<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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
incorporation or organization) Identification No.)
5701 S. SANTA FE DRIVE
LITTLETON, COLORADO 80120
(Address of principal executive offices) (Zip code)
(303) 723-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF JULY 24, 2000, THE REGISTRANT'S OUTSTANDING COMMON STOCK CONSISTED OF
234,358,053 SHARES OF CLASS A COMMON STOCK AND 238,435,208 SHARES OF CLASS B
COMMON STOCK.
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1999 and June 30, 2000 (Unaudited)........................................ 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 2000 (Unaudited).......................... 2
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 2000 (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................................................ None
Item 3. Defaults Upon Senior Securities.......................................................... None
Item 4. Submission of Matters to a Vote of Security Holders...................................... 25
Item 5. Other Information........................................................................ None
Item 6. Exhibits and Reports on Form 8-K......................................................... 25
</TABLE>
<PAGE> 3
ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 905,299 $ 486,152
Marketable investment securities ............................................ 348,876 404,470
Trade accounts receivable, net of allowance for uncollectible accounts of
$13,109 and $21,969, respectively ......................................... 159,685 193,284
Insurance receivable ........................................................ 106,000 106,000
Inventories ................................................................. 123,630 204,044
Other current assets ........................................................ 40,205 38,678
------------ ------------
Total current assets ........................................................... 1,683,695 1,432,628
Restricted cash and marketable investment securities ........................... 3,000 3,000
Property and equipment, net .................................................... 1,339,939 1,380,295
FCC authorizations, net ........................................................ 722,402 719,205
Other noncurrent assets ........................................................ 149,153 286,194
------------ ------------
Total assets .............................................................. $ 3,898,189 $ 3,821,322
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable ...................................................... $ 194,046 $ 193,543
Deferred revenue ............................................................ 181,531 232,770
Accrued expenses ............................................................ 499,265 617,194
Current portion of long-term debt ........................................... 22,067 19,072
------------ ------------
Total current liabilities ...................................................... 896,909 1,062,579
Long-term obligations, net of current portion:
1994 Notes .................................................................. 1,503 1,503
1996 Notes .................................................................. 1,097 1,097
1997 Notes .................................................................. 15 15
Seven Year Notes ............................................................ 375,000 375,000
Ten Year Notes .............................................................. 1,625,000 1,625,000
Convertible Notes ........................................................... 1,000,000 1,000,000
Mortgages and other notes payable, net of current portion ................... 27,990 24,144
Long-term deferred satellite services revenue and other long-term
liabilities............................................................... 19,093 25,526
------------ ------------
Total long-term obligations, net of current portion ............................ 3,049,698 3,052,285
------------ ------------
Total liabilities ......................................................... 3,946,607 4,114,864
Commitments and Contingencies (Note 6)
Stockholders' Equity (Deficit):
6 3/4% Series C Cumulative Convertible Preferred Stock, 908,665 and 251,093
shares issued and outstanding, respectively ............................... 45,434 12,555
Class A Common Stock, $.01 par value, 1,600,000,000 shares authorized,
220,087,230 and 234,338,161 shares issued and outstanding,
respectively .............................................................. 2,200 2,343
Class B Common Stock, $.01 par value, 800,000,000 shares authorized,
238,435,208 shares issued and outstanding ................................. 2,384 2,384
Class C Common Stock, $.01 par value, 800,000,000 shares authorized, none
outstanding ............................................................... -- --
Additional paid-in capital .................................................. 1,622,538 1,697,223
Deferred stock-based compensation ........................................... (117,780) (85,454)
Accumulated other comprehensive loss ........................................ -- (676)
Accumulated deficit ......................................................... (1,603,194) (1,921,917)
------------ ------------
Total stockholders' equity (deficit) ........................................... (48,418) (293,542)
------------ ------------
Total liabilities and stockholders' equity (deficit) ...................... $ 3,898,189 $ 3,821,322
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
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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,
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
DISH Network:
Subscription television services ........................ $ 306,781 $ 555,309 $ 567,797 $ 1,032,183
Other ................................................... 2,161 2,169 4,424 3,482
------------ ------------ ------------ ------------
Total DISH Network ........................................ 308,942 557,478 572,221 1,035,665
DTH equipment sales and integration services .............. 27,073 60,034 59,742 122,738
Satellite services ........................................ 9,345 19,360 17,319 33,610
C-band and other .......................................... 4,857 9,257 10,511 19,837
------------ ------------ ------------ ------------
Total revenue ................................................ 350,217 646,129 659,793 1,211,850
COSTS AND EXPENSES:
DISH Network Operating Expenses:
Subscriber-related expenses ............................. 133,060 231,450 243,417 433,024
Customer service center and other ....................... 24,925 68,371 49,034 124,420
Satellite and transmission .............................. 10,629 13,895 20,075 26,371
------------ ------------ ------------ ------------
Total DISH Network operating expenses ..................... 168,614 313,716 312,526 583,815
Cost of sales - DTH equipment and integration services .... 18,606 46,320 41,522 92,542
Cost of sales - C-band and other .......................... 3,393 7,120 7,443 15,236
Marketing:
Subscriber promotion subsidies .......................... 142,965 227,825 270,573 477,912
Advertising and other ................................... 8,967 24,471 20,656 47,641
------------ ------------ ------------ ------------
Total marketing expenses .................................. 151,932 252,296 291,229 525,553
General and administrative ................................ 31,002 58,176 61,025 113,753
Non-cash, stock-based compensation ........................ 1,719 13,022 1,719 27,031
Depreciation and amortization ............................. 25,940 41,710 51,000 82,168
------------ ------------ ------------ ------------
Total costs and expenses ..................................... 401,206 732,360 766,464 1,440,098
------------ ------------ ------------ ------------
Operating loss ............................................... (50,989) (86,231) (106,671) (228,248)
Other Income (Expense):
Interest income ........................................... 8,006 16,947 12,942 35,945
Interest expense, net of amounts capitalized .............. (48,798) (61,502) (101,308) (123,015)
Other ..................................................... 15,674 (2,038) 15,664 (2,581)
------------ ------------ ------------ ------------
Total other expense .......................................... (25,118) (46,593) (72,702) (89,651)
------------ ------------ ------------ ------------
Loss before income taxes ..................................... (76,107) (132,824) (179,373) (317,899)
Income tax provision, net .................................... (22) (36) (88) (91)
------------ ------------ ------------ ------------
Net loss before extraordinary charges ........................ (76,129) (132,860) (179,461) (317,990)
Extraordinary charge for early retirement of debt, net of tax -- -- (268,999) --
------------ ------------ ------------ ------------
Net loss ..................................................... (76,129) (132,860) (448,460) (317,990)
8% Series A Cumulative Preferred Stock dividends ............. -- -- (124) --
12 1/8% Series B Senior Redeemable Exchangeable Preferred
Stock dividends payable in-kind ........................... -- -- (241) --
Accretion of 6 3/4% Series C Cumulative Convertible
Preferred Stock .............................................. (1,885) -- (3,719) --
6 3/4% Series C Cumulative Convertible Preferred Stock
dividends ................................................. -- (240) -- (733)
------------ ------------ ------------ ------------
Numerator for basic and diluted loss per share - loss
attributable to common shareholders ....................... $ (78,014) $ (133,100) $ (452,544) $ (318,723)
============ ============ ============ ============
Denominator for basic and diluted loss per share -
weighted-average common shares outstanding ................ 388,936 471,555 375,736 468,661
============ ============ ============ ============
Net loss per common share:
Basic and diluted loss per share before extraordinary
charge .................................................... $ (0.20) $ (0.28) $ (0.49) $ (0.68)
Extraordinary charge ...................................... -- -- (0.71) --
------------ ------------ ------------ ------------
Basic and diluted net loss ................................ $ (0.20) $ (0.28) $ (1.20) $ (0.68)
============ ============ ============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
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ECHOSTAR COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (448,460) $ (317,990)
Adjustments to reconcile net loss to net cash flows from operating activities:
Extraordinary charge for early retirement of debt ........................... 268,999 --
Deferred stock-based compensation recognized ................................ 1,719 27,031
Loss on disposal of assets .................................................. 8,378 1,091
Depreciation and amortization ............................................... 51,000 82,168
Amortization of debt discount and deferred financing costs .................. 11,841 3,068
Employee benefits funded by issuance of Class A Common Stock ................ 3,545 7,280
Change in reserve for excess and obsolete inventory ......................... (276) 343
Change in long-term deferred satellite services revenue and other long-term
liabilities ............................................................... 20,801 6,433
Other, net .................................................................. (807) 524
Changes in current assets and current liabilities, net ...................... 155,075 52,758
------------ ------------
Net cash flows from operating activities ....................................... 71,815 (137,294)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investment securities .................................. (216,638) (478,825)
Sales of marketable investment securities ...................................... 326,452 422,782
Funds released from escrow and restricted cash and marketable investment
securities ................................................................... 77,657 --
Purchases of property and equipment ............................................ (32,199) (114,709)
Investment in iSKY, Inc. ...................................................... -- (50,000)
Investment in Replay TV ........................................................ -- (10,000)
Investment in Gilat ............................................................ -- (50,045)
Other .......................................................................... (820) (1,445)
------------ ------------
Net cash flows from investing activities ....................................... 154,452 (282,242)
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 .......................... (11,954) (7,982)
Net proceeds from Class A Common Stock options exercised and Class A Common
Stock issued to Employee Stock Purchase Plan ................................. 5,002 9,103
Other .......................................................................... -- (732)
------------ ------------
Net cash flows from financing activities ....................................... (55,266) 389
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................... 171,001 (419,147)
Cash and cash equivalents, beginning of period ................................. 106,547 905,299
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 277,548 $ 486,152
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
8% Series A Cumulative Preferred Stock dividends ............................ $ 124 $ --
12 1/8% Series B Senior Redeemable Exchangeable Preferred Stock dividends
payable in-kind ........................................................... 241 --
Accretion of 6 3/4% Series C Cumulative Convertible Preferred Stock ......... 3,719 --
Class A Common Stock issued related to acquisition of Kelly Broadcasting
Systems, Inc. .............................................................. -- 31,556
Conversion of 6 3/4% Series C Cumulative Convertible Preferred Stock to
Class A common stock ....................................................... 69,567 32,879
Forfeitures of deferred non-cash, stock-based compensation .................. -- 5,994
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
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION AND BUSINESS ACTIVITIES
Principal Business
The operations of EchoStar Communications Corporation include three
interrelated business units:
o The DISH Network - a direct broadcast satellite ("DBS") subscription
television service in the United States. As of June 30, 2000, we had
approximately 4.3 million DISH Network subscribers.
o 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"), the
design and distribution of similar equipment for international
direct-to-home ("DTH") systems, and the provision of uplink center
design, construction oversight and other project integration services
for international DTH ventures.
o 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, we have deployed substantial resources to develop the "EchoStar
DBS System." The EchoStar DBS System consists of our FCC-allocated DBS spectrum,
six DBS satellites ("EchoStar I," "EchoStar II," "EchoStar III," "EchoStar IV,"
"EchoStar V," and "EchoStar VI"), EchoStar receiver systems, digital broadcast
operations centers, customer service facilities, and other assets utilized in
our operations. Our principal business strategy is to continue developing our
subscription television service in the United States to provide consumers with a
fully competitive alternative to cable television service.
Recent Developments
EchoStar VI was successfully launched on July 14, 2000. EchoStar VI will be
tested at 148 degrees West Longitude before moving to its final orbital
location. Subject to FCC approval, EchoStar VI will operate at 119 degrees West
Longitude and EchoStar I may be moved from the 119 degrees orbital location to
the 148 degrees orbital location. This move would allow us to enhance our
primary DBS service at the 119 degrees orbital location, and is expected to
increase the number of channels offered to residents of Alaska and Hawaii.
Assuming successful completion of in-orbit testing, EchoStar VI is expected to
commence commercial service during October 2000.
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, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 1999. Certain prior year amounts have been reclassified to conform with the
current year presentation.
4
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
Comprehensive Loss
The components of comprehensive loss, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
SIX-MONTHS ENDED
JUNE 30,
------------------------------
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Net loss ......................................................... $ (448,460) $ (317,990)
Change in unrealized loss on available-for-sale securities ....... -- (676)
------------ ------------
Comprehensive loss ............................................... $ (448,460) $ (318,666)
============ ============
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
condensed consolidated balance sheets consists of the accumulated net unrealized
loss on available-for-sale securities, net of deferred taxes.
Basic and Diluted Loss Per Share
As of June 30, 2000 and 1999, options to purchase approximately 25,569,000
and 28,512,000 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 (6 3/4% Series C
Cumulative Convertible Preferred Stock and 4 7/8% Convertible Subordinated
Notes) are also antidilutive and excluded from the calculation of diluted loss
per share. Approximately 35,800,000 and 4,121,000 shares of Class A common stock
were issuable upon conversion of the 6 3/4% Series C Cumulative Convertible
Preferred Stock as of June 30, 1999 and 2000, respectively. As of June 30, 2000,
the 4 7/8% Convertible Subordinated Notes are convertible into approximately 22
million shares of Class A common stock.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
<S> <C> <C>
Finished goods - DBS ............................. $ 63,567 $ 108,059
Raw materials .................................... 35,751 65,528
Finished goods - reconditioned and other ......... 19,509 20,496
Work-in-process .................................. 7,666 13,004
Consignment ...................................... 1,084 1,247
Reserve for excess and obsolete inventory ........ (3,947) (4,290)
---------- ----------
$ 123,630 $ 204,044
========== ==========
</TABLE>
5
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ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
4. ECHOSTAR III
During the three months ended June 30, 2000, two transponder pairs on
EchoStar III malfunctioned. Including the three transponder pairs that
malfunctioned during 1998, these anomalies have resulted in the failure of a
total of ten transponders on the satellite to date. While a maximum of 32
transponders can be operated at any time, the satellite was equipped with a
total of 44 transponders to provide redundancy. As a result of this redundancy
and because we are only licensed by the FCC to operate 11 transponders at 61.5
degrees WL, where the satellite is located, the transponder anomaly has not
resulted in a loss of service to date. The satellite manufacturer, Lockheed
Martin, has advised us that it believes it has identified the root cause of the
failures, and that while further transponder failures are possible, based upon
this root cause and the operating configuration of the satellite Lockheed Martin
does not believe it is likely that the operational capacity of EchoStar III will
be reduced below 32 transponders. Lockheed Martin also believes it is unlikely
that our ability to operate at least the 11 licensed frequencies on the
satellite will be affected. We will continue to evaluate the performance of
EchoStar III and may be required to modify our loss assessment as new events or
circumstances develop.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
<S> <C> <C>
Programming ............................ $ 59,769 $ 140,184
Interest ............................... 81,574 106,654
Royalties and copyright fees ........... 91,387 99,005
Marketing .............................. 88,205 90,876
Advances from News/MCI for Echo VI ..... 67,804 41,810
Other .................................. 110,526 138,665
---------- ----------
$ 499,265 $ 617,194
========== ==========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
DirecTV
During February 2000 we filed suit against DirecTV and Thomson Consumer
Electronics/RCA in the Federal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to fend off competition from the
DISH Network. According to the complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and has threatened to cause economic
damage to retailers if they continue to offer both product lines in head-to-head
competition. The suit alleges, among other things, that DirecTV has acted in
violation of federal and state anti-trust laws in order to protect DirecTV's
market share. We are seeking injunctive relief and monetary damages. It is too
early in the litigation to make an assessment of the probable outcome.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our right to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery. It is too early
in the litigation to make an assessment of the probable outcome.
