1
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 333-52756
ECHOSTAR BROADBAND CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1560440
(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 AUGUST 10, 2001, REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF 1,000
SHARES OF COMMON STOCK.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2000 and 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 Narrative Analysis of Results of Operations........................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 22
Item 2. Changes in Securities and Use of Proceeds....................................... *
Item 3. Defaults Upon Senior Securities................................................. *
Item 4. Submission of Matters to a Vote of Security Holders............................. *
Item 5. Other Information............................................................... None
Item 6. Exhibits and Reports on Form 8-K................................................ 27
- --------
* This item has been omitted pursuant to the reduced disclosure format as set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31, JUNE 30,
2000 2001
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents ................................... $ 657,592 $ 553,838
Marketable investment securities ............................ 370,595 276,794
Trade accounts receivable, net of allowance for uncollectible
accounts of $19,934 and $11,257, respectively ............ 276,081 268,913
Insurance receivable ........................................ 106,000 106,000
Inventories ................................................. 159,665 149,315
Other current assets ........................................ 33,919 30,122
----------- -----------
Total current assets .......................................... 1,603,852 1,384,982
Cash reserved for satellite insurance (Note 4) ................ 82,393 74,196
Property and equipment, net ................................... 1,474,265 1,678,475
FCC authorizations, net ....................................... 709,817 700,097
Other noncurrent assets ....................................... 95,549 90,492
----------- -----------
Total assets .............................................. $ 3,965,876 $ 3,928,242
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Trade accounts payable ...................................... $ 144,263 $ 184,351
Deferred revenue ............................................ 282,939 336,511
Accrued expenses ............................................ 643,359 682,732
Advances from affiliates, net ............................... 832,334 680,018
Current portion of long-term debt ........................... 19,642 14,343
----------- -----------
Total current liabilities ..................................... 1,922,537 1,897,955
Long-term obligations, net of current portion:
9 1/4% Seven Year Notes ..................................... 375,000 375,000
9 3/8% Ten Year Notes ....................................... 1,625,000 1,625,000
10 3/8% Seven Year Notes .................................... 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion ... 11,644 11,357
Long-term deferred distribution and carriage revenue and
other long-term liabilities .............................. 56,047 80,492
----------- -----------
Total long-term obligations, net of current portion ........... 3,067,691 3,091,849
----------- -----------
Total liabilities ......................................... 4,990,228 4,989,804
Commitments and Contingencies (Note 5)
Stockholder's Deficit:
Common Stock, $.01 par value, 1,000 shares authorized, issued
and outstanding .......................................... -- --
Additional paid-in capital .................................. 1,440,253 1,438,207
Deferred stock-based compensation ........................... (58,193) (41,680)
Accumulated other comprehensive income (loss) ............... (1,150) 266
Accumulated deficit ......................................... (2,405,262) (2,458,355)
----------- -----------
Total stockholder's deficit ................................... (1,024,352) (1,061,562)
----------- -----------
Total liabilities and stockholder's deficit ............... $ 3,965,876 $ 3,928,242
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
REVENUE:
DISH Network:
Subscription television services ......................... $ 554,234 $ 882,047 $ 1,030,539 $ 1,675,585
Other .................................................... 2,874 4,291 4,808 7,727
----------- ----------- ----------- -----------
Total DISH Network .......................................... 557,108 886,338 1,035,347 1,683,312
DTH equipment sales and integration services ................ 58,685 45,989 119,500 85,674
Other ....................................................... 26,406 30,273 55,410 51,920
----------- ----------- ----------- -----------
Total revenue .................................................. 642,199 962,600 1,210,257 1,820,906
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses .............................. 234,182 361,692 438,142 681,029
Customer service center and other ........................ 68,340 69,914 124,389 134,697
Satellite and transmission ............................... 11,590 8,224 23,914 17,034
----------- ----------- ----------- -----------
Total DISH Network operating expenses ....................... 314,112 439,830 586,445 832,760
Cost of sales - DTH equipment and integration services ...... 47,143 31,127 94,071 59,901
