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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________.
Commission File Number: 0-26176
ECHOSTAR COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 88-0336997
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 2, 1999, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED
OF 54,164,739 SHARES OF CLASS A COMMON STOCK AND 59,608,802 SHARES OF CLASS B
COMMON STOCK.
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<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and June 30, 1999 (Unaudited). . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1999 (Unaudited). . . 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1999 (Unaudited). . . . . . . . 3
Notes to Condensed Consolidated Financial Statements (Unaudited) . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . .12
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. . . . . . . . . . . . . .24
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . .None
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .24
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . .None
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .25
</TABLE>
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
----------------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents................................................. $ 106,547 $ 277,548
Marketable investment securities.......................................... 217,553 107,739
Trade accounts receivable, net of allowance for uncollectible accounts
of $2,996 and $3,359, respectively...................................... 107,233 115,939
Insurance receivable...................................................... - 106,000
Inventories............................................................... 76,708 75,456
Other current assets...................................................... 29,804 21,901
----------------------------
Total current assets......................................................... 537,845 704,583
Restricted Assets:
Interest and satellite escrows and other restricted cash and marketable
investment securities................................................... 77,657 -
Insurance receivable...................................................... 106,000 -
----------------------------
Total restricted assets...................................................... 183,657 -
Property and equipment, net.................................................. 876,914 1,350,120
FCC authorizations, net...................................................... 103,434 727,225
Other noncurrent assets...................................................... 105,002 121,474
----------------------------
Total assets............................................................ $1,806,852 $ 2,903,402
----------------------------
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable.................................................... $ 90,646 $ 114,466
Deferred revenue.......................................................... 132,982 148,508
Accrued expenses.......................................................... 184,470 298,034
Current portion of long-term debt......................................... 22,679 20,901
----------------------------
Total current liabilities.................................................... 430,777 581,909
Long-term obligations, net of current portion:
1994 Notes................................................................ 571,674 1,503
1996 Notes................................................................ 497,955 1,097
1997 Notes................................................................ 375,000 15
Seven Year Notes.......................................................... - 375,000
Ten Year Notes............................................................ - 1,625,000
Mortgages and other notes payable, net of current portion................. 43,450 33,279
Long-term deferred satellite services revenue and other long-term
liabilities............................................................. 33,498 54,299
----------------------------
Total long-term obligations, net of current portion.......................... 1,521,577 2,090,193
----------------------------
Total liabilities....................................................... 1,952,354 2,672,102
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock, $.01 par
value, 900,000 shares authorized; 225,301 and no shares issued and
outstanding, respectively.................................................. 226,038 -
Commitments and Contingencies (Note 9)
Stockholders' Equity (Deficit):
Preferred Stock, 20,000,000 shares authorized (inclusive of 900,000 shares
designated as Series B Preferred Stock):
8% Series A Cumulative Preferred Stock, 1,616,681 and no shares issued
and outstanding, respectively, including cumulative accrued dividends
of $5,755 and none, respectively....................................... 20,807 -
6 3/4% Series C Cumulative Convertible Preferred Stock, 2,300,000 and
2,182,919 shares issued and outstanding, respectively.................. 108,666 106,530
Class A Common Stock, $.01 par value, 400,000,000 shares authorized,
30,634,760 and 49,481,240 shares issued and outstanding, respectively... 306 495
Class B Common Stock, $.01 par value, 200,000,000 shares authorized,
59,608,802 shares issued and outstanding................................ 596 596
Class C Common Stock, $.01 par value, 200,000,000 shares authorized,
none outstanding.......................................................... - -
Common Stock Warrants..................................................... 12 12
Additional paid-in capital................................................ 231,166 1,379,305
Accumulated deficit....................................................... (733,093) (1,255,638)
----------------------------
Total stockholders' equity (deficit)......................................... (371,540) 231,300
----------------------------
Total liabilities and stockholders' equity (deficit).................... $1,806,852 $ 2,903,402
----------------------------
----------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- ---------------------------
1998 1999 1998 1999
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services...................... $151,527 $306,023 $ 280,068 $ 566,824
Other................................................. 3,508 2,161 10,143 4,424
----------------------------- ---------------------------
Total DISH Network...................................... 155,035 308,184 290,211 571,248
DTH equipment sales and integration services............ 80,445 27,073 147,839 59,742
Satellite services...................................... 5,774 9,764 10,369 17,741
C-band and other........................................ 4,584 4,857 11,858 10,511
----------------------------- ---------------------------
Total revenue.............................................. 245,838 349,878 460,277 659,242
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses........................... 69,388 132,721 133,197 242,866
Customer service center and other..................... 14,380 25,266 26,115 49,375
Satellite and transmission............................ 5,460 10,859 10,712 20,305
----------------------------- ---------------------------
Total DISH Network operating expenses................... 89,228 168,846 170,024 312,546
Cost of sales - DTH equipment and integration services.. 53,895 18,606 101,402 41,522
Cost of sales - C-band and other........................ 3,282 3,393 9,224 7,443
Marketing:
Subscriber promotion subsidies........................ 58,205 142,965 102,170 270,573
Advertising and other................................. 9,339 8,967 17,592 20,656
----------------------------- ---------------------------
Total marketing expenses................................ 67,544 151,932 119,762 291,229
General and administrative.............................. 23,488 32,150 43,182 62,173
Amortization of subscriber acquisition costs............ 5,886 - 16,905 -
Depreciation and amortization........................... 18,759 25,940 37,187 51,000
----------------------------- ---------------------------
Total costs and expenses................................... 262,082 400,867 497,686 765,913
----------------------------- ---------------------------
Operating loss............................................. (16,244) (50,989) (37,409) (106,671)
Other Income (Expense):
Interest income......................................... 7,898 8,006 16,832 12,942
Interest expense, net of amounts capitalized............ (36,546) (48,798) (73,920) (101,308)
Other................................................... (713) 15,674 (823) 15,664
----------------------------- ---------------------------
Total other income (expense)............................... (29,361) (25,118) (57,911) (72,702)
----------------------------- ---------------------------
Loss before income taxes................................... (45,605) (76,107) (95,320) (179,373)
Income tax provision, net.................................. (112) (22) (283) (88)
----------------------------- ---------------------------
Net loss before extraordinary charges...................... (45,717) (76,129) (95,603) (179,461)
Extraordinary charge for early retirement of debt, net
of tax................................................... - - - (268,999)
----------------------------- ---------------------------
Net loss................................................... (45,717) (76,129) (95,603) (448,460)
8% Series A Cumulative Preferred Stock dividends........... (301) - (602) (124)
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind.......................... (6,615) - (13,036) (241)
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock.......................................... (1,761) (1,885) (3,482) (3,719)
----------------------------- ---------------------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders...................... $(54,394) $(78,014) $(112,723) $(452,544)
----------------------------- ---------------------------
----------------------------- ---------------------------
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding............... 89,874 97,234 89,748 93,934
----------------------------- ---------------------------
----------------------------- ---------------------------
Net loss per common share:
Basic and diluted loss per share before extraordinary
charge................................................ $ (0.61) $ (0.80) $ (1.26) $ (1.96)
Extraordinary charge.................................... - - - (2.86)
----------------------------- ---------------------------
Basic and diluted net loss.............................. $ (0.61) $ (0.80) $ (1.26) $ (4.82)
----------------------------- ---------------------------
----------------------------- ---------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
--------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (95,603) $ (448,460)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt......................... - 268,999
Loss on disposal of assets................................................ - 8,378
Depreciation and amortization............................................. 37,187 51,000
Amortization of subscriber acquisition costs.............................. 16,905 -
Amortization of debt discount and deferred financing costs................ 56,387 11,841
Change in reserve for excess and obsolete inventory....................... 17 (276)
Change in long-term deferred satellite services revenue and other
long-term liabilities................................................... 6,159 20,801
Other, net................................................................ 2,245 2,738
Changes in current assets and current liabilities, net.................... (3,864) 156,794
--------------------------
Net cash flows from operating activities..................................... 19,433 71,815
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities................................ (253,412) (216,638)
Sales of marketable investment securities.................................... 397,440 326,452
Funds released from escrow and restricted cash and marketable investment
securities................................................................... 74,735 77,657
Investment earnings placed in escrow......................................... (4,081) -
Purchases of property and equipment.......................................... (110,149) (32,199)
Issuance of note receivable.................................................. (6,200) -
Payments received on note receivable......................................... 3,170 -
Other........................................................................ 393 (820)
--------------------------
Net cash flows from investing activities..................................... 101,896 154,452
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Seven Year Notes................................... - 375,000
Proceeds from issuance of Ten Year Notes..................................... - 1,625,000
Debt issuance costs and prepayment premiums.................................. - (273,718)
Retirement of 1994 Notes..................................................... - (575,674)
Retirement of 1996 Notes..................................................... - (501,350)
Retirement of 1997 Notes..................................................... - (378,110)
Retirement of Senior Exchange Notes.......................................... - (228,528)
Redemption of Series A Preferred Stock....................................... - (90,934)
Repayments of mortgage indebtedness and notes payable........................ (8,167) (11,954)
Net proceeds from Class A common stock options exercised and Class A common
stock issued to Employee Stock Purchase Plan............................... 1,202 5,002
--------------------------
Net cash flows from financing activities..................................... (6,965) (55,266)
--------------------------
Net increase in cash and cash equivalents.................................... 114,364 171,001
Cash and cash equivalents, beginning of period............................... 145,207 106,547
--------------------------
Cash and cash equivalents, end of period..................................... $ 259,571 $ 277,548
--------------------------
--------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capitalized interest...................................................... $ 17,868 $ -
Accrued capital expenditures.............................................. 16,050 -
Satellite vendor financing................................................ 12,950 -
8% Series A Cumulative Preferred Stock dividends.......................... 602 124
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind......................................................... 13,036 241
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock....... 3,482 3,719
Assets acquired from News Corporation and MCI:
FCC licenses and other................................................. - 626,120
Satellites............................................................. - 451,200
Digital broadcast operations center.................................... - 47,000
Common stock issued to News Corporation and MCI........................... - 1,124,320
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
PRINCIPAL BUSINESS
The operations of EchoStar Communications Corporation ("ECC," and
together with its subsidiaries, or referring to particular subsidiaries in
certain circumstances, "EchoStar" or the "Company") include three
interrelated business units:
- THE DISH NETWORK - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 1999,
EchoStar had approximately 2.6 million DISH Network subscribers.
