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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission File Number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of 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 APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF APRIL 27, 2001, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
236,708,581 SHARES OF CLASS A COMMON STOCK AND 238,435,208 SHARES OF CLASS B
COMMON STOCK.
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2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and March 31, 2001 (Unaudited)................................................. 1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 2001 (Unaudited)........................................... 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 2001 (Unaudited)........................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 24
Item 2. Changes in Securities and Use of Proceeds.......................................................... None
Item 3. Defaults Upon Senior Securities.................................................................... None
Item 4. Submission of Matters to a Vote of Security Holders................................................ None
Item 5. Other Information.................................................................................. None
Item 6. Exhibits and Reports on Form 8-K................................................................... 29
3
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, MARCH 31,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 856,818 $ 801,081
Marketable investment securities .......................................... 607,357 493,544
Trade accounts receivable, net of allowance for uncollectible accounts of
$31,241 and $21,766, respectively ....................................... 278,614 251,800
Insurance receivable ...................................................... 106,000 106,000
Inventories ............................................................... 161,161 149,243
Other current assets ...................................................... 50,827 51,471
----------- -----------
Total current assets ......................................................... 2,060,777 1,853,139
Restricted cash and marketable investment securities ......................... 3,000 3,000
Cash reserved for satellite insurance (Note 4) ............................... 82,393 78,295
Property and equipment, net .................................................. 1,511,303 1,619,556
FCC authorizations, net ...................................................... 709,984 705,374
Other noncurrent assets ...................................................... 298,493 233,987
----------- -----------
Total assets ............................................................ $ 4,665,950 $ 4,493,351
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable .................................................... $ 226,568 $ 120,339
Deferred revenue .......................................................... 283,895 330,000
Accrued expenses .......................................................... 691,482 689,594
Current portion of long-term debt ......................................... 21,132 17,375
----------- -----------
Total current liabilities .................................................... 1,223,077 1,157,308
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ................................................... 375,000 375,000
9 3/8% Ten Year Notes ..................................................... 1,625,000 1,625,000
4 7/8% Convertible Notes ................................................. 1,000,000 1,000,000
10 3/8% Seven Year Notes .................................................. 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion ................. 14,812 14,585
Long-term deferred distribution and carriage revenue and other long-term
liabilities .............................................................. 56,329 75,974
----------- -----------
Total long-term obligations, net of current portion .......................... 4,071,141 4,090,559
----------- -----------
Total liabilities ....................................................... 5,294,218 5,247,867
Commitments and Contingencies (Note 5)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 218,951 and 199,182
shares issued and outstanding, respectively .............................. 10,948 9,959
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
235,749,557 and 236,360,794 shares issued and outstanding, respectively .. 2,357 2,364
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding ............................... 2,384 2,384
Class C common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding ............................................................... -- --
Additional paid-in capital ................................................ 1,700,367 1,702,246
Deferred stock-based compensation ......................................... (58,193) (50,137)
Accumulated other comprehensive loss ...................................... (60,580) (28,562)
Accumulated deficit ....................................................... (2,225,551) (2,392,770)
----------- -----------
Total stockholders' deficit .................................................. (628,268) (754,516)
----------- -----------
Total liabilities and stockholders' deficit ............................. $ 4,665,950 $ 4,493,351
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 2001
----------- -------------
REVENUE:
DISH Network:
Subscription television services ........................... $ 476,874 $ 794,448
Other ...................................................... 1,313 2,483
--------- ---------
Total DISH Network ........................................... 478,187 796,931
DTH equipment sales and integration services ................. 62,704 41,019
Other ........................................................ 24,830 23,980
--------- ---------
Total revenue ................................................... 565,721 861,930
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................ 201,574 316,335
Customer service center and other .......................... 56,049 64,782
Satellite and transmission ................................. 12,476 9,095
--------- ---------
Total DISH Network operating expenses ........................ 270,099 390,212
Cost of sales - DTH equipment and integration services ....... 46,222 28,836
Cost of sales - other ........................................ 8,116 15,929
Marketing:
Subscriber promotion subsidies - promotional DTH equipment .. 172,138 190,265
Subscriber promotion subsidies - other ..................... 77,949 82,966
Advertising and other ...................................... 23,170 26,927
--------- ---------
Total marketing expenses ..................................... 273,257 300,158
General and administrative ................................... 55,577 75,672
Non-cash, stock-based compensation ........................... 14,009 7,456
Depreciation and amortization ................................ 40,458 58,850
--------- ---------
Total costs and expenses ........................................ 707,738 877,113
--------- ---------
Operating loss .................................................. (142,017) (15,183)
Other Income (Expense):
Interest income .............................................. 18,998 24,564
Interest expense ............................................. (61,513) (83,097)
Other ........................................................ (543) (93,276)
--------- ---------
Total other income (expense) .................................... (43,058) (151,809)
--------- ---------
Loss before income taxes ........................................ (185,075) (166,992)
Income tax provision, net ....................................... (55) (49)
--------- ---------
Net loss ........................................................ (185,130) (167,041)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................... (493) (178)
--------- ---------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders .......................... $(185,623) $(167,219)
========= =========
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................... 465,768 474,563
========= =========
Net loss per common share:
--------- ---------
Basic and diluted net loss ................................... $ (0.40) $ (0.35)
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 2001
---------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $(185,130) $(167,041)
Adjustments to reconcile net loss to net cash flows from operating activities:
Deferred stock-based compensation recognized ................................... 13,709 7,456
Loss due to decline in the estimated fair value of strategic investments ....... -- 91,803
Depreciation and amortization .................................................. 40,458 58,850
Amortization of debt discount and deferred financing costs ..................... 1,534 1,878
Employee benefits funded by issuance of Class A Common Stock ................... 7,280 --
Change in reserve for excess and obsolete inventory ............................ 303 679
Change in long-term deferred satellite services revenue and other long-term
liabilities .................................................................. 7,448 19,645
Other, net ..................................................................... 990 1,348
Changes in current assets and current liabilities, net ......................... 8,831 (34,941)
--------- ---------
Net cash flows from operating activities .......................................... (104,577) (20,323)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ..................................... (218,888) (706,698)
Sales of marketable investment securities ......................................... 198,107 820,126
Purchases of property and equipment ............................................... (36,900) (148,600)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 4) ............................................................... -- 4,098
Investment in Wildblue Communications ............................................. (50,000) --
Investment in Replay TV ........................................................... (10,000) --
Other ............................................................................. (694) (1,675)
--------- ---------
Net cash flows from investing activities .......................................... (118,375) (32,749)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgage indebtedness and notes payable ............................. (4,236) (3,984)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan ................................... 2,170 1,497
Other ............................................................................. (493) (178)
--------- ---------
Net cash flows from financing activities .......................................... (2,559) (2,665)
--------- ---------
Net increase (decrease) in cash and cash equivalents .............................. (225,511) (55,737)
Cash and cash equivalents, beginning of period .................................... 905,299 856,818
--------- ---------
Cash and cash equivalents, end of period .......................................... $ 679,788 $ 801,081
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
6 3/4% Series C Cumulative Convertible Preferred Stock dividends ............... $ -- $ 178
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock ......................................................... -- 989
Forfeitures of deferred non-cash, stock-based compensation ..................... -- 600
Class A Common Stock issued related to acquisition of Kelly Broadcasting
Systems, Inc. ................................................................ 31,556 --
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION 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 two interrelated business
units (Note 6):
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of March 31, 2001, we had
approximately 5.7 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar
equipment for international direct-to-home ("DTH") satellite and other
systems and the provision of uplink center design, construction
oversight and other project integration services for international DTH
ventures.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, 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 three months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2001. 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, 2000. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Investment Securities
As of March 31, 2001, EchoStar has classified all marketable investment
securities as available-for-sale. The fair market value of marketable investment
securities approximates the carrying value and represents the quoted market
prices at the balance sheet dates. Related unrealized gains and losses are
reported as a separate component of stockholders' deficit, net of related
deferred income taxes, if applicable. The specific identification method is used
to determine cost in computing realized gains and losses. Such unrealized losses
totaled approximately $29 million as of March 31, 2001. Approximately $19
million of these unrealized losses relate to a decline in the value of OpenTV.