6
<PAGE> 9
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
The News Corporation Limited
We had a contingent fee arrangement with the attorneys who represented us
in litigation with News Corporation which was settled during 1999. The
contingent fee arrangement provides for the attorneys to be paid a percentage of
any net recovery obtained by us in the News Corporation litigation. The
attorneys have asserted that they may be entitled to receive payments totaling
hundreds of millions of dollars under this fee arrangement. We are vigorously
contesting the attorneys' interpretation of the fee arrangement, which we
believe significantly overstates the magnitude of our liability.
During mid-1999, we initiated litigation against the attorneys in Arapahoe
County, Colorado, District Court arguing that the fee arrangement is void and
unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. A two week arbitration hearing has been
set for January 2001. It is too early to determine the outcome of negotiations,
arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd., an
Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, 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.
During September 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
including EchoStar. WIC is a company authorized to broadcast certain copyrighted
work, such as movies and concerts, to residents of Canada. WIC alleges that the
defendants engaged in, promoted, and/or allowed satellite dish equipment from
the United States to be sold in Canada and to Canadian residents and that some
of the defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for viewing
in the United States. The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada, together with damages in excess
of $175 million.
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss, which is currently under appeal. The Alberta Court also granted a
motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EchoStar DBS Corporation, EchoStar Technologies Corporation, and
EchoStar Satellite Broadcast Corporation have been added as defendants in the
litigation. The newly added defendants have also challenged jurisdiction. The
Court in the Federal action has stayed that case before ruling on our motion to
dismiss. We intend to vigorously defend the suits in the event our motions are
denied. 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
The national networks and local affiliate stations successfully challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. Until July 1998, we obtained distant broadcast network
channels for distribution to our customers through PrimeTime 24. In December
1998, the United States District Court for the Southern District of Florida
entered a nationwide permanent injunction preventing PrimeTime 24 from selling
its programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The national networks in the Florida
litigation have admitted that the permanent
7
<PAGE> 10
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
injunction does not apply to us. A federal district court in North Carolina also
issued an injunction against PrimeTime 24 prohibiting certain distant signal
retransmissions in the Raleigh area. We have implemented Satellite Home Viewer
Act compliance procedures which materially restrict the market for the sale of
network channels by us.
In October 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. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against us in federal district court in Miami alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule, although we do not know if they
adhered to this schedule.
The networks are pursuing a Motion for Preliminary Injunction in the Miami
court, asking the court to enjoin us from providing network programming except
under very limited circumstances. A preliminary injunction hearing was held on
September 21, 1999. The Court took the issues under advisement to consider the
networks' request for an injunction, whether to hear live testimony before
ruling upon the request, and whether to hear argument on why the Satellite Home
Viewer Act may be unconstitutional, among other things. The Court did not say
when a decision will be made, or whether an additional hearing will be necessary
prior to ruling upon the networks' preliminary injunction motion. The court has
not yet ruled upon the networks' request for an injunction or indicated whether
any additional hearing will be necessary.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We have
opposed the networks' recent motion and again asked the court to hear live
testimony before ruling upon the networks' injunction request. The judge has not
ruled upon the networks' recent motion and has not indicated whether live
testimony will be heard before the networks' most recent motion is ruled upon.
If this case is decided against us, or a preliminary injunction is issued,
significant material restrictions on the sale of distant ABC, NBC, CBS and Fox
channels by us could result, including potentially a nationwide permanent
prohibition on our broadcast of ABC, NBC, CBS and Fox network channels by
satellite. The litigation and the Satellite Home Viewer Improvement Act, among
other things, could also cause us to terminate delivery of network signals to a
material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. We have sent letters to some of our subscribers warning
that their access to distant broadcast network channels might be terminated and
have terminated ABC, NBC, CBS and Fox programming to many customers. Such
terminations will result in a small reduction in average monthly revenue per
subscriber and could result in increased subscriber turnover.
8
<PAGE> 11
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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.
Meteoroid Events
In November 1998 and 1999, certain meteoroid events occurred as the Earth's
orbit passed through the particulate trail of Comet 55P (Tempel-Tuttle). Similar
meteoroid events are expected to occur again in November 2000. These meteoroid
events pose a potential threat to all in-orbit geosynchronous satellites
including our DBS satellites. While the probability that our satellites will be
damaged by space debris is very small, that probability will increase by several
orders of magnitude during these meteoroid events.
Solar Storms
Due to the current peak in the 11-year solar cycle, increased solar
activity is likely for the next 1 1/2 years. Some of these solar storms pose a
potential threat to all in-orbit geosynchronous satellites including our DBS
satellites. While the probability that the effects from the storms will damage
our satellites or cause service interruptions is generally very small, that
probability will increase by several orders of magnitude during this solar cycle
peak.
7. SEGMENT REPORTING
Financial Data by Business Unit (in thousands)
We 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, 1999
Revenue.............................. $ 583,653 $ 47,692 $ 19,709 $ 8,739 $ 659,793
Net income (loss) before
extraordinary charges............. (171,499) (7,255) 11,769 (12,476) (179,461)
SIX MONTHS ENDED JUNE 30, 2000
Revenue.............................. $ 1,057,234 $ 100,514 $ 33,427 $ 20,675 $ 1,211,850
Net income (loss).................... (340,728) (355) 22,781 312 (317,990)
</TABLE>
8. SUBSEQUENT EVENTS
Debt Redemption
Effective July 14, 2000, we redeemed all of our remaining outstanding
12 7/8% Senior Secured Discount Notes Due 2004 (the "1994 Notes"), 13 1/8%
Senior Secured Discount Notes due 2004 (the "1996 Notes"), 13 1/8% Senior
Secured Notes due 2002 (the "1997 Notes") and 12 1/8% Senior Exchange Notes Due
2004 (the "Exchange Notes") totaling approximately $2.6 million. Aggregate
premium charges of approximately $122,000 related to the redemption of the 1994
Notes, 1996 Notes, 1997 Notes and Exchange Notes were accrued at June 30, 2000.
9
<PAGE> 12
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Digital Dynamite Plans
On July 10, 2000, we announced the commencement of our new Digital Dynamite
promotion. The Digital Dynamite plans offer four choices to consumers, ranging
from the use of one EchoStar receiver system and our America's Top 100
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $99, which includes
standard professional installation and first month's payment. Since the
equipment in the Digital Dynamite plans will be owned by us, those equipment
costs will be capitalized and depreciated over a period of 4 years.
EchoStar V
EchoStar V is equipped with a total of 48 transponders, including 16
spares. Two transponders on the satellite have failed, the most recent loss
occurring during July 2000. While the failures have not impacted the operational
capacity of the satellite and the satellite manufacturer has advised that the
anomalies are probably unrelated, until the root cause of the most recent
anomaly is finally determined, there can be no assurance future similar
anomalies will not cause further transponder losses which could reduce
operational capacity.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the failure of 24 transponders to date, a maximum of approximately 16 of the 44
transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment loss of
$106 million to write-down the carrying value of the satellite and related
costs, and simultaneously recorded an insurance claim receivable for the same
amount. We continue to believe we will ultimately recover at least the amount
originally recorded and do not intend to adjust the amount of the receivable
until there is greater certainty with respect to the amount of the final
settlement.
As a result of the 1999 thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. This change will increase depreciation expense to be
recognized by us during the year ending December 31, 2000 by approximately $9.6
million. We will continue to evaluate the performance of EchoStar IV and may
modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar
III expired July 25, 2000. The insurers have to date refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance
10
<PAGE> 13
ECHOSTAR COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
coverage, it is our belief that the carriers colluded and conspired to boycott
us unless we accept their offer to settle the EchoStar IV claim for $88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing under Colorado Statutes, and unfair claim practices in violation of
Colorado Statutes. Additionally, we have filed a lawsuit against the insurance
carriers in the United States District Court for the District of Colorado
asserting causes of action for violation of Federal and State Antitrust laws.
