1
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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 JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File Number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
AS OF JULY 13, 2001, THE REGISTRANT'S OUTSTANDING COMMON STOCK
CONSISTED OF 240,306,159 SHARES OF CLASS A COMMON STOCK AND 238,435,208 SHARES
OF CLASS B COMMON STOCK.
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2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and June 30, 2001 (Unaudited).............................................. 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 2001 (Unaudited)................................ 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 2001 (Unaudited).......................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited)............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 29
Item 2. Changes in Securities and Use of Proceeds...................................................... None
Item 3. Defaults Upon Senior Securities................................................................ None
Item 4. Submission of Matters to a Vote of Security Holders............................................ 34
Item 5. Other Information.............................................................................. None
Item 6. Exhibits and Reports on Form 8-K............................................................... 35
3
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31, JUNE 30,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ....................................................... $ 856,818 $ 1,492,560
Marketable investment securities ................................................ 607,357 823,307
Trade accounts receivable, net of allowance for uncollectible accounts of
$31,241 and $25,940, respectively ............................................. 278,614 273,689
Insurance receivable ............................................................ 106,000 106,000
Inventories ..................................................................... 161,161 150,319
Other current assets ............................................................ 50,827 60,861
----------- -----------
Total current assets ............................................................... 2,060,777 2,906,736
Restricted cash and marketable investment securities ............................... 3,000 2,035
Cash reserved for satellite insurance (Note 4) ..................................... 82,393 74,196
Property and equipment, net ........................................................ 1,511,303 1,716,077
FCC authorizations, net ............................................................ 709,984 700,264
Other noncurrent assets ............................................................ 298,493 247,339
----------- -----------
Total assets .................................................................. $ 4,665,950 $ 5,646,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable .......................................................... $ 226,568 $ 186,515
Deferred revenue ................................................................ 283,895 339,769
Accrued expenses ................................................................ 691,482 734,918
Current portion of long-term debt ............................................... 21,132 15,794
----------- -----------
Total current liabilities .......................................................... 1,223,077 1,276,996
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% Convertible Notes ...................................................... 1,000,000 1,000,000
4 7/8% Convertible Notes ....................................................... 1,000,000 1,000,000
5 3/4% Convertible Notes ........................................................ -- 1,000,000
Mortgages and other notes payable, net of current portion ....................... 14,812 13,388
Long-term deferred distribution and carriage revenue and other long-term
liabilities ................................................................... 56,329 80,633
----------- -----------
Total long-term obligations, net of current portion ................................ 4,071,141 5,094,021
----------- -----------
Total liabilities ............................................................. 5,294,218 6,371,017
Commitments and Contingencies (Note 5)
Stockholders' Deficit:
6 3/4% Series C Cumulative Convertible Preferred Stock, 218,951 and 111,566
shares issued and outstanding, respectively ................................... 10,948 5,578
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
235,749,557 and 238,446,218 shares issued and outstanding, respectively ....... 2,357 2,384
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding ..................................... 2,384 2,384
Class C common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding ................................................................... -- --
Additional paid-in capital ...................................................... 1,700,367 1,709,706
Deferred stock-based compensation ............................................... (58,193) (41,680)
Accumulated other comprehensive loss ............................................ (60,580) (12,063)
Accumulated deficit ............................................................. (2,225,551) (2,390,679)
----------- -----------
Total stockholders' deficit ........................................................ (628,268) (724,370)
----------- -----------
Total liabilities and stockholders' deficit ................................... $ 4,665,950 $ 5,646,647
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
REVENUE:
DISH Network:
Subscription television services ........................... $ 555,309 $ 883,055 $ 1,032,183 $ 1,677,503
Other ...................................................... 2,169 3,245 3,482 5,728
----------- ----------- ----------- -----------
Total DISH Network ........................................... 557,478 886,300 1,035,665 1,683,231
DTH equipment sales and integration services ................. 60,034 47,159 122,738 88,178
Other ........................................................ 28,617 32,813 53,447 56,793
----------- ----------- ----------- -----------
Total revenue ................................................... 646,129 966,272 1,211,850 1,828,202
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ................................ 231,450 358,634 433,024 674,969
Customer service center and other .......................... 68,371 69,914 124,420 134,696
Satellite and transmission ................................. 13,895 8,821 26,371 17,916
----------- ----------- ----------- -----------
Total DISH Network operating expenses ........................ 313,716 437,369 583,815 827,581
Cost of sales - DTH equipment and integration services ....... 46,320 31,160 92,542 59,996
Cost of sales - other ........................................ 7,120 22,572 15,236 38,501
Marketing:
Subscriber promotion subsidies - promotional DTH
equipment ................................................ 154,568 105,488 326,706 295,753
Subscriber promotion subsidies - other ..................... 73,257 121,366 151,206 204,332
Advertising and other ...................................... 24,471 26,877 47,641 53,804
----------- ----------- ----------- -----------
Total marketing expenses ..................................... 252,296 253,731 525,553 553,889
General and administrative ................................... 58,176 87,677 113,753 163,349
Non-cash, stock-based compensation ........................... 13,022 7,011 27,031 14,467
Depreciation and amortization ................................ 41,710 62,839 82,168 121,689
----------- ----------- ----------- -----------
Total costs and expenses ........................................ 732,360 902,359 1,440,098 1,779,472
----------- ----------- ----------- -----------
Operating income (loss) ......................................... (86,231) 63,913 (228,248) 48,730
Other Income (Expense):
Interest income .............................................. 16,947 22,196 35,945 46,760
Interest expense, net of amounts capitalized ................. (61,502) (86,058) (123,015) (169,155)
Other ........................................................ (2,038) 2,246 (2,581) (91,030)
----------- ----------- ----------- -----------
Total other expense ............................................. (46,593) (61,616) (89,651) (213,425)
----------- ----------- ----------- -----------
Income (loss) before income taxes ............................... (132,824) 2,297 (317,899) (164,695)
Income tax provision, net ....................................... (36) (48) (91) (97)
----------- ----------- ----------- -----------
Net income (loss) ............................................... (132,860) 2,249 (317,990) (164,792)
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends .................................................... (240) (158) (733) (336)
----------- ----------- ----------- -----------
Numerator for basic and diluted income (loss) per share -
income (loss) attributable to common shareholders ............ $ (133,100) $ 2,091 $ (318,723) $ (165,128)
=========== =========== =========== ===========
Denominator for basic income (loss) per share -
weighted-average common shares outstanding ................... 471,555 475,768 468,661 475,169
=========== =========== =========== ===========
Denominator for diluted income (loss) per share -
weighted-average common shares outstanding ................... 471,555 484,090 468,661 475,169
=========== =========== =========== ===========
----------- ----------- ----------- -----------
Basic and diluted net income (loss) per common share ......... $ (0.28) $ 0.00 $ (0.68) $ (0.35)
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................... $ (317,990) $ (164,792)
Adjustments to reconcile net loss to net cash flows from operating activities:
Deferred stock-based compensation recognized .................................... 27,031 14,467
Loss due to decline in the estimated fair value of strategic investments ........ -- 92,683
Depreciation and amortization ................................................... 82,168 121,689
Amortization of debt discount and deferred financing costs ...................... 3,068 3,756
Employee benefits funded by issuance of Class A Common Stock .................... 7,280 1,200
Change in long-term deferred distribution and carriage revenue and other
long-term liabilities ......................................................... 6,433 24,304
Other, net ...................................................................... 1,958 9,813
Changes in current assets and current liabilities, net .......................... 52,758 51,146
----------- -----------
Net cash flows from operating activities ........................................... (137,294) 154,266
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ...................................... (478,825) (1,298,036)
Sales of marketable investment securities .......................................... 422,782 1,097,344
Purchases of property and equipment ................................................ (114,709) (302,276)
Change in cash reserved for satellite insurance due to depreciation on related
satellites (Note 4) ............................................................. -- 8,197
Investment in Wildblue Communications .............................................. (50,000) --
Investment in Replay TV ............................................................ (10,000) --
Investment in StarBand Communications .............................................. (50,045) --
Other .............................................................................. (1,445) (1,497)
----------- -----------
Net cash flows from investing activities ........................................... (282,242) (496,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of 5 3/4% Convertible Notes ............................. -- 980,000
Repayments of mortgage indebtedness and notes payable .............................. (7,982) (6,762)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan .................................... 9,103 4,843
Other .............................................................................. (732) (337)
----------- -----------
Net cash flows from financing activities ........................................... 389 977,744
----------- -----------
Net (decrease) increase in cash and cash equivalents ............................... (419,147) 635,742
Cash and cash equivalents, beginning of period ..................................... 905,299 856,818
----------- -----------
Cash and cash equivalents, end of period ........................................... $ 486,152 $ 1,492,560
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock .......................................................... $ 32,879 $ 5,370
Forfeitures of deferred non-cash, stock-based compensation ...................... 5,994 2,046
Class A Common Stock issued related to acquisition of Kelly Broadcasting
Systems, Inc. ................................................................. 31,556 --
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation ("ECC," and together
with its subsidiaries, or referring to particular subsidiaries in certain
circumstances, "EchoStar" or the "Company") include two interrelated business
units (Note 7):
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 2001, we had
approximately 6.07 million DISH Network subscribers.
o EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae and
other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar
equipment for international direct-to-home ("DTH") satellite and other
systems and the provision of uplink center design, construction
oversight and other project integration services for international DTH
ventures.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in its operations. EchoStar's principal
business strategy is to continue developing its subscription television service
in the United States to provide consumers with a fully competitive alternative
to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X for
interim financial information. Accordingly, these statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. All significant intercompany
accounts and transactions have been eliminated in consolidation. Operating
results for the six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in EchoStar's Annual Report on Form 10-K for the year
ended December 31, 2000. Certain prior year amounts have been reclassified to
conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for each reporting
period. Actual results could differ from those estimates.