EchoStar acquired that stock in connection with the establishment of a strategic
relationship with OpenTV which did not involve an investment of cash by
EchoStar.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment security which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. EchoStar reviewed the
fair value of its marketable investment securities as of March 31, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As such, EchoStar established a new cost basis for these
securities, and accordingly reduced its previously recorded unrealized loss and
recorded a charge to earnings of approximately $32.4 million during the three
months ended March 31, 2001.
EchoStar also has made strategic equity investments in certain
non-marketable investment securities including Wildblue Communications, StarBand
Communications, VisionStar, Inc. and Replay TV. The original cost basis of
EchoStar's investments in these non-marketable investment securities totaled
approximately $116 million. The securities of these companies are not publicly
traded. EchoStar's ability to create realizable value for its strategic
investments in companies that are not public is dependent on the success of
their business plans and ability to obtain sufficient capital to execute their
business plans. StarBand and Wildblue recently cancelled their planned initial
public stock offerings. As a result of the cancellation of those offerings and
other factors, during the three months ended March 31, 2001, EchoStar recorded a
non-recurring charge of approximately $59.4 million to reduce the carrying value
of certain of these non-marketable investment securities to their estimated fair
values. StarBand and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of EchoStar's
investments could be necessary.
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
--------- ---------
(Unaudited)
Net loss ..................................................................... $(185,130) $(167,041)
Unrealized holding losses on available-for-sale securities arising during
period .................................................................... 1,463 (385)
Reclassification adjustment for impairment losses on available-for-sale
securities included in net loss .......................................... -- 32,403
--------- ---------
Comprehensive loss ........................................................... $(183,667) $(135,023)
========= =========
Accumulated other comprehensive income presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gains (losses) on available-for-sale securities, net of deferred taxes.
5
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
We had net losses for the three months ending March 31, 2000 and 2001.
Therefore, the effect of the common stock equivalents and convertible securities
is excluded from the computation of diluted earnings (loss) per share since the
effect is anti-dilutive.
As of March 31, 2001 and 2000, options to purchase a total of
approximately 24,825,000 and 27,861,000 shares of Class A common stock were
outstanding, respectively. Approximately 3,269,000 and 5,713,000 shares of Class
A common stock were issuable upon conversion of the 6 3/4 Series C Cumulative
Convertible Preferred Stock as of March 31, 2001 and 2000, respectively. As of
March 31, 2001, the 4 7/8% Convertible Subordinated Notes are convertible into
approximately 22 million shares of Class A common stock.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31,
2000 2001
------------ ----------
Finished goods - DBS ....................................... $ 96,362 $ 88,727
Raw materials .............................................. 40,247 43,195
Finished goods - reconditioned and other ................... 23,101 18,905
Work-in-process ............................................ 8,879 6,178
Consignment ................................................ 2,478 1,465
Reserve for excess and obsolete inventory .................. (9,906) (9,227)
--------- ---------
$ 161,161 $ 149,243
========= =========
4. SATELLITE INSURANCE
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, EchoStar filed a $219.3 million insurance claim for
a constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance 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. EchoStar
strongly disagrees with the position of the insurers and has filed an
arbitration claim against them for breach of contract, failure to pay a valid
insurance claim and bad faith denial of a valid claim, among other things. There
can be no assurance that EchoStar will receive the amount claimed or, if
EchoStar does, that EchoStar will retain title to EchoStar IV with its reduced
capacity.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
At the time EchoStar filed its claim in 1998, EchoStar recognized an
impairment loss of $106 million to write-down the carrying value of the
satellite and related costs, and simultaneously recorded an insurance claim
receivable for the same amount. EchoStar continues to believe it will ultimately
recover at least the amount originally recorded and does not intend to adjust
the amount of the receivable until there is greater certainty with respect to
the amount of the final settlement.
As a result of the thermal and propulsion system anomalies, EchoStar
reduced the estimated remaining useful life of EchoStar IV to approximately 4
years during January 2000. EchoStar will continue to evaluate the performance of
EchoStar IV and may modify its loss assessment as new events or circumstances
develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, EchoStar believes that the carriers
colluded and conspired to boycott EchoStar unless EchoStar accepts their offer
to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, EchoStar has added causes of action in
its EchoStar IV demand for arbitration for breach of the duty of good faith and
fair dealing, and unfair claim practices. Additionally, EchoStar filed a lawsuit
against the insurance carriers in the United States District Court for the
District of Colorado asserting causes of action for violation of Federal and
State Antitrust laws. While EchoStar believes it is entitled to the full amount
claimed under the EchoStar IV insurance policy and believes the insurance
carriers are in violation of Antitrust laws and have committed further acts of
bad faith in connection with their refusal to negotiate reasonable insurance
coverage on EchoStar's other satellites, there can be no assurance as to the
outcome of these proceedings. During March 2001, EchoStar voluntarily dismissed
the antitrust lawsuit without prejudice. EchoStar has the right to re-file an
antitrust action against the insurers again in the future.
The indentures related to the outstanding senior notes of EDBS contain
restrictive covenants that require EchoStar to maintain satellite insurance with
respect to at least half of the satellites it owns. Insurance coverage is
therefore required for at least three of EchoStar's six satellites currently in
orbit. EchoStar has procured normal and customary launch insurance for EchoStar
VI. This launch insurance policy provides for insurance of $225.0 million. The
EchoStar VI launch insurance policy expires in July 2001. EchoStar is currently
self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V.
To satisfy insurance covenants related to the outstanding EDBS senior notes, as
of March 31, 2001, EchoStar has reclassified approximately $78 million from cash
and cash equivalents to restricted cash and marketable investment securities on
its balance sheet. The reclassification will continue until such time, if ever,
as the insurers are again willing to insure EchoStar's satellites on
commercially reasonable terms. The amount of cash reserved for satellite
insurance will be increased by approximately $60 million in the event EchoStar
has not procured satellite insurance by July 2001. EchoStar believes it has
in-orbit satellite capacity sufficient to expeditiously recover transmission of
most programming in the event one of its in-orbit satellites was to fail.
However, the cash reserved for satellite insurance is not adequate to fund the
construction, launch and insurance for a replacement satellite in the event of a
complete loss of a satellite and programming continuity could not be assured in
the event of multiple satellite losses.
5. COMMITMENTS AND CONTINGENCIES
VisionStar
During November 2000, one of EchoStar's wholly owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an FCC license,
and is constructing a Ka-band satellite, to launch into the 113 W.L. orbital
slot. Together with VisionStar, EchoStar has requested FCC approval to acquire
control over VisionStar by increasing its ownership of VisionStar to 90%, for a
total purchase price of approximately $2.8 million. EchoStar has also provided
loans to VisionStar totaling less than $10 million to date for the construction
of their satellite and expects to provide additional funding to VisionStar in
the future. EchoStar is not obligated to
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
finance the full remaining cost to construct and launch the VisionStar
satellite, but VisionStar's FCC license currently requires construction of the
satellite to be completed by April 30, 2002 or the license could be revoked.
EchoStar currently expects to continue to fund loans and equity contributions
for construction of the satellite in the near term from cash on hand, and
expects that it may spend approximately $79.5 million during 2001 for that
purpose subject to, among other things, FCC action.