While we believe we are entitled to the full amount claimed under the EchoStar
IV insurance policy and believe the insurance carriers are in violation of
Antitrust laws and have committed further acts of bad faith in connection with
their refusal to negotiate reasonable insurance coverage on our other
satellites, there can be no assurance as to the outcome of these proceedings.
The indentures related to our 9 1/4% Senior Notes due 2006 (the "Seven Year
Notes") and our 9 3/8% Senior Notes due 2009 (the "Ten Year Notes")
(collectively, the "Seven and Ten Year Notes Indentures") contain restrictive
covenants that require us to maintain satellite insurance with respect to at
least half of the satellites we own. Insurance coverage is therefore required
for at least three of our six satellites currently in orbit. We have procured
normal and customary launch insurance for EchoStar V and EchoStar VI. These
launch insurance policies each provide for insurance of $225.0 million. The
EchoStar V launch insurance policy expires during September 2000. The EchoStar
VI launch insurance policy expires in July 2001. We are currently self-insuring
EchoStar I, EchoStar II, EchoStar III and EchoStar IV. To satisfy insurance
covenants in the Seven and Ten Year Notes Indenture, on July 25, 2000 we
reclassified approximately $60 million from cash and cash equivalents to
restricted cash and marketable investment securities on our balance sheet. The
reclassification will continue until such time, if ever, as the insurers are
again willing to insure our satellites on commercially reasonable terms. A
reclassification equal to the depreciated cost of an additional satellite may be
required after September 2000, if we are unable to obtain in-orbit insurance
after the expiration of the initial period of coverage for EchoStar V.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements contained herein, as well as statements made in press
releases and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking statements.
Among the factors that could cause our actual results to differ materially are
the following: a total or partial loss of one or more satellites due to
operational failures, space debris or otherwise; an unsuccessful deployment of
our sixth satellite, EchoStar VI; delays in the construction of our seventh,
eighth or ninth satellites; inability to settle outstanding claims with
insurers; a decrease in sales of digital equipment and related services to
international direct-to-home service providers; a decrease in DISH Network
subscriber growth; an increase in subscriber turnover; an increase in subscriber
acquisition costs; an inability to obtain certain retransmission consents; our
inability to retain necessary authorizations from the FCC; an 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 and statements filed with the
Securities and Exchange Commission. In addition to statements that explicitly
describe such risks and uncertainties, readers are urged to consider statements
that include the terms "believes," "belief," "expects," "plans," "anticipates,"
"intends" or the like to be uncertain and forward-looking. All cautionary
statements made herein should be read as being applicable to all forward-looking
statements wherever they appear. In this connection, investors should consider
the risks described herein and should not place undue reliance on any
forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999.
Revenue. Total revenue for the three months ended June 30, 2000 was $646
million, an increase of $296 million compared to total revenue for the three
months ended June 30, 1999 of $350 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth. We expect that our
revenues will continue to increase as the number of DISH Network subscribers
increases.
DISH Network subscription television services revenue totaled $555 million
for the three months ended June 30, 2000, an increase of $248 million compared
to the same period in 1999. DISH Network subscription television services
revenue principally consists of revenue from basic, premium and pay-per-view
subscription television services. This increase was directly attributable to the
increase in the number of DISH Network subscribers and higher average revenue
per subscriber. DISH Network subscribers for the three months ended June 30,
2000 increased approximately 34% compared to the same period in 1999. As of June
30, 2000, we had approximately 4.3 million DISH Network subscribers compared to
2.6 million at June 30, 1999. The strong subscriber growth reflects the impact
of aggressive marketing promotions, including our free installation program,
together with increased interest in satellite television resulting from the
availability of local network channels by satellite, and generally good economic
conditions and positive momentum for the DISH Network. DISH Network subscription
television services revenue will continue to increase to the extent we are
successful in increasing the number of DISH Network subscribers and maintaining
or increasing revenue per subscriber.
Monthly average revenue per subscriber was approximately $45.22 during the
three months ended June 30, 2000 and approximately $41.94 during the same period
in 1999. The increase in monthly average revenue per subscriber is primarily
attributable to a $1.00 price increase in America's Top 100 CD, our most popular
programming package, and other price increases, during May 2000, the increased
availability of local channels by satellite together with the earlier successful
introduction of our $39.99 per month America's Top 150 programming package.
While there can be no assurance, we expect more modest increases in monthly
average revenue per subscriber during the remainder of 2000.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
For the three months ended June 30, 2000, DTH equipment sales and
integration services totaled $60 million, an increase of $33 million compared to
the same period during 1999. DTH equipment sales consist of sales of digital
set-top boxes and other digital satellite broadcasting equipment to
international DTH service operators and sales of DBS accessories. This increase
in DTH equipment sales and integration services revenue was primarily
attributable to an increase in international demand for digital set-top boxes as
compared to the same period during 1999.
Substantially all of our EchoStar Technologies Corporation, or ETC,
revenues have resulted from sales to two international DTH providers. We
currently have agreements to provide equipment to DTH service operators in Spain
and Canada. Our future revenue from the sale of DTH equipment and integration
services in international markets depends largely on the success of these DTH
operators and continued demand for our digital set-top boxes. Since our ETC
business currently is economically dependent on these two DTH providers, there
can be no assurance as to total DTH equipment and integration services revenue
for the year ended December 31, 2000. Although we continue to actively pursue
additional distribution and integration service opportunities internationally,
no assurance can be given that any such efforts will be successful.
As previously reported, since 1998, Telefonica's Via Digital, one of the
two DTH service providers described above, has had recurrent discussions and
negotiations for a possible merger with Sogecable's Canal Satelite Digital, one
of its primary competitors. While we are not currently aware of any formal
negotiations between Via Digital and Canal Satelite Digital, there are again
rumors of a potential merger in the marketplace. Although we have binding
purchase orders from Via Digital for deliveries of DTH equipment in 2000, we
cannot predict the impact, if any, eventual consummation of this possible merger
might have on our future sales to Via Digital.
Satellite services revenue totaled $19 million during the three months
ended June 30, 2000, an increase of $10 million as compared to the same period
during 1999. 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 the addition of new full-time BTV customers.
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 and increased subscriber turnover. While
there can be no assurance, any such decreases could be offset by increases in
average monthly revenue per subscriber resulting from the delivery of local
network channels by satellite, and increases in other programming offerings with
the commencement of operation of EchoStar VI.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$314 million during the three months ended June 30, 2000, an increase of $145
million or 86%, compared to the same period in 1999. DISH Network operating
expenses represented 56% and 55% of subscription television services revenue
during the three months ended June 30, 2000 and 1999, respectively. The increase
in DISH Network operating expenses in total and as a percentage of subscription
television services revenue was consistent with, and primarily attributable to,
the increase in the number of DISH Network subscribers.
Subscriber-related expenses totaled $231 million during the three months
ended June 30, 2000, an increase of $98 million compared to the same period in
1999. Such expenses, which include programming expenses, copyright royalties,
residuals currently payable to retailers and distributors, and billing, lockbox
and other variable subscriber expenses, represented 42% and 43% of subscription
television services revenues during the three months ended June 30, 2000 and
1999, respectively. Although we do not currently expect subscriber-related
expenses as a percentage of subscription television services revenue to increase
materially in future periods, there can be no assurance this expense to revenue
ratio will not materially increase.
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Customer service center and other expenses principally consist of costs
incurred in the operation of our DISH Network customer service centers, such as
personnel and telephone expenses, as well as subscriber equipment installation
and other operating expenses. Customer service center and other expenses totaled
$68 million during the three months ended June 30, 2000, an increase of $43
million as compared to the same period in 1999. The increase in customer service
center and other expenses primarily resulted from increased personnel and
telephone expenses to support the growth of the DISH Network and from
installation expenses related to the expansion of our installation business.
