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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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 333-52756
ECHOSTAR BROADBAND CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1560440
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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 MAY 14, 2001, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
1,000 SHARES OF COMMON STOCK.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
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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 Narrative Analysis of Results of Operations........................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... None
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 18
Item 2. Changes in Securities and Use of Proceeds....................................... *
Item 3. Defaults Upon Senior Securities................................................. *
Item 4. Submission of Matters to a Vote of Security Holders............................. *
Item 5. Other Information............................................................... None
Item 6. Exhibits and Reports on Form 8-K................................................ 23
- ----------
* This item has been omitted pursuant to the reduced disclosure format as
set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, MARCH 31,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .......................................... $ 657,592 $ 560,639
Marketable investment securities ................................... 370,595 296,427
Trade accounts receivable, net of allowance for uncollectible
accounts of $19,934 and $9,409, respectively .................... 276,081 247,495
Insurance receivable ............................................... 106,000 106,000
Inventories ........................................................ 159,665 148,066
Other current assets ............................................... 33,919 26,747
----------- -----------
Total current assets ................................................. 1,603,852 1,385,374
Cash reserved for satellite insurance (Note 4) ....................... 82,393 78,295
Property and equipment, net .......................................... 1,474,265 1,581,780
FCC authorizations, net .............................................. 709,817 705,206
Other noncurrent assets .............................................. 95,549 93,083
----------- -----------
Total assets ..................................................... $ 3,965,876 $ 3,843,738
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable ............................................. $ 144,263 $ 118,007
Deferred revenue ................................................... 282,939 327,120
Accrued expenses ................................................... 643,359 655,265
Advances from affiliates, net ...................................... 832,334 720,535
Current portion of long-term debt .................................. 19,642 15,940
----------- -----------
Total current liabilities ............................................ 1,922,537 1,836,867
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
10 3/8% Seven Year Notes .......................................... 1,000,000 1,000,000
1994 Notes, 1996 Notes, 1997 Notes, mortgages and other notes
payable, net of current portion ................................. 11,644 11,502
Long-term deferred satellite services revenue and other
long-term liabilities ........................................... 56,047 75,692
----------- -----------
Total long-term obligations, net of current portion .................. 3,067,691 3,087,194
----------- -----------
Total liabilities ................................................ 4,990,228 4,924,061
Commitments and Contingencies (Note 5)
Stockholder's Deficit:
Common Stock, $.01 par value, 1,000 shares authorized, issued
and outstanding .................................................... -- --
Additional paid-in capital ......................................... 1,440,253 1,439,653
Deferred stock-based compensation .................................. (58,193) (50,137)
Accumulated other comprehensive income ............................. (1,150) 1,605
Accumulated deficit ................................................ (2,405,262) (2,471,444)
----------- -----------
Total stockholder's deficit .......................................... (1,024,352) (1,080,323)
----------- -----------
Total liabilities and stockholder's deficit ...................... $ 3,965,876 $ 3,843,738
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 2001
--------- ---------
REVENUE:
DISH Network:
Subscription television services ...................................... $ 476,305 $ 793,538
Other ................................................................. 1,934 3,436
--------- ---------
Total DISH Network ...................................................... 478,239 796,974
DTH equipment sales and integration services ............................ 60,815 39,685
Other ................................................................... 29,004 21,647
--------- ---------
Total revenue ............................................................. 568,058 858,306
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ........................................... 203,960 319,337
Customer service center and other ..................................... 56,049 64,783
Satellite and transmission ............................................ 12,324 8,810
--------- ---------
Total DISH Network operating expenses ................................... 272,333 392,930
Cost of sales -- DTH equipment and integration services ................. 46,928 28,774
Cost of sales -- other ................................................. 8,115 13,676
Marketing:
Subscriber promotion subsidies -- promotional DTH equipment ........... 172,138 190,265
Subscriber promotion subsidies - other ................................ 83,888 83,893
Advertising and other ................................................. 23,165 26,554
--------- ---------
Total marketing expenses ................................................ 279,191 300,712
General and administrative .............................................. 53,595 71,715
Non-cash, stock-based compensation ...................................... 14,009 7,456
Depreciation and amortization ........................................... 39,343 55,505
--------- ---------
Total costs and expenses .................................................. 713,514 870,768
--------- ---------
Operating loss ............................................................ (145,456) (12,462)
Other Income (Expense):
Interest income ......................................................... 3,202 17,153
Interest expense ........................................................ (48,617) (70,172)
Other ................................................................... (279) (701)
--------- ---------
Total other income (expense) .............................................. (45,694) (53,720)
--------- ---------
Loss before income taxes .................................................. (191,150) (66,182)
Income tax provision, net ................................................. (33) --
--------- ---------
Net loss .................................................................. $(191,183) $ (66,182)
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2000 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $(191,183) $ (66,182)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Deferred stock-based compensation recognized ....................... 14,009 7,456
Depreciation and amortization ...................................... 39,343 55,505
Amortization of debt discount and deferred financing costs ......... 820 1,164
Change in reserve for excess and obsolete inventory ................ 305 (679)
Change in long-term deferred satellite services revenue
and other long-term liabilities .................................. 7,448 19,645
Other, net ......................................................... 1,007 1,350