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's merchandise and has
threatened to cause economic damage to retailers if they continue 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. EchoStar subsequently amended the Complaint adding claims
against Circuit City, Radio Shack and Best Buy, alleging that these retailers
are engaging in improper conduct that has had an anti-competitive impact on
EchoStar. It is too early in the litigation to make an assessment of the
probable outcome. During October 2000, DirecTV filed a motion for summary
judgment asking that the Court enter judgment in DirecTV's favor on certain of
EchoStar's claims. DirecTV's motion for summary judgment remains pending.
The DirecTV defendants filed a counterclaim against EchoStar. DirecTV
alleges that EchoStar tortiously 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 its 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. Discovery has been stayed until the next
scheduling conference on June 13, 2001. The amount of damages DirecTV is seeking
is as yet unquantified. However, in an arbitration proceeding related to
DirecTV's allegations with respect to KBS, DirecTV has claimed damages totaling
hundreds of millions of dollars. It is too early in the litigation to make an
assessment of the probable outcome. EchoStar and KBS intend to vigorously defend
against DirecTV's allegations in the litigation and in the arbitration.
Fee Dispute
EchoStar had a contingent fee arrangement with the attorneys who
represented EchoStar in the litigation with News Corporation. The contingent fee
arrangement provides for the attorneys to be paid a percentage of any net
recovery obtained by EchoStar 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.
During mid-1999, EchoStar initiated litigation against the attorneys in
the Arapahoe County, Colorado, District Court arguing that the fee arrangement
is void and unenforceable. In December 1999, the attorneys initiated an
arbitration proceeding before the American Arbitration Association. The
litigation has been stayed while the arbitration is ongoing. The arbitration
hearing commenced April 2, 2001 and continued through April 13, 2001. The
hearing could not be completed during that time period and has been continued
until August 7, 2001, when it will resume until it is presumably completed.
While there can be no assurance that the attorneys will not continue to claim a
right to hundreds of millions of dollars, the damage model the attorneys
presented during the arbitration was for $56 million. EchoStar believes that
even that amount significantly overstates the amount the attorneys should
reasonably be entitled to receive under the fee agreement but it is not possible
for EchoStar to predict what the decision of the three person arbitrator panel
will be with any degree of certainty. EchoStar continues to vigorously contest
the attorneys' interpretation of the fee arrangement, which EchoStar believes
significantly overstates the magnitude of its liability.
8
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
WIC Premium Television Ltd.
During July 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
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
Echosphere Corporation and Dish, Ltd. 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.
During September 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.
EchoStar filed motions to dismiss each of the actions for lack of
personal jurisdiction. The Court in the Alberta action recently denied
EchoStar's Motion to Dismiss, which EchoStar appealed. The Alberta Court also
granted a motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EDBS, 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 of Appeals denied
EchoStar's appeal and the Alberta Court has asserted jurisdiction over all of
the EchoStar defendants. The Court in the Federal action has stayed that case
pending the outcome of the Alberta action. The case is now currently in
discovery. EchoStar intends to vigorously defend the suit. It is 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
Until July 1998, EchoStar obtained distant broadcast network channels
(ABC, NBC, CBS and FOX) for distribution to its customers through PrimeTime 24.
In December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, EchoStar filed a declaratory judgment action against
ABC, NBC, CBS and FOX in Denver Federal Court. EchoStar asked the court to enter
a judgment declaring that its method of providing distant network programming
did not violate the Satellite Home Viewer Act and hence did not infringe the
networks' copyrights. In November 1998, the networks and their affiliate groups
filed a complaint against EchoStar in Miami Federal Court alleging, among other
things, copyright infringement. The court combined the case that EchoStar filed
in Colorado with the case in Miami and transferred it to the Miami court. The
case remains pending in Miami. While the networks have not sought monetary
damages, they have sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
programming other than EchoStar agreed to this cut-off schedule, although
EchoStar does not know if they adhered to this schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against EchoStar in the Miami court, and asked the court to enjoin
EchoStar from providing network programming except under limited circumstances.
A preliminary injunction hearing was held on 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.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring EchoStar to turn off network programming
to certain of its customers. At that time, the networks also argued that
EchoStar's compliance procedures violate the Satellite Home Viewer Improvement
Act. EchoStar opposed the networks' motion and again asked the court to hear
live testimony before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates which would be
physically impossible to comply with. The order imposes restrictions on
EchoStar's past and future sale of distant ABC, NBC, CBS and Fox channels
similar to those imposed on PrimeTime 24 (and, EchoStar believes, on DirecTV and
others). Some of those restrictions go beyond the statutory requirements imposed
by the Satellite Home Viewer Act and the Satellite Home Viewer Improvement Act.
For these and other reasons EchoStar believes the Court's order is, among other
things, fundamentally flawed, unconstitutional and should be overturned.
However, it is very unusual for a Court of Appeals to overturn a lower court's
order and there can be no assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
EchoStar to shut off, by February 15, 2001, all subscribers who are ineligible
to receive distant network programming under the court's order. EchoStar has
appealed the September 2000 preliminary injunction order and the October 3, 2000
amended preliminary injunction order. On November 22, 2000, the United States
Court of Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending EchoStar's appeal. At that time, the Eleventh Circuit
also expedited its consideration of EchoStar's appeal.
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of EchoStar's appeal. The
Consumer Federation of America and the Media Access Project have also submitted
an amicus brief in support of EchoStar's appeal. The Networks have responded to
EchoStar's appeal brief and the amicus briefs filed by the Consumer Federation
of America and the Media Access Project and the Satellite Broadcasting and
Communications Association. In December 2000, the Department of Justice filed a
motion to intervene with respect to EchoStar's constitutional challenge of the
Satellite Home Viewers Act, and the National Association of Broadcasters filed
an amicus brief in support of the Networks' position in the appeal. During
January 2001, EchoStar filed its reply appeal brief and asked the Eleventh
Circuit for an opportunity to respond to the amicus brief filed by the National
Association of Broadcasters and the brief filed by the Department of Justice. On
January 11, 2001, the Networks advised the Eleventh Circuit that they did not
object to EchoStar's filing a response to the National Association of
Broadcasters' amicus brief or the Department of Justice's brief. On January 19,
2001, EchoStar filed its supplemental brief responding to the Department of
Justice's brief. On January 23, 2001, the Department of Justice filed a motion
to strike EchoStar's supplemental brief or for an opportunity to reply to
EchoStar's supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking EchoStar's supplemental reply and
denying EchoStar an opportunity to file a response to the Department of
Justice's motion to intervene. The Eleventh Circuit has currently set oral
argument for May 24, 2001. EchoStar
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
cannot predict when the Eleventh Circuit will rule on its appeal, but it could
be as early as May 2001. EchoStar's appeal effort may not be successful and
EchoStar may be required to comply with the Court's preliminary injunction order
on short notice. The preliminary injunction could force EchoStar to terminate
delivery of distant network channels to a substantial portion of its distant
network subscriber base, which could also cause many of these subscribers to
cancel their subscription to EchoStar's other services. Such terminations would
result in a small reduction in EchoStar's reported average monthly revenue per
subscriber and could result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide, filed a suit for patent infringement against EchoStar and
certain of its subsidiaries in the United States District Court for the Western
District of North Carolina, Asheville Division. The suit alleges infringement of
United States Patent No. 4,706,121 (the "121 Patent") which relates to certain
electronic program guide functions. EchoStar has examined this patent and
believes that it is not infringed by any of its products or services.
In December 2000, EchoStar filed suit against Gemstar - TV Guide
International, Inc. (and certain of its subsidiaries) in the United States
District Court for the District of Colorado alleging violations by Gemstar of
various federal and state anti-trust laws and laws governing unfair competition.
The lawsuit seeks an injunction and monetary damages. The Court recently denied
a motion by Gemstar to transfer this case to the Western District of North
Carolina.