Customer service center and other expenses totaled 12% of subscription
television services revenue during the three months ended June 30, 2000, as
compared to 8% during the same period in 1999. The increase in this expense to
revenue ratio primarily resulted from the on-going Construction and start-up
costs of our fourth and fifth customer service centers in Texas and Virginia,
and the continued build-out of our installation offices nationwide. These
expenses in total, and as a percentage of subscription television services
revenue, may continue to increase in future periods as we continue to develop
and expand our customer service centers and installation business to provide
additional customer support and help us better accommodate anticipated
subscriber growth, resulting in long term efficiency improvements.
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 $14 million during the three months ended June 30,
2000, a $3 million increase compared to the same period in 1999. 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 3% of subscription television
services revenue during each of the three months ended June 30, 2000 and 1999.
Cost of sales - DTH equipment and Integration Services. Cost of sales - DTH
equipment and integration services totaled $46 million during the three months
ended June 30, 2000, an increase of $27 million compared to the same period in
1999. Cost of sales - DTH equipment and integration services principally
includes costs associated with digital set-top boxes and related components sold
to international DTH operators and DBS accessories. This increase in cost of
sales - DTH equipment and integration services is consistent with the increase
in DTH equipment sales and integration services revenue. Cost of sales - DTH
equipment and integration services represented 77% and 69% of DTH equipment
revenue, during the three months ended June 30, 2000 and 1999, respectively. The
increase reflects price pressure resulting from increased competition from other
providers of DTH equipment.
Marketing Expenses. We currently subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Marketing
expenses totaled $252 million during the three months ended June 30, 2000, an
increase of $100 million compared to the same period in 1999. 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 $24 million and $9 million
during the three months ended June 30, 2000 and 1999, respectively.
During the three months ended June 30, 2000, our marketing promotions
included our DISH Network One-Rate Plan, C-band bounty program, Great Rewards
program (PrimeStar bounty), cable bounty and a free installation program. Our
subscriber acquisition costs under these programs are significantly higher than
those under our marketing programs historically.
Under the DISH Network One-Rate Plan, consumers are eligible to receive a
rebate of up to $199 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 150 programming or our America's Top 100 CD
programming package plus one premium movie package (or equivalent additional
programming). 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. To the extent that
actual consumer participation levels
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
exceed present expectations, subscriber acquisition costs may increase. Although
there can be no assurance as to the ultimate duration of the DISH Network
One-Rate Plan, we intend to continue it through at least December 2000.
Under our bounty programs, current cable customers are eligible to receive
a free base-level EchoStar receiver system and free installation. To be eligible
for this program, a subscriber must make a one-year commitment to subscribe to
either our America's Top 100 CD programming package plus one premium movie
package (or equivalent additional programming) or our America's Top 150
programming package and prove that they are a current cable customer.
Under our free installation program all customers who purchased an EchoStar
receiver system through April 2000, and from May 24, 2000 to July 31, 2000 are
eligible to receive a free professional installation. The free installation
program was responsible, in part, for the strong subscriber growth during the
first and second quarters of 2000. While there can be no assurance, we expect
that subscriber acquisition costs may be lower during the remainder of 2000
following expiration of the free installation program and commencement of other
less expensive promotional programs including our new Digital Dynamite plans.
That plan provides consumers with the use of up to two receivers plus
installation, in home service and our America's Top 100 CD or America's Top 150
programming packages for only $34.99 to $49.99, plus a $99 up front fee.
During the three months ended June 30, 2000, our total subscriber
acquisition costs, inclusive of acquisition marketing expenses, totaled
approximately $252 million, or approximately $408 per new subscriber activation.
Comparatively, our subscriber acquisition costs during the three months ended
June 30, 1999, inclusive of acquisition marketing expenses, totaled $151
million, or approximately $365 per new subscriber activation. The increase in
our subscriber acquisition costs, on a per new subscriber activation basis,
principally resulted from the impact of several aggressive marketing promotions
to acquire new subscribers, including most significantly our free installation
offer which was reinstated at the end of May and is scheduled to conclude during
the third quarter.
Our per subscriber acquisition costs declined compared to the three months
ended March 31, 2000, as a result, among other things, of the suspension of our
free installation program for approximately one month during the second quarter
2000, cost saving modifications to our PrimeStar and C-band bounty in April
2000, and an increase in direct sales to subscribers during the three months
ended June 30, 2000. The decrease also resulted from the limited rollout of our
Digital Dynamite promotion, which allows us to capitalize and depreciate over 4
years certain costs which would otherwise be expensed at the time of sale.
Capital expenditures under our Digital Dynamite promotion totaled approximately
$4 million for the three months ended June 30, 2000. As a result of continuing
competition and our plans to attempt to continue to drive rapid subscriber
growth, we expect our per subscriber acquisition costs for 2000 may average as
much as $450 or more for the full year.
Most of our core programming is broadcast from our satellites at the 119
degree orbital location, and almost all of our subscribers have EchoStar
receiver systems that can view programming from that location. With the
commencement of additional services from the 110 degree orbital location
following the successful launch of EchoStar V, our existing subscribers will
need to upgrade their dish and receiver systems in order to take advantage of
the additional services we now offer. To encourage existing subscribers to
upgrade their systems and remain subscribers, we are currently subsidizing
upgrades by existing subscribers to our DISH 500 system, which receives
programming from both the 110 degree and 119 degree orbital locations. The cost
of this program could be significant if utilized by a large number of our
existing subscribers, though upgrades should also result in increased revenue
per subscriber.
Our subscriber acquisition costs, both in the aggregate and on a per new
subscriber activation basis, may materially increase further to the extent that
we continue or expand our bounty program, our "free system/free installation"
program, the DISH Network One-Rate Plan, or other more aggressive promotions if
we determine that they are necessary to respond to competition, or for other
reasons.
General and Administrative Expenses. General and administrative expenses
totaled $58 million during the three months ended June 30, 2000, an increase of
$27 million as compared to the same period in 1999. The increase in G&A expenses
was principally attributable to increased personnel expenses to support the
growth of the DISH
15
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Network. G&A expenses represented 9% of total revenue during each of the three
months ended June 30, 2000 and 1999. Although we expect G&A expenses as a
percentage of total revenue to remain near the current level or decline modestly
in future periods, this expense to revenue ratio could increase.
Non-cash, Stock-based Compensation. During 1999, we adopted an incentive
plan which provided certain key employees with incentives including stock
options. The payment of these incentives was contingent upon our achievement of
certain financial and other goals. We met certain of these goals during 1999.
Accordingly, during 1999, we recorded approximately $179 million of deferred
compensation related to post-grant appreciation of stock options granted
pursuant to the 1999 incentive plan. The related deferred compensation will be
recognized over the five-year vesting period. Accordingly, during the three
months ended June 30, 2000 and 1999 we recognized $13 million and $1.7 million,
respectively, under this performance-based plan.
We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for key
employees who participate in the 1999 incentive plan:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 2000
------- --------
<S> <C> <C>
Customer service center and other.......................... $ 342 $ 546
Satellite and transmission................................. 229 656
General and administrative................................. 1,148 11,820
------- --------
Total non-cash, stock-based compensation.............. $ 1,719 $ 13,022
======= ========
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash, stock-based compensation. EBITDA was negative $31
million during the three months ended June 30, 2000 compared to negative $23
million during the same period in 1999. This decline in EBITDA principally
resulted from an increase in subscriber acquisition costs due to the success of
several aggressive marketing promotions to acquire new subscribers, as well as
other previously described factors. 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, 2000 and 1999 does not
include approximately $13 million and $1.7 million, respectively, of non-cash
compensation expense resulting from post-grant appreciation of employee stock
options. 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 $42 million during the three months ended June 30, 2000, a $16
million increase compared to the same period in 1999. The increase in
depreciation and amortization expenses principally resulted from an increase in
depreciation related to the commencement of operation of EchoStar V in November
1999 and other depreciable assets placed in service during 1999.