4
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Investment Securities
As of June 30, 2001, EchoStar has classified all marketable investment
securities as available-for-sale. The fair market value of marketable investment
securities approximates the carrying value and represents the quoted market
prices at the balance sheet dates. Related unrealized gains and losses are
reported as a separate component of stockholders' deficit, net of related
deferred income taxes, if applicable. The specific identification method is used
to determine cost in computing realized gains and losses. Such unrealized losses
totaled approximately $12 million as of June 30, 2001. Approximately $9 million
of these unrealized losses relate to a decline in the value of OpenTV. EchoStar
acquired that stock in connection with the establishment of a strategic
relationship with OpenTV which did not involve an investment of cash by
EchoStar.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment security which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. EchoStar reviewed the
fair value of its marketable investment securities as of June 30, 2001 and
determined that some declines in market value have occurred which may be other
than temporary. As such, EchoStar established a new cost basis for these
securities, and accordingly reduced its previously recorded unrealized loss and
recorded a charge to earnings of approximately $856,000 during the three months
ended June 30, 2001. During the six months ended June 30, 2001, EchoStar
recorded an aggregate charge to earnings for other than temporary declines of
approximately $33.3 million.
EchoStar also has made strategic equity investments in certain
non-marketable investment securities including Wildblue Communications, StarBand
Communications, VisionStar, Inc. and Replay TV. The original cost basis of
EchoStar's investments in these non-marketable investment securities totaled
approximately $116 million. The securities of these companies are not publicly
traded. EchoStar's ability to create realizable value for its strategic
investments in companies that are not public is dependent on the success of
their business plans and ability to obtain sufficient capital to execute their
business plans. StarBand and Wildblue cancelled their planned initial public
stock offerings. As a result of the cancellation of those offerings and other
factors, during the six months ended June 30, 2001, EchoStar recorded a
non-recurring charge of approximately $59.4 million to reduce the carrying value
of certain of these non-marketable investment securities to their estimated fair
values. StarBand and Wildblue need to obtain significant additional capital in
the near term. Absent such funding, additional write-downs of EchoStar's
investments could be necessary. During July 2001, EchoStar announced its
intention to invest an additional $50 million in StarBand (Note 8).
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 2001
---------- ----------
(Unaudited)
Net loss...................................................................... $ (317,990) $ (164,792)
Unrealized holding (losses) gains on available-for-sale securities arising
during period.............................................................. (676) 15,258
Reclassification adjustment for impairment losses on available-for-sale
securities included in net loss........................................... -- 33,259
---------- ----------
Comprehensive loss............................................................ $ (318,666) $ (116,275)
========== ==========
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
gains (losses) on available-for-sale securities, net of deferred taxes.
5
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Basic and Diluted Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("FAS No. 128") requires entities to present both basic earnings per
share ("EPS") and diluted EPS. Basic EPS excludes dilution and is computed by
dividing income (loss) available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or warrants were exercised
or convertible securities were converted to common stock, resulting in the
issuance of common stock that then would share in any earnings of the Company.
EchoStar had net losses for the three month period ended June 30, 2000
and for the six month periods ending June 30, 2000 and 2001. Therefore, the
effect of the common stock equivalents and convertible securities is excluded
from the computation of diluted earnings (loss) per share for these periods
since the effect is anti-dilutive. Since EchoStar had net income for the three
month period ended June 30, 2001, the potential dilution from stock options
exercisable into common stock for the three-month period ending June 30, 2001
was computed using the treasury stock method based on the average fair market
value of the Class A common stock for the period. The following table reflects
the basic and diluted weighted-average shares (in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 2001 2000 2001
-------- -------- -------- --------
Denominator for basic income (loss) per share -
weighted-average common shares outstanding .......... 471,555 475,768 468,661 475,169
Dilutive impact of options outstanding ................ -- 8,322 -- --
-------- -------- -------- --------
Denominator for diluted income (loss) per share -
weighted-average common shares outstanding .......... 471,555 484,090 468,661 475,169
======== ======== ======== ========
As of June 30, 2001 and 2000, approximately 1,831,000 and 4,121,000
shares of Class A common stock were issuable upon conversion of the 6 3/4%
Series C Cumulative Convertible Preferred Stock, respectively. As of June 30,
2001, the 4 7/8% Convertible Subordinated Notes and the 5 3/4% Convertible
Subordinated Notes were convertible into approximately 22 million shares and
approximately 23 million shares of Class A common stock, respectively. The
effect of the convertible securities is excluded from the computation of diluted
earning (loss) per share since the dividends or interest per common share
obtainable upon conversion of each security exceeds the basic earnings (loss)
per share and the effect is anti-dilutive.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
----------- -----------
Finished goods - DBS .................... $ 96,362 $ 83,590
Raw materials ........................... 40,247 42,442
Finished goods - reconditioned and
other .................................. 23,101 20,195
Work-in-process ......................... 8,879 11,536
Consignment ............................. 2,478 1,697
Reserve for excess and obsolete inventory (9,906) (9,141)
--------- ---------
$ 161,161 $ 150,319
========= =========
6
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. PROPERTY AND EQUIPMENT
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. As a result of the anomaly, we believe that
one stationkeeping thruster and a pair of transponders are unusable. The
satellite is equipped with a substantial number of backup transponders and
thrusters. EchoStar VI has also experienced anomalies resulting in the loss of
two solar array strings. The satellite has a total of approximately 112 solar
array strings and approximately 106 are required to assure full power
availability for the 12-year design life of the satellite. An investigation of
the anomalies, none of which have impacted commercial operation of the satellite
to date, is continuing. Until the root cause of the anomalies is finally
determined, there can be no assurance future anomalies will not cause further
losses which could impact commercial operation of the satellite.
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.
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 on July 25, 2000. The insurers 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 accepted their offer to settle the
EchoStar IV claim for $88 million.
7
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Based on the carriers' actions, EchoStar 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 had procured normal and customary launch insurance for EchoStar
VI, which expired on July 14, 2001. As a result, EchoStar is currently
self-insuring EchoStar I, EchoStar II, EchoStar III, EchoStar IV, EchoStar V and
EchoStar VI. To satisfy insurance covenants related to the outstanding EDBS
senior notes, as of June 30, 2001, EchoStar had reclassified approximately $74
million from cash and cash equivalents to restricted cash and marketable
investment securities on its balance sheet. Cash reserved for satellite
insurance increased by approximately $60 million on July 14, 2001 as a result of
the expiration of the EchoStar VI launch insurance policy. The reclassification
will continue until such time, if ever, as EchoStar can again insure its
satellites on acceptable terms and for acceptable amounts. 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 fails. 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. Programming continuity could not be assured in the
event of multiple satellite losses.
5. COMMITMENTS AND CONTINGENCIES
VisionStar
During November 2000, one of EchoStar's wholly-owned subsidiaries
purchased a 49.9% interest in VisionStar, Inc. VisionStar holds an FCC license
for, and is constructing a Ka-band satellite to launch into, the 113 degree
orbital location. 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 antitrust 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
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ECHOSTAR COMMUNICATIONS CORPORATION
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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 on certain of EchoStar's claims. DirecTV's motion
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 trademarks owned by PrimeStar, which is 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 August 21, 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. The
arbitration between DirecTV and KBS was held in June 2001, with closing
arguments held on July 3, 2001. On July 10, 2001, the parties submitted
post-hearing briefs. The arbitration panel has indicated that a ruling in the
arbitration will be issued in late August or early September 2001. DirecTV has
alleged damages in the arbitration in excess of $200 million.
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 EchoStar cannot
predict with certainty what the arbitration panel will decide. EchoStar
continues to vigorously contest the attorneys' interpretation of the fee
arrangement, which EchoStar believes significantly overstates the magnitude of
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. EchoStar Satellite Corporation, EchoStar
DBS Corporation, EchoStar Technologies Corporation, and EchoStar Satellite
Broadcast Corporation were subsequently added as defendants. The lawsuit seeks,
among other things, interim and permanent injunctions 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
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ECHOSTAR COMMUNICATIONS CORPORATION
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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.
The Court in the Alberta action recently denied EchoStar's Motion to
Dismiss, which EchoStar appealed. 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.
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
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ECHOSTAR COMMUNICATIONS CORPORATION
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(Unaudited)
15, 1999," and contained other dates with which it would be physically
impossible to comply. 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. Oral argument before the Eleventh Circuit was held on May 24, 2001. At
the oral argument, the parties agreed to participate in a court supervised
mediation and that the mediator was to report back to the Eleventh Circuit on
July 11, 2001. The Eleventh Circuit indicated that it would not rule on the
pending appeal until after July 11, 2001. Since May 24, 2001, the parties
participated in the court supervised mediation. On July 11, 2001, the mediator
reported to the Eleventh Circuit the status of the parties' mediation efforts.
On July 16, 2001, the Eleventh Circuit issued an order for the parties to engage
in further mediation efforts until August 10, 2001. On August 10, 2001, the
mediator is expected to report to the Eleventh Circuit the status of any
continued mediation efforts by the parties.