In February 2001, Gemstar filed patent infringement actions against
EchoStar in District Court in Atlanta, Georgia and in the International Trade
Commission (ITC). These suits allege infringement of United States Patent Nos.
5,252,066, 5,479,268 and 5,809,204 which all relate to certain electronic
program guide functions. In addition, the ITC action alleges infringement of the
121 Patent which is asserted in the North Carolina case. In the Atlanta District
Court case, Gemstar seeks damages and an injunction. We expect the Atlanta and
North Carolina cases will be stayed pending resolution of the ITC action. ITC
actions typically proceed according to an expedited schedule. EchoStar expects
the ITC action to go to trial by the end of 2001. EchoStar further expects that
the ITC will issue an initial determination by March of 2002 and that a final
determination will be issued by June 2002. While the ITC cannot award damages,
it can issue exclusion orders that would prevent the importation of articles
that are found to infringe the asserted patents. In addition, it can issue cease
and desist orders that would prohibit the sale of infringing products that had
been previously imported. EchoStar has examined these patents and believes they
are not infringed by any of EchoStar's products or services. EchoStar will
vigorously contest the ITC, North Carolina and Atlanta allegations of
infringement and will, among other things, challenge both the validity and
enforceability of the asserted patents.
During 2000, Superguide Corp. also filed suit against EchoStar, DirecTv
and others in the same North Carolina Court, alleging infringement of United
States Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is EchoStar's understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against EchoStar. Nevertheless, Gemstar was recently added by the Court as a
party to this lawsuit. EchoStar has examined these patents and believes that
they are not infringed by any of its products or services. EchoStar intends to
vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that EchoStar infringes on any
of the aforementioned patents EchoStar may be subject to substantial damages,
and/or an injunction that could require EchoStar to materially modify certain
user friendly electronic programming guide and related features it currently
offers to consumers. It is too early to make an assessment of the probable
outcome of the suits.
11
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against EchoStar in the United States District Court for the District of
Delaware. The suit alleges infringement of 5 patents. The patents disclose
various systems for the implementation of features such as impulse-pay-per view,
parental control and category lock-out. One patent relates to an encryption
technique. Three of the patents have expired. The trial is expected to commence
July 9, 2001. EchoStar is vigorously defending against the suit based, among
other things, on non-infringement, invalidity and failure to provide notice of
alleged infringement.
In the event it is ultimately determined that EchoStar infringes on any
of these patents, EchoStar may be subject to substantial damages, and/or an
injunction with respect to the two unexpired patents, that could require
EchoStar to materially modify certain user friendly features it currently offers
to consumers. It is too early to make an assessment of the probable outcome of
the suit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate class actions. In
two separate lawsuits filed in the District Court, Arapahoe County, State of
Colorado and the United States District Court for the District of Colorado,
respectively, Air Communication & Satellite, Inc. and John DeJong, et. al. filed
lawsuits on October 6, 2000 on behalf of themselves and a class of persons
similarly situated. The plaintiffs are attempting to certify nationwide classes
allegedly brought on behalf of persons, primarily retail dealers, who were
alleged signatories to certain retailer agreements with EchoStar Satellite
Corporation. The plaintiffs are requesting the Court to declare certain
provisions of the alleged agreements invalid and unenforceable, to declare that
certain changes to the agreements are invalid and unenforceable, and to award
damages for lost commissions and payments, charge backs, and other compensation.
The plaintiffs are alleging breach of contract and breach of the covenant of
good faith and fair dealing and are seeking declaratory relief, compensatory
damages, injunctive relief, and pre-judgment and post-judgment interest.
EchoStar intends to vigorously defend against the suits and to assert a variety
of counterclaims. It is too early to make an assessment of the probable outcome
of the litigation or to determine the extent of any potential liability or
damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment who contract with EchoStar and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that (1) EchoStar charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) EchoStar
manipulated the accounts of subscribers to deny payments to class members; and
(3) EchoStar misrepresented to class members who owns certain equipment related
to the provision of satellite television service. The plaintiff is requesting a
permanent injunction and monetary damages. EchoStar intends to vigorously defend
the lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
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 EchoStar's financial position or results of operations.
Meteoroid Events
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including EchoStar's DBS satellites. While the probability that
EchoStar's satellites will be damaged by meteoroids is very small, that
probability increases significantly when the Earth passes through the
particulate stream left behind by various comets.
12
15
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next year. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including EchoStar's
DBS satellites. The probability that the effects from the storms will damage our
satellites or cause service interruptions is generally very small.
Some decommissioned spacecraft are in uncontrolled orbits which pass
through the geostationary belt at various points, and present hazards to
operational spacecraft including EchoStar's DBS satellites. The locations of
these hazards are generally well known and may require EchoStar to perform
maneuvers to avoid collisions.
6. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
Statement of Financial Accounting Standard No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("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. Operating segments are components of an
enterprise about which separate financial information is available and regularly
evaluated by the chief operating decision maker(s) of an enterprise. During
2000, under this definition, we were operating as three separate business units.
However, beginning 2001, it was determined that the chief operating decision
maker of our Company regularly evaluates the following two separate business
units. All prior year amounts have been restated to conform to the current year
presentation.
ECHOSTAR ELIMINATIONS
DISH TECHNOLOGIES AND OTHER, CONSOLIDATED
NETWORK CORPORATION NET TOTAL
--------- ------------ ------------ ------------
THREE MONTHS ENDED MARCH 31, 2000
Revenue .............................. $ 484,448 $ 52,469 $ 28,804 $ 565,721
Net income (loss) .................... (190,764) (4,494) 10,128 (185,130)
THREE MONTHS ENDED MARCH 31, 2001
Revenue .............................. $ 817,991 $ 18,728 $ 25,211 $ 861,930
Net income (loss) .................... (221,867) (7,788) 62,614 (167,041)
7. SUBSEQUENT EVENTS
EchoStar VI
EchoStar VI is equipped with a total of 48 transponders, including 16
spares. During April, 2001, EchoStar VI experienced a series of anomalous events
resulting in a temporary interruption of service. The satellite was quickly
restored to normal operations mode. However, spare transponders and a
station-keeping thruster were activated while the anomaly investigation period
proceeds. The satellite is equipped with a substantial number of backup
transponders and thrusters. Consequently, the anomalous events have not impacted
commercial operation of the satellite. However, until the root cause of the most
recent anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further losses which could impact commercial operation
of the satellite.
13
16
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 one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
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 and statements 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 OPERATIONS
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
2000.
Revenue. Total revenue for the three months ended March 31, 2001 was
$862 million, an increase of $296 million compared to total revenue for the
three months ended March 31, 2000 of $566 million. The increase in total revenue
was primarily attributable to DISH Network subscriber growth. We expect that our
revenues will continue to increase significantly as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $794
million for the three months ended March 31, 2001, an increase of $317 million
compared to the same period in 2000. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. This increase was directly
attributable to the increase in the number of DISH Network subscribers and
higher average revenue per subscriber. DISH Network added approximately 460,000
net new subscribers for the three months ended March 31, 2001 compared to
approximately 455,000 net subscriber additions during the same period in 2000.
As of March 31, 2001, we had approximately 5.7 million DISH Network subscribers
compared to approximately 3.9 million at March 31, 2000, an increase of
approximately 48%. The 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. 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. While there can be no assurance, assuming the U.S.
economy continues to grow at a slow pace, we expect to add approximately 1.5 to
2.0 million net new subscribers during 2001, and to obtain a majority of all net
new DBS subscribers.
Monthly average revenue per subscriber was approximately $48.23 during
the three months ended March 31, 2001 and approximately $43.85 during the same
period in 2000. The increase in monthly average revenue per subscriber is
primarily attributable to a $1.00 price increase in America's Top 100 CD, our
most popular programming package, during both May 2000 and February 2001, the
increased availability of local channels by satellite, the successful
introduction of our $39.99 per month America's Top 150 programming package
during April
14
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
2000 together with an increase in subscriber penetration in our higher priced
Digital Home Plans. While there can be no assurance, we expect our moderate
historical increases in revenue per subscriber to continue during 2001 and
expect to reach monthly average revenue per subscriber of approximately $50 by
the end of December 2001.