Cost of sales - other ....................................... 7,116 20,813 15,231 34,489
Marketing:
Subscriber promotion subsidies - promotional DTH equipment 154,568 105,488 326,706 295,753
Subscriber promotion subsidies - other ................... 79,614 122,455 163,502 206,348
Advertising and other .................................... 24,332 26,484 47,497 53,038
----------- ----------- ----------- -----------
Total marketing expenses .................................... 258,514 254,427 537,705 555,139
General and administrative .................................. 51,827 82,505 105,422 154,220
Non-cash, stock-based compensation .......................... 13,022 7,011 27,031 14,467
Depreciation and amortization ............................... 40,580 59,703 79,923 115,208
----------- ----------- ----------- -----------
Total costs and expenses ....................................... 732,314 895,416 1,445,828 1,766,184
----------- ----------- ----------- -----------
Operating income (loss) ....................................... (90,115) 67,184 (235,571) 54,722
Other Income (Expense):
Interest income ............................................. 2,480 10,428 5,682 27,581
Interest expense, net of amounts capitalized ................ (48,599) (68,138) (97,216) (138,310)
Other ....................................................... (1,671) 3,615 (1,950) 2,914
----------- ----------- ----------- -----------
Total other expense ............................................ (47,790) (54,095) (93,484) (107,815)
----------- ----------- ----------- -----------
Income (loss) before income taxes .............................. (137,905) 13,089 (329,055) (53,093)
Income tax provision, net ...................................... (26) -- (59) --
----------- ----------- ----------- -----------
Net income (loss) .............................................. $ (137,931) $ 13,089 $ (329,114) $ (53,093)
=========== =========== =========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................. $(329,114) $ (53,093)
Adjustments to reconcile net loss to net cash flows from operating activities:
Deferred stock-based compensation recognized .......................................... 27,031 14,467
Depreciation and amortization ......................................................... 79,923 115,208
Amortization of debt discount and deferred financing costs ............................ 1,640 2,327
Change in long-term deferred distribution and carriage revenue and
other long-term liabilities ......................................................... 6,433 24,304
Other, net ............................................................................ 1,933 8,002
Changes in current assets and current liabilities ..................................... 36,241 140,850
--------- ---------
Net cash flows from operating activities ................................................. (175,913) 252,065
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities ............................................ -- (512,885)
Sales of marketable investment securities ................................................ 19,775 608,102
Change in cash reserved for satellite insurance due to depreciation on related satellites
(Note 4) ............................................................................... -- 8,197
Purchases of property and equipment ...................................................... (64,573) (301,331)
--------- ---------
Net cash flows from investing activities ................................................. (44,798) (197,917)
CASH FLOWS FROM FINANCING ACTIVITIES:
Non-interest bearing advances from affiliates ............................................ 171,276 (152,316)
Repayments of mortgage indebtedness and notes payable .................................... (7,847) (5,586)
--------- ---------
Net cash flows from financing activities ................................................. 163,429 (157,902)
--------- ---------
Net decrease in cash and cash equivalents ................................................ (57,282) (103,754)
Cash and cash equivalents, beginning of period ........................................... 159,761 657,592
--------- ---------
Cash and cash equivalents, end of period ................................................. $ 102,479 $ 553,838
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Forfeitures of deferred non-cash, stock-based compensation ............................ $ 5,994 $ 2,046
See accompanying Notes to Condensed Consolidated Financial Statements.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
EchoStar Broadband Corporation ("EBC") is a wholly-owned subsidiary
of EchoStar Communications Corporation ("ECC" and together with its subsidiaries
"EchoStar"), a publicly traded company on the Nasdaq National Market. Unless
otherwise stated herein, or the context otherwise requires, references herein to
EchoStar shall include ECC, EBC and all direct and indirect wholly-owned
subsidiaries thereof. EBC's management refers readers of this Quarterly Report
on Form 10-Q to EchoStar's Quarterly Report on Form 10-Q for the six months
ended June 30, 2001. Substantially all of EchoStar's operations are conducted by
subsidiaries of EBC. The operations of EchoStar include two interrelated
business units (Note 6):
- The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 2001, we had
approximately 6.07 million DISH Network subscribers.