EchoStar cannot predict when the Eleventh Circuit will rule on its
appeal, but it will not be before August 10, 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. Management has determined that 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. If EchoStar loses the case at
trial, the judge could, as one of many possible remedies, prohibit all future
sales of distant network programming by EchoStar, which would have a material
adverse affect on EchoStar's business.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide International, Inc., 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. EchoStar will vigorously defend against this suit.
In December 2000, EchoStar filed suit against Gemstar-TV Guide (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. Gemstar recently filed counterclaims in this
lawsuit alleging infringement of United States Patent Nos. 5,923,362 and
5,684,525 which relate to certain electronic program guide functions. EchoStar
has examined these patents and believes they are not infringed by any of
EchoStar's products or services. EchoStar will vigorously contest these
counterclaims.
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ECHOSTAR COMMUNICATIONS CORPORATION
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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 all of which 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. The North Carolina case has
been stayed pending resolution of the ITC action and EchoStar expects that the
Atlanta action will also 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 April 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. Portions of EchoStar's
receivers are currently manufactured outside the United States. 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. Gemstar has been added as a party to this
case and is now asserting these patents against EchoStar. EchoStar has examined
these patents and believes that they are not infringed by any of its products or
services. A Markman hearing is currently scheduled for July 23, 2001. 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,
including the potential for treble 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, and its conditional access vendor Nagra, in the United States
District Court for the District of Delaware. The suit alleged 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. One patent was subsequently dropped by
plaintiffs. The Court entered summary judgment in favor of EchoStar that the
encryption patent, with respect to which the plaintiffs claimed $80 million in
damages, was not infringed by EchoStar. On July 13, 2001, a jury found that the
remaining three patents were infringed and awarded damages of $15 million. The
jury also found that one of the patents was willfully infringed which means that
the judge is entitled to increase the award of damages. EchoStar intends to
appeal the decision and plaintiffs have indicated they will appeal as well. Any
final award of damages would be split between EchoStar and Nagra in percentages
to be agreed upon between EchoStar and Nagra.
California Actions
A purported class action was filed against EchoStar in the California
State Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. EchoStar has not yet filed a responsive
pleading. It is too early in the litigation to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages. EchoStar intends to deny all liability and intends to
vigorously defend the lawsuit.
A purported class action relating to the use of terms such as "crystal
clear digital video," "CD-quality audio," and "on-screen program guide", and
with respect to the number of channels available in various programming
packages, has also been filed against EchoStar in the California State Superior
Court for Los Angeles County by David Pritikin and by Consumer Advocates, a
nonprofit unincorporated association. The complaint alleges breach of express
warranty and violation of the California Consumer Legal Remedies Act, Civil Code
Sections 1750, et. seq., and the California Business & Professions Code Sections
17500, 17200. EchoStar has filed an answer and the case is currently in
discovery. No motion for class certification has been filed to date. It is too
early in the litigation to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
EchoStar denies all liability and intends to vigorously defend the lawsuit.
Retailer Class Actions
EchoStar has been sued by retailers in three separate purported 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
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
agreements are invalid and unenforceable, and to award damages for lost
commissions and payments, charge backs, and other compensation. The plaintiffs
allege breach of contract and breach of the covenant of good faith and fair
dealing and seek 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 EchoStar: (1) charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) manipulated the
accounts of subscribers to deny payments to class members; and (3)
misrepresented to class members who own certain equipment related to the
provision of satellite television service. The plaintiff is requesting a
permanent injunction and monetary damages. EchoStar intends to vigorously defend
the lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect EchoStar's financial position or results of operations.
Meteoroid Events
Meteoroid events pose a potential threat to all in orbit geosynchronous
satellites including EchoStar's DBS satellites. While the probability that
EchoStar's satellites will be damaged by meteoroids is very small, that
probability increases significantly when the Earth passes through the
particulate stream left behind by various comets.
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. LONG-TERM DEBT
5 3/4% Convertible Notes
On May 24, 2001, EchoStar sold $1 billion principal amount of 5 3/4/%
Convertible Subordinated Notes due 2008 (the "5 3/4% Convertible Notes").
Interest accrues at an annual rate of 5 3/4% on the 5 3/4% Convertible Notes and
is payable semi-annually in cash, in arrears on May 15 and November 15 of each
year, commencing November 15, 2001.
The 5 3/4% Convertible Notes are general unsecured obligations, which
rank junior in right of payment to:
o all existing and future senior obligations;
o all of EchoStar's secured debts to the extent of the value of the
assets securing those debts; and
o all existing and future debts and other liabilities or EchoStar's
subsidiaries.
In addition, the 5 3/4% Convertible Notes rank equal to EchoStar's 4
7/8% Convertible Subordinated Notes due 2007.
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Except under certain circumstances requiring prepayment premiums, and
in other limited circumstances, the 5 3/4% Convertible Notes are not redeemable
at EchoStar's option prior to May 15, 2004. Thereafter, the 5 3/4% Convertible
Notes will be subject to redemption, at the option of the Company, in whole or
in part, at redemption prices decreasing from 103.286% during the year
commencing May 15, 2004 to 100% on or after May 15, 2008, together with accrued
and unpaid interest thereon to the redemption date.
The 5 3/4% Convertible Notes, unless previously redeemed, are
convertible at the option of the holder any time after 90 days following the
date of their original issuance and prior to maturity into shares of EchoStar's
class A common stock at a conversion price of $43.29 per share.
The indenture related to the 5 3/4% Convertible Notes (the "5 3/4%
Convertible Notes Indenture") contains certain restrictive covenants that do not
impose material limitations on EchoStar.
In the event of a change of control, as defined in the 5 3/4%
Convertible Notes Indenture, EchoStar will be required to make an offer to
repurchase all or any part of the holder's 5 3/4% Convertible Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, together
with accrued and unpaid interest thereon, to the date of repurchase.
7. 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. Eliminations and other primarily consists of intercompany
eliminations. These amounts also consist of revenue and expenses from other
immaterial operating segments for which the disclosure requirements of FAS No.
131 do not apply.
ECHOSTAR ELIMINATIONS
DISH TECHNOLOGIES AND OTHER, CONSOLIDATED
NETWORK CORPORATION NET TOTAL
----------- ------------ ------------ ------------
THREE MONTHS ENDED JUNE 30, 2000
Revenue ............................ $ 572,786 $ 48,045 $ 25,298 $ 646,129
Net income (loss) .................. (149,964) 4,139 12,965 (132,860)
THREE MONTHS ENDED JUNE 30, 2001
Revenue ............................ $ 906,590 $ 25,760 $ 33,922 $ 966,272
Net income (loss) .................. 33,537 (7,469) (23,819) 2,249
SIX MONTHS ENDED JUNE 30, 2000
Revenue ............................ $ 1,057,234 $ 100,514 $ 54,102 $ 1,211,850
Net income (loss) .................. (340,728) (355) 23,093 (317,990)
SIX MONTHS ENDED JUNE 30, 2001
Revenue ............................ $ 1,724,581 $ 44,488 $ 59,133 $ 1,828,202
Net income (loss) .................. (188,330) (15,257) 38,795 (164,792)
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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8. SUBSEQUENT EVENTS
DirecTV
EchoStar has had discussions with representatives of Hughes Electronics
Corporation and its DirecTv subsidiary concerning the possible spin off of all
or a portion of Hughes and a possible transaction between Hughes and EchoStar.
Hughes and DirecTv management recently informed EchoStar that General Motors is
unwilling to further consider EchoStar's proposal.
EchoStar V
EchoStar V is equipped with a total of three momentum wheels, including
one spare. During July 2001, EchoStar V experienced an anomaly resulting in the
loss of one momentum wheel. The satellite was quickly restored to normal
operations mode. While no further momentum wheel losses are expected, until the
root cause of the anomaly is finally determined, there can be no assurance
future anomalies will not cause further losses which could impact commercial
operation of the satellite. The extent to which the loss of an additional
momentum wheel would impair commercial operation has not yet been finally
determined, but terms for in-orbit insurance, if procured, could be impacted.
Series C Preferred Stock Redemption
Effective July 6, 2001, EchoStar redeemed, for cash, all of its
remaining outstanding 6 3/4% Series C Cumulative Convertible Preferred Stock
(the "Series C Preferred Stock") at a total redemption price of approximately
$2,400 or $51.929 per share.
StarBand
On July 11, 2001, EchoStar announced that, subject, among other things,
to customary regulatory approvals, it intends to increase its equity stake in
StarBand Communications Inc. to approximately 32% and acquire four out of seven
seats on the StarBand Board of Directors. In exchange, EchoStar would invest an
additional $50 million in StarBand. Further, EchoStar would lease transponder
capacity to StarBand from a next generation satellite. In accordance with the
agreement and subject to customary regulatory approvals, EchoStar's equity stake
would increase to approximately 60% upon commencement of the construction of the
next generation satellite. This investment is expected to be accounted for using
the equity method of accounting, which will be retroactively applied during the
third quarter 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; future acquisitions, business
combinations, strategic partnerships and divestitures; 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 June 30, 2001 Compared to the Three Months Ended June 30,
2000.
Revenue. Total revenue for the three months ended June 30, 2001 was
$966 million, an increase of $320 million compared to total revenue for the
three months ended June 30, 2000 of $646 million. The increase in total revenue
was primarily attributable to higher average revenue per subscriber and
continued DISH Network subscriber growth. We expect that our revenues will
continue to increase as the number of DISH Network subscribers increases.