For the three months ended March 31, 2001, DTH equipment sales and
integration services totaled $41 million, a decrease of $22 million compared to
the same period during 2000. 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. This decrease
in DTH equipment sales and integration services revenue was primarily
attributable to a decrease in international demand for digital set-top boxes as
compared to the same period during 2000.
A significant portion of DTH equipment sales and integration services
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. 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-top boxes. While we have
binding purchase orders from both providers for 2001, we expect overall demand
for 2001 to be lower than the same period in 2000. As a result, we expect total
DTH equipment sales and integration services revenue to decrease in 2001
compared to 2000. 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.
In order, among other things, to commence compliance with the
injunction issued against us in our pending litigation with the four major
broadcast networks and their affiliate groups, we have terminated the delivery
of distant network channels to certain of our subscribers. Additionally, during
2000, the FCC issued rules which impair our ability to deliver certain
superstation channels to our customers. Those rules will increase the cost of
our delivery of superstations, and could require that we terminate the delivery
of certain superstations to a material portion of our subscriber base. In
combination, these terminations would result in a small reduction in average
monthly revenue per subscriber and could increase 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.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $390 million during the three months ended March 31, 2001, an increase
of $120 million or 44% compared to the same period in 2000. DISH Network
operating expenses represented 49% and 57% of subscription television services
revenue during the three months ended March 31, 2001 and 2000, respectively. The
increase in DISH Network operating expenses in total was consistent with, and
primarily attributable to, the increase in the number of DISH Network
subscribers. We expect to continue to control costs and create operating
efficiencies. While there can be no assurance, we expect operating expenses as a
percentage of subscription television services revenue to remain near current
levels during the remainder of 2001.
Subscriber-related expenses totaled $316 million during the three
months ended March 31, 2001, an increase of $114 million compared to the same
period in 2000. Such expenses, which include programming expenses, copyright
royalties, residuals currently payable to retailers and distributors, and
billing, lockbox and other variable subscriber expenses, represented 40% and 42%
of subscription television services revenues during the three months ended March
31, 2001 and 2000, respectively. 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 other operating expenses related to
our service and installation business. Customer service center and other
expenses totaled $65 million during the three months ended March 31, 2001, an
increase of $9 million as compared to the same period in 2000. 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 and
from operating expenses related to the expansion of our installation and service
business. Customer service center and other expenses totaled 8% of subscription
television
15
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
services revenue during the three months ended March 31, 2001, as compared to
12% during the same period in 2000. The decrease in this expense to revenue
ratio primarily resulted from the on-going construction and start-up costs of
our fifth customer service center in Virginia and our sixth customer service
center in West Virginia during 2000. While there can be no assurance, we expect
these expenses in total, and as a percentage of subscription television services
revenue, to remain near current levels during the remainder of 2001. We continue
to work to automate simple phone responses, and intend to increase internet
based customer assistance in the future, in order to better manage customer
service costs.
Satellite and transmission expenses include expenses associated with
the operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and commercial satellite in-orbit insurance
premiums. Satellite and transmission expenses totaled $9 million during the
three months ended March 31, 2001, a $3 million decrease compared to the same
period in 2000. This decrease resulted from the expiration of the commercial
in-orbit satellite insurance policies for EchoStar I, EchoStar II and EchoStar
III during July 2000. As discussed below, we are currently self-insuring these
satellites. Satellite and transmission expenses totaled 1% and 3% of
subscription television services revenue during the three months ended March 31,
2001 and 2000, respectively. We expect satellite and transmission expenses in
total and as a percentage of subscription television services revenue, to
increase in the future as additional satellites or digital broadcast centers are
placed in service and to the extent we successfully renegotiate commercial
in-orbit insurance.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $29 million during the three
months ended March 31, 2001, a decrease of $17 million compared to the same
period in 2000. 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
decrease in cost of sales - DTH equipment and integration services is consistent
with the decrease in DTH equipment sales and integration services revenue. Cost
of sales - DTH equipment and integration services represented 70% and 74% of DTH
equipment revenue, during the three months ended March 31, 2001 and 2000,
respectively.
Marketing Expenses. We subsidize the cost and installation of EchoStar
receiver systems in order to attract new DISH Network subscribers. Consequently,
our subscriber acquisition costs are significant. Marketing expenses totaled
$300 million during the three months ended March 31, 2001, an increase of $27
million compared to the same period in 2000. The increase in marketing expenses
was primarily attributable to an increase in subscriber promotion subsidies.
Subscriber promotion subsidies - promotional DTH equipment includes the cost
related to EchoStar receiver systems distributed to retailers and other
distributors of our equipment. Subscriber promotion subsidies - other includes
net costs related to our free installation promotion and other promotional
incentives. Advertising and other expenses totaled $27 million and $23 million
during the three months ended March 31, 2001 and 2000, respectively.
During the three months ended March 31, 2001, our marketing promotions
included our Digital Home Plan, Free Now and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
During July 2000, we announced the commencement of our new Digital
Dynamite promotion. This promotion was re-named the Digital Home Plan effective
February 1, 2001. The Digital Home Plan offers four choices to consumers,
ranging from the use of one EchoStar receiver system and our America's Top 100
CD programming package for $35.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49.99, which includes
the first month's programming payment.
During February 2001, we announced our Free Now promotion offering all
new subscribers a free base-level EchoStar receiver system and free
installation. To be eligible for this program, a subscriber must provide a valid
major credit card and make a one-year commitment to subscribe to either our
America's Top 150 programming package or our America's Top 100 CD or DISH Latino
Dos programming package plus additional programming totaling at least $39.98 per
month. Subscriber acquisition costs are materially higher under this plan
compared to historical promotions. To the extent that actual consumer
participation levels exceed present expectations, subscriber
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
acquisition costs may increase. Although there can be no assurance as to the
ultimate duration of the Free Now promotion, we intend to continue it through at
least May 2001.
We subsidize the cost and installation of EchoStar receiver systems in
order to attract new DISH Network subscribers. There is no clear industry
standard used in the calculation of subscriber acquisition costs. Our subscriber
acquisition costs include subscriber promotion subsidies - promotional DTH
equipment, subscriber promotion subsidies - other and DISH Network acquisition
marketing expenses. During the three months ended March 31, 2001, our subscriber
acquisition costs totaled approximately $297 million, or approximately $432 per
new subscriber activation. Since we retain ownership of the equipment, amounts
capitalized under our Digital Home Plan are not included in our calculation of
these subscriber acquisition costs. Comparatively, our subscriber acquisition
costs during the three months ended March 31, 2000, prior to the introduction of
our Digital Home Plan, totaled $273 million, or approximately $467 per new
subscriber activation. The increase in our total subscriber acquisition expenses
principally resulted from strong DISH Network subscriber growth during the three
months ended March 31, 2001. As a result of continuing competition and our plans
to attempt to continue to drive rapid subscriber growth, we expect our per
subscriber acquisition costs for 2001 will remain in a range consistent with our
2000 average of approximately $452 per new subscriber activation.
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 Free Now program, or introduce other more
aggressive promotions if we determine that they are necessary to respond to
competition, or for other reasons.
General and Administrative Expenses. General and administrative
expenses totaled $76 million during the three months ended March 31, 2001, an
increase of $20 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% and 10% of
total revenue during the three months ended March 31, 2001 and 2000,
respectively. 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 with incentives 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, during 1999, we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended March 31, 2001 and 2000 we recognized $7 million and $14
million, respectively, under this performance-based plan.