Changes in current assets and current liabilities .................. 1,115 67,486
--------- ---------
Net cash flows from operating activities ............................. (127,136) 85,745
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ........................ -- (173,951)
Sales of marketable investment securities ............................ 14,770 250,874
Change in cash reserved for satellite insurance due to
depreciation on related satellites (Note 4) ....................... -- 4,098
Purchases of property and equipment .................................. (18,055) (148,076)
--------- ---------
Net cash flows from investing activities ............................. (3,285) (67,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Non-interest bearing advances from affiliates ........................ 81,118 (111,799)
Repayments of mortgage indebtedness and notes payable ................ (4,217) (3,844)
--------- ---------
Net cash flows from financing activities ............................. 76,901 (115,643)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. (53,520) (96,953)
Cash and cash equivalents, beginning of period ....................... 159,761 657,592
--------- ---------
Cash and cash equivalents, end of period ............................. $ 106,241 $ 560,639
========= =========
Supplemental Disclosure of Cash Flow Information
Forfeitures of deferred non-cash, stock-based compensation ........... $ -- $ 600
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
EchoStar Broadband Corporation ("EBC") is a wholly-owned subsidiary of
EchoStar Communications Corporation ("ECC" and together with its subsidiaries
"EchoStar"), a publicly traded company on the Nasdaq National Market. Unless
otherwise stated herein, or the context otherwise requires, references herein to
EchoStar shall include ECC, EBC and all direct and indirect wholly-owned
subsidiaries thereof. EBC's management refers readers of this Quarterly Report
on Form 10-Q to EchoStar's Quarterly Report on Form 10-Q for the three months
ended March 31, 2000. Substantially all of EchoStar's operations are conducted
by subsidiaries of EBC. The operations of EchoStar include two interrelated
business units (Note 6):
- 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.
- 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 the Company'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 BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 ................................................... $(191,183) $(66,182)
Unrealized holding gains (losses) on available-for-sale
securities arising during period ........................ (81) 2,755
--------- --------
Comprehensive loss ......................................... $(191,264) $(63,427)
========= ========
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.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, MARCH 31,
2000 2001
----------- ---------
Finished goods - DBS ............................. $ 94,997 $ 87,896
Raw materials .................................... 40,069 42,917
Finished goods - reconditioned and other ......... 23,101 18,772
Work-in-process .................................. 8,879 6,179
Consignment ...................................... 2,461 1,465
Reserve for excess and obsolete inventory ........ (9,842) (9,163)
--------- ---------
$ 159,665 $ 148,066
========= =========
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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
will receive the amount claimed or, if EchoStar does, that EchoStar will retain
title to EchoStar IV with its reduced capacity.
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.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 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,
9
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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
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.
10
13
ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
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.
11
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
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 ECHOSTAR OTHER
DISH TECHNOLOGIES AND OTHER, CONSOLIDATED ECHOSTAR EBC AND
NETWORK CORPORATION NET TOTAL ACTIVITY SUBSIDIARIES
--------- ------------ ------------ ------------ --------- ------------
THREE MONTHS ENDED
MARCH 31, 2000
Revenue ............... $ 484,448 $ 52,469 $28,804 $ 565,721 $ 2,337 $ 568,058
Net income (loss) ..... (190,764) (4,494) 10,128 (185,130) (6,053) (191,183)
THREE MONTHS ENDED
MARCH 31, 2001
Revenue ............... $ 817,991 $ 18,728 $25,211 $ 861,930 $ (3,624) $ 858,306
Net income (loss) ..... (221,867) (7,788) 62,614 (167,041) 100,859 (66,182)
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.
12
15
Item 2. MANAGEMENT'S NARRATIVE ANALYSIS OF 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
$858 million, an increase of $290 million compared to total revenue for the
three months ended March 31, 2000 of $568 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 $318 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.
13
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 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 $40 million, a decrease of $21 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
$393 million during the three months ended March 31, 2001, an increase of $121
million or 44% compared to the same period in 2000. DISH Network operating
expenses represented 50% 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 $319 million during the three months
ended March 31, 2001, an increase of $115 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 43% 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.
14
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 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 $18 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 73% and 77% 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
$301 million during the three months ended March 31, 2001, an increase of $22
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.
15
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 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 $72 million during the three months ended March 31, 2001, an increase of
$18 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 8% and 9% 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 NARRATIVE ANALYSIS OF 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 88% 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 $50 million during the three
months ended March 31, 2001, compared to negative $92 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 $56 million during the three months ended March 31, 2001, a $17
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 $54 million during
the three months ended March 31, 2001, an increase of $8 million compared to the
same period in 2000. This increase primarily resulted 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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
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PART II - OTHER INFORMATION
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 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.
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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 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 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.
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PART II - OTHER INFORMATION
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.
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.
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PART II - OTHER INFORMATION
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.
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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PART II - OTHER INFORMATION
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.
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.
None.
(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 BROADBAND 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 15, 2001