DISH Network subscription television services revenue totaled $883
million for the three months ended June 30, 2001, an increase of $328 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 higher average revenue per subscriber and continued DISH Network
subscriber growth. DISH Network added approximately 350,000 net new subscribers
for the three months ended June 30, 2001 compared to approximately 445,000 net
subscriber additions during the same period in 2000. The reduction in net new
subscribers for the quarter ended June 30, 2001 primarily resulted from
increased churn. As of June 30, 2001, we had approximately 6.07 million DISH
Network subscribers compared to approximately 4.3 million at June 30, 2000, an
increase of approximately 41%. 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 1.75 million net
new subscribers during 2001, and to obtain a majority of all net new DBS
subscribers. This subscriber guidance has been refined from our previous
estimate of 1.5 to 2.0 million net new subscriber additions during 2001.
Monthly average revenue per subscriber was approximately $50.00 during
the three months ended June 30, 2001 and approximately $45.22 during the same
period in 2000. For the six months ended June 30, 2001, our monthly average
revenue per subscriber was approximately $49.00. The increase in monthly average
revenue per subscriber is primarily attributable to $1.00 price increases in
America's Top 100 CD, our most popular programming
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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.
Anticipated programming promotions may reduce monthly average revenue per
subscriber for new subscriber additions during the third quarter of 2001. Those
reductions would also impact monthly average revenue per subscriber in total
during the third quarter.
For the three months ended June 30, 2001, DTH equipment sales and
integration services revenue totaled $47 million, a decrease of $13 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 demand for digital set-top boxes from our two
primary international customers 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 comply with the injunction issued
against us in our pending litigation with the four major broadcast networks and
their affiliate groups, we may terminate 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. Further, in the
event our EchoStar VII spot beam satellite is not delivered and launched in
accordance with contractual schedules, or for any other reason is not
operational by January 1, 2002, we could be required to temporarily terminate
delivery of local network channels in specific markets. Such terminations could
be necessary in order to comply with government imposed must carry obligations
to carry all channels in markets where popular channels are carried. In
combination, these terminations would result in a small reduction in average
monthly revenue per subscriber and could increase subscriber churn. 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 $437 million during the three months ended June 30, 2001, an increase of
$123 million or 39% compared to the same period in 2000. DISH Network operating
expenses represented 50% and 56% of subscription television services revenue
during the three months ended June 30, 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. We would
expect operating expenses as a percentage of subscription television services
revenue to remain near current levels during the remainder of 2001, however,
anticipated programming promotions could cause the percentage to increase.
Subscriber-related expenses totaled $359 million during the three
months ended June 30, 2001, an increase of $128 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 41% and 42%
of subscription television services revenues during the three months ended June
30, 2001 and 2000, respectively. While there can be no assurance, we expect
subscriber-related expenses as a percentage of subscription television services
revenue to remain near current levels during the remainder of 2001.
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20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 $70 million during the three months ended June 30, 2001, an
increase of $2 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 June 30, 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.
These expenses and percentages could temporarily increase in the future as
additional infrastructure is added to meet future growth. We continue to work to
automate simple telephone 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 June 30, 2001, a $5 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 June 30,
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 place commercial in-orbit
insurance.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $31 million during the three
months ended June 30, 2001, a decrease of $15 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 66% and 77% of DTH
equipment revenue, during the three months ended June 30, 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
$254 million during the three months ended June 30, 2001 compared to $252
million for the same period in 2000. 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 $24 million during the three months ended June 30, 2001
and 2000, respectively.
During the three months ended June 30, 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 several 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 or more
EchoStar receiver systems and our America's Top 150 programming package for
$49.99 per month. Consumers may also choose from one of our DishPVR Plans which
includes the use of two or more EchoStar receiver systems, one of which includes
a built-in hard drive that allows viewers to pause and record live programming
without the need for video tape. The DishPVR Plans
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21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
also included either America's Top 100 CD or DISH Latino Dos programming package
for $49.99 per month or America's Top 150 programming package for $59.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $49.99, which includes
the first month's programming payment.
During February 2001, we announced our Free Now promotion offering all
new subscribers a free base-level EchoStar receiver system and free
installation. To be eligible for this program, a subscriber must provide a valid
major credit card and make a one-year commitment to subscribe to either our
America's Top 150 programming package or our America's Top 100 CD or DISH Latino
Dos programming package plus additional programming totaling at least $39.98 per
month. Subscriber acquisition costs are materially higher under this plan
compared to historical promotions. To the extent that actual consumer
participation levels increase beyond current levels, 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
July 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 June 30, 2001, our subscriber
acquisition costs totaled approximately $252 million, or approximately $384 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 June 30, 2000, prior to the introduction of
our Digital Home Plan, totaled $252 million, or approximately $408 per new
subscriber activation. The decrease in our per new subscriber acquisition cost
primarily resulted from an increase in direct sales and an increase in
penetration of our Digital Home Plans. While there can be no assurance, we
expect total subscriber acquisition costs for the year ended December 31, 2001
to be less than our prior estimate of approximately $450 per subscriber.
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 $88 million during the three months ended June 30, 2001, an
increase of $30 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the three months ended June 30, 2001 and 2000. 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 June 30, 2001 and 2000 we recognized $7 million and $13
million, respectively, under this performance-based plan.
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22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
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:
THREE MONTHS ENDED JUNE 30,
2000 2001
-------- --------
Customer service center and other ............... $ 546 $ 388
Satellite and transmission ...................... 656 311
General and administrative ...................... 11,820 6,312
-------- --------
Total non-cash, stock-based compensation ..... $ 13,002 $ 7,011
======== ========
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $387 million during
the three months ended June 30, 2001, an increase of 75% 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 June 30, 2001 compared to 34%
during the same period in 2000. We believe that pre-marketing cash flow can be a
helpful 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 $134 million during the three
months ended June 30, 2001, compared to negative $31 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 June 30, 2001 and 2000 does not include approximately $7 million and $13
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 $63 million during the three months ended June 30, 2001, a $21
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 $62 million
during the three months ended June 30, 2001, an increase of $15 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 in
September 2000 and the issuance of our 5 3/4% Convertible Subordinated Notes in
late May 2001. This increase in interest expense was partially offset by an
increase in interest income.
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23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000.
Revenue. Total revenue for the six months ended June 30, 2001 was
$1.828 billion, an increase of $616 million compared to total revenue for the
six months ended June 30, 2000 of $1.212 billion. The increase in total revenue
was primarily attributable to higher average revenue per subscriber and
continued DISH Network subscriber growth.
DISH Network subscription television services revenue totaled $1.678
billion for the six months ended June 30, 2001, an increase of $646 million
compared to the same period in 2000. This increase was directly attributable to
higher average revenue per subscriber and continued DISH Network subscriber
growth.
For the six months ended June 30, 2001, DTH equipment sales and
integration services revenue totaled $88 million, a decrease of $35 million
compared to the same period during 2000. This decrease in DTH equipment sales
and integration services revenue was primarily attributable to a decrease in
demand for digital set-top boxes from our two primary international customers as
compared to the same period during 2000.
DISH Network Operating Expenses. DISH Network operating expenses
totaled $828 million during the six months ended June 30, 2001, an increase of
$244 million or 42% compared to the same period in 2000. DISH Network operating
expenses represented 49% and 57% of subscription television services revenue
during the six months ended June 30, 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.
Subscriber-related expenses totaled $675 million during the six months
ended June 30, 2001, an increase of $242 million compared to the same period in
2000. Such expenses represented 40% and 42% of subscription television services
revenues during the six months ended June 30, 2001 and 2000, respectively.
Customer service center and other expenses totaled $135 million during
the six months ended June 30, 2001, an increase of $11 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 six months ended June 30, 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.
Satellite and transmission expenses totaled $18 million during the six
months ended June 30, 2001, a $8 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 six months ended June 30, 2001 and 2000,
respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales -
DTH equipment and integration services totaled $60 million during the six months
ended June 30, 2001, a decrease of $33 million compared to the same period in
2000. 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 68%
and 75% of DTH equipment revenue, during the six months ended June 30, 2001 and
2000, respectively.
Marketing Expenses. Marketing expenses totaled $554 million during the
six months ended June 30, 2001, an increase of $28 million compared to the same
period in 2000. The increase in marketing expenses was primarily attributable to
an increase in subscriber promotion subsidies. Advertising and other expenses
totaled $54 million and $48 million during the six months ended June 30, 2001
and 2000, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
General and Administrative Expenses. General and administrative
expenses totaled $163 million during the six months ended June 30, 2001, an
increase of $49 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% of total
revenue during each of the six months ended June 30, 2001 and 2000.
Non-cash, Stock-based Compensation. As a result of substantial
post-grant appreciation of stock options, during the six months ended June 30,
2001 and 2000 we recognized $14 million and $27 million, respectively, of the
total remaining deferred stock-based compensation under the 1999 incentive plan.
The remainder will be recognized over the remaining vesting period.
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:
SIX MONTHS ENDED JUNE 30,
2000 2001
-------- --------
Customer service center and other ............... $ 1,201 $ 621
Satellite and transmission ...................... 1,311 777
General and administrative ...................... 24,519 13,069
-------- --------
Total non-cash, stock-based compensation ..... $ 27,031 $ 14,467
======== ========
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of EBITDA
plus total marketing expenses. Pre-marketing cash flow was $739 million during
the six months ended June 30, 2001, an increase of 82% compared to the same
period in 2000. Our pre-marketing cash flow as a percentage of total revenue was
approximately 40% during the six months ended June 30, 2001 compared to 34%
during the same period in 2000.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
represents earnings before interest, taxes, depreciation, amortization, and
non-cash, stock-based compensation. EBITDA was $185 million during the six
months ended June 30, 2001, compared to negative $119 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, though not yet adequate to support
interest payments and other non-operating costs, together with the introduction
of our Digital Home Plan in July 2000. Our calculation of EBITDA for the six
months ended June 30, 2001 and 2000 does not include approximately $14 million
and $27 million, respectively, of non-cash compensation expense resulting from
post-grant appreciation of employee stock options.