Other Income and Expense. Other expense, net totaled $47 million during the
three months ended June 30, 2000, an increase of $22 million compared to the
same period in 1999. This increase resulted from an increase in interest expense
partially offset by an increase in interest income.
16
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999.
Revenue. Total revenue for the six months ended June 30, 2000 was $1.212
billion, an increase of $552 million compared to total revenue for the six
months ended June 30, 1999 of $660 million. The increase in total revenue was
primarily attributable to DISH Network subscriber growth
DISH Network subscription television services revenue totaled $1.032
billion for the six months ended June 30, 2000, an increase of $464 million
compared to the same period in 1999. This increase was directly attributable to
the increase in the number of DISH Network subscribers and higher average
revenue per subscriber. DISH Network subscribers for the six months ended June
30, 2000 increased approximately 37% compared to the same period in 1999.
For the six months ended June 30, 2000, DTH equipment sales and integration
services totaled $123 million, an increase of $63 million compared to the same
period during 1999. This increase in DTH equipment sales and integration
services revenue was primarily attributable to an increase in international
demand for digital set-top boxes as compared to the same period during 1999.
Satellite services revenue totaled $34 million during the six months ended
June 30, 2000, an increase of $17 million as compared to the same period during
1999. The increase in satellite services revenue was primarily attributable to
the addition of new full-time BTV customers.
DISH Network Operating Expenses. DISH Network operating expenses totaled
$584 million during the six months ended June 30, 2000, an increase of $271
million or 87%, compared to the same period in 1999. 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 57% and 55% of subscription television services revenue
during the six months ended June 30, 2000 and 1999, respectively. The percentage
increase is primarily attributable to operating inefficiencies resulting from
our rapid growth during the first quarter 2000 including upgrades to our
installation and call center infrastructure.
Subscriber-related expenses totaled $433 million during the six months
ended June 30, 2000, an increase of $190 million compared to the same period in
1999. Such expenses represented 42% and 43% of subscription television services
revenues during the six months ended June 30, 2000 and 1999, respectively.
Customer service center and other expenses totaled $124 million during the
six months ended June 30, 2000, an increase of $75 million as compared to the
same period in 1999. The increase in customer service center and other expenses
primarily resulted from increased personnel and telephone expenses to support
the growth of the DISH Network and from installation expenses related to the
expansion of our installation business. Customer service center and other
expenses totaled 12% of subscription television services revenue during the six
months ended June 30, 2000, as compared to 9% during the same period in 1999.
The increase in this expense to revenue ratio primarily resulted from the
on-going Construction and start-up costs of our fourth and fifth customer
service centers in Texas and Virginia, and the continued build-out of our
installation offices nationwide.
Satellite and transmission expenses totaled $26 million during the six
months ended June 30, 2000, a $6 million increase compared to the same period in
1999. 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 totaled 3% and 4% of
subscription television services revenue during the six months ended June 30,
2000 and 1999, respectively.
Cost of sales - DTH equipment and Integration Services. Cost of sales - DTH
equipment and integration services totaled $93 million during the six months
ended June 30, 2000, an increase of $51 million compared to the same period in
1999. This increase in cost of sales - DTH equipment and integration services is
consistent with the increase in DTH equipment sales and integration services
revenue. Cost of sales - DTH equipment and integration services represented 75%
and 70% of DTH equipment revenue, during the six months ended June 30, 2000 and
1999, respectively. The increase reflects price pressure resulting from
increased competition from other providers of DTH equipment.
17
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Marketing Expenses. Marketing expenses totaled $526 million during the six
months ended June 30, 2000, an increase of $235 million compared to the same
period in 1999. The increase in marketing expenses was primarily attributable to
an increase in subscriber promotion subsidies, resulting from several aggressive
marketing promotions. Advertising and other expenses totaled $48 million and $21
million during the six months ended June 30, 2000 and 1999, respectively.
General and Administrative Expenses. General and administrative expenses
totaled $114 million during the six months ended June 30, 2000, an increase of
$53 million as compared to the same period in 1999. The increase in G&A expenses
was principally attributable to increased personnel expenses to support the
growth of the DISH Network. G&A expenses represented 9% of total revenue during
each of the six months ended June 30, 2000 and 1999.
Non-cash, Stock-based Compensation. As a result of substantial post-grant
appreciation of stock options, during the six months ended June 30, 2000 and
1999 we recognized $27 million and $1.7 million, respectively, of the total
remaining deferred stock-based compensation under the 1999 incentive plan. The
remainder will be recognized over the remaining vesting period.
We report all non-cash compensation based on stock option appreciation as a
single expense category in our accompanying statements of operations. The
following table represents the other expense categories in our statements of
operations that would be affected if non-cash, stock-based compensation was
allocated to the same expense categories as the base compensation for certain
key employees who participated in the 1999 incentive plan:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 2000
------- --------
<S> <C> <C>
Customer service center and other.......................... $ 342 $ 1,201
Satellite and transmission................................. 229 1,311
General and administrative................................. 1,148 24,519
------- --------
Total non-cash, stock-based compensation.............. $ 1,719 $ 27,031
======= ========
</TABLE>
EBITDA. EBITDA represents earnings before interest, taxes, depreciation,
amortization, and non-cash, stock-based compensation. EBITDA was negative $119
million during the six months ended June 30, 2000 compared to negative $54
million during the same period in 1999. This decline in EBITDA principally
resulted from an increase in subscriber acquisition costs due to the success of
several aggressive marketing promotions to acquire new subscribers, as well as
other previously described factors. 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, 2000 does not include
approximately $27 million of non-cash compensation expense resulting from
post-grant appreciation of employee stock options. 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 $82 million during the six months ended June 30, 2000, a $31 million
increase compared to the same period in 1999. The increase in depreciation and
amortization expenses principally resulted from an increase in depreciation
related to the commencement of operation of EchoStar V in November 1999 and
other depreciable assets placed in service during 1999.
Other Income and Expense. Other expense, net totaled $90 million during the
six months ended June 30, 2000, an increase of $17 million compared to the same
period in 1999. This increase resulted from an increase in interest expense
partially offset by an increase in interest income.
18
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash Sources
As of June 30, 2000, our unrestricted cash, cash equivalents and marketable
investment securities totaled $891 million compared to $1.254 billion as of
December 31, 1999. For the six months ended June 30, 1999 and 2000, we reported
net cash flows from operating activities of $72 million and negative $137
million, respectively. The increase in net cash flow used in operating
activities reflects, among other things, the significant increase in subscriber
acquisition costs associated with our rapid subscriber growth and our "free
installation" promotion, and the build up of our inventory to prepare for
historically strong subscriber additions during the third and fourth quarter of
2000.
We expect that our future working capital, capital expenditure and debt
service requirements will be satisfied primarily from existing cash and
investment balances and cash generated from operations. Our ability to generate
positive future operating and net cash flows is dependent upon our ability to
continue to rapidly expand our DISH Network subscriber base, retain existing
DISH Network subscribers, and our ability to grow our ETC and Satellite Services
businesses. There can be no assurance that we will be successful in achieving
our goals. The amount of capital required to fund our 2000 working capital and
capital expenditure needs will vary, depending, among other things, on the rate
at which we acquire new subscribers and the cost of subscriber acquisition. Our
working capital and capital expenditure requirements could increase materially
in the event of increased competition for subscription television customers,
significant satellite failures, or in the event of a general economic downturn,
among other factors. These factors could require that we raise additional
capital in the future.
