110 acquisition.
As a result of the anomalies experienced by EchoStar IV and in order to
fully exploit certain of our remaining FCC-allocated DBS frequencies, we have
deployed and intend to deploy additional DBS satellites. Upon consummation of
the 110 acquisition we acquired two additional DBS satellites, EchoStar V and
EchoStar VI. EchoStar V was successfully launched and deployed in September
1999. However, there can be no assurance that EchoStar VI will be launched
and deployed successfully. We are also evaluating other contingency plans.
There can be no assurance that net insurance proceeds will be sufficient to
fully cover the costs to deploy replacement DBS satellites.
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continuedcenters.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof and
a Low Earth Orbit Mobile-Satellite Service 6-satellite system. We will need to
raise additional capital to fully construct these satellites. Further, there mayWe recently
announced agreements for the construction and delivery of three new satellites.
Two of these satellites, EchoStar VII and EchoStar VIII, will be advanced,
high-powered DBS satellites. The third satellite, EchoStar IX, will be a number of factors, some of which are beyond our
control or ability to predict, that could require us 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, if
required, will be available on terms acceptable to us, or at all.
The amount of capital required to fund the remainder of our 1999 working
capital and capital expenditure needs will vary, dependent upon the growth
rate of the Dish Network, our subscriber acquisition costs, and our ability to
expand our other business units. During the first three quarters of 1999,
subscriber growth exceeded our expectations. To the extent the subscriber
growth rate continues to exceed our expectations, it may be necessary for us
to raise additional capital to fund increased working capital requirements.
In addition, our working capital and capital expenditure requirements could
increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or general economic
downturn, among other factors.hybrid
Ku/Ka-band satellite.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to continue to rapidly expand our DISH Network subscriber base, retain
existing DISH Network subscribers, and our ability to grow our ETC and Satellite
Services businesses. During the first quarter of 2000, subscriber growth
exceeded our expectations. To the extent the subscriber growth rate continues to
exceed our expectations, it may be necessary for us to raise additional capital
to fund increased working capital requirements. There may be a number of other
factors, some of which are beyond our control or ability to predict, that could
require us 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. If cash generated from our operations is not
sufficient to meet our debt service requirements or other obligations, we would
be required to obtain cash from other financing sources. ThereIf we were required to
raise capital today a variety of debt and equity funding sources would likely be
available to us. However, there can be no assurance that such financing would be
available on terms acceptable to us, or if available, that the proceeds of such
financing would be sufficient to enable us to meet all of our obligations.
Year17
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000 Readiness Disclosure
We have assessedwe filed suit against DirecTV and continue to assess the impact of the Year 2000 issue
on our computer systems and operations. The Year 2000 issue exists because
many computer systems and applications currently use two-digit date fields to
designate a year. Thus, as the century date approaches, date sensitive
systems may recognize the year 2000 as 1900 or not at all. The inability to
recognize or properly treat the year 2000 may cause computer systems to
process critical financial and operational information incorrectly. If our
Year 2000 remediation plan is not successful or is not completed in a timely
manner, the Year 2000 issue could significantly disrupt our ability to
transact business with our customers and suppliers, and could have a material
impact on our operations. Even if our Year 2000 remediation plan is
successful or completed on time, there can be no assurance that the systems of
other companies with which our systems interact will be timely converted, or
that any such failure to convert by another company would not have an adverse
effect on our business or operations.
We have established a five-phase plan to address potential Year 2000
issues:
* Inventory the identification of all relevant hardware and software
to establish the scope of subsequent testing;
* Assessment the process of evaluating the current level of Year 2000
readiness of all components identifiedThomson Consumer
Electronics/RCA in the inventory phase,
defining actions necessaryFederal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to retire, replace or otherwise correct all
non-conforming components and estimating resources and timelines
required by action plans;
* Remediationfend off competition from the
correction of previously identified Year 2000
issues;
* Validation/testing the evaluation of each component's performance
as the date is rolled forward to January 1, 2000 and other dates and
times relatingDISH Network. According to the Year 2000 issue;complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and * Implementation the processhas threatened to cause economic
damage to retailers if they continued to offer both product lines in
head-to-head competition. The suit alleges, among other things, that DirecTV has
acted in violation of updating componentsfederal and correcting
Year 2000 issuesstate anti-trust laws in order to protect
DirecTV's market share. We are seeking injunctive relief and monetary damages.