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 $122 million during the six months ended June 30, 2001, a $40 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Other Income and Expense. Other expense, net, totaled $213 million
during the six months ended June 30, 2001, an increase of $123 million compared
to the same period in 2000. This increase primarily resulted from impairment
losses on marketable and non-marketable investment securities of approximately
$92 million, as discussed below, and from an increase in interest expense as a
result of the issuance of our 10 3/8% Senior Notes in September 2000 and the
issuance of our 5 3/4% Convertible Subordinated Notes in late May 2001. This
increase in interest expense was partially offset by an increase in interest
income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
On May 31, 2001, we sold $1 billion principal amount of 5 3/4%
Convertible Subordinated Notes due 2008. The net proceeds of the offering are
expected to be used for the construction, launch and insurance of additional
satellites, strategic investments and acquisitions, and other general corporate
purposes.
As of June 30, 2001, our cash, cash equivalents and marketable
investment securities totaled $2.392 billion, including $74 million of cash
reserved for satellite insurance and approximately $2 million of restricted
cash, compared to $1.550 billion, including $82 million of cash reserved for
satellite insurance and $3 million of restricted cash, as of December 31, 2000.
For the six months ended June 30, 2001 and 2000, we reported net cash flows from
operating activities of $154 million and negative $137 million, respectively.
The increase in net cash flow from operating activities reflects, among other
things, an increase in the number of DISH Network subscribers and higher average
revenue per subscriber, resulting in recurring revenue which is large enough to
support the cost of new and existing subscribers, though not yet adequate to
support interest payments and other non-operating costs.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to expand our DISH Network subscriber base, retain existing DISH
Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our remaining 2001 working
capital and capital expenditure needs will vary, depending, among other things,
on the rate at which we acquire new subscribers and the cost of subscriber
acquisition. Our working capital and capital expenditure requirements could
increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or in the event of a
general economic downturn, among other factors. These factors could require that
we raise additional capital in the future.
Subscriber Turnover
Our percentage churn for the six months ended June 30, 2001 increased
compared to our percentage churn for the same period in 2000. The increase in
our percentage churn during the second quarter of 2001 was due in part to price
increases in certain of our programming packages, which went into effect on
February 1, 2001. We believe that our percentage churn continues to be lower
than satellite and cable industry averages. While we have successfully managed
churn within a narrow range historically, we expect our percentage churn to be
in excess of our historical average percentage churn for the remainder of 2001
as a result of the slowing economy, significant piracy of our competitor's
product, bounty programs offered by competitors, our maturing subscriber base,
and other factors. Finally, impacts from our litigation with the networks in
Miami, new FCC rules governing the delivery of superstations and other factors,
could cause us to terminate delivery of distant network channels and
superstations to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in an increase in our percentage churn. While
there can be no assurance, notwithstanding the issues discussed above we have
and expect to be able to continue to manage our percentage churn below industry
averages during the remainder of 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Subscriber Acquisition Costs
As previously described, we subsidize the cost and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers. Our
average subscriber acquisition costs were $408 per new subscriber activation
during the six months ended June 30, 2001. Since we retain ownership of the
equipment, amounts capitalized under our Digital Home Plan are not included in
our calculation of these subscriber acquisition costs. While there can be no
assurance, we expect total subscriber acquisition costs for the year ended
December 31, 2001 to be less than our prior estimate of approximately $450 per
subscriber. Our subscriber acquisition costs, both in the aggregate and on a per
new subscriber activation basis, may materially increase to the extent that we
continue or expand our Free Now promotion, or introduce other more aggressive
promotions if we determine that they are necessary to respond to competition, or
for other reasons.
Funds necessary to meet subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Digital Home Plan
During July 2000, we announced the commencement of our new Digital
Dynamite promotion, which was re-named the Digital Home Plan effective February
1, 2001. The Digital Home Plan offers four choices to consumers, ranging from
the use of one EchoStar receiver system and our America's Top 100 CD programming
package for $35.99 per month, to providing consumers two or more EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. Consumers may also choose from one of our DishPVR Plans which includes
the use of two or more EchoStar receiver systems, one of which includes a
built-in hard disk drive that allows viewers to pause and record live
programming without the need for video tape. The DishPVR Plans also included
either America's Top 100 CD or DISH Latino Dos programming package for $49.99
per month or America's Top 150 programming package for $59.99 per month. With
each plan, consumers receive in-home-service, must agree to a one-year
commitment and incur a one-time set-up fee of $49.99, which includes the first
month's programming payment. Our Digital Home Plan promotion allows us to
capitalize and depreciate over 4 years equipment costs that would otherwise be
expensed at the time of sale, but also results in increased capital
expenditures. Capital expenditures under our Digital Home Plan promotion totaled
approximately $149.1 million for the six months ended June 30, 2001.
Conditional Access System
The access control system is central to the security network that
prevents unauthorized viewing of programming. Theft of cable and satellite
programming has been widely reported and our signal encryption has been pirated
and could be further compromised in the future. Theft of our programming reduces
future potential revenue and increases our net subscriber acquisition costs. If
other measures are not successful, it could be necessary to replace the credit
card size smart card that controls the security of each consumer set top box at
a material cost to us. In order to combat piracy and to generate additional
future revenue opportunities, we may decide to replace smart cards at any time
in the future. The cost of replacing these smart cards will not have a material
effect on our results of operations.
Intellectual Property
Many entities, including some of our competitors, now have and may in
the future obtain patents and other intellectual property rights that cover or
affect products or services directly or indirectly related to those that we
offer. In general, if a court determines that one or more of our products
infringes on intellectual property held by others, we would be required to cease
developing or marketing those products, to obtain licenses to develop and market
those products from the holders of the intellectual property, or to redesign
those products in such a way as to avoid infringing the patent claims. Material
damage awards, including the potential for triple damages under patent laws,
could also
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
result. Various parties have asserted patent and other intellectual property
rights with respect to components within our direct broadcast satellite system.
Certain of these parties have filed suit against us, including Starsight,
Superguide, and IPPV Enterprises, as previously described. We cannot be certain
that these persons do not own the rights they claim, that our products do not
infringe on these rights, that we would be able to obtain licenses from these
persons on commercially reasonable terms or, if we were unable to obtain such
licenses, that we would be able to redesign our products to avoid infringement.
Obligations and Future Capital Requirements
Semi-annual cash debt service of approximately $94 million related to
our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8% Senior Notes
due 2009 (Ten Year Notes), is payable in arrears on February 1 and August 1 each
year. Semi-annual cash debt service requirements of approximately $24 million
related to our 4 7/8% Convertible Subordinated Notes due 2007 is payable in
arrears on January 1 and July 1 of each year. Semi-annual cash debt service of
approximately $52 million related to our 10 3/8% Senior Notes due 2007 is
payable in arrears on April 1 and October 1 of each year. Semi-annual debt
service requirements of approximately $29 million related to our 5 3/4%
Convertible Subordinated Notes due 2008 is payable in arrears on May 15 and
November 15 of each year, commencing November 15, 2001. There are no scheduled
principal payment or sinking fund requirements prior to maturity of any of these
notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We had procured
normal and customary launch insurance for EchoStar VI, which expired on July 14,
2001. As a result, we are currently self-insuring EchoStar I, EchoStar II,
EchoStar III, EchoStar IV, EchoStar V and EchoStar VI. During 2000, to satisfy
insurance covenants related to the outstanding EchoStar DBS senior notes, we
reclassified an amount equal to the depreciated cost of two of our satellites
from cash and cash equivalents to cash reserved for satellite insurance on our
balance sheet. As of June 30, 2001, cash reserved for satellite insurance
totaled approximately $74 million. Cash reserved for satellite insurance
increased by approximately $60 million on July 14, 2001 as a result of the
expiration of the EchoStar VI launch insurance policy. The reclassifications
will continue until such time, if ever, as we can again insure our satellites on
acceptable terms and for acceptable amounts. We believe we have in-orbit
satellite capacity sufficient to expeditiously recover transmission of most
programming in the event one of our in-orbit satellites fails. 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. Programming continuity could not be assured in the event of
multiple satellite losses.
We utilized $91 million of satellite vendor financing for our first
four satellites. As of June 30, 2001, approximately $20 million of that
satellite vendor financing remained outstanding. The satellite vendor financing
bears interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates. A portion of the
contract price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellites.
Effective July 6, 2001, we redeemed, for cash, all of our remaining
outstanding 6 3/4% Series C Cumulative Convertible Preferred Stock at a total
redemption price of approximately $2,400 or $51.929 per share.
During the remainder of 2001, we anticipate total capital expenditures
of between $300-$500 million depending upon the strength of the economy and
other factors. We expect as much as 40% of that amount to be utilized for
satellite construction and approximately 60% for EchoStar receiver systems in
connection with our Digital Home Plan and for general corporate expansion. These
percentages could change depending on actual total expenditures for the year.