- EchoStar Technologies Corporation ("ETC") - engaged in the design,
development, distribution and sale of DBS set-top boxes, antennae
and other digital equipment for the DISH Network ("EchoStar receiver
systems"), the design, development and distribution of similar
equipment for international direct-to-home ("DTH") satellite and
other systems and the provision of uplink center design,
construction oversight and other project integration services for
international DTH ventures.
Since 1994, EchoStar has deployed substantial resources to develop
the "EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, six DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," "EchoStar IV," "EchoStar V," and "EchoStar VI"), EchoStar
receiver systems, digital broadcast operations centers, customer service
facilities, and other assets utilized in its operations. EchoStar's principal
business strategy is to continue developing its subscription television service
in the United States to provide consumers with a fully competitive alternative
to cable television service.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Article 10 of Regulation
S-X for interim financial information. Accordingly, these statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Operating results for the 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.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Comprehensive Income (Loss)
The components of comprehensive loss, net of tax, are as follows (in
thousands):
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 2001
---------- ---------
(Unaudited)
Net loss................................................................................... $ (329,114) $ (53,093)
Unrealized holding (losses) gains on available-for-sale securities arising during period... (51) 1,416
---------- ---------
Comprehensive loss......................................................................... $ (329,165) $ (51,677)
========== =========
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.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
--------- ---------
Finished goods - DBS .................... $ 94,997 $ 82,836
Raw materials ........................... 40,069 42,139
Finished goods - reconditioned and other 23,101 20,183
Work-in-process ......................... 8,879 11,536
Consignment ............................. 2,461 1,698
Reserve for excess and obsolete inventory (9,842) (9,077)
--------- ---------
$ 159,665 $ 149,315
========= =========
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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
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 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-
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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
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 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.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 continued August 7,
2001. The arbitration hearing is expected to conclude on or before August 17,
2001. While there can be no assurance that the attorneys will claim a right to
hundreds of millions of dollars, the damage model the attorneys presented at 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 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.
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 8, 2001, the parties participated in
another court ordered mediation but were unable to reach a resolution. On August
10, 2001, the mediator reported to the Eleventh Circuit that despite the
parties' extensive efforts, the parties were unable to resolve their differences
and that further efforts at mediation "will not contribute to a resolution of
the dispute between the parties at this time." The mediator therefore advised
the Eleventh Circuit that it may rule upon EchoStar's appeal.
EchoStar cannot predict when the Eleventh Circuit will rule on its
appeal, but it could be as early as August 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 more 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.
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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 was recently held and the case is
not expected to go to trial before November of 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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
nationwide classes allegedly brought on behalf of persons, primarily retail
dealers, who were alleged signatories to certain retailer agreements with
EchoStar Satellite Corporation. The plaintiffs are requesting the Court to
declare certain provisions of the alleged agreements invalid and unenforceable,
to declare that certain changes to the agreements are invalid and unenforceable,
and to award damages for lost commissions and payments, charge backs, and other
compensation. The plaintiffs 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. 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
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ECHOSTAR BROADBAND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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 ECHOSTAR OTHER
TECHNOLOGIES ELIMINATIONS CONSOLIDATED ECHOSTAR EBC AND
DISH NETWORK CORPORATION AND OTHER, NET TOTAL ACTIVITY SUBSIDIARIES
------------ ----------- -------------- ----- -------- ------------
THREE MONTHS ENDED
JUNE 30, 2000
Revenue.................. $ 572,786 $ 48,045 $ 25,298 $ 646,129 $ (3,930) $ 642,199
Net income (loss)........ (149,964) 4,139 12,965 (132,860) (5,071) (137,931)
THREE MONTHS ENDED
JUNE 30, 2001
Revenue.................. $ 906,590 $ 25,760 $ 33,922 $ 966,272 $ (3,672) $ 962,600
Net income (loss)........ 33,537 (7,469) (23,819) 2,249 10,840 13,089
SIX MONTHS ENDED
JUNE 30, 2000
Revenue.................. $ 1,057,234 $ 100,514 $ 54,102 $1,211,850 $ (1,593) $ 1,210,257
Net income (loss)........ (340,728) (355) 23,093 (317,990) (11,124) (329,114)
SIX MONTHS ENDED
JUNE 30, 2001
Revenue.................. $ 1,724,581 $ 44,488 $ 59,133 $1,828,202 $ (7,296) $ 1,820,906
Net income (loss)........ (188,330) (15,257) 38,795 (164,792) 111,699 (53,093)
7. SUBSEQUENT EVENTS
DirecTV
On August 5, 2001, EchoStar announced that it made a proposal to
General Motors to combine EchoStar with Hughes Electronic Corporation in a
stock-for-stock transaction.
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.
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 NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; delays in the construction of
our seventh, eighth or ninth satellites; an unsuccessful deployment of future
satellites; inability to settle outstanding claims with insurers; a decrease in
sales of digital equipment and related services to international direct-to-home
service providers; a decrease in DISH Network subscriber growth; an increase in
subscriber turnover; an increase in subscriber acquisition costs; an inability
to obtain certain retransmission consents; our inability to retain necessary
authorizations from the FCC; an inability to obtain patent licenses from holders
of intellectual property or redesign our products to avoid patent infringement;
an increase in competition from cable as a result of digital cable or otherwise,
direct broadcast satellite, other satellite system operators, and other
providers of subscription television services; 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
$963 million, an increase of $321 million compared to total revenue for the
three months ended June 30, 2000 of $642 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 $882
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.
14
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 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 $46 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 $440 million during the three months ended June 30, 2001, an increase of
$126 million or 40% compared to the same period in 2000. DISH Network operating
expenses represented 50% and 57% of subscription television services revenue
during the three months ended 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 $362 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
15
18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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.
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 $8 million during the
three months ended June 30, 2001, a $4 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 2% 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 $16 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 68% and 80% 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 $259 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 $26 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
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
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 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 $83 million during the three months ended June 30, 2001, an
increase of $31 million as compared to the same period in 2000. The increase in
G&A expenses was principally attributable to increased personnel expenses to
support the growth of the DISH Network. G&A expenses represented 9% and 8% of
total revenue during the three months ended June 30, 2001 and 2000,
respectively. Although we expect G&A expenses as a percentage of total revenue
to remain near the current level or decline modestly in future periods, this
expense to revenue ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an
incentive plan which provided certain key employees with incentives including
stock options. The payment of these incentives was contingent upon our
achievement of certain financial and other goals. We met certain of these goals
during 1999. Accordingly, during 1999 we recorded approximately $179 million of
deferred compensation related to post-grant appreciation of stock options
granted pursuant to the 1999 incentive plan. The related deferred compensation
will be recognized over the five-year vesting period. Accordingly, during the
three months ended June 30, 2001 and 2000 we recognized $7 million and $13
million, respectively, under this performance-based plan.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF 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 $13,022 $ 7,011
======= =======
Pre-Marketing Cash Flow. Pre-marketing cash flow is comprised of
EBITDA plus total marketing expenses. Pre-marketing cash flow was $388 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 35% 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 $37 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 $60 million during the three months ended June 30, 2001, a $19
million increase compared to the same period in 2000. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar VI in October
2000 and other depreciable assets placed in service during late 2000.
Other Income and Expense. Other expense, net, totaled $54 million
during the three months ended June 30, 2001, an increase of $6 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. This increase in interest expense was partially offset by an
increase in interest income.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF 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
$1.821 billion, an increase of $611 million compared to total revenue for the
six months ended June 30, 2000 of $1.210 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 $1.676
billion for the six months ended June 30, 2001, an increase of $645 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 $86 million, a decrease of $34 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 $833 million during the six months ended June 30, 2001, an increase of
$247 million or 42% compared to the same period in 2000. DISH Network operating
expenses represented 50% 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 $681 million during the six
months ended June 30, 2001, an increase of $243 million compared to the same
period in 2000. Such expenses represented 41% and 43% 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 $17 million during the
six months ended June 30, 2001, a $7 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 2% of
subscription television services revenue during the six months ended June 30,
2001and 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 $34 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 70% and 79% of DTH equipment revenue, during the six months ended
June 30, 2001 and 2000, respectively.
Marketing Expenses. Marketing expenses totaled $555 million during
the six months ended June 30, 2001, an increase of $17 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 $53 million and $47 million during the six months ended
June 30, 2001 and 2000, respectively.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
General and Administrative Expenses. General and administrative
expenses totaled $154 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 8% and 9% of
total revenue during the six months ended June 30, 2001 and 2000, respectively.
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 $740 million
during the six months ended June 30, 2001, an increase of 81% 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 $184 million during the six
months ended June 30, 2001, compared to negative $129 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 $115 million during the six months ended June 30, 2001, a $35 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 NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS - CONTINUED
Other Income and Expense. Other expense, net, totaled $108 million
during the six 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. This increase in interest expense was partially offset by an increase
in interest income.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000, EchoStar filed suit against DirecTV and Thomson
Consumer Electronics/RCA in the Federal District Court of Colorado. The suit
alleges that DirecTV has utilized improper conduct in order to fend off
competition from the DISH Network. According to the complaint, DirecTV has
demanded that certain retailers stop displaying EchoStar's merchandise and has
threatened to cause economic damage to retailers if they continue to offer both
product lines in head-to-head competition. The suit alleges, among other things,
that DirecTV has acted in violation of federal and state 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 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 continued August 7,
2001. The arbitration hearing is expected to conclude on or before August 17,
2001. While there can be no assurance that the attorneys will claim a right to
hundreds of millions of dollars, the damage model the attorneys presented at 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,
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PART II - OTHER INFORMATION
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 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.
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PART II - OTHER INFORMATION
In March 2000, the networks filed an emergency motion again asking
the court to issue an injunction requiring EchoStar to turn off network
programming to certain of its customers. At that time, the networks also argued
that EchoStar's compliance procedures violate the Satellite Home Viewer
Improvement Act. EchoStar opposed the networks' motion and again asked the court
to hear live testimony before ruling upon the networks' injunction request.
During September 2000, the Court granted the Networks' motion for
preliminary injunction, denied the Network's emergency motion and denied
EchoStar's request to present live testimony and evidence. The Court's original
order required EchoStar to terminate network programming to certain subscribers
"no later than February 15, 1999," and contained other dates 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 8, 2001, the
parties participated in another court ordered mediation but were unable to reach
a resolution. On August 10, 2001, the mediator reported to the Eleventh Circuit
that despite the parties' extensive efforts, the parties were unable to resolve
their differences and that further efforts at mediation "will not contribute to
a resolution of the dispute between the parties at this time." The mediator
therefore advised the Eleventh Circuit that it may rule upon EchoStar's appeal.
EchoStar cannot predict when the Eleventh Circuit will rule on its
appeal, but it could be as early as August 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.
24
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PART II - OTHER INFORMATION
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 more 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.
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 was recently held and the case is
not expected to go to trial before November of 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.
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PART II - OTHER INFORMATION
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 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.
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
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PART II - OTHER INFORMATION
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.
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.
We are subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect our financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR BROADBAND CORPORATION
By: /s/ David K. Moskowitz
------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel,
Secretary and Director
(Duly Authorized Officer)
By: /s/ Michael R. McDonnell
------------------------------------------
Michael R. McDonnell
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: August 13, 2001
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