We report all non-cash compensation based on stock option appreciation
as a single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
MARCH 31,
2000 2001
------- -------
Customer service center and other ........................ $ 655 $ 233
Satellite and transmission ............................... 655 466
General and administrative ............................... 12,699 6,757
------- -------
Total non-cash, stock-based compensation .............. $14,009 $ 7,456
======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $351 million during
the three months ended March 31, 2001, an increase of 89% compared to the same
period in 2000. Our pre-marketing cash flow as a percentage of total revenue was
approximately 40% during the three months ended March 31, 2001 compared to 33%
during the same period in 2000. We believe that pre-marketing cash flow can help
to measure of operating efficiency for companies in the DBS industry. While
there can be no assurance, we expect pre-marketing cash flow as a percentage of
total revenue to remain near the current level during the remainder of 2001.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
represents earnings before interest, taxes, depreciation, amortization, and
non-cash, stock-based compensation. EBITDA was $51 million during the three
months ended March 31, 2001, compared to negative $88 million during the same
period in 2000. This improvement in EBITDA was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber, resulting in recurring revenue which was large enough to support
the cost of new and existing subscribers, together with the introduction of our
Digital Home Plan in July 2000. Our calculation of EBITDA for the three months
ended March 31, 2001 and 2000 does not include approximately $7 million and $14
million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options. While there can be no
assurance, we expect to continue to have positive EBITDA for the year ended
December 31, 2001. 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 generally expensed as incurred.
It is important to note that EBITDA and pre-marketing cash flow do not
represent cash provided or used by operating activities. EBITDA and
pre-marketing cash flow 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 $59 million during the three months ended March 31, 2001, a $19
million increase compared to the same period in 2000. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar VI in October
2000 and other depreciable assets placed in service during late 2000.
Other Income and Expense. Other expense, net, totaled $152 million
during the three months ended March 31, 2001, an increase of $109 million
compared to the same period in 2000. This increase primarily resulted from
impairment losses on marketable and non-marketable investment securities of
approximately $92 million, as discussed below, and from an increase in interest
expense as a result of the issuance of our 10 3/8% Senior Notes due 2007 in
September 2000. This increase in interest expense was partially offset by an
increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
As of March 31, 2001, our unrestricted cash, cash equivalents and
marketable investment securities totaled $1.295 billion compared to $1.464
billion as of December 31, 2000. For the three months ended March 31, 2001 and
2000, we reported net cash flows from operating activities of negative $20
million and negative $105 million, respectively. The decrease in net cash flow
used in operating activities reflects, among other things, an increase in the
number of DISH Network subscribers and higher average revenue per subscriber,
resulting in recurring revenue which is large enough to support the cost of new
and existing subscribers.
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 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 achieving
our goals. The amount of capital
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
required to fund our remaining 2001 working capital and capital expenditure
needs will vary, depending, among other things, on the rate at which we acquire
new subscribers and the 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 raise additional capital in the
future.
Subscriber Turnover
Our percentage churn for the three months ended March 31, 2001 was
generally consistent with our percentage churn for the same period in 2000. We
believe that our percentage churn continues to be lower than satellite and cable
industry averages. While we have successfully managed churn within a narrow
range historically, our maturing subscriber base, a slowing economy, the effects
of rapid growth, bounty programs offered by competitors and other factors could
cause future increases in churn. Further, we expect a temporary increase in our
percentage churn during the second quarter of 2001 due in part to price
increases in certain of our programming packages, which went into effect on
February 1, 2001. Finally, impacts from our litigation with the networks in
Miami, new FCC rules governing the delivery of superstations and other factors,
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn. While
there can be no assurance, notwithstanding the issues discussed above we have
and expect to be able to continue to manage our percentage churn below industry
averages during the remainder of 2001.
Subscriber Acquisition Costs
As previously described, we subsidize the cost and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers. Our
average subscriber acquisition costs were $432 per new subscriber activation
during the three months ended March 31, 2001. Since we retain ownership of the
equipment, amounts capitalized under our Digital Home Plan are not included in
our calculation of these subscriber acquisition costs. As a result of continuing
competition and our plans to attempt to continue to drive rapid subscriber
growth, we expect our per subscriber acquisition costs for 2001 will remain in a
range consistent with our 2000 average of approximately $452 per new subscriber
activation. Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase to the extent that we
continue or expand our Free Now promotion, or introduce other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
Funds necessary to meet 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. If 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, if needed in the future.
Digital Home Plan
During July 2000, we announced the commencement of our new Digital
Dynamite promotion, which was re-named the Digital Home Plan effective February
1, 2001. The Digital Home Plan offers four choices to consumers, ranging from
the use of one EchoStar receiver system and our America's Top 100 CD programming
package for $35.99 per month, to providing consumers two EchoStar receiver
systems and our America's Top 150 programming package for $49.99 per month. With
each plan, consumers receive in-home-service, must agree to a one-year
commitment and incur a one-time set-up fee of $49.99, which includes the first
month's programming payment. Our Digital Home Plan promotion allows us to
capitalize and depreciate over 4 years equipment costs that would otherwise be
expensed at the time of sale, but also results in increased capital
expenditures. Capital expenditures under our Digital Home Plan promotion totaled
approximately $62.7 million for the three months ended March 31, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. If
other measures are not successful, it could be necessary to replace the credit
card size card that controls the security of each consumer set top box at a
material cost to us.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Various
parties have asserted patent and other intellectual property rights with respect
to components within our direct broadcast satellite system. Certain of these
parties have filed suit against us, including Starsight, Superguide, and IPPV
Enterprises, as previously described. We cannot be certain that these persons do
not own the rights they claim, that our products do not infringe on these
rights, that we would be able to obtain licenses from these persons on
commercially reasonable terms or, if we were unable to obtain such licenses,
that we would be able to redesign our products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service 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 is payable in
arrears on January 1 and July 1 of each year. Semi-annual cash debt service of
approximately $52 million related to our 10 3/8% Senior Notes due 2007 is
payable in arrears on April 1 and October 1 of each year, commencing April 1,
2001. There are no scheduled principal payment or sinking fund requirements
prior to maturity of any of these notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar VI. This launch insurance
policy provides for insurance of $225.0 million. The EchoStar VI launch
insurance policy expires in July 2001. We are currently self-insuring EchoStar
I, EchoStar II, EchoStar III, EchoStar IV and EchoStar V. During 2000, to
satisfy insurance covenants related to the outstanding EchoStar DBS senior
notes, we reclassified the depreciated cost of two of our satellites from cash
and cash equivalents to cash reserved for satellite insurance on our balance
sheet. As of March 31, 2001, cash reserved for satellite insurance totaled
approximately $78 million. The reclassifications will continue until such time,
if ever, as the insurers are again willing to insure our satellites on
commercially reasonable terms. The amount of cash reserved for satellite
insurance will be increased by approximately $60 million in the event we have
not procured satellite insurance by July 2001. We believe we have in-orbit
satellite capacity sufficient to expeditiously recover transmission of most
programming in the event one of our in-orbit satellites was to fail. However,
the cash reserved for satellite insurance is not adequate to fund the
construction, launch and insurance for a replacement satellite in the event of a
complete loss of a satellite and programming continuity could not be assured in
the event of multiple satellite losses.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
We utilized $91 million of satellite vendor financing for our first
four satellites. As of March 31, 2001, approximately $22 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
began to accrue on November 2, 1999. Holders of the Series C Preferred Stock are
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.
During the remainder of 2001, we anticipate total capital expenditures
of between $450-$750 million depending upon the strength of the economy and
other factors. We expect approximately 40% of that amount to be utilized for
satellite construction and approximately 60% for EchoStar receiver systems in
connection with our Digital Home Plan and for general corporate expansion. Our
anticipated capital expenditures related to the Digital Home Plan promotion may
materially increase to the extent this promotion is successful and to the extent
that we continue or expand our Digital Home Plan promotion.