While the Digital Home Plan is a competitive promotion for consumers who want
multiple receivers, consumers who only want a single receiver tend to be more
attracted to other
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
industry promotions. Consequently, our anticipated capital expenditures related
to the Digital Home Plan promotion will decrease to the extent those consumers
find other promotions we offer to be more compelling.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system and a two
satellite FSS Ka-band satellite system. We will need to raise additional capital
to fully construct these satellites. We are currently funding the construction
phase for three satellites. Two of these satellites, EchoStar VII and EchoStar
VIII, will be advanced, high-powered DBS satellites. The third satellite,
EchoStar IX, will be a hybrid Ku/Ka-band satellite.
During November 2000, one of our wholly-owned subsidiaries purchased a
49.9% interest in VisionStar, Inc. VisionStar holds an FCC license for, and is
constructing a Ka-band satellite to launch into, the 113 W.L. orbital slot.
Together with VisionStar we have requested FCC approval to acquire control over
VisionStar by increasing our ownership of VisionStar to 90%, for a total
purchase price of approximately $2.8 million. We have also provided loans to
VisionStar totaling less than $10 million to date for the construction of their
satellite and expect to provide additional funding to VisionStar in the future.
We are not obligated to finance the full remaining cost to construct and launch
the VisionStar satellite, but VisionStar's FCC license currently requires
construction of the satellite to be completed by April 30, 2002 or the license
could be revoked. There can be no assurance construction of the satellite will
be completed within this time frame. We currently expect to continue to fund
loans and equity contributions for construction of the satellite in the near
term from cash on hand, and expect that we may spend approximately $79.5 million
during 2001 for that purpose subject to, among other things, FCC action. In the
future we may fund construction, launch and insurance of the satellite through
cash from operations, public or private debt or equity financing, joint ventures
with others, or from other sources.
On July 11, 2001, we announced that, subject, among other things, to
customary regulatory approvals, we intend to increase our equity stake in
StarBand Communications Inc. to approximately 32% and acquire four out of seven
seats on the StarBand Board of Directors. In exchange, we would invest an
additional $50 million in StarBand. Further, we would lease transponder capacity
to StarBand from a next generation satellite. In accordance with the agreement
and subject to customary regulatory approvals, our equity stake would increase
to approximately 60% upon commencement of the construction of the next
generation satellite. This investment is expected to be accounted for using the
equity method of accounting, which will be retroactively applied during the
third quarter 2001. In the future we may fund construction, launch and insurance
of satellites through cash from operations, public or private debt or equity
financing, joint ventures with others, or from other sources.
From time to time we evaluate opportunities for strategic investments
or acquisitions that would complement our current services and products, enhance
our technical capabilities or otherwise offer growth opportunities. As a result,
acquisition discussions and offers, and in some cases, negotiations may take
place and future material investments or acquisitions involving cash, debt or
equity securities or a combination thereof may result.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate positive
future operating and net cash flows is dependent, among other things, upon our
ability to retain existing DISH Network subscribers, our ability to manage the
growth of our subscriber base, and our ability to grow our ETC business. To the
extent future subscriber growth exceeds our expectations, it may be necessary
for us to raise additional capital to fund increased working capital
requirements. There may be a number of other factors, some of which are beyond
our control or ability to predict, that could require us to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the cost
of acquiring subscribers due to additional competition, among other things. If
cash generated from our operations is not sufficient to meet our debt service
requirements or other obligations, we would be required to obtain cash from
other financing sources. If we were required to raise capital today a variety of
debt and equity funding sources would likely be available to us. However, there
can be no assurance that such financing would be available on terms acceptable
to us, or if available, that the proceeds of such financing would be sufficient
to enable us to meet all of our obligations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
As of June 30, 2001, our unrestricted cash, cash equivalents and
marketable investment securities had a fair value of $2.316 billion. Of that
amount, a total of $2.174 billion was invested in: (a) cash; (b) debt
instruments of the U.S. Government and its agencies; (c) commercial paper with
an average maturity of less than one year and rated in one of the four highest
rating categories by at least two nationally recognized statistical rating
organizations; and (d) instruments with similar risk characteristics to the
commercial paper described above. The primary purpose of these investing
activities has been to preserve principal until the cash is required to fund
operations. Consequently, the size of this portfolio fluctuates significantly as
cash is raised and used in our business.
The value of certain of the investments in this portfolio can be
impacted by, among other things, the risk of adverse changes in securities and
economic markets generally, as well as the risks related to the performance of
the companies whose commercial paper and other instruments we hold. However, the
high quality of these investments (as assessed by independent rating agencies),
reduces these risks. The value of these investments can also be impacted by
interest rate fluctuations. At June 30, 2001, all of our investments in this
category were in fixed rate instruments or money market type accounts. While an
increase in interest rates would ordinarily adversely impact the fair value of
fixed rate investments, we normally hold these investments to maturity.
Consequently, neither interest rate fluctuations nor other market risks
typically result in significant gains or losses to this portfolio. A decrease in
interest rates has the effect of reducing our future annual interest income from
this portfolio, since funds would be re-invested at lower rates as the
instruments mature. Over time, any net percentage decrease in interest rates
could be reflected in a corresponding net percentage decrease in our interest
income. During the six months ending June 30, 2000 and 2001, the impact of
interest rate fluctuations, changed business prospects and all other factors did
not have a material impact on the fair value of the portfolio, or on our income
derived from this portfolio.
We also invest in debt and equity of public and private companies for
strategic and financial purposes. As of June 30, 2001, we held strategic and
financial debt and equity investments of public companies with a fair value of
approximately $142 million. We acquired stock in one of those companies, OpenTV,
in connection with establishment of a strategic relationship which did not
involve the investment of cash by us. None of these investments accounted for
more than 40% of the total fair value of the portfolio. We may make additional
strategic and financial investments in other debt and equity securities in the
future.
The fair value of our strategic debt investments can be impacted by
interest rate fluctuations. Absent the effect of other factors, a hypothetical
10% increase in LIBOR would result in a decrease in the fair value of our
investments in these debt instruments of approximately $40 million. The fair
value of our strategic debt and equity investments can also be significantly
impacted by the risk of adverse changes in securities markets generally, as well
as risks related to the performance of the companies whose securities we have
invested in, risks associated with specific industries, and other factors. These
investments are subject to significant fluctuations in fair market value due to
the volatility of the securities markets and of the underlying businesses. A
hypothetical 10% adverse change in the price of our public strategic debt and
equity investments would result in approximately a $14.2 million decrease in the
fair value of that portfolio.
In accordance with generally accepted accounting principles, declines
in the market value of a marketable investment securities which are estimated to
be "other than temporary" must be recognized in the statement of operations,
thus establishing a new cost basis for such investment. We reviewed the fair
value of our marketable investment securities as of June 30, 2001 and determined
that some declines in market value have occurred which may be other than
temporary. As a result, we established a new cost basis for certain of these
investments, and accordingly reduced our previously recorded unrealized loss and
recorded a charge to earnings of approximately $856,000 during the three months
ended June 30, 2001. During the six months ended June 30, 2001, EchoStar
recorded an aggregate charge to earnings for other than temporary declines of
approximately $33.3 million. We have not used derivative financial instruments
for speculative purposes. We have not hedged or otherwise protected against the
risks associated with any of our investing or financing activities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - CONTINUED
In addition to the $2.316 billion, we have made strategic equity
investments in certain non-marketable investment securities including Wildblue
Communications, StarBand Communications, VisionStar, Inc. and Replay TV. The
original cost basis of our investments in these non-marketable investment
securities totaled approximately $116 million. The securities of these companies
are not publicly traded. Our ability to create realizable value for our
strategic investments in companies that are not public is dependent on the
success of their business plans. Among other things, there is relatively greater
risk that those companies may not be able to raise sufficient capital to fully
finance and execute their business plans. Since private markets are not as
liquid as public markets, there is also increased risk that we will not be able
to sell these investments, or that when we desire to sell them that we will not
be able to obtain full value for them. StarBand and Wildblue cancelled their
planned initial public stock offerings. As a result of the cancellation of those
offerings and other factors, during the six months ended June 30, 2001, we
recorded a non-recurring charge of approximately $59.4 million to reduce the
carrying value of certain of our non-marketable investment securities to their
estimated fair values. Starband and Wildblue need to obtain significant
additional capital in the near term. Absent such funding, additional write-downs
of our investments could be necessary. As previously discussed, we intend to
increase our equity stake in StarBand to approximately 32% and acquire four out
of seven seats on the StarBand Board of Directors. In exchange, we would invest
an additional $50 million in StarBand. Further, we would lease transponder
capacity to StarBand from a next generation satellite. In accordance with the
agreement and subject to customary regulatory approvals, our equity stake would
increase to approximately 60% upon commencement of the construction of the next
generation satellite.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000, we filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying our merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state antitrust laws in order
to protect DirecTV's market share. We are seeking injunctive relief and monetary
damages. We subsequently amended the complaint adding claims against Circuit
City, Radio Shack and Best Buy, alleging that these retailers are engaging in
improper conduct that has had an anti-competitive impact on us. It is too early
in the litigation to make an assessment of the probable outcome. During October
2000, DirecTV filed a motion for summary judgment on certain of our claims.
DirecTV's motion remains pending.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortiously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. DirecTV alleges that we "merged" with KBS in
contravention of DirecTV's contract with KBS. DirecTV also alleges that we have
falsely advertised to consumers about our right to offer network programming.