It is too early in the production operating environment of a system.
21
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
In connection with this effort, we have segregated our computer systems
and corresponding Year 2000 readiness risk into three categories: internal
financial and administrative systems, service-delivery systems, and third-
party systems.
Internal Financial and Administrative Systems
With respectlitigation to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We have also
completed the process of assessing these systems by communicating with our
outside software and hardware vendors and reviewing their certifications of
Year 2000 readiness, as well as reviewing internal custom programming codes.
Upon completion of the assessment phase, we began the remediation and
validation/testing phases. During the remediation phase, we corrected all
problems detected while performing the assessment phase. During the
validation/testing phase, we created a parallel environment of all internal
and administrative systems. This parallel environment was tested to assess
its reaction to changes in dates and times relating to the Year 2000 issue.
All problems encountered during these tests were fixed. As of September 30,
1999, the remediation and validation/testing phases were complete for all of
our corporate systems, except two non-business critical applications. These
applications have recently been upgraded to Year 2000 compliant versions and
will be tested during November 1999.
During the implementation phase software upgrades and patches were
implemented in the actual operating environment of our internal financial and
administrative systems for all known problems detected in previous phases.
While there can be no guarantee we presently believe that our internal
financial and administrative systems are Year 2000 ready. As new or enhanced
technology and software are integrated into our financial and administrative
systems we will perform additional testing to attempt to ensure continued Year
2000 readiness.
Service-Delivery Systems
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites and
third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware
and software changes that normally occur over time. This system gives us the
ability to perform "real-time" testing of the various elements of the system
by simulating the year 2000 rollover, and confirming system operation. This
ability to perform accurate offline simulations has provided a tremendous
benefit to our Year 2000 test process.
We have completed initial testing of our set-top receivers. During these
tests, the dates in the broadcast system, and hence the set-top receivers were
rolled forward to each of the dates and times affected by the Year 2000 issue.
We deemed these initial tests successful, as no problems were detected during
thorough testing of the set-top receivers when the dates were rolled forward.
These tests also affirm the integrity of the broadcast systems supplying the
set-top receivers with critical operational system information. As new
technology and software are integrated into our set-top receivers, we will
perform additional testing to attempt to ensure continued Year 2000 readiness.
In addition to the practical testing performed above, we have completedmake an independent inventory and assessment of the systems atprobable outcome.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc., or KBS. DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our digital
broadcast center andright to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have substantially completed the remediation phasebeen
marketing National Football League games in a misleading manner. The amount of
our
Year 2000 readiness plan.damages DirecTV is seeking is as yet unquantified. We will continueintend to perform validation and testing
of communications within our digital broadcast center and expect to complete
this testing during November 1999.vigorously
defend against these claims. The validation and testing of our digital
broadcast center is not expected to cause interruption of programming to DISH
Network subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do
not expect changes in dates and times to affect the operation of our DBS
satellites.
22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has
indicated it has substantially completed all testing and remediation
activities on its core systems andcase is currently testing its custom interfaces.
The vendor has indicated it believes it is currently Year 2000 ready, however
we can not provide any assurance in this regard.
Third-Party Systems
We also are currently assessing our vulnerability to unexpected business
interruptions due to the failure of third-parties to remediate Year 2000
readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant
requesting that they certify their Year 2000 readiness. To date, we have
received responses from approximately 85% of these vendors. We are presently
in the process of contacting our critical suppliers and vendors who have
either not responded or have not responded adequately to our requests for
proof of certification and will continue to follow-up on unresolved issues
thereafter. There can be no assurance that third-parties who have responded,
or will respond, to our request regarding Year 2000 readiness have responded,
or will respond, accurately or satisfactorily, or that anticipated Year 2000
actions set forth in their responses will be properly conducted.