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 and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to fully construct these satellites. During February 2000, we 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 hybrid Ku/Ka-band
satellite.
During November 2000, one of our wholly owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license, and is
constructing a Ka-band satellite, to launch into the 113 W.L. orbital slot.
Together with VisionStar we have requested FCC approval to acquire control over
VisionStar by increasing our ownership of VisionStar to 90%, for a total
purchase price of approximately $2.8 million. We have also provided loans to
VisionStar totaling less than $10 million to date for the construction of their
satellite and expect to provide additional funding to VisionStar in the future.
We are not obligated to finance the full remaining cost to construct and launch
the VisionStar satellite, but VisionStar's FCC license currently requires
construction of the satellite to be completed by April 30, 2002 or the license
could be revoked. We currently expect to continue to fund loans and equity
contributions for construction of the satellite in the near term from cash on
hand, and expect that we may spend approximately $79.5 million during 2001 for
that purpose subject to, among other things, FCC action. In the future we may
fund construction, launch and insurance of the satellite through cash from
operations, public or private debt or equity financing, joint ventures with
others, or from other sources.
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 retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC and Satellite
Services businesses. During the first quarter of 2001, subscriber growth was
strong. To the extent future subscriber growth exceeds 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. If 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of March 31, 2001, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of $1.295 billion. Of that
amount, a total of $1.204 billion was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper with
an average maturity of less than one year and rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the
commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At March 31, 2001, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. During the three months ending March 31, 2000 and 2001, the impact of
interest rate fluctuations, changed business prospects and all other factors did
not have a material impact on the fair value of the portfolio, or on our income
derived from this portfolio.
We also invest in debt and equity of public and private companies for
strategic business purposes. As of March 31, 2001, we held strategic debt and
equity investments of public companies with a fair value of approximately $91
million. We acquired stock in one of those companies, OpenTV, in connection with
establishment of a strategic relationship which did not involve the investment
of cash by us. None of these investments accounted for more than 40% of the
total fair value of the portfolio. We may make additional strategic investments
in other debt and equity securities in the future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $8 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 10% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $9.1 million decrease in the
fair value of that portfolio.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment securities which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We reviewed the fair
value of our marketable investment securities as of March 31, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As a result, we established a new cost basis for certain of
these investments, and accordingly reduced our previously recorded unrealized
loss and recorded a charge to earnings of approximately $32.4 million during the
three months ended March 31, 2001. We have not used derivative financial
instruments for speculative purposes. We have not hedged or otherwise protected
against the risks associated with any of our investing or financing activities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
In addition to the $1.295 billion, we have made strategic equity
investments in certain non-marketable investment securities including Wildblue
Communications, StarBand Communications, VisionStar, Inc. and Replay TV. The
original cost basis of our investments in these non-marketable investment
securities totaled approximately $116 million. The securities of these companies
are not publicly traded. Our ability to create realizable value for our
strategic investments in companies that are not public is dependent on the
success of their business plans. Among other things, there is relatively greater
risk that those companies may not be able to raise sufficient capital to fully
finance their business plans and ability to obtain sufficient capital to execute
their business plans. Since private markets are not as liquid as public markets,
there is also increased risk that we will not be able to sell these investments,
or that when we desire to sell them that we will be able to obtain full value
for them. StarBand and Wildblue recently cancelled their planned initial public
stock offerings. As a result of the cancellation of those offerings and other
factors, during the three months ended March 31, 2001, we recorded a
non-recurring charge of approximately $59.4 million to reduce the carrying value
of certain of our non-marketable investment securities to their estimated fair
values. Starband and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of our investments
could be necessary.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000, we 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 our merchandise and has
threatened to cause economic damage to retailers if they continue 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. We are seeking injunctive relief and
monetary damages. We subsequently amended the Complaint adding claims against
Circuit City, Radio Shack and Best Buy, alleging that these retailers are
engaging in improper conduct that has had an anti-competitive impact on us. It
is too early in the litigation to make an assessment of the probable outcome.
During October 2000, however, DirecTV filed a motion for summary judgment asking
that the Court enter judgment in DirecTV's favor on certain of our claims.
DirecTV's motion for summary judgment remains pending.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortiously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. 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 right 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 been
marketing National Football League games in a misleading manner. Discovery has
been stayed until the next scheduling conference on June 13, 2001. The amount of
damages DirecTV is seeking is as yet unquantified. However, in an arbitration
proceeding related to DirecTV's allegations with respect to KBS, DirecTV has
claimed damages totaling hundreds of millions of dollars. It is too early in the
litigation to make an assessment of the probable outcome. We and KBS intend to
vigorously defend against DirecTV's allegations in the litigation and in the
arbitration.
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented
us in the litigation with News Corporation. The contingent fee arrangement
provides for the attorneys to be paid a percentage of any net recovery obtained
by us 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.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. The arbitration hearing commenced April
2, 2001 and continued through April 13, 2001. The hearing could not be completed
during that time period and has been continued until August 7, 2001, when it
will resume until it is presumably completed. While there can be no assurance
that the attorneys will not continue to claim a right to hundreds of millions of
dollars, the damage model the attorneys presented during the arbitration was for
$56 million. We believe that even that amount significantly overstates the
amount the attorneys should reasonably be entitled to receive under the fee
agreement but it is not possible for us to predict what the decision of the
three person arbitrator panel will be with any degree of certainty. We continue
to vigorously contest the attorneys' interpretation of the fee arrangement,
which we believe significantly overstates the magnitude of our liability.
WIC Premium Television Ltd.
During July 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
Communications Corporation, and two of EchoStar's wholly-owned subsidiaries,
Echosphere Corporation and Dish, Ltd. The lawsuit seeks, among other things, an
interim and permanent injunction prohibiting the defendants from activating
receivers
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PART II - OTHER INFORMATION
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.
During September 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, which we appealed. The Alberta Court also granted a motion to add more
EchoStar parties to the lawsuit. EchoStar Satellite Corporation, EDBS, 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 of Appeals denied our appeal and the Alberta
Court has asserted jurisdiction over all of the EchoStar defendants. The Court
in the Federal action has stayed that case pending the outcome of the Alberta
action. The case is now currently in discovery. We intend to vigorously defend
the suit. It is 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
Until July 1998, we obtained distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that its method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court 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. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although we do not know if they adhered to this
schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us from
providing network programming except under limited circumstances. A preliminary
injunction hearing was held on 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.
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PART II - OTHER INFORMATION
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of its customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required us to terminate network programming to certain subscribers "no later
than February 15, 1999," and contained other dates which would be physically
impossible to comply with. The order imposes restrictions on our past and future
sale of distant ABC, NBC, CBS and Fox channels similar to those imposed on
PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However, it is very unusual
for a Court of Appeals to overturn a lower court's order and there can be no
assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network programming under the court's order. We have appealed
the September 2000 preliminary injunction order and the October 3, 2000 amended
preliminary injunction order. On November 22, 2000, the United States Court of
Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal.