DirecTV further alleges that we improperly used certain trademarks owned by
PrimeStar, which is now owned by DirecTV. Finally, DirecTV alleges that we have
been marketing National Football League games in a misleading manner. Discovery
has been stayed until the next scheduling conference on August 21, 2001. The
amount of damages DirecTV is seeking is as yet unquantified. However, in an
arbitration proceeding related to DirecTV's allegations with respect to KBS,
DirecTV has claimed damages totaling hundreds of millions of dollars. It is too
early in the litigation to make an assessment of the probable outcome. We and
KBS intend to vigorously defend against DirecTV's allegations in the litigation.
The arbitration between DirecTV and KBS was held in June 2001, with closing
arguments held on July 3, 2001. On July 10, 2001, the parties submitted
post-hearing briefs. The arbitration panel has indicated that a ruling in the
arbitration will be issued in late August or early September 2001. DirecTV has
alleged damages in the arbitration in excess of $200 million.
Fee Dispute
We had a contingent fee arrangement with the attorneys who represented
us in the litigation with News Corporation. The contingent fee arrangement
provides for the attorneys to be paid a percentage of any net recovery obtained
by us in the News Corporation litigation. The attorneys have asserted that they
may be entitled to receive payments totaling hundreds of millions of dollars
under this fee arrangement.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. The arbitration hearing commenced April
2, 2001 and continued through April 13, 2001. The hearing could not be completed
during that time period and has been continued until August 7, 2001, when it
will resume until it is presumably completed. While there can be no assurance
that the attorneys will not continue to claim a right to hundreds of millions of
dollars, the damage model the attorneys presented during the arbitration was for
$56 million. We believe that even that amount significantly overstates the
amount the attorneys should reasonably be entitled to receive under the fee
agreement but we cannot predict with certainty what the arbitration panel will
decide. We continue to vigorously contest the attorneys' interpretation of the
fee arrangement, which we believe significantly overstates the magnitude of
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
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PART II - OTHER INFORMATION
Corporation, and two of EchoStar's wholly-owned subsidiaries, Echosphere
Corporation and Dish, Ltd. EchoStar Satellite Corporation, EchoStar DBS
Corporation, EchoStar Technologies Corporation, and EchoStar Satellite Broadcast
Corporation were subsequently added as defendants. The lawsuit seeks, among
other things, interim and permanent injunctions 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.
The Court in the Alberta action recently denied our Motion to Dismiss,
which we appealed. The Court in the Federal action has stayed that case pending
the outcome of the Alberta action. The case is now currently in discovery. We
intend to vigorously defend the suit. It is too early to make an assessment of
the probable outcome of the litigation or to determine the extent of any
potential liability or damages.
Broadcast network programming
Until July 1998, we obtained distant broadcast network channels (ABC,
NBC, CBS and FOX) for distribution to our customers through PrimeTime 24. In
December 1998, the United States District Court for the Southern District of
Florida entered a nationwide permanent injunction requiring PrimeTime 24 to shut
off distant network channels to many of its customers, and henceforth to sell
those channels to consumers in accordance with certain stipulations in the
injunction.
In October 1998, we filed a declaratory judgment action against ABC,
NBC, CBS and FOX in Denver Federal Court. We asked the court to enter a judgment
declaring that its method of providing distant network programming did not
violate the Satellite Home Viewer Act and hence did not infringe the networks'
copyrights. In November 1998, the networks and their affiliate groups filed a
complaint against us in Miami Federal Court alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami. While the networks have not sought monetary damages, they have
sought to recover attorney fees if they prevail.
In February 1999, the networks filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. DirecTV settled this lawsuit with the networks. Under
the terms of the settlement between DirecTV and the networks, some DirecTV
customers were scheduled to lose access to their satellite-provided distant
network channels by July 31, 1999, while other DirecTV customers were to be
disconnected by December 31, 1999. Subsequently, PrimeTime 24 and substantially
all providers of satellite-delivered network programming other than EchoStar
agreed to this cut-off schedule, although we do not know if they adhered to this
schedule.
In December 1998, the networks filed a Motion for Preliminary
Injunction against us in the Miami court, and asked the court to enjoin us from
providing network programming except under limited circumstances. A preliminary
injunction hearing was held on September 21, 1999. The court took the issues
under advisement to consider the networks' request for an injunction, whether to
hear live testimony before ruling upon the request, and whether to hear argument
on why the Satellite Home Viewer Act may be unconstitutional, among other
things.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of its customers. At that time, the networks also argued that
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PART II - OTHER INFORMATION
our compliance procedures violate the Satellite Home Viewer Improvement Act. We
opposed the networks' motion and again asked the court to hear live testimony
before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied our
request to present live testimony and evidence. The Court's original order
required us to terminate network programming to certain subscribers "no later
than February 15, 1999," and contained other dates with which it would be
physically impossible to comply. The order imposes restrictions on our past and
future sale of distant ABC, NBC, CBS and Fox channels similar to those imposed
on PrimeTime 24 (and, we believe, on DirecTV and others). Some of those
restrictions go beyond the statutory requirements imposed by the Satellite Home
Viewer Act and the Satellite Home Viewer Improvement Act. For these and other
reasons we believe the Court's order is, among other things, fundamentally
flawed, unconstitutional and should be overturned. However, it is very unusual
for a Court of Appeals to overturn a lower court's order and there can be no
assurance whatsoever that it will be overturned.
On October 3, 2000, and again on October 25, 2000, the Court amended
its original preliminary injunction order in an effort to fix some of the errors
in the original order. The twice amended preliminary injunction order required
us to shut off, by February 15, 2001, all subscribers who are ineligible to
receive distant network programming under the court's order. We have appealed
the September 2000 preliminary injunction order and the October 3, 2000 amended
preliminary injunction order. On November 22, 2000, the United States Court of
Appeals for the Eleventh Circuit stayed the Florida Court's preliminary
injunction order pending our appeal. At that time, the Eleventh Circuit also
expedited its consideration of our appeal.
During November 2000, EchoStar filed its appeal brief with the Eleventh
Circuit. Oral argument before the Eleventh Circuit was held on May 24, 2001. At
the oral argument, the parties agreed to participate in a court supervised
mediation and that the mediator was to report back to the Eleventh Circuit on
July 11, 2001. The Eleventh Circuit indicated that it would not rule on the
pending appeal until after July 11, 2001. Since May 24, 2001, the parties
participated in the court supervised mediation. On July 11, 2001 the mediator
reported to the Eleventh Circuit the status of the parties' mediation efforts.
On July 16, 2001, the Eleventh Circuit issued an order for the parties to engage
in further mediation efforts until August 10, 2001. On August 10, 2001, the
mediator is expected to report to the Eleventh Circuit the status of any
continued mediation efforts by the parties.
We cannot predict when the Eleventh Circuit will rule on our appeal,
but it will not be before August 10, 2001. Our appeal effort may not be
successful and we may be required to comply with the Court's preliminary
injunction order on short notice. The preliminary injunction could force us to
terminate delivery of distant network channels to a substantial portion of our
distant network subscriber base, which could also cause many of these
subscribers to cancel their subscription to our other services. Management has
determined that such terminations would result in a small reduction in our
reported average monthly revenue per subscriber and could result in a temporary
increase in churn. If we lose the case at trial, the judge could, as one of many
possible remedies, prohibit all future sales of distant network programming by
us, which would have a material adverse affect on our business.
Gemstar
During October 2000, Starsight Telecast, Inc., a subsidiary of
Gemstar-TV Guide International, Inc., filed a suit for patent infringement
against us 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. We have examined this
patent and believe that it is not infringed by any of our products or services.
We will vigorously defend against this suit.
In December 2000, we filed suit against Gemstar-TV Guide (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. Gemstar recently filed counterclaims in this lawsuit alleging
infringement of United States Patent Nos. 5,923,362
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PART II - OTHER INFORMATION
and 5,684,525 which relate to certain electronic program guide functions. We
have examined these patents and believe they are not infringed by any of our
products or services. We will vigorously contest these counterclaims.
In February 2001, Gemstar filed patent infringement actions against us
in District Court in Atlanta, Georgia and in the International Trade Commission
(ITC). These suits allege infringement of United States Patent Nos. 5,252,066,
5,479,268 and 5,809,204 all of which 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. The North Carolina case has been
stayed pending resolution of the ITC action and we expect that the Atlanta
action will also be stayed pending resolution of the ITC action. ITC actions
typically proceed according to an expedited schedule. We expect the ITC action
to go to trial by the end of 2001. We further expect that the ITC will issue an
initial determination by March of 2002 and that a final determination will be
issued by April 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. Portions of our receivers are currently manufactured
outside the United States. In addition, it can issue cease and desist orders
that would prohibit the sale of infringing products that had been previously
imported. We have examined these patents and believe they are not infringed by
any of our products or services. We will vigorously contest the ITC, North
Carolina and Atlanta allegations of infringement and will, among other things,
challenge both the validity and enforceability of the asserted patents.
During 2000, Superguide Corp. also filed suit against us, DirecTv and
others in the same North Carolina Court, alleging infringement of United States
Patent Nos. 5,038,211, 5,293,357 and 4,751,578 which relate to certain
electronic program guide functions, including the use of electronic program
guides to control VCRs. It is our understanding that these patents may be
licensed by Superguide to Gemstar. Gemstar has been added as a party to this
case and is now asserting these patents against us. We have examined these
patents and believe that they are not infringed by any of our products or
services. A Markman hearing is currently scheduled for July 23, 2001. We intend
to vigorously defend against this action and assert a variety of counterclaims.