Contingency Planning
We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used
to try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we
will continue to contact our critical vendors in order to obtain certification
of their Year 2000 readiness. However, no assurance can be made that such
contingency plans will resolve any Year 2000 problems that may occur, in a
manner which is satisfactory or desirable to us.
Costs
In the ordinary course of business, we have made capital expenditures
over the past few years to improve our systems, for reasons other than Year
2000 remediation. Because these upgrades also resulted in improved Year 2000
readiness, replacement and remediation costs have not been material. To date
we have incurred approximately $1.4 million in costs associated with the Year
2000 issue. While there can be no assurance, we believe our total costs to
successfully mitigate the Year 2000 issue will not be material to our
operations. No assurance can be made, however, as to the total cost for the
Year 2000 plan until the plan has been completed.
23
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGSdiscovery.
The News Corporation Limited
During February 1997, News Corporation agreed to acquire approximately 50%
of theour outstanding capital stock of EchoStar.stock. During late April 1997, substantial
disagreements arose between the parties regarding their obligations under this
agreement. Those substantial disagreements led to litigation which the parties
subsequently settled. In connection with the News Corporation litigation, EchoStar haswe
have a contingent fee arrangement with the attorneys who represented EchoStarus in that
litigation, which provides for the attorneys to be paid a percentage of any net
recovery obtained in the News Corporation litigation. The attorneys have
asserted that they may be entitled to receive payments totaling hundreds of
millions of dollars under this fee arrangement. EchoStar isWe are vigorously contesting the
attorneys' interpretation of the fee arrangement, which EchoStar believeswe believe significantly
overstates the magnitude of itsour liability. IfWe also believe that the fee
arrangement is void and unenforceable because the attorneys who represented us
are seeking a fee that we believe is unreasonable and EchoStarexcessive, among other
things. If we are unable to resolve this fee dispute with the attorneys, it
would be resolved through arbitration or litigation. During mid-1999, we
initiated litigation against the attorneys in the District Court, Arapahoe
County, Colorado, arguing that the fee arrangement is void and unenforceable. In
December 1999, the attorneys initiated an arbitration proceeding before the
American Arbitration Association. It is too early to determine the outcome of
negotiations, arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
OnDuring July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd., an
Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, and two
of EchoStar's wholly-owned subsidiaries. The lawsuit seeks, among other things,
an interim and permanent injunction prohibiting the defendants from activating
receivers in Canada and from infringing any copyrights held by WIC. It is too
early to determine whether or when any other lawsuits or claims will be filed.
It is also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
OnDuring September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
including EchoStar. WIC is a company authorized to broadcast certain copyrighted
work, such as movies and concerts, to residents of Canada. WIC alleges that the
defendants engaged in, promoted, and/or allowed satellite dish equipment from
the United States to be sold in Canada and to Canadian residents and that some
of the defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for viewing
in the United States. The lawsuit
18
21
PART II - OTHER INFORMATION
seeks, among other things, an interim and permanent injunction prohibiting the
defendants from importing hardware into Canada and from activating receivers in
Canada, together with damages in excess of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss. The Alberta Court also granted a motion to add more EchoStar parties to
the lawsuit. EchoStar Satellite Corporation, EchoStar DBS Corporation, EchoStar
Technologies Corporation, and EchoStar Satellite Broadcast Corporation have been
added as defendants in the litigation. The newly added defendants have also
challenged jurisdiction. The Court in the Federal action has stayed that case
before ruling on our motion to dismiss. We intend to vigorously defend the suits
in the event our motions are denied. It is too early to determine whether or
when any other lawsuits or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Broadcast network programming
TheUnder the Satellite Home Viewer Act, permits satellite retransmissionthe determination of whether a
household qualifies as "unserved" for the purpose of eligibility to receive a
distant network signals only to "unserved households."