Subscriber Turnover
Our churn increased during 1999, but did not further increase during the
six months ended June 30, 2000. We believe that our average churn continues to
be lower than satellite industry averages. Our maturing subscriber base,
together with the effects of rapid growth, were primarily responsible for the
increase in churn during 1999. Rapid growth resulted in customer installation
delays, and the effectiveness of our customer service was also impacted. We are
rapidly expanding our customer service and installation capabilities in response
to our increased business, but churn may increase until we have completed the
upgrades to our infrastructure. Further, our litigation with the networks in
Miami, and other factors, could cause us to terminate delivery of distant
network channels to a material portion of our subscriber base, which could cause
many of those customers to cancel their subscription to our other services. Any
such terminations could result in a small reduction in average monthly revenue
per subscriber and could result in increased churn. While there can be no
assurance, notwithstanding the issues discussed above we have and expect to be
able to continue to manage churn below satellite industry averages during 2000.
Subscriber Acquisition Costs
As previously described, we subsidize the purchase and installation of
EchoStar receiver systems in order to attract new DISH Network subscribers.
Consequently, our subscriber acquisition costs are significant. Our average
subscriber acquisition cost was $437 during the six months ended June 30, 2000.
Our Digital Dynamite promotion allows us to capitalize and depreciate over 4
years certain costs that would otherwise be expensed at the time of sale but
also results in increased capital expenditures. Capital expenditures under our
Digital Dynamite promotion totaled approximately $4 million for the six months
ended June 30, 2000. As a result of continuing competition and our plans to
attempt to continue to drive rapid subscriber growth, we expect our per
subscriber acquisition costs for 2000 may average as much as $450 or more for
the full year. Our subscriber acquisition costs, both in the aggregate and on a
per new subscriber activation basis, may materially increase if our Digital
Dynamite promotion is not widely accepted, or to the extent that we continue or
expand our bounty program, our "free system/free installation" program, the DISH
Network One-Rate Plan, or other more aggressive promotions if we determine that
they are necessary to respond to competition, or for other reasons.
19
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Funds necessary to meet subscriber acquisition costs will be satisfied from
existing cash and investment balances to the extent available. We may, however,
be required to raise additional capital in the future to meet these
requirements, particularly if our Digital Dynamite promotion gains wide
acceptance. If we were required to raise capital today, a variety of debt and
equity funding sources would likely be available to us. However, there can be no
assurance that additional financing will be available on acceptable terms, or at
all, if needed in the future.
Conditional Access System
The access control system is central to the security network that prevents
unauthorized viewing of programming. Theft of cable and satellite programming
has been widely reported and our signal encryption has been pirated and could be
further compromised in the future. If other measures are not successful, it
could be necessary to replace the credit card size card that controls the
security of each consumer set top box at a material cost to us.
Obligations and Future Capital Requirements
As of June 30, 2000, we had approximately $3.0 billion of outstanding
long-term debt (including the current portion), which includes $2.6 million of
outstanding notes that were not tendered during our January 1999 refinancing.
Effective July 14, 2000, we redeemed the remaining outstanding amount of $2.6
million principal on the 12 7/8% Senior Secured Discount Notes Due 2004 (1994
Notes), 13 1/8% Senior Secured Discount Notes due 2004 (1996 Notes), 13 1/8%
Senior Secured Notes due 2002 (1997 Notes) and 12 1/8% Senior Exchange Notes Due
2004 (Exchange Notes). Total premium charges of approximately $122,000 were paid
in connection with the redemption of the 1994 Notes, 1996 Notes, 1997 Notes and
Exchange Notes.
Semi-annual cash debt service requirements of approximately $94 million
related to our 9 1/4% Senior Notes due 2006 (Seven Year Notes) and our 9 3/8%
Senior Notes due 2009 (Ten Year Notes), is payable in arrears on February 1 and
August 1 each year. Semi-annual cash debt service requirements of approximately
$24 million related to our 4 7/8% Convertible Subordinated Notes due 2007 is
payable in arrears on January 1 and July 1 of each year, commencing July 1,
2000. There are no scheduled principal payment or sinking fund requirements
prior to maturity of any of these notes.
The indentures related to our 9 1/4% Senior Notes due 2006 (the Seven Year
Notes) and our 9 3/8% Senior Notes due 2009 (the Ten Year Notes) (collectively,
the Seven and Ten Year Notes Indentures) contain restrictive covenants that
require us to maintain satellite insurance with respect to at least half of the
satellites we own. Insurance coverage is therefore required for at least three
of our six satellites currently in orbit. We have procured normal and customary
launch insurance for EchoStar V and EchoStar VI. These launch insurance policies
each provide for insurance of $225.0 million. The EchoStar V launch insurance
policy expires during September 2000. The EchoStar VI launch insurance policy
expires in July 2001. We are currently self-insuring EchoStar I, EchoStar II,
EchoStar III and EchoStar IV. To satisfy insurance covenants in the Seven and
Ten Year Notes Indenture, on July 25, 2000 we reclassified approximately $60
million from cash and cash equivalents to restricted cash and marketable
investment securities on our balance sheet. The reclassification will continue
until such time, if ever, as the insurers are again willing to insure our
satellites on commercially reasonable terms. A reclassification equal to the
depreciated cost of an additional satellite may be required after September
2000, if we are unable to obtain in-orbit insurance after the expiration of the
initial period of coverage for EchoStar V.
We utilized $91 million of satellite vendor financing for our first four
satellites. As of June 30, 2000, approximately $32 million of that satellite
vendor financing remained outstanding. The satellite vendor financing bears
interest at 8 1/4% and is payable in equal monthly installments over five years
following launch of the satellite to which it relates. A portion of the contract
price with respect to EchoStar VII is payable over a period of 13 years
following launch with interest at 8%, and a portion of the contract price with
respect to EchoStar VIII and EchoStar IX is payable following launch with
interest at 8%. Those in orbit payments are contingent on the continued health
of the satellite.
Dividends on our 6 3/4% Series C Cumulative Convertible Preferred Stock
began to accrue on November 2, 1999. Holders of the Series C Preferred Stock are
entitled to receive cumulative dividends at an annual rate of 6 3/4% of the
Liquidation Preference of $50 per share. Dividends are payable quarterly in
arrears, commencing
20
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
February 1, 2000, when, as, and if declared by our Board of Directors. All
accumulated and unpaid dividends may, at our option, be paid in cash, Class A
common stock, or a combination thereof upon conversion or redemption. We
declared a cash dividend of approximately $212,000 or $0.84375 per share,
payable on August 1, 2000 to Series C Preferred Stock shareholders of record on
July 21, 2000.
During the remainder of 2000, we anticipate total capital expenditures of
approximately $225-$345 million. This amount includes approximately $150-$200
million related to the construction and launch of EchoStar VII, EchoStar VIII
and EchoStar IX, approximately $50-$100 million or more related to EchoStar
receiver systems to be provided under our Digital Dynamite promotion and $30
million for capital expenditures related to the build-out of our digital
broadcast centers.
On July 10, 2000, we announced the commencement of our new Digital Dynamite
promotion. The Digital Dynamite plans offer four choices to consumers, ranging
from the use of one EchoStar receiver system and our America's Top 100
programming package for $34.99 per month, to providing consumers two EchoStar
receiver systems and our America's Top 150 programming package for $49.99 per
month. With each plan, consumers receive in-home-service, must agree to a
one-year commitment and incur a one-time set-up fee of $99, which includes
standard professional installation and first month's payment. Since the
equipment in the Digital Dynamite plans will be owned by us, those equipment
costs will be capitalized and depreciated over a period of 4 years.
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 6-satellite Low Earth Orbit Mobile system. We will need to raise additional
capital to fully construct these satellites. We recently announced agreements
for the construction and delivery of three new satellites. Two of these
satellites, EchoStar VII and EchoStar VIII, will be advanced, high-powered DBS
satellites. The third satellite, EchoStar IX, will be a hybrid Ku/Ka-band
satellite.