In the event it is ultimately determined that we infringe on any of the
aforementioned patents we may be subject to substantial damages, including the
potential for treble damages, and/or an injunction that could require us 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 us, and our conditional access vendor Nagra, in the United States
District Court for the District of Delaware. The suit alleged 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. One patent was subsequently dropped by
plaintiffs. The Court entered summary judgment in favor of us that the
encryption patent, with respect to which the plaintiffs claimed $80 million in
damages, was not infringed by us. On July 13, 2001, a jury found that the
remaining three patents were infringed and awarded damages of $15 million. The
jury also found that one of the patents was willfully infringed which means that
the judge is entitled to increase the award of damages. We intend to appeal the
decision and plaintiffs have indicated they will appeal as well. Any final award
of damages would be split between us and Nagra in percentages to be agreed upon
between us and Nagra.
California Actions
A purported class action was filed against us in the California State
Superior Court for Alameda County during May 2001 by Andrew A. Werby. The
complaint, relating to late fees, alleges unlawful, unfair and fraudulent
business practices in violation of California Business and Professions Code
Section 17200 et seq., false and misleading advertising in violation of
California Business and Professions Code Section 17500, and violation of the
California Consumer Legal Remedies Act. We have not yet filed a responsive
pleading. It is too early in the litigation to make an assessment of the
probable outcome of the litigation or to determine the extent of any potential
liability or damages. We intend to deny all liability and intend to vigorously
defend the lawsuit.
A purported class action relating to the use of terms such as "crystal
clear digital video," "CD-quality audio," and "on-screen program guide", and
with respect to the number of channels available in various programming
packages, has also been filed against us in the California State Superior Court
for Los Angeles County by David Pritikin and by Consumer Advocates, a nonprofit
unincorporated association. The complaint alleges breach of express warranty
and violation of the California Consumer Legal Remedies Act, Civil Code Section
1750, et. seq., and the California Business & Professions Code Section 17500,
17200. We have filed an answer and the case is currently in discovery. No
motion for class certification has been filed to date. It is too early in the
litigation to make an assessment of the probable outcome of the litigation or to
determine the extent of any potential liability or damages. We deny all
liability and intend to vigorously defend the lawsuit.
Retailer Class Actions
We have been sued by retailers in three separate purported 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
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PART II - OTHER INFORMATION
agreements are invalid and unenforceable, and to award damages for lost
commissions and payments, charge backs, and other compensation. The plaintiffs
allege breach of contract and breach of the covenant of good faith and fair
dealing and seek declaratory relief, compensatory damages, injunctive relief,
and pre-judgment and post-judgment interest. We intend to vigorously defend
against the suits and to assert a variety of counterclaims. It is too early to
make an assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
Satellite Dealers Supply, Inc. filed a lawsuit in the United States
District Court for the Eastern District of Texas on September 25, 2000, on
behalf of itself and a class of persons similarly situated. The plaintiff is
attempting to certify a nationwide class on behalf of sellers, installers, and
servicers of satellite equipment, who contract with the us and claims the
alleged class has been "subject to improper chargebacks." The plaintiff alleges
that we: (1) charged back certain fees paid by members of the class to
professional installers in violation of contractual terms; (2) manipulated the
accounts of subscribers to deny payments to class members; and (3)
misrepresented to class members who own certain equipment related to the
provision of satellite television services. The plaintiff is requesting a
permanent injunction and monetary damages. We intend to vigorously defend the
lawsuit and to assert a variety of counterclaims. It is too early to make an
assessment of the probable outcome of the litigation or to determine the extent
of any potential liability or damages.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy
and the failure of 28 transponders to date, a maximum of approximately 14 of the
44 transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system. There can be no assurance that further material degradation,
or total loss of use, of EchoStar IV will not occur in the immediate future.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million,
or 40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment
loss of $106 million to write-down the carrying value of the satellite and
related costs, and simultaneously recorded an insurance claim receivable for the
same amount. We continue to believe we will ultimately recover at least the
amount originally recorded and do not intend to adjust the amount of the
receivable until there is greater certainty with respect to the amount of the
final settlement.
As a result of the thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. We will continue to evaluate the performance of EchoStar IV
and may modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and
EchoStar III expired July 25, 2000. The insurers refused to renew insurance on
EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, we believe that the carriers colluded and conspired
to boycott us unless we accept their offer to settle the EchoStar IV claim for
$88 million.
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36
PART II - OTHER INFORMATION
Based on the carriers' actions, we added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing, and unfair claim practices. Additionally, we filed a lawsuit against
the insurance carriers in the United States District Court for the District of
Colorado asserting causes of action for violation of Federal and State antitrust
laws. While we believe we are entitled to the full amount claimed under the
EchoStar IV insurance policy and believe the insurance carriers are in violation
of antitrust laws and have committed further acts of bad faith in connection
with their refusal to negotiate reasonable insurance coverage on our other
satellites, there can be no assurance as to the outcome of these proceedings.
During March 2001, we voluntarily dismissed the antitrust lawsuit without
prejudice. We have the right to re-file an antitrust action against the insurers
again in the future.
We are subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of
shareholders of EchoStar Communications Corporation held on May 4, 2001:
a. The election of Charles W. Ergen, James DeFranco, David K.
Moskowitz, Raymond L. Friedlob, O. Nolan Daines and Cantey
Ergen as directors to serve until the 2002 annual meeting of
shareholders, and
b. The ratification of the appointment of Arthur Andersen LLP as
independent auditors for Echostar Communications Corporation
for the year ending December 31, 2001.
All matters voted on at the annual meeting were approved. The voting
results were as follows:
Votes
-------------------------------------------------
Proposal For Against Withheld
-------- ------------- ------------- -------------
Election as director:
O. Nolan Daines 2,559,702,781 -- 1,189,987
James DeFranco 2,555,608,893 -- 5,283,875
Cantey Ergen 2,551,015,005 -- 9,877,763
Charles W. Ergen 2,555,607,449 -- 5,285,319
Raymond L. Friedlob 2,556,482,886 -- 4,409,882
David K. Moskowitz 2,555,612,069 -- 5,280,699
Ratification of the appointment of Arthur Andersen LLP as
independent auditors for Echostar Communications
Corporation for the year ending December 31, 2001 2,560,234,808 600,321 56,999
Michael Schroeder, a substantial shareholder and a director of
privately held DSI Distributing Inc., was also listed as a director nominee in
the proxy materials. DSI is a corporation with significant ties to a competitor
of EchoStar. In order to avoid any potential appearance of impropriety, Mr.
Schroeder concluded that it would not be prudent to serve on our Board. As such,
he formally withdrew his name from candidacy.
On June 13, 2001, our Board of Directors unanimously approved the
appointment of Mr. Peter Dea to the Board. Mr. Dea is Chairman of the Board and
Chief Executive Officer of Barrett Resources Corporation and has held various
positions with Barrett since 1993.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1+ Indenture, dated as of May 31, 2001 between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as Trustee.
4.2+ Registration Rights Agreement, dated as of May 31, 2001, by
and between EchoStar Communications Corporation and UBS
Warburg LLC.
10.1+ Modification No. 1 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated January 27, 2000, between
Lockheed Martin Corporation and EchoStar Orbital
Corporation.**
10.2+ Amended and Restated Contract dated February 1, 2001, between
EchoStar Orbital Corporation and Space Systems/Loral, Inc.,
EchoStar VIII Satellite Program (110 degree West
Longitude).**
10.3+ Amendment No. 1 to the Contract dated February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc., EchoStar IX Satellite Program (121 degree West
Longitude).**
- ----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.
(b) Reports on Form 8-K.
On May 21, 2001, we filed a Current Report on Form 8-K to report that
we offered $1 billion aggregate principal amount of Convertible Subordinated
Notes due 2008 in accordance with Securities and Exchange Commission Rule 144A.
On May 24,2001, we filed a Current Report on Form 8-K to report that
General Motors was willing to establish a dialogue with us concerning a
transaction related to the possible spin-off of all or a part of its GMH
subsidiary.
On June 14, 2001, we filed a Current Report on Form 8-K to report that
our Board of Directors unanimously approved the appointment of Mr. Peter Dea to
EchoStar's Board of Directors.
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38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ David K. Moskowitz
--------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary
and Director
(Duly Authorized Officer)
By: /s/ Michael R. McDonnell
--------------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: July 19, 2001
39
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1+ Indenture, dated as of May 31, 2001 between EchoStar
Communications Corporation and U.S. Bank Trust National
Association, as Trustee.
4.2+ Registration Rights Agreement, dated as of May 31, 2001, by
and between EchoStar Communications Corporation and UBS
Warburg LLC.
10.1+ Modification No. 1 to the Satellite Contract (EchoStar VII -
119 degree West Longitude) dated January 27, 2000, between
Lockheed Martin Corporation and EchoStar Orbital
Corporation.**
10.2+ Amended and Restated Contract dated February 1, 2001, between
EchoStar Orbital Corporation and Space Systems/Loral, Inc.,
EchoStar VIII Satellite Program (110 degree West
Longitude).**
10.3+ Amendment No. 1 to the Contract dated February 22, 2000,
between EchoStar Orbital Corporation and Space Systems/Loral
Inc., EchoStar IX Satellite Program (121 degree West
Longitude).**
- ----------
+ Filed herewith.
** Certain provisions have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request
for confidential treatment. A conforming electronic copy is
being filed herewith.