During November 2000, we filed our appeal brief with the Eleventh
Circuit. During December 2000, the Satellite Broadcasting and Communications
Association submitted an amicus brief in support of our appeal. The Consumer
Federation of America and the Media Access Project have also submitted an amicus
brief in support of our appeal. The Networks have responded to our appeal brief
and the amicus briefs filed by the Consumer Federation of America and the Media
Access Project and the Satellite Broadcasting and Communications Association. In
December 2000, the Department of Justice filed a motion to intervene with
respect to our constitutional challenge of the Satellite Home Viewers Act, and
the National Association of Broadcasters filed an amicus brief in support of the
Networks' position in the appeal. During January 2001, we filed our reply appeal
brief and asked the Eleventh Circuit for an opportunity to respond to the amicus
brief filed by the National Association of Broadcasters and the brief filed by
the Department of Justice. On January 11, 2001, the Networks advised the
Eleventh Circuit that they did not object to our filing a response to the
National Association of Broadcasters' amicus brief or the Department of
Justice's brief. On January 19, 2001, we filed our supplemental brief responding
to the Department of Justice's brief. On January 23, 2001, the Department of
Justice filed a motion to strike our supplemental brief or for an opportunity to
reply to our supplemental brief. On February 2, 2001, without explanation, the
Eleventh Circuit issued an order striking our supplemental reply and denying us
an opportunity to file a response to the Department of Justice's motion to
intervene. The Eleventh Circuit has currently set oral argument for May 24,
2001. We cannot predict when the Eleventh Circuit will rule on our appeal, but
it could be as early as May 2001. Our appeal effort may not be successful and we
may be required to comply with the Court's preliminary injunction order on short
notice. The preliminary injunction could force us to terminate delivery of
distant network channels to a substantial portion of our distant network
subscriber base, which could also cause many of these subscribers to cancel
their subscription to our other services. Such terminations would result in a
small reduction in our reported average monthly revenue per subscriber and could
result in a temporary increase in churn.
Starsight
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide, filed a suit for patent infringement against us and certain of
our subsidiaries in the United States District Court for the Western District of
North Carolina, Asheville Division. The suit alleges infringement of United
States Patent No. 4,706,121 (the "121
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29
PART II - OTHER INFORMATION
Patent") which relates to certain electronic program guide functions. We have
examined this patent and believe that it is not infringed by any of our products
or services.
In December 2000, we filed suit against Gemstar - TV Guide
International, Inc. (and certain of its subsidiaries) in the United States
District Court for the District of Colorado alleging violations by Gemstar of
various federal and state anti-trust laws and laws governing unfair competition.
The lawsuit seeks an injunction and monetary damages. The Court recently denied
a motion by Gemstar to transfer this case to the Western District of North
Carolina.
In February 2001, Gemstar filed patent infringement actions against us
in District Court in Atlanta, Georgia and in the International Trade Commission
(ITC). These suits allege infringement of United States Patent Nos. 5,252,066,
5,479,268 and 5,809,204 which all relate to certain electronic program guide
functions. In addition, the ITC action alleges infringement of the 121 Patent
which is asserted in the North Carolina case. In the Atlanta District Court
case, Gemstar seeks damages and an injunction. EchoStar expects the Atlanta and
North Carolina cases will be stayed pending resolution of the ITC action. ITC
actions typically proceed according to an expedited schedule. We expect the ITC
action to go to trial by the end of 2001. We further expect that the ITC will
issue an initial determination by March of 2002 and that a final determination
will be issued by June 2002. While the ITC cannot award damages, it can issue
exclusion orders that would prevent the importation of articles that are found
to infringe the asserted patents. In addition, it can issue cease and desist
orders that would prohibit the sale of infringing products that had been
previously imported. We have examined these patents and believe they are not
infringed by any of our products or services. We will vigorously contest the
ITC, North Carolina and Atlanta allegations of infringement and will, among
other things, challenge both the validity and enforceability of the asserted
patents.
During 2000, Superguide Corp. also filed suit against us, DirecTv and
others in the same North Carolina Court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is our understanding that these patents may be
licensed by Superguide to Gemstar, although Gemstar has not asserted the patents
against us. Nevertheless, Gemstar was recently added by the Court as a party to
this lawsuit. We have examined these patents and believe that they are not
infringed by any of our products or services. We intend to vigorously defend
against this action and assert a variety of counterclaims.
In the event it is ultimately determined that we infringe on any of the
aforementioned patents we may be subject to substantial damages, and/or an
injunction that could require us to materially modify certain user friendly
electronic programming guide and related features we currently offer to
consumers. It is too early to make an assessment of the probable outcome of the
suits.
IPPV Enterprises
IPPV Enterprises, LLC and MAAST, Inc. filed a patent infringement suit
against us in the United States District Court for the District of Delaware. The
suit alleges infringement of 5 patents. The patents disclose various systems for
the implementation of features such as impulse-pay-per view, parental control
and category lock-out. One patent relates to an encryption technique. Three of
the patents have expired. The trial is expected to commence July 9, 2001. We are
vigorously defending against the suit based, among other things, on
non-infringement, invalidity and failure to provide notice of alleged
infringement.
In the event it is ultimately determined that we infringe on any of
these patents, we may be subject to substantial damages, and/or an injunction
with respect to the two unexpired patents, that could require us to materially
modify certain user friendly features we currently offer to consumers. It is too
early to make an assessment of the probable outcome of the suit.
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30
PART II - OTHER INFORMATION
Retailer Class Actions
We have been sued by retailers in three separate class actions. In two
separate lawsuits filed in the District Court, Arapahoe County, State of
Colorado and the United States District Court for the District of Colorado,
respectively, Air Communication & Satellite, Inc. and John DeJong, et. al. filed
lawsuits on October 6, 2000 on behalf of themselves and a class of persons
similarly situated. The plaintiffs are attempting to certify nationwide classes
allegedly brought on behalf of persons, primarily retail dealers, who were
alleged signatories to certain retailer agreements with EchoStar Satellite
Corporation. The plaintiffs are requesting the Court to declare certain
provisions of the alleged agreements invalid and unenforceable, to declare that
certain changes to the agreements are invalid and unenforceable, and to award
damages for lost commissions and payments, charge backs, and other compensation.
The plaintiffs are alleging breach of contract and breach of the covenant of
good faith and fair dealing and are seeking declaratory relief, compensatory
damages, injunctive relief, and pre-judgment and post-judgment interest. We
intend to vigorously defend against the suits and to assert a variety of
counterclaims. It is too early to make an assessment of the probable outcome of
the litigation or to determine the extent of any potential liability or damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment, who contract with the us and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that (1) we charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) we manipulated
the accounts of subscribers to deny payments to class members; and (3) we
misrepresented to class members who owns certain equipment related to the
provision of satellite television services. The plaintiff is requesting a
permanent injunction and monetary damages. We intend to vigorously defend the
lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us 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. We strongly disagree
with the position of the insurers and have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment
loss of $106 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for the
same amount. We continue to believe we will ultimately recover at least the
amount originally recorded and do not intend to adjust the amount of the
receivable until there is greater certainty with respect to the amount of the
final settlement.
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PART II - OTHER INFORMATION
As a result of the thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. We will continue to evaluate the performance of EchoStar IV
and may modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers have to date refused to renew
insurance on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based
on, among other things, the insurance carriers' unanimous refusal to negotiate
reasonable renewal insurance coverage, we believe that the carriers colluded and
conspired to boycott us unless we accept their offer to settle the EchoStar IV
claim for $88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we filed a lawsuit against
the insurance carriers in the United States District Court for the District of
Colorado asserting causes of action for violation of Federal and State Antitrust
laws. While we believe we are entitled to the full amount claimed under the
EchoStar IV insurance policy and believe the insurance carriers are in violation
of Antitrust laws and have committed further acts of bad faith in connection
with their refusal to negotiate reasonable insurance coverage on our other
satellites, there can be no assurance as to the outcome of these proceedings.
During March 2001, we voluntarily dismissed the antitrust lawsuit without
prejudice. We have the right to re-file an antitrust action against the insurers
again in the future.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1+ Contract for Launch Services, dated January 31, 2001, between
Lockheed Martin's International Launch Services and EchoStar
Orbital Corporation. **
- ----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of 2001.
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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/ Michael R. McDonnell
-------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date: May 3, 2001
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1+ Contract for Launch Services, dated January 31, 2001, between
Lockheed Martin's International Launch Services and EchoStar
Orbital Corporation. **
- ----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.