Thechannel depends, in part, on whether that household can receive
a signal of "Grade B intensity" as defined by the FCC.
During 1998, the national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. Historically, we obtained distant broadcast network
signals for distribution to our customers through PrimeTime 24. The United
States District Court for the Southern District of Florida entered a nationwide
permanent injunction preventing PrimeTime 24 from selling its programming to
consumers unless the programming was sold in accordance with certain
stipulations in the injunction. The injunction covers "distributors"distributors as well. The
plaintiffs in the Florida litigation informed us they considered us a
"distributor"distributor for purposes of that injunction. A federal district court in North
Carolina also issued an injunction against PrimeTime 24 prohibiting certain
distant signal retransmissions in the Raleigh area. The Fourth Circuit Court of
Appeals recently affirmed the North Carolina Court's decision. We have
implemented Satellite Home Viewer Act compliance procedures which materially
restrict the market for the sale of network channels by us.
24
PART II OTHER INFORMATION
In October 1998, we filed a declaratory judgment action in the United
States District Court for the District of Colorado against the four major
networks. We asked the court to enter a judgment declaring that our method of
providing distant network programming does not violate the Satellite Home Viewer
Act and hence does not infringe the networks' copyrights. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against us in federal court in Miami alleging, among other things, copyright
infringement. The court combined the case that we filed in Colorado with the
case in Miami and transferred it to the Miami court.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DIRECTV, Inc.DirecTV
in Miami related to the delivery of distant network channels to DIRECTVDirecTV
customers by satellite. Under the terms of a settlement between DIRECTVDirecTV and the
networks, some DIRECTVDirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DIRECTVDirecTV
customers arewere to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule.
The networks are pursuing a Motion for Preliminary Injunction in the Miami
Court, asking the Court to enjoin us from providing network programming except
under very limited circumstances. In general, the networks want uscircumstances, and to turn off network programming to many of
our customers on the same schedule agreed to by
DIRECTV.customers.
A preliminary injunction hearing was held onduring September 21,1999.1999. The Court
took the issues under advisement to consider the networks' request for an
injunction, whether to hear live testimony before ruling upon the request, and
whether to hear argument on why the Satellite Home Viewer Act may be
unconstitutional, among other things. The Court did not say when a decision will
be made, or whether an additional hearing will be
19
22
PART II - OTHER INFORMATION
necessary prior to ruling on the networks' preliminary injunction motion.
Additional motions and affidavits have been filed with the Court over the past
several months and a ruling adverse, or favorable to us could be issued at any
time.
If this case is decided against us, or a preliminary injunction is issued,
significant material restrictions on the sale of distant ABC, NBC, CBS and Fox
channels by us could result. Amongresult, including potentially a nationwide permanent
prohibition on our broadcast of ABC, NBC, CBS and Fox network channels by
satellite. The litigation and the new legislation discussed above, among other
things, the litigation,
together with legislation pending in Congress, could also require us to terminate delivery of network signals to a
material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. We have commenced sendingsent letters to some of our subscribers warning
that their access to distant broadcast network channels might be terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscribersoon
and could result in increased
subscriber turnover.
Underhave terminated ABC, NBC, CBS and Fox programming to many customers.
In November 1999, Congress passed new legislation regarding the Satellite Home Viewer Act,satellite
delivery of network programming and it was signed into law by President Clinton.
This new law has the determinationpotential of whether a
household qualifiesreducing the number of customers whose network
channels EchoStar may otherwise be required to terminate, as "unserved" for the purpose of eligibilitylaw
"grandfathers" many subscribers to continue to receive a
distant network channel depends, in part, on whether that household can
receive a signal of "Grade B intensity" as definedchannels by
the FCC.
In February 1999, the FCC released a report and order on these matters.
Although the FCC declined to change the values of Grade B intensity, it
adopted a method for measuring it at particular households. The FCC also
endorsed a method for predicting Grade B intensity at particular households.
The FCC recently denied in part and granted in part our petition for
reconsideration, allowing us some additional flexibility in the method for
measuring Grade B intensity but denying our requests on other matters. We
cannot be sure whether these methods are favorable to us or what weight, if
any, the courts will give to the FCC's decision. We also cannot be certain
whether the application of these methods by the courts will result in
termination of distant signal delivery to a material portion of our
subscribers and decreases in future subscriber activations.
In addition, the Satellite Home Viewer Act is set to expire at the end of
1999. While proposed legislation being considered in conference by Congress
would extend the satellite companies' ability to retransmit distant network
signals subject to many limitations, we cannot be sure whether or when such
legislation will be enacted or whether it would be favorable to us.
24
PART II OTHER INFORMATION
Environmental Protection Agency
In connection with the expansion of our digital broadcast center in
Cheyenne, Wyoming, two additional underground storage tanks were installed by
a contractor. The underground storage tanks were properly installed and are
being operated in accordance with Environmental Protection Agency regulations.
However, the EPA alleged that the State of Wyoming was not timely advised of
the installation of those tanks, and that a certificate of compliance was not
timely filed following installation. As a result, during May 1999, we
received notice that the EPA filed a complaint against us and proposed to
assess a civil penalty of $9,500. During August 1999, the matter was settled
without admission or denial of the factual allegations contained in the
complaint and all counts against us were dropped. The total civil penalty was
reduced to $3,600 and, in accordance with our construction contract for the
digital broadcast center, the general contractor paid the penalty to the EPA.
We are subject to various other legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to those actions will not materially affect
our financial position or results of operations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This information is incorporated by reference to Item 1 of Part I
of this document.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Itemsatellite.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27*3.1(a)[] Amended Restated Articles of Incorporation of EchoStar.
10.1[] Satellite contract dated as of January 27, 2000, between EchoStar
Orbital Corporation and Lockheed Martin Corporation.
10.2[] Satellite contract dated as of February 4, 2000, between EchoStar
Orbital Corporation and Space Systems/Loral Inc.
10.3[] Satellite contract dated as of February 22,2000, between EchoStar
Orbital Corporation and Space Systems/Loral Inc..
10.4[] Agreement dated February 22, 2000, between EchoStar Orbital
Corporation and Loral Skynet, a division of Loral SpaceCom
Corporation.
27[] Financial Data Schedule.
*- --------------------------------
[] Filed herewith.
(b) Reports on Form 8-K.
On July 2, 1999,February 28, 2000, we filed a Current Report on Form 8-K to report that on
June 24, 1999, we acquired certain high-power direct broadcast satellite
assets from News Corporation and MCI in exchange for 34,412,464 sharesa
2-for-1 split of our Class A common stock. 24Effective March 22, 2000, stockholders of
record at the close of business on March 10, 2000 received one additional share
of common stock for each share they owned on the record date.
20
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
___________________________-------------------------------------
David K. Moskowitz
Senior Vice President, General
Counsel, Secretary and Director
(Duly Authorized Officer)
By: /s/ Steven B. Schaver
___________________________-------------------------------------
Steven B. Schaver
Chief Financial Officer
(Principal Financial Officer)
Date: November 2, 1999April 27, 2000
24
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1(a)[] Amended Restated Articles of Incorporation of EchoStar.
10.1[] Satellite contract dated as of January 27, 2000, between EchoStar
Orbital Corporation and Lockheed Martin Corporation.
10.2[] Satellite contract dated as of February 4, 2000, between EchoStar
Orbital Corporation and Space Systems/Loral Inc.
10.3[] Satellite contract dated as of February 22,2000, between EchoStar
Orbital Corporation and Space Systems/Loral Inc..
10.4[] Agreement dated February 22, 2000, between EchoStar Orbital
Corporation and Loral Skynet, a division of Loral SpaceCom
Corporation.
27[] Financial Data Schedule.
- --------------------------------
[] Filed herewith.