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. During the first half of 2000, subscriber growth exceeded
our expectations. To the extent the subscriber growth rate continues to exceed
our expectations and to the extent that our Digital Dynamite promotion is
successful, it may be necessary for us to raise additional capital to fund
increased working capital requirements. There may be a number of other factors,
some of which are beyond our control or ability to predict, that could require
us to raise additional capital. These factors include unexpected increases in
operating costs and expenses, a defect in or the loss of any satellite, or an
increase in the cost of acquiring subscribers due to additional competition,
among other things. If cash generated from our operations is not sufficient to
meet our debt service requirements or other obligations, we would be required to
obtain cash from other financing sources. If we were required to raise capital
today a variety of debt and equity funding sources would likely be available to
us. However, there can be no assurance that such financing would be available on
terms acceptable to us, or if available, that the proceeds of such financing
would be sufficient to enable us to meet all of our obligations.
21
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DirecTV
During February 2000 we filed suit against DirecTV and Thomson Consumer
Electronics/RCA in the Federal District Court of Colorado. The suit alleges that
DirecTV has utilized improper conduct in order to fend off competition from the
DISH Network. According to the complaint, DirecTV has demanded that certain
retailers stop displaying our merchandise and has threatened to cause economic
damage to retailers if they continue to offer both product lines in head-to-head
competition. The suit alleges, among other things, that DirecTV has acted in
violation of federal and state anti-trust laws in order to protect DirecTV's
market share. We are seeking injunctive relief and monetary damages. It is too
early in the litigation to make an assessment of the probable outcome.
The DirecTV defendants filed a counterclaim against us. DirecTV alleges
that we tortuously interfered with a contract that DirecTV allegedly had with
Kelly Broadcasting Systems, Inc. ("KBS"). DirecTV alleges that we "merged" with
KBS, in contravention of DirecTV's contract with KBS. DirecTV also alleges that
we have falsely advertised to consumers about our right to offer network
programming. DirecTV further alleges that we improperly used certain marks owned
by PrimeStar, now owned by DirecTV. Finally, DirecTV alleges that we have been
marketing National Football League games in a misleading manner. The amount of
damages DirecTV is seeking is as yet unquantified. We intend to vigorously
defend against these claims. The case is currently in discovery.
The News Corporation Limited
We had a contingent fee arrangement with the attorneys who represented us
in the litigation with News Corporation. The contingent fee arrangement provides
for the attorneys to be paid a percentage of any net recovery obtained by us in
the News Corporation litigation. The attorneys have asserted that they may be
entitled to receive payments totaling hundreds of millions of dollars under this
fee arrangement. We are vigorously contesting the attorneys' interpretation of
the fee arrangement, which we believe significantly overstates the magnitude of
our liability.
During mid-1999, we initiated litigation against the attorneys in the
Arapahoe County, Colorado, District Court arguing that the fee arrangement is
void and unenforceable. In December 1999, the attorneys initiated an arbitration
proceeding before the American Arbitration Association. The litigation has been
stayed while the arbitration is ongoing. A two week arbitration hearing has been
set for January 2001. It is too early to determine the outcome of negotiations,
arbitration or litigation regarding this fee dispute.
WIC Premium Television Ltd.
During July 1998, a lawsuit was filed by WIC Premium Television Ltd., an
Alberta corporation, in the Federal Court of Canada Trial Division, against
General Instrument Corporation, HBO, Warner Communications, Inc., John Doe,
Showtime, United States Satellite Broadcasting Company, Inc., EchoStar, 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.
During September 1998, WIC filed another lawsuit in the Court of Queen's
Bench of Alberta Judicial District of Edmonton against certain defendants,
including EchoStar. WIC is a company authorized to broadcast certain copyrighted
work, such as movies and concerts, to residents of Canada. WIC alleges that the
defendants engaged in, promoted, and/or allowed satellite dish equipment from
the United States to be sold in Canada and to Canadian residents and that some
of the defendants allowed and profited from Canadian residents purchasing and
viewing subscription television programming that is only authorized for viewing
in the United States. The lawsuit seeks, among other things, an interim and
permanent injunction prohibiting the defendants from importing hardware into
Canada and from activating receivers in Canada, together with damages in excess
of $175 million.
22
<PAGE> 25
PART II - OTHER INFORMATION
We filed motions to dismiss each of the actions for lack of personal
jurisdiction. The Court in the Alberta action recently denied our Motion to
Dismiss, which is currently under appeal. The Alberta Court also granted a
motion to add more EchoStar parties to the lawsuit. EchoStar Satellite
Corporation, EchoStar DBS Corporation, EchoStar Technologies Corporation, and
EchoStar Satellite Broadcast Corporation have been added as defendants in the
litigation. The newly added defendants have also challenged jurisdiction. The
Court in the Federal action has stayed that case before ruling on our motion to
dismiss. We intend to vigorously defend the suits in the event our motions are
denied. 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
The national networks and local affiliate stations successfully challenged,
based upon copyright infringement, PrimeTime 24's methods of selling network
programming to consumers. Until July 1998, we obtained distant broadcast network
channels for distribution to our customers through PrimeTime 24. In December
1998, the United States District Court for the Southern District of Florida
entered a nationwide permanent injunction preventing PrimeTime 24 from selling
its programming to consumers unless the programming was sold in accordance with
certain stipulations in the injunction. The national networks in the Florida
litigation have admitted that the permanent injunction does not apply to us. A
federal district court in North Carolina also issued an injunction against
PrimeTime 24 prohibiting certain distant signal retransmissions in the Raleigh
area. We have implemented Satellite Home Viewer Act compliance procedures which
materially restrict the market for the sale of network channels by us.
In October 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. In November 1998, the
four major broadcast networks and their affiliate groups filed a complaint
against us in federal district court in Miami alleging, among other things,
copyright infringement. The court combined the case that we filed in Colorado
with the case in Miami and transferred it to the Miami court. The case remains
pending in Miami.
In February 1999, CBS, NBC, Fox and ABC filed a "Motion for Temporary
Restraining Order, Preliminary Injunction and Contempt Finding" against DirecTV,
Inc. in Miami related to the delivery of distant network channels to DirecTV
customers by satellite. Under the terms of a settlement between DirecTV and the
networks, some DirecTV customers were scheduled to lose access to their
satellite-provided network channels by July 31, 1999, while other DirecTV
customers were to be disconnected by December 31, 1999. Subsequently, PrimeTime
24 and substantially all providers of satellite-delivered network programming
other than us agreed to this cut-off schedule, although we do not know if they
adhered to this schedule.
The networks are pursuing a Motion for Preliminary Injunction in the Miami
court, asking the court to enjoin us from providing network programming except
under very limited circumstances. A preliminary injunction hearing was held on
September 21, 1999. The Court took the issues under advisement to consider the
networks' request for an injunction, whether to hear live testimony before
ruling upon the request, and whether to hear argument on why the Satellite Home
Viewer Act may be unconstitutional, among other things. The Court did not say
when a decision will be made, or whether an additional hearing will be necessary
prior to ruling upon the networks' preliminary injunction motion. The court has
not yet ruled upon the networks' request for an injunction or indicated whether
any additional hearing will be necessary.
In March 2000, the networks filed an emergency motion again asking the
court to issue an injunction requiring us to turn off network programming to
certain of our customers. At that time, the networks also argued that our
compliance procedures violate the Satellite Home Viewer Improvement Act. We have
opposed the networks' recent motion and again asked the court to hear live
testimony before ruling upon the networks' injunction request.
23
<PAGE> 26
PART II - OTHER INFORMATION
The judge has not ruled upon the networks' recent motion and has not indicated
whether live testimony will be heard before the networks' most recent motion is
ruled upon.
If this case is decided against us, or a preliminary injunction is issued,
significant material restrictions on the sale of distant ABC, NBC, CBS and Fox
channels by us could result, including potentially a nationwide permanent
prohibition on our broadcast of ABC, NBC, CBS and Fox network channels by
satellite. The litigation and the Satellite Home Viewer Improvement Act, among