- ECHOSTAR TECHNOLOGIES CORPORATION ("ETC") - engaged in the design,
distribution and sale of DBS set-top boxes, antennae and other digital
equipment for the DISH Network ("EchoStar receiver systems"), and the
design and distribution of similar equipment for direct-to-home
("DTH") projects of others internationally, together with the
provision of uplink center design, construction oversight and other
project integration services for international DTH ventures.
- SATELLITE SERVICES - engaged in the delivery of video, audio and data
services to business television customers and other satellite users.
These services may include satellite uplink services, satellite
transponder space usage, billing, customer service and other services.
Since 1994, EchoStar has deployed substantial resources to develop the
"EchoStar DBS System." The EchoStar DBS System consists of EchoStar's
FCC-allocated DBS spectrum, DBS satellites ("EchoStar I," "EchoStar II,"
"EchoStar III," and "EchoStar IV,"), digital satellite receivers, digital
broadcast operations centers, customer service facilities, and other assets
utilized in its operations. EchoStar's principal business strategy is to
continue developing its subscription television service in the United States
to provide consumers with a fully competitive alternative to cable television
service.
RECENT DEVELOPMENTS
On May 25, 1999, the Company announced a two-for-one stock split
effective July 19, 1999 to shareholders of record as of the close of business
on July 1, 1999. An amount equal to the par value of the common shares
issued was transferred from additional paid-in capital to Class A common
stock and Class B common stock. Accordingly, all historical outstanding
share and per share amounts have been restated herein to reflect the stock
split, unless otherwise noted.
On February 2, 1999, EchoStar consummated the acquisition of
privately-held Media4, Inc., ("Media4"), an Atlanta-based supplier of
broadband satellite networking equipment for personal computers. In
connection with the acquisition, EchoStar issued approximately 170,000
pre-split shares of its Class A common stock valued, at the date of issuance,
at approximately $10 million for 100% of the outstanding stock of Media4.
The acquisition of Media4 was accounted for as a purchase transaction.
4
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
On June 24, 1999, EchoStar acquired certain high-power DBS assets from
The News Corporation Limited ("News Corporation") and MCI Telecommunications
Corporation/WorldCom ("MCI") in exchange for shares of its Class A common
stock. A total of 8,603,116 pre-split shares were issued, valued at
approximately $1.12 billion, at the date of issuance. The original purchase
price was reduced by approximately $45.6 million. The reduction consisted of
$30 million as compensation to EchoStar in exchange for the elimination of a
commitment by an affiliate of News Corporation to purchase a minimum of
500,000 set-top boxes from ETC, and approximately $15.6 million of
commitments assumed by EchoStar related to the build-out of the digital
broadcast center in Gilbert, Arizona. The primary assets acquired by EchoStar
from News and MCI in the transaction are:
- the rights to 28 DBS frequencies at the 110DEG. West Longitude ("WL")
orbital location;
- two DBS satellites ("EchoStar V" and "EchoStar VI") to be delivered
in-orbit (including construction, launch and insurance costs), and
currently expected to be launched in September 1999 and December 1999
or January 2000, respectively;
- a recently-constructed digital broadcast operations center located in
Gilbert, Arizona;
- a worldwide license from NDS Limited to use certain technology in
connection with the manufacture and distribution of set-top boxes
intended for use with the services of certain network operators; and
- a three-year retransmission consent agreement for the DISH Network to
rebroadcast FOX Broadcasting Company's local station signals in those
markets where FOX owns the local affiliate.
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, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in
EchoStar's Annual Report on Form 10-K for the year ended December 31, 1998.
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.
BASIC AND DILUTED LOSS PER SHARE
As of June 30, 1998 and 1999, options to purchase approximately
3,370,000 and 7,128,000 shares of Class A common stock were outstanding,
respectively. Common stock equivalents (employee stock options and warrants)
are excluded from the calculation of diluted loss per share as they are
antidilutive. Securities which are convertible into shares of Class A common
stock (8% Series A Cumulative Preferred Stock and 6 3/4% Series C Cumulative
Convertible Preferred Stock) also are excluded from the calculation of
diluted loss per share as they are antidilutive. As of June 30, 1998 and
1999, approximately 12,772,000 and 8,949,968 shares of Class A common stock
were issuable upon conversion of the 8% Series A Cumulative Preferred Stock
and the 6 3/4% Series C Cumulative Convertible Preferred Stock, respectively.
5
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
--------------------------
(Unaudited)
<S> <C> <C>
DBS receiver components.................................... $27,050 $32,335
EchoStar receiver systems.................................. 45,025 30,113
Consigned DBS receiver components.......................... 6,073 12,931
Finished goods - analog DTH equipment...................... 2,656 3,617
Spare parts and other...................................... 1,085 1,365
Reserve for excess and obsolete inventory.................. (5,181) (4,905)
--------------------------
$76,708 $75,456
--------------------------
--------------------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
--------------------------
(Unaudited)
<S> <C> <C>
EchoStar I....................................... $ 201,607 $ 201,607
EchoStar II...................................... 228,694 228,694
EchoStar III..................................... 234,083 234,083
EchoStar IV...................................... 105,005 105,005
Furniture, fixtures and equipment................ 182,747 210,139
Buildings and improvements....................... 60,867 57,933
Land............................................. 6,563 6,564
Tooling and other................................ 5,552 5,614
Vehicles......................................... 1,288 1,312
Construction in progress......................... 18,329 514,161
--------------------------
Total property and equipment................. 1,044,735 1,565,112
Accumulated depreciation......................... (167,821) (214,992)
--------------------------
Property and equipment, net.................. $ 876,914 $1,350,120
--------------------------
--------------------------
</TABLE>
Construction in progress consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
--------------------------
(Unaudited)
<S> <C> <C>
Progress amounts for satellite construction, launch, and launch
insurance:
EchoStar V................................................. $ - $243,100
EchoStar VI................................................ - 208,100
Digital broadcast operations center............................. - 47,000
Other........................................................... 18,329 15,961
--------------------------
$18,329 $514,161
--------------------------
--------------------------
</TABLE>
6
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
5. ECHOSTAR IV
As previously announced, the south solar array on EchoStar IV did not
properly deploy subsequent to the launch on May 8, 1998. This anomaly
resulted in a reduction of power available to operate the satellite and
accelerated consumption of fuel. Available power will continue to decline
over the next several years, resulting in continuing reductions in the number
of available transponders. Approximately 16 transponders should be available
for the entire life of the satellite. In addition, an unrelated anomaly
discovered during the third quarter of 1998 resulted in the failure of six
transponders during 1998. The satellite is equipped with a total of
44 transponders. In September 1998, EchoStar filed a $219.3 million
insurance claim for a total constructive loss (as defined in the launch
insurance policy) related to EchoStar IV. That claim is pending.
During May 1999, EchoStar IV experienced anomalies affecting
transponders, heating systems and the fuel system. In July 1999, prior to
arriving at the 110DEG. WL orbital location, additional fuel system
anomalies were confirmed. The recent anomalies have not caused material
reductions in functionality to date. While there can be no assurance, we do
not currently expect a material adverse impact on short or medium term
satellite operations. It is not yet possible to conclude whether these
anomalies will result in further reductions of satellite functionality or
useful life in the future. We have not completed our assessment of the
additional impairment, if any, to EchoStar IV, but we currently continue to
believe that insurance proceeds will be sufficient to offset all write-downs
of satellite assets that might ultimately be necessary because of lost
functionality caused by anomalies and consequences of which we are currently
aware. However, we can provide no assurance as to the ultimate amount that
may be received from the insurance claim, or that coverage will be available.
We will continue to evaluate the performance of EchoStar IV and may modify
our loss assessment as new events or circumstances develop.
As a result of the recent anomalies that EchoStar IV experienced, we
have instructed our broker to notify our insurance carriers of additional
occurrences under the terms of the EchoStar IV launch insurance policy. The
EchoStar IV launch insurance policy provides for insurance of $219.3 million
covering the period from launch of the satellite on May 8, 1998 through May 8,
1999. Due to the anomalies that EchoStar IV experienced and the pending
claim for a total constructive loss, we did not obtain in-orbit insurance on
EchoStar IV. Consequently, in the event we do not resolve our pending
insurance claim to our satisfaction, EchoStar IV will not be insured if
further losses occur in the future.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------------------------
(Unaudited)
<S> <C> <C>
Interest.................................................... $ 24,918 $ 82,000
Royalties and copyright fees................................ 53,746 71,748
Programming................................................. 35,472 52,846
Marketing................................................... 33,463 51,160
Other....................................................... 36,871 40,280
------------------------------
$184,470 $298,034
------------------------------
------------------------------
</TABLE>
7
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
7. LONG-TERM DEBT
On January 25, 1999, EchoStar DBS Corporation ("DBS Corp") sold
$375 million principal amount of 9 1/4% Senior Notes due 2006 (the "Seven
Year Notes") and $1.625 billion principal amount of 9 3/8% Senior Notes due
2009 (the "Ten Year Notes," and together with the Seven Year Notes, the
"Notes"). Concurrent with the closing of these offerings, EchoStar used
approximately $1.658 billion of net proceeds received from the sale of the
Notes to complete tender offers for the outstanding 12 7/8% Senior Secured
Discount Notes due June 1, 2004 issued by Dish, Ltd. ("the 1994 Notes"), the
13 1/8% Senior Secured Discount Notes due 2004 issued by EchoStar Satellite
Broadcasting Corporation ("the 1996 Notes") and the 12 1/2% Senior Secured
Notes due 2002 issued by DBS Corp ("the 1997 Notes"). In February 1999,
EchoStar used approximately $268 million of net proceeds received from the
sale of the Notes to complete a tender offer related to the 12 1/8% Senior
Preferred Exchange Notes due 2004, issued on January 4, 1999, in exchange for
all of its issued and outstanding 12 1/8% Series B Senior Redeemable
Exchangeable Preferred Stock. Substantially all of the restrictive covenants
contained in each of the respective indentures were removed upon closing of
the tender offers. The consummation of the tender offers resulted in a
one-time extraordinary charge to EchoStar's net income of $269 million
(approximately $236 million of tender premiums and consent fees and
approximately $33 million associated with the write-off of unamortized
deferred financing costs and other transaction-related costs).
8. PREFERRED STOCK
SERIES A PREFERRED STOCK
On February 8, 1999, EchoStar repurchased all outstanding shares of its
Series A Preferred Stock at $52.611 per share (the average of the preceding
20 trading day pre-split closing price of EchoStar's Class A common stock).
The total repurchase price was approximately $91 million, including accrued
dividends of approximately $6 million. The carrying value of the Series A
Preferred Stock, including accrued dividends, as of the date of repurchase
was approximately $21 million. All of the shares of Series A Preferred Stock
were owned by Charles W. Ergen, President and CEO of EchoStar, and James
DeFranco, EchoStar's Executive Vice President.
SERIES C PREFERRED STOCK
As of June 30, 1999, 117,081 shares of EchoStar's 6 3/4% Series C
Cumulative Convertible Preferred Stock ("Series C Preferred Stock") had been
converted into approximately 480,332 shares of EchoStar's Class A common
stock. Subsequently, approximately 1.1 million additional shares of Series C
Preferred Stock were converted into approximately 4.7 shares of Class A
common stock.
9. COMMITMENTS AND CONTINGENCIES
THE NEWS CORPORATION LIMITED
During February 1997, EchoStar and News Corporation announced an
agreement pursuant to which, among other thing, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of EchoStar.
During late April 1997, substantial disagreements arose between the parties
regarding their obligations under this agreement. Those substantial
disagreements led to litigation which the parties subsequently settled. In
connection with the News Corporation litigation that arose in 1997, EchoStar
has a contingent fee arrangement with its attorneys, which provides for the
attorneys to be paid a percentage of any net recovery obtained in its dispute
with News Corporation. The attorneys have asserted that they may be entitled
to receive payments in excess of $80 million to $100 million under this fee
arrangement in connection with the settlement of the dispute with News
Corporation. EchoStar intends to vigorously contest the attorneys'
interpretation of the fee arrangement, which EchoStar believes significantly
overstates the magnitude of its liability. If the attorneys and EchoStar are
unable to resolve this fee dispute under the fee arrangement, the fee dispute
would be resolved through arbitration or litigation. It is too early to
determine the outcome of this fee dispute.
8
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, United
States Satellite Broadcasting Company, Inc., EchoStar, and two of EchoStar's
wholly-owned subsidiaries. The lawsuit seeks, among other things, an interim
and permanent injunction prohibiting the defendants from activating receivers
in Canada and from infringing any copyrights held by WIC. It is too early to
determine whether or when any other lawsuits or claims will be filed. It is
also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
which also include ECC and Echosphere Corporation, a wholly-owned subsidiary
of 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, interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of $175 million. It is too early to
determine whether or when any other lawsuits or claims will be filed. It is
also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes EchoStar to
provide satellite-delivered network channels to customers who qualify as
"unserved households," defined in the Satellite Home Viewer Act as consumers
who, among other things, "cannot receive, through the use of a conventional
outdoor rooftop receiving antenna, an over-the-air signal of Grade B
intensity, as defined by the FCC, of a primary network station affiliated
with that network." Historically, EchoStar obtained distant broadcast network
signals for distribution to its customers through PrimeTime 24, Joint Venture
("PrimeTime 24"). PrimeTime 24 also distributed network signals to certain
of EchoStar's competitors in the satellite industry.
The national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. The United States District Court for the Southern
District of Florida entered a nationwide permanent injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
injunction covers "distributors" as well. The plaintiffs in the Florida
litigation informed EchoStar that they considered EchoStar to be a
"distributor" for purposes of that injunction. A federal district court in
North Carolina has also issued an injunction against PrimeTime 24 prohibiting
certain distant signal retransmissions in the Raleigh area. Other copyright
litigation against PrimeTime 24 is pending.
EchoStar ceased delivering PrimeTime 24 programming in July 1998, and
began uplinking and distributing network channels directly. EchoStar has also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by EchoStar.
On October 19, 1998, EchoStar filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. EchoStar asked the court to enter a judgment declaring that
its method of providing distant network programming does not violate the
Satellite Home Viewer Act and hence does not infringe the networks'
copyrights. On November 5, 1998, the four major broadcast networks and their
affiliate groups filed a complaint against EchoStar in federal court in Miami
alleging, among other things, copyright
9
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
infringement. The plaintiffs in that action have also requested the issuance
of a preliminary injunction against EchoStar. The case filed by EchoStar was
subsequently transferred to the Florida courts.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. ("DIRECTV") in Miami relating to the delivery of
distant network channels to DIRECTV customers by satellite. On March 12,
1999, DIRECTV and the four networks announced that they had reached a
settlement of that dispute. Under the terms of the settlement, DIRECTV
customers predicted to receive a strong signal of Grade A intensity from
their local stations will lose access to their satellite provided network
channels by July 31, 1999, while DIRECTV customers predicted to receive a
weaker, but allegedly adequate signal of Grade B intensity from their local
stations will 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.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that court to enjoin EchoStar from providing
network programming except under very limited circumstances. In general, the
networks want EchoStar to turn off programming to its customers on the same
schedule agreed to by DIRECTV. EchoStar intends to vigorously contest the
issuance of such an injunction. In the event of a decision adverse to
EchoStar in this case, significant material restrictions on the sale of
distant ABC, NBC, CBS and Fox channels by EchoStar could result. Among other
things, EchoStar could be required to terminate delivery of network signals
to a material portion of its subscriber base. While the Networks have not
sought monetary damages, they have sought to recover attorney fees if they
prevail. EchoStar has commenced sending letters to some of its subscribers
warning that their access to distant broadcast network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber. While there can be no assurance, any
such decrease could be offset by increases in average monthly revenue per
subscriber resulting from the delivery of local network channels by
satellite, and increases in programming offerings that will follow the
scheduled launches of EchoStar V and EchoStar VI later this year. While there
can be no assurance, legislation pending in the Senate would, if passed into
law, reduce the number of customers whose network channels EchoStar might
otherwise be required to terminate.
EchoStar is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not
materially affect the Company's financial position or results of operations.
METEOROID EVENTS
In November 1998 certain meteoroid events occurred as the earth's orbit
passed through the particulate trail of Comet 55P (Tempel-Tuttle). EchoStar
believes that its DBS satellites did not incur any significant damage as a
result of these events. Similar meteoroid events are expected to occur again
in November 1999. These meteoroid events continue to pose a potential threat
to all in-orbit geosynchronous satellites, including EchoStar's DBS
satellites. While the probability that EchoStar's spacecraft will be damaged
by space debris is very small, that probability will increase by several
orders of magnitude during the November 1999 meteoroid events. EchoStar is
presently evaluating the potential effects that the November 1999 meteoroid
events may have on its DBS satellites. While there can be no assurance, due
to its significant satellite capacity, EchoStar is relatively well positioned
to avoid any interruption of service due to any potential damage resulting
from these meteoroid events.
10
<PAGE>
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
10. SEGMENT REPORTING
EchoStar adopted Financial Accounting Standard No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("FAS No. 131")
effective as of the year ended December 31, 1998. FAS No. 131 establishes
standards for reporting information about operating segments in annual
financial statements of public business enterprises and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders.
<TABLE>
<CAPTION>
ECHOSTAR
DISH TECHNOLOGIES SATELLITE ELIMINATIONS CONSOLIDATED
NETWORK CORPORATION SERVICES AND OTHER TOTAL
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenue.............................. $ 305,158 $141,247 $10,794 $ 3,078 $ 460,277
Net income (loss).................... (75,195) 19,579 9,480 (49,467) (95,603)
SIX MONTHS ENDED JUNE 30, 1999
Revenue.............................. $ 593,988 $ 49,405 $23,158 $ (7,309) $ 659,242
Net income (loss) before
extraordinary charges.............. (203,113) (7,018) 12,183 18,487 (179,461)
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN, AS WELL AS STATEMENTS MADE IN PRESS
RELEASES AND ORAL STATEMENTS THAT MAY BE MADE BY US OR BY OFFICERS, DIRECTORS
OR EMPLOYEES ACTING ON OUR BEHALF, THAT ARE NOT STATEMENTS OF HISTORICAL FACT
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT COULD
CAUSE OUR ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM HISTORICAL RESULTS
OR FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: A TOTAL OR PARTIAL LOSS OF A SATELLITE DUE TO
OPERATIONAL FAILURES, SPACE DEBRIS OR OTHERWISE; AN UNSUCCESSFUL LAUNCH OR
DEPLOYMENT OF OUR FIFTH OR SIXTH SATELLITE, ECHOSTAR V AND ECHOSTAR VI,
RESPECTIVELY; A DECREASE IN SALES OF DIGITAL EQUIPMENT AND RELATED SERVICES
TO INTERNATIONAL DIRECT-TO-HOME OR DTH SERVICE PROVIDERS; A DECREASE IN DISH
NETWORK SUBSCRIBER GROWTH; AN INCREASE IN SUBSCRIBER TURNOVER; AN INCREASE IN
SUBSCRIBER ACQUISITION COSTS; IMPEDIMENTS TO THE RETRANSMISSION OF LOCAL OR
DISTANT BROADCAST NETWORK SIGNALS WHICH COULD RESULT FROM PENDING LITIGATION
OR LEGISLATION; LOWER THAN EXPECTED DEMAND FOR OUR DELIVERY OF LOCAL
BROADCAST NETWORK SIGNALS; AN UNEXPECTED BUSINESS INTERRUPTION DUE TO THE
FAILURE OF THIRD-PARTIES TO REMEDIATE YEAR 2000 ISSUES; OUR INABILITY TO
RETAIN NECESSARY AUTHORIZATIONS FROM THE FCC; AN INCREASE IN COMPETITION FROM
CABLE, DIRECT BROADCAST SATELLITE, OTHER SATELLITE SYSTEM OPERATORS, AND
OTHER PROVIDERS OF SUBSCRIPTION TELEVISION SERVICES; THE INTRODUCTION OF NEW
TECHNOLOGIES AND COMPETITORS INTO THE SUBSCRIPTION TELEVISION BUSINESS; A
CHANGE IN THE REGULATIONS GOVERNING THE SUBSCRIPTION TELEVISION SERVICE
INDUSTRY; THE OUTCOME OF ANY LITIGATION IN WHICH WE MAY BE INVOLVED; GENERAL
BUSINESS AND ECONOMIC CONDITIONS; AND OTHER RISK FACTORS DESCRIBED FROM TIME
TO TIME IN OUR REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. IN
ADDITION TO STATEMENTS THAT EXPLICITLY DESCRIBE SUCH RISKS AND UNCERTAINTIES,
READERS ARE URGED TO CONSIDER STATEMENTS THAT INCLUDE THE TERMS "BELIEVES,"
"BELIEF," "EXPECTS," "PLANS," "ANTICIPATES," "INTENDS" OR THE LIKE TO BE
UNCERTAIN AND FORWARD-LOOKING. ALL CAUTIONARY STATEMENTS MADE HEREIN SHOULD
BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY
APPEAR. IN THIS CONNECTION, INVESTORS SHOULD CONSIDER THE RISKS DESCRIBED
HEREIN AND SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998.
REVENUE. Total revenue for the three months ended June 30, 1999 was
$350 million, an increase of $104 million compared to total revenue for the
three months ended June 30, 1998 of $246 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth,
partially offset by a decrease in EchoStar Technologies Corporation's or
ETC's DTH equipment sales and integration services revenue. We expect that
our revenues will continue to increase as the number of DISH Network
subscribers increases.
DISH Network subscription television services revenue totaled $306 million
for the three months ended June 30, 1999, an increase of $154 million or 102%
compared to the same period in 1998. This increase was directly attributable
to the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. Average DISH Network subscribers for the three
months ended June 30, 1999 increased approximately 89% compared to the same
period in 1998. As of June 30, 1999, we had approximately 2.6 million DISH
Network subscribers compared to 1.4 million at June 30, 1998. Monthly
revenue per subscriber approximated $42 and $39 during the three months ended
June 30, 1999 and 1998, respectively. DISH Network subscription television
services revenue principally consists of revenue from basic, premium and
pay-per-view subscription television services. DISH Network subscription
television services will continue to increase to the extent we are successful
in increasing the number of DISH Network subscribers and maintaining or
increasing revenue per subscriber.
For the three months ended June 30, 1999, DTH equipment sales and
integration services totaled $27 million, a decrease of $53 million compared
to 1998. DTH equipment sales consist of sales of digital set-top boxes and
other digital satellite broadcasting equipment by us to international DTH
service operators. We currently have agreements to provide equipment to DTH
service operators in Spain and Canada. This decrease in DTH equipment sales
and integration services revenue, which was expected, was primarily
attributable to decreased shipments to the Spanish DTH service operator as a
result of lower demand.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Substantially all of our ETC revenues have resulted from sales to two
international DTH providers. As a result, our ETC business currently is
economically dependent on these two DTH providers. Our future revenue from
the sale of DTH equipment and integration services in international markets
depends largely on the success of these DTH operators and continued demand
for our digital set-top boxes. Due to the continued decrease in the sales
price of digital set-top boxes and increasing competition, we expect that our
DTH equipment and integration services revenue for the year ended December 31,
1999 may decline as much as 50% as compared to 1998. 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.
During July 1998, Telefonica, one of the two DTH service providers
described above, announced its intention to merge with Sogecable (Canal Plus
Satellite), one of its primary competitors. In October 1998, Telefonica
announced that the merger negotiations had been suspended. Subsequently,
negotiations between Telefonica and Canal Plus Satellite were resumed and
again suspended. Currently, we do not expect that merger negotiations will
resume. Although we have binding purchase orders from Telefonica for 1999
deliveries of DTH equipment, we cannot yet predict the impact, if any,
eventual consummation of this often discussed merger might have on our future
sales to Telefonica.
Satellite services revenue totaled $10 million during the three months
ended June 30, 1999, an increase of $4 million as compared to the same period
during 1998. These revenues principally include fees charged to content
providers for signal carriage and revenues earned from business television,
or BTV customers. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time
BTV customers. Satellite services revenue is expected to increase during the
remainder of 1999 to the extent we are successful in increasing the number of
our BTV customers and developing and implementing new services.
In order, among other things, to prepare for a potential adverse result
in our pending litigation with the four major broadcast networks and their
affiliate groups, we have sent letters to some of our subscribers warning
that their access to CBS, NBC, Fox and ABC distant network channels might be
terminated this year. Such terminations would result in a small reduction in
average monthly revenue per subscriber. 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 programming offerings that will follow the
scheduled launches of EchoStar V and EchoStar VI later this year. While
there can be no assurance, legislation pending in the Senate would, if passed
into law, reduce the number of customers whose network channels we may
otherwise be required to terminate.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $169 million during the three months ended June 30, 1999, an increase
of $80 million or 89%, compared to the same period in 1998. The increase in
DISH Network operating expenses was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers.
DISH Network operating expenses represented 55% and 59% of subscription
television services revenue during the three months ended June 30, 1999 and
1998, respectively.
Subscriber-related expenses totaled $133 million during the three months
ended June 30, 1999, an increase of $64 million compared to the same period
in 1998. Such expenses, which include programming expenses, copyright
royalties, residuals payable to retailers and distributors, and billing,
lockbox and other variable subscriber expenses, represented 43% of subscription
television services revenues during the three months ended June 30, 1999
compared to 46% during the same period in 1998. The decrease in this expense
to revenue ratio resulted from subscription television services revenue
increasing at a greater rate than subscriber-related expenses, due to greater
premium channel penetration and subscription price increases. Although we do
not currently expect subscriber-related expenses as a percentage of
subscription television services revenue to increase materially in future
periods, there can be no assurance this expense to revenue ratio will not
materially increase.
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such
as personnel and telephone expenses, as well as subscriber equipment
installation and other operating expenses. Customer service center and other
expenses totaled $25 million during the
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
three months ended June 30, 1999, an increase of $11 million as compared to
the same period in 1998. The increase in customer service center and other
expenses resulted from increased personnel and telephone expenses to support
the growth of the DISH Network. Customer service center and other expenses
totaled 8% of subscription television services revenue during the three
months ended June 30, 1999, as compared to 9% during the same period in 1998.
Although we do not expect customer service center and other expenses as a
percentage of subscription television services revenue to increase materially
in future periods, there can be no assurance this expense to revenue ratio
will not materially increase.
Satellite and transmission expenses include expenses associated with the
operation of our digital broadcast center, contracted satellite telemetry,
tracking and control services, and satellite in-orbit insurance. Satellite
and transmission expenses totaled $11 million during the three months ended
June 30, 1999, a $6 million increase compared to the same period in 1998.
This increase resulted from higher satellite and other digital broadcast
center operating expenses due to an increase in the number of operational
satellites. We expect satellite and transmission expenses to continue to
increase in the future as additional satellites or digital broadcast centers
are placed in service. Satellite and transmission expenses totaled 4% of
subscription television services revenue during the three months ended June 30,
1999 and 1998. We expect this expense to revenue ratio to decline to the
extent we are successful in increasing the number of DISH Network subscribers
and maintaining or increasing revenue per subscriber.
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales -
DTH equipment and integration services totaled $19 million during the three
months ended June 30, 1999, a decrease of $35 million compared to the same
period in 1998. This decrease is consistent with the decrease in DTH
equipment revenue. Cost of sales - DTH equipment and integration services
principally includes costs associated with digital set-top boxes and related
components sold to international DTH operators. Cost of sales - DTH
equipment and integration services represented 69% and 67% of DTH equipment
revenue, during the three months ended June 30, 1999 and 1998, respectively.
We expect that cost of sales - DTH equipment and integration services may
increase as a percentage of DTH equipment revenue in the future, due to price
pressure resulting from increased competition from other providers of DTH
equipment.
MARKETING EXPENSES. Marketing expenses totaled $152 million during the
three months ended June 30, 1999, an increase of $84 million or 125%,
compared to the same period in 1998. The increase in marketing expenses was
primarily attributable to an increase in subscriber promotion subsidies.
Subscriber promotion subsidies include the excess of transaction costs over
transaction proceeds at the time of sale of EchoStar receiver systems,
activation allowances paid to retailers, and other promotional incentives.
Advertising and other expenses totaled $9 million during each of the three
months ended June 30, 1999 and 1998.
During the three months ended June 30, 1999, our subscriber acquisition
costs, inclusive of acquisition marketing expenses, totaled $151 million, or
approximately $365 per new subscriber activation. Comparatively, our
subscriber acquisition costs during the three months ended June 30, 1998,
inclusive of acquisition marketing expenses and deferred subscriber
acquisition costs, totaled $66 million, or approximately $280 per new
subscriber activation. The increase in our subscriber acquisition costs, on
a per new subscriber activation basis, principally resulted from the
introduction of several aggressive marketing promotions to acquire new
subscribers.
During the second quarter of 1999, we introduced the C-band bounty
program, continued our PrimeStar bounty program and further enhanced our DISH
Network One-Rate Plan. Our subscriber acquisition costs under these programs
are significantly higher than those under our other marketing programs.
Under the enhanced DISH Network One-Rate Plan, consumers are eligible to
receive a rebate that ranges from $100 up to $299 on the purchase of certain
EchoStar receiver systems. To be eligible for this rebate, a subscriber must
make a one-year commitment to subscribe to our America's Top 100 CD
programming package plus additional channels. The amount of the monthly
programming commitment determines the amount of the rebate. Although
subscriber acquisition costs are materially higher under this plan compared
to previous promotions, DISH Network One-Rate Plan customers generally
provide materially greater average revenue per subscriber than a typical DISH
Network subscriber. In addition, we believe that these customers represent
lower credit risk and therefore may be marginally less likely to disconnect
their service than other DISH Network subscribers. Under the enhanced DISH
Network One-Rate Plan, we presently expect the
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
participation rate to remain at approximately 30% of new subscriber
activations during the duration of the promotion. To the extent that actual
consumer participation levels exceed present expectations, subscriber
acquisition costs may materially increase. Although there can be no
assurance as to the ultimate duration of the DISH Network One-Rate Plan, it
will continue through at least September 1999.
Under our bounty programs, current C-band and PrimeStar customers are
eligible to receive a free base-level EchoStar receiver system, free
installation and six months of our America's Top 40 programming (which
retails for $19.99 per month) without charge. A subscriber must make a
one-year commitment to subscribe to either our America's Top 40 or our
America's Top 100 CD programming package and prove that they are a current
C-band or PrimeStar customer to be eligible for this program.
Based upon our current promotions we expect a modest increase in average
subscriber acquisition costs during the remainder of 1999. However our
subscriber acquisition costs, both in aggregate and on a per new subscriber
activation basis, may materially increase to the extent that we expand our
bounty programs or the DISH Network One-Rate Plan, or if we determine that
more aggressive promotions are necessary to respond to competition, or for
other reasons.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $32 million during the three months ended June 30, 1999, an
increase of $9 million as compared to the same period in 1998. The increase
in G&A expenses was principally attributable to increased personnel expenses
to support the growth of the DISH Network. G&A expenses as a percentage of
total revenue decreased to 9% during the three months ended June 30, 1999
compared to 10% during the same period in 1998. Although we expect G&A
expenses as a percentage of total revenue to remain near this level or
decline modestly in future periods, this expense to revenue ratio could
increase.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash deferred compensation. EBITDA was negative
$23 million during the three months ended June 30, 1999 compared to $3 million
during the three months ended June 30, 1998. EBITDA, as adjusted to exclude
amortization of subscriber acquisition costs, was negative $23 million for
the three months ended June 30, 1999 compared to $8 million for the same
period in 1998. This decline in EBITDA principally resulted from a decrease
in DTH equipment revenue and an increase in subscriber promotion subsidies.
It is important to note that EBITDA does not represent cash provided or used
by operating activities. Further, our calculation of EBITDA for the three
months ended June 30, 1999 does not include approximately $1.7 million of
non-cash compensation resulting from appreciation of stock options granted to
employees. EBITDA should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with generally accepted
accounting principles.
As previously discussed, to the extent we expand our current marketing
promotions and our subscriber acquisition costs materially increase, our
EBITDA results will be negatively impacted because subscriber acquisition
costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
aggregated $26 million during the three months ended June 30, 1999, a
$1 million increase compared to the same period in 1998, during which
subscriber acquisition costs were amortized. Commencing October 1997, we
instead expensed all of these costs at the time of sale. The increase in
depreciation and amortization expenses principally resulted from an increase
in depreciation related to the commencement of operation of EchoStar IV in
August of 1998 and other depreciable assets placed in service during 1998,
partially offset by subscriber acquisition costs becoming fully amortized
during the third quarter of 1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $25 million during
the three months ended June 30, 1999, a decrease of $4 million compared to
the same period in 1998. This decrease was primarily the result of a gain on
the sale of investments, partially offset by a loss on disposal of assets and
an increase in interest expense. In January 1999, we refinanced our
outstanding 12 1/2% Senior Secured Notes due 2002 issued in June 1997,
referred to herein as the 1997 notes; our 12 7/8% Senior Secured Discount
Notes due 2004 issued in 1994, referred to herein as the
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
1994 notes; and our 13 1/8% Senior Secured Discount Notes due 2004 issued in
1996, referred to herein as the 1996 notes, at more favorable interest rates
and terms. In connection with the refinancing, we consummated an offering of
9 1/4% Senior Notes due 2006, referred to herein as the seven year notes, and
9 3/8% Senior Notes due 2009, referred to herein as the ten year notes.
Although the seven and ten year notes have lower interest rates than the debt
securities we repurchased, interest expense increased by approximately
$12 million because we raised additional debt to cover tender premiums and
consent and other fees related to the refinancing.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998.
REVENUE. Total revenue for the six months ended June 30, 1999 was
$659 million, an increase of $199 million compared to total revenue for the
six months ended June 30, 1998 of $460 million. The increase in total
revenue was primarily attributable to DISH Network subscriber growth and
higher average revenue per subscriber.
DISH Network subscription television services revenue totaled $567 million
for the six months ended June 30, 1999, an increase of $287 million or 102%
compared to the same period in 1998. This increase was directly attributable
to the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. Average DISH Network subscribers for the six months
ended June 30, 1999 increased approximately 88% compared to the same period
in 1998.
For the six months ended June 30, 1999, DTH equipment sales and
integration services totaled $60 million, a decrease of $88 million compared
to 1998. This expected decrease in DTH equipment sales and integration
services revenue was primarily attributable to a decrease in demand combined
with a decrease in the sales price of digital set-top boxes attributable to
increased competition.
Satellite services revenue totaled $18 million during the six months
ended June 30, 1999, an increase of $8 million as compared to the same period
during 1998. The increase in satellite services revenue was primarily
attributable to increased BTV revenue due to the addition of new full-time
BTV customers.
DISH NETWORK OPERATING EXPENSES. DISH Network operating expenses
totaled $313 million during the six months ended June 30, 1999, an increase
of $143 million or 84%, compared to the same period in 1998. The increase in
DISH Network operating expenses was consistent with, and primarily
attributable to, the increase in the number of DISH Network subscribers.
DISH Network operating expenses represented 55% and 61% of subscription
television services revenue during the six months ended June 30, 1999 and
1998, respectively.
Subscriber-related expenses totaled $243 million during the six months
ended June 30, 1999, an increase of $110 million compared to the same period
in 1998. Such expenses represented 43% of subscription television services
revenues during the six months ended June 30, 1999 compared to 48% during the
same period in 1998. The decrease in this expense to revenue ratio resulted
from subscription television services revenue increasing at a greater rate
than subscriber-related expenses, due to greater premium channel penetration
and subscription price increases. Although we expect subscriber-related
expenses as a percentage of subscription television services revenue to
remain near this level in future periods, this expense to revenue ratio could
increase.
Customer service center and other expenses totaled $49 million during
the six months ended June 30, 1999, an increase of $23 million as compared to
the same period in 1998. The increase in customer service center and other
expenses resulted from increased personnel and telephone expenses to support
the growth of the DISH Network. Customer service center and other expenses
totaled 9% of subscription television services revenue during each of the six
months ended June 30, 1999 and 1998.
Satellite and transmission expenses totaled $20 million during the six
months ended June 30, 1999, a $9 million increase compared to the same period
in 1998. This increase resulted from higher satellite and other digital
broadcast center operating expenses due to an increase in the number of
operational satellites. Satellite and transmission expenses represented 4%
of subscription television services revenue during the six months ended
June 30, 1999 and 1998.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
COST OF SALES - DTH EQUIPMENT AND INTEGRATION SERVICES. Cost of sales -
DTH equipment and integration services totaled $42 million during the six
months ended June 30, 1999, a decrease of $59 million compared to the same
period in 1998. This decrease is consistent with the decrease in DTH
equipment revenue. Cost of sales - DTH equipment and integration services
represented 70% of DTH equipment revenue during the six months ended June 30,
1999 as compared to 69% during the same period in 1998.
MARKETING EXPENSES. Marketing expenses totaled $291 million during the
six months ended June 30, 1999, an increase of $171 million or 143%, compared
to the same period in 1998. The increase in marketing expenses was primarily
attributable to an increase in subscriber promotion subsidies. Advertising
and other expenses totaled $21 million during the six months ended June 30,
1999, an increase of $3 million over the same period in 1998.
During the six months ended June 30, 1999, our subscriber acquisition
costs, inclusive of acquisition marketing expenses, totaled $293 million.
Comparatively, our subscriber acquisition costs during the six months ended
June 30, 1998, inclusive of acquisition marketing expenses and deferred
subscriber acquisition costs, totaled $102 million. The increase in our
subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the introduction of several aggressive marketing
promotions to acquire new subscribers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses totaled $62 million during the six months ended June 30, 1999, an
increase of $19 million as compared to the same period in 1998. The increase
in G&A expenses was principally attributable to increased personnel expenses
to support the growth of the DISH Network. G&A expenses as a percentage of
total revenue totaled 9% during each of the six months ended June 30, 1999
and 1998.
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and other non-cash deferred compensation. EBITDA was negative
$54 million and $222,000, during the six months ended June 30, 1999 and 1998,
respectively. EBITDA, as adjusted to exclude amortization of subscriber
acquisition costs, was negative $54 million for the six months ended June 30,
1999 compared to $17 million for the same period in 1998. This decline in
EBITDA principally resulted from a decrease in DTH equipment revenue and an
increase in subscriber promotion subsidies. It is important to note that
EBITDA does not represent cash provided or used by operating activities.
Further, our calculation of EBITDA for the six months ended June 30, 1999
does not include approximately $1.7 million of non-cash compensation
resulting from appreciation of stock options granted to employees. EBITDA
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
aggregated $51 million during the six months ended June 30, 1999, a $3 million
decrease compared to the same period in 1998, during which subscriber
acquisition costs were amortized. The decrease in depreciation and
amortization expenses principally resulted from subscriber acquisition costs
becoming fully amortized during the third quarter of 1998, offset by an
increase in depreciation related to the commencement of operation of EchoStar
IV in August of 1998 and other depreciable assets placed in service during
1998.
OTHER INCOME AND EXPENSE. Other expense, net totaled $73 million during
the six months ended June 30, 1999, an increase of $15 million as compared to
the same period in 1998. The increase in other expense resulted primarily
from an increase in interest expense associated with our seven and ten year
notes, partially offset by a gain on the sale of the investments.
LIQUIDITY AND CAPITAL RESOURCES
CASH SOURCES
On January 25, 1999 we sold $375 million principal amount of the seven
year notes and $1.625 billion principal amount of the ten year notes,
together referred to as the notes. Concurrent with the closing of these
offerings,
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
we used approximately $1.658 billion of net proceeds received from the sale
of the notes to complete tender offers for our outstanding 1994 notes, 1996
notes and 1997 notes. In February 1999, we used approximately $268 million
of net proceeds received from the sale of the notes to complete a tender
offer for our 12 1/8% Senior Preferred Exchange Notes issued on January 4,
1999, in exchange for all issued and outstanding 12 1/8% Series B Senior
Redeemable Exchangeable Preferred Stock.
As of June 30, 1999, our unrestricted cash, cash equivalents and
marketable investment securities totaled $385 million compared to $324 million
as of December 31, 1998. For the six months ended June 30, 1999 and 1998, we
reported net cash flows from operating activities of $72 million and
$19 million, respectively.
SUBSCRIBER TURNOVER
Our subscriber turnover, or churn, continues to be in line with our
current internal benchmark of 1.25%, notwithstanding expected seasonal
increases experienced during the spring and summer. While we expect to be
able to continue to manage churn in line with our internal benchmark for the
remainder of this year, we can provide no assurance that churn will not
increase. Further, our benchmark could increase in the future as our
subscriber base, and the industry generally, mature.
SUBSCRIBER ACQUISITION COSTS
As previously described, we subsidize the cost of EchoStar receiver
systems in order to attract new DISH Network subscribers. Consequently, our
subscriber acquisition costs are significant. During the six months ended
June 30, 1999, our aggregate subscriber acquisition costs, which include
subscriber promotion subsidies and acquisition marketing expenses, approximated
$360 per new subscriber activation. Our subscriber acquisition costs, both
in the aggregate and on a per new subscriber activation basis, may materially
increase to the extent that we continue or expand our bounty programs or the
DISH Network One-Rate Plan, or if we determine that more aggressive
promotions are necessary to respond to competition, or for other reasons.
Funds necessary to meet these subscriber acquisition costs will be satisfied
from existing cash and investment balances to the extent available. We may,
however, be required to raise additional capital in the future to meet these
requirements. There can be no assurance that additional financing will be
available on acceptable terms, or at all.
OBLIGATIONS
Interest accrues at the rate of 9 1/4% and 9 3/8% on the seven and ten
year notes, respectively. Interest on the seven and ten year notes is
payable semi-annually in cash in arrears on February 1 and August 1 of each
year, commencing August 1, 1999. Although the seven and ten year notes have
lower interest rates than the debt securities we repurchased, reported
interest expense will increase because we raised additional debt to cover
tender premiums and consent and other fees related to the refinancing.
FUTURE CAPITAL REQUIREMENTS
As of June 30, 1999, we had approximately $2.0 billion of outstanding
long-term debt, which includes $2.6 million of 1994 notes, 1996 notes, 1997
notes, and Senior Exchange notes which remain outstanding. We are required
to retire these remaining notes when they mature, and the indentures
governing the 1994, 1996 and 1997 notes will remain outstanding (although
substantially all of the restrictive covenants have been eliminated) until
each series of notes has been retired in full. Additionally, beginning in
August 1999, we will have semi-annual cash debt service requirements of
approximately $94 million related to the seven and ten year notes. There are
no scheduled principal payment or sinking fund requirements prior to maturity
of these notes.
We utilized $91 million of satellite vendor financing for our first four
satellites. As of June 30, 1999, approximately $49 million of that satellite
vendor financing remained outstanding. The satellite vendor financing bears
interest at 8 1/4% and is payable in equal monthly installments over five
years following launch of the satellite to which it relates.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
During the remainder of 1999, we anticipate total capital expenditures
of approximately $50 million. This amount includes approximately $14 million
for capital expenditures related to digital encoders required by the Cheyenne
digital broadcast center to accommodate expansion to approximately 500 video
and audio channels, as a result of the consummation of the 110 acquisition.
In addition, we expect to expend over $100 million, and perhaps more than
$125 million, primarily during 2000, in one-time expenses associated with
repositioning subscriber satellite dishes toward the 110DEG. West Longitude
orbital location.
As a result of the anomalies experienced by EchoStar IV and in order to
fully exploit certain of our remaining FCC-allocated DBS frequencies, we intend
to deploy one or more additional DBS satellites. Upon consummation of the
110 acquisition we acquired two additional DBS satellites, EchoStar V and
EchoStar VI. However, there can be no assurance that EchoStar V and
EchoStar VI will be launched and deployed successfully. We are also
evaluating other contingency plans. There can be no assurance that net
insurance proceeds will be sufficient to fully cover the costs to deploy
replacement DBS satellites.
In addition to our DBS business plan, we have licenses, or applications
pending with the FCC, for a two satellite FSS Ku-band satellite system, a two
satellite FSS Ka-band satellite system, and a proposed modification thereof
and a Low Earth Orbit Mobile-Satellite Service 6-satellite system. We will
need to raise additional capital to fully construct these satellites.
Further, there may be a number of factors, some of which are beyond our
control or ability to predict, that could require us to raise additional
capital. These factors include unexpected increases in operating costs and
expenses, a defect in or the loss of any satellite, or an increase in the
cost of acquiring subscribers due to additional competition, among other
things. There can be no assurance that additional debt, equity or other
financing, if required, will be available on terms acceptable to us, or at
all.
The amount of capital required to fund the remainder of our 1999 working
capital and capital expenditure needs will vary, dependent upon the growth
rate of the Dish Network, our subscriber acquisition costs, and our ability
to expand our other business units. During the first half of 1999,
subscriber growth exceeded our expectations. To the extent the subscriber
growth rate continues to exceed our expectations, it may be necessary for us
to raise additional capital to fund increased working capital requirements.
In addition, our working capital and capital expenditure requirements could
increase materially in the event of increased competition for subscription
television customers, significant satellite failures, or general economic
downturn, among other factors.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied from existing cash and investment
balances, and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent, among other
things, upon our ability to continue to rapidly expand our DISH Network
subscriber base, retain existing DISH Network subscribers, and our ability to
grow our ETC and Satellite Services businesses. If cash generated from our
operations is not sufficient to meet our debt service requirements or other
obligations, we would be required to obtain cash from other financing
sources. There can be no assurance that such financing would be available on
terms acceptable to us, or if available, that the proceeds of such financing
would be sufficient to enable us to meet all of our obligations.
YEAR 2000 READINESS DISCLOSURE
We have assessed and continue to assess the impact of the Year 2000
issue on our computer systems and operations. The Year 2000 issue exists
because many computer systems and applications currently use two-digit date
fields to designate a year. Thus, as the century date approaches, date
sensitive systems may recognize the year 2000 as 1900 or not at all. The
inability to recognize or properly treat the year 2000 may cause computer
systems to process critical financial and operational information
incorrectly. If our Year 2000 remediation plan is not successful or is not
completed in a timely manner, the Year 2000 issue could significantly disrupt
our ability to transact business with our customers and suppliers, and could
have a material impact on our operations. Even if our Year 2000 remediation
plan is successful or completed on time, there can be no assurance that the
systems of other companies with which our systems interact will be timely
converted, or that any such failure to convert by another company would not
have an adverse effect on our business or operations.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
We have established a five-phase plan to address potential Year 2000
issues:
- INVENTORY - the identification of all relevant hardware and software to
establish the scope of subsequent testing;
- ASSESSMENT - the process of evaluating the current level of Year 2000
readiness of all components identified in the inventory phase, defining
actions necessary to retire, replace or otherwise correct all
non-conforming components and estimating resources and timelines
required by action plans;
- REMEDIATION - the correction of previously identified Year 2000 issues;
- VALIDATION/TESTING - the evaluation of each component's performance as
the date is rolled forward to January 1, 2000 and other dates and times
relating to the Year 2000 issue; and
- IMPLEMENTATION - the process of updating components and correcting Year
2000 issues in the production operating environment of a system.
In connection with this effort, we have segregated our computer systems
and corresponding Year 2000 readiness risk into three categories: internal
financial and administrative systems, service-delivery systems, and
third-party systems.
INTERNAL FINANCIAL AND ADMINISTRATIVE SYSTEMS
With respect to our internal financial and administrative systems, we
have completed the inventory phase of the Year 2000 readiness plan by
identifying all systems with potential Year 2000 problems. We have also
completed the process of assessing these systems by communicating with our
outside software and hardware vendors and reviewing their certifications of
Year 2000 readiness, as well as reviewing internal custom programming codes.
Upon completion of the assessment phase, we began the remediation and
validation/testing phases. During the remediation phase, we will attempt to
correct all problems detected while performing the assessment phase. During
the validation/testing phase, we will create a parallel environment of all
internal and administrative systems. We will run tests on the parallel
environment to assess its reaction to changes in dates and times relating to
the Year 2000 issue. We currently expect the remediation and validation/
testing phases to be complete by the end of August 1999, for most of our
corporate systems.
Once all known problems are corrected within the parallel environment,
we will make changes to the actual operating environment of our internal
financial and administrative systems during the implementation phase. We
currently expect to complete the implementation phase by mid October 1999.
While we presently believe that our internal financial and administrative
systems are Year 2000 ready, we will not be able to certify our Year 2000
readiness until the successful completion of the implementation phase. As
new or enhanced technology and software are integrated into our financial and
administrative systems we will perform additional testing to attempt to
ensure continued Year 2000 readiness.
SERVICE-DELIVERY SYSTEMS
We have defined service-delivery systems as all internal systems
necessary to deliver DISH Network programming to our subscribers. During the
inventory phase we initially identified our set-top boxes, compression and
conditional access systems at our digital broadcast center, DBS satellites
and third-party billing system as systems with potential Year 2000 issues.
Given the interdependent nature of the receiver and broadcast systems
used to deliver our service, we previously implemented a smaller, offline
version of our overall system to aid in the evaluation and test of hardware
and software changes that normally occur over time. This system gives us the
ability to perform "real-time" testing of the various elements of the system
by simulating the year 2000 rollover, and confirming system operation. This
ability to perform accurate offline simulations has provided a tremendous
benefit to our Year 2000 test process.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
We have completed initial testing of our set-top receivers. During
these tests, the dates in the broadcast system, and hence the set-top
receivers were rolled forward to each of the dates and times affected by the
Year 2000 issue. We deemed these initial tests successful, as no problems
were detected during thorough testing of the set-top receivers when the dates
were rolled forward. These tests also affirm the integrity of the broadcast
systems supplying the set-top receivers with critical operational system
information. As new technology and software are integrated into our set-top
receivers, we will perform additional testing to attempt to ensure continued
Year 2000 readiness.
In addition to the practical testing performed above, we have completed
an independent inventory and assessment of the systems at our digital
broadcast center and have substantially completed the remediation phase of
our Year 2000 readiness plan. We will continue to perform validation and
testing of communications within our digital broadcast center and expect to
complete this testing during the third quarter of 1999. The validation and
testing of our digital broadcast center is not expected to cause interruption
of programming to DISH Network subscribers.
During the assessment of our DBS satellites, we determined that our
satellites do not operate under a calendar-driven system. Therefore, we do
not expect changes in dates and times to affect the operation of our DBS
satellites.
We are currently working with the vendor of our third-party billing
system to attempt to ensure its Year 2000 readiness. This vendor has
indicated it has substantially completed all testing and remediation
activities on its core systems and is currently testing its custom
interfaces. The vendor has indicated it believes it is currently Year 2000
ready, however we can not provide any assurance in this regard.
THIRD-PARTY SYSTEMS
We also are currently assessing our vulnerability to unexpected business
interruptions due to the failure of third-parties to remediate Year 2000
readiness issues associated with products or services on which our business
relies. In connection with this assessment, we sent letters to third-party
business partners, suppliers and vendors which we deemed significant
requesting that they certify their Year 2000 readiness. To date, we have
received responses from approximately 75% of these vendors. We are presently
in the process of contacting our critical suppliers and vendors who have
either not responded or have not responded adequately to our requests for
proof of certification and will continue to follow-up on unresolved issues
thereafter. There can be no assurance that third-parties who have responded,
or will respond, to our request regarding Year 2000 readiness have responded,
or will respond, accurately or satisfactorily, or that anticipated Year 2000
actions set forth in their responses will be properly conducted.
CONTINGENCY PLANNING
We also are involved in limited contingency planning. In the event that
previously undetected Year 2000 issues arise, contingency plans will be used
to try to mitigate potential system problems. Our internal financial and
administrative and service-delivery contingency plan includes making back-up
copies of certain systems as well as using standby power generators at our
digital broadcasting center. With respect to other third-party systems, we
will continue to contact our critical vendors in order to obtain certification
of their Year 2000 readiness. However, no assurance can be made that such
contingency plans will resolve any Year 2000 problems that may occur, in a
manner which is satisfactory or desirable to us.
COSTS
We have not yet determined the full cost of our Year 2000 readiness plan
and its related impact on our financial condition. In the ordinary course of
business, we have made capital expenditures over the past few years to
improve our systems, for reasons other than Year 2000 remediation. Because
these upgrades also resulted in improved Year 2000 readiness, replacement and
remediation costs have not been material. We currently have budgeted
$300,000 for the completion of our Year 2000 readiness plan. While there can
be no assurance, we believe our costs to successfully mitigate the Year 2000
issue will not be material to our operations. No assurance can be made,
however, as to the total cost for the Year 2000 plan until the plan has been
completed.
21
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
THE NEWS CORPORATION LIMITED
During February 1997, our parent company and News Corporation announced
an agreement pursuant to which, among other thing, News Corporation agreed to
acquire approximately 50% of the outstanding capital stock of our parent
company. During late April 1997, substantial disagreements arose between the
parties regarding their obligations under this agreement. Those substantial
disagreements led to litigation which the parties subsequently settled. In
connection with the News Corporation litigation that arose in 1997, our
parent company has a contingent fee arrangement with its attorneys, which
provides for the attorneys to be paid a percentage of any net recovery
obtained in its dispute with News Corporation. The attorneys have asserted
that they may be entitled to receive payments in excess of $80 million to
$100 million under this fee arrangement in connection with the settlement of
the dispute with News Corporation. Our parent company intends to vigorously
contest the attorneys' interpretation of the fee arrangement, which EchoStar
believes significantly overstates the magnitude of its liability. If the
attorneys and our parent company are unable to resolve this fee dispute under
the fee arrangement, the fee dispute would be resolved through arbitration or
litigation. It is too early to determine the outcome of this fee dispute.
WIC PREMIUM TELEVISION LTD.
On July 28, 1998, a lawsuit was filed by WIC Premium Television Ltd.
("WIC"), an Alberta corporation, in the Federal Court of Canada Trial
Division, against certain defendants which include: General Instrument
Corporation, HBO, Warner Communications, Inc., John Doe, Showtime, United
States Satellite Broadcasting Company, Inc., EchoStar Communications
Corporation, or ECC, and two of our wholly-owned subsidiaries. The lawsuit
seeks, among other things, an interim and permanent injunction prohibiting
the defendants from activating receivers in Canada and from infringing any
copyrights held by WIC. It is too early to determine whether or when any
other lawsuits or claims will be filed. It is also too early to make an
assessment of the probable outcome of the litigation or to determine the
extent of any potential liability or damages.
On September 28, 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
which also include ECC and Echosphere Corporation, our wholly-owned
subsidiary. 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, interim and permanent injunction prohibiting the defendants from
importing hardware into Canada and from activating receivers in Canada and
damages in excess of the equivalent of $175 million. It is too early to
determine whether or when any other lawsuits or claims will be filed. It is
also too early to make an assessment of the probable outcome of the
litigation or to determine the extent of any potential liability or damages.
BROADCAST NETWORK PROGRAMMING
Section 119 of the Satellite Home Viewer Act authorizes us to provide
satellite-delivered network channels to customers who qualify as "unserved
households," defined in the Satellite Home Viewer Act as consumers who, among
other things, "cannot receive, through the use of a conventional outdoor
rooftop receiving antenna, an over-the-air signal of Grade B intensity, as
defined by the FCC, of a primary network station affiliated with that network."
Historically, we obtained distant broadcast network signals for distribution
to our customers through PrimeTime 24, Joint Venture. PrimeTime 24 also
distributed network signals to certain of our competitors in the satellite
industry.
The national networks and local affiliate stations recently challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. The United States District Court for the Southern
District of Florida entered a nationwide permanent injunction preventing
PrimeTime 24 from selling its programming to consumers unless the programming
was sold in accordance with certain stipulations in the injunction. The
injunction covers "distributors" as well. The plaintiffs in the Florida
litigation informed us that they
22
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PART II - OTHER INFORMATION
considered us a "distributor" for purposes of that injunction. A federal
district court in North Carolina has also issued an injunction against
PrimeTime 24 prohibiting certain distant signal retransmissions in the
Raleigh area. Other copyright litigation against PrimeTime 24 is pending.
We ceased delivering PrimeTime 24 programming in July 1998, and began
uplinking and distributing network channels directly. We have also
implemented Satellite Home Viewer Act Section 119 compliance procedures which
materially restrict the market for the sale of network channels by us.
On October 19, 1998, we filed a declaratory judgment action in the
United States District Court for the District of Colorado against the four
major networks. We asked the court to enter a judgment declaring that our
method of providing distant network programming does not violate the
Satellite Home Viewer Act and hence does not infringe the networks'
copyrights. On November 5, 1998, the four major broadcast networks and their
affiliate groups filed a complaint against us in federal court in Miami
alleging, among other things, copyright infringement. The plaintiffs in that
action have also requested the issuance of a preliminary injunction against
us. The case filed by us was subsequently transferred to the Florida courts.
On February 24, 1999, CBS, NBC, Fox, and ABC filed a "Motion for
Temporary Restraining Order, Preliminary Injunction, and Contempt Finding"
against DIRECTV, Inc. in Miami relating to the delivery of distant network
channels to DIRECTV customers by satellite. On March 12, 1999, DIRECTV and
the four networks announced that they had reached a settlement of that
dispute. Under the terms of the settlement, DIRECTV customers predicted to
receive a strong signal of Grade A intensity from their local stations will
lose access to their satellite provided network channels by July 31, 1999,
while DIRECTV customers predicted to receive a weaker, but allegedly adequate
signal of Grade B intensity from their local stations will be disconnected by
December 31, 1999. Subsequently, PrimeTime 24 and substantially all providers
of satellite delivered network programming other than us agreed to this cut
off schedule.
The Networks are currently pursuing a Motion for Preliminary Injunction
in the Miami Court, asking that court to enjoin us from providing network
programming except under very limited circumstances. In general, the
networks want us to turn off programming to our customers on the same
schedule agreed to by DIRECTV. We intend to vigorously contest the issuance
of such an injunction. In the event of a decision adverse to us in this case,
significant material restrictions on the sale of distant ABC, NBC, CBS and
Fox channels by us could result. Among other things, we could be required to
terminate delivery of network signals to a material portion of our subscriber
base. While the Networks have not sought monetary damages, they have sought
to recover attorney fees if they prevail. We have commenced sending letters
to some of our subscribers warning that their access to distant broadcast
network channels might be terminated this year. Such terminations would
result in a small reduction in average monthly revenue per subscriber. While
there can be no assurance, any such decrease could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in programming offerings that
will follow the scheduled launches of EchoStar V and EchoStar VI later this
year. While there can be no assurance, legislation pending in the Senate
would, if passed into law, reduce the number of customers whose network
channels we might otherwise be required to terminate.
ENVIRONMENTAL PROTECTION AGENCY
In connection with a recent expansion of our digital broadcast center in
Cheyenne, Wyoming, two additional underground storage tanks were installed by
a contractor. The underground storage tanks were properly installed and are
being operated in accordance with Environmental Protection Agency regulations.
However, the EPA has alleged that the State of Wyoming was not timely advised
of the installation of those tanks, and that a certificate of compliance was
not timely filed following installation. As a result, during May 1999, we
received notice that the EPA filed a complaint against us and has proposed to
assess a civil penalty of $9,500. In accordance with our construction
contract for the digital broadcast center, the general contractor has agreed
to defend and indemnify us and to hold us harmless for any costs involved
with resolving the complaint.
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PART II - OTHER INFORMATION
We are subject to various other legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, the amount
of ultimate liability with respect to those actions will not materially
affect our financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This information is incorporated by reference to Item 1 of Part I of
this document.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of
shareholders of EchoStar Communications Corporation held on April 16, 1999:
a. The election of Charles W. Ergen, James DeFranco, David K. Moskowitz,
Raymond L. Friedlob and O. Nolan Daines as directors to serve until the
2000 annual meeting of shareholders,
b. The issuance of shares of EchoStar's Class A Common Stock as
consideration for the 110 acquisition,
c. Amendment of EchoStar's Amended and Restated Articles of Incorporation
to clarify certain voting provisions,
d. Approval of the Company's 1999 Stock Incentive Plan, and
e. The ratification of the appointment of Arthur Andersen LLP as
independent auditors for the Company for the year ending December 31,
1999.
All matters voted on at the annual meeting were approved. The voting
results were as follows:
<TABLE>
<CAPTION>
Votes
------------------------------------
Proposal For Against Withheld
-------- ----------- --------- --------
<S> <C> <C> <C>
ELECTION AS DIRECTOR:
Charles W. Ergen 309,956,447 - 164,919
James DeFranco 309,956,482 - 164,884
David K. Moskowitz 309,956,352 - 165,014
Raymond L. Friedlob 309,955,509 - 165,857
O. Nolan Daines 309,956,362 - 165,004
THE ISSUANCE OF SHARES OF ECHOSTAR'S CLASS A COMMON STOCK AS
CONSIDERATION FOR THE 110 ACQUISITION. 306,946,895 5,263 4,550
AMENDMENT OF ECHOSTAR'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO CLARIFY CERTAIN VOTING PROVISIONS. 304,282,585 2,589,016 85,105
APPROVAL OF THE COMPANY'S 1999 STOCK INCENTIVE PLAN 302,093,016 4,773,788 89,900
RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS
INDEPENDENT AUDITORS FOR THE COMPANY FOR THE YEAR ENDING
DECEMBER 31, 1999 310,034,165 9,787 77,414
</TABLE>
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27+ Financial Data Schedule.
______________________________________
+ Filed herewith.
(b) REPORTS ON FORM 8-K.
On May 26, 1999, we filed a Current Report on Form 8-K to report that on
May 25, 1999 we announced a 2-for-1 split of our common stock, which was
approved by our Board of Directors. Effective July 19, 1999, stockholders of
record at the close of business on July 1, 1999 are entitled to one
additional share of common stock for each share they own on the record date.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHOSTAR COMMUNICATIONS CORPORATION
By: /s/ DAVID K. MOSKOWITZ
--------------------------------------------------------------
David K. Moskowitz
Senior Vice President, General Counsel, Secretary and Director
(DULY AUTHORIZED OFFICER)
By: /s/ STEVEN B. SCHAVER
--------------------------------------------------------------
Steven B. Schaver
Chief Financial Officer
(PRINCIPAL FINANCIAL OFFICER)
Date: August 9, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHOSTAR COMMUNICATIONS CORPORATION AS OF AND FOR THE
QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 277,548
<SECURITIES> 107,739
<RECEIVABLES> 115,939
<ALLOWANCES> 3,359
<INVENTORY> 75,456
<CURRENT-ASSETS> 704,665
<PP&E> 1,350,120
<DEPRECIATION> 214,992
<TOTAL-ASSETS> 2,903,402
<CURRENT-LIABILITIES> 581,909
<BONDS> 2,035,894
0
106,530
<COMMON> 1,091
<OTHER-SE> 123,679
<TOTAL-LIABILITY-AND-EQUITY> 2,903,402
<SALES> 641,501<F1>
<TOTAL-REVENUES> 659,242
<CGS> 361,511<F2>
<TOTAL-COSTS> 765,913
<OTHER-EXPENSES> 72,702
<LOSS-PROVISION> 3,370
<INTEREST-EXPENSE> 101,308
<INCOME-PRETAX> (179,373)
<INCOME-TAX> (88)
<INCOME-CONTINUING> (179,461)
<DISCONTINUED> 0
<EXTRAORDINARY> (268,999)
<CHANGES> 0
<NET-INCOME> (448,460)
<EPS-BASIC> (4.82)
<EPS-DILUTED> (4.82)
<FN>
<F1>INCLUDES SALES OF PROGRAMMING.
<F2>INCLUDES COSTS OF PROGRAMMING.
</FN>
</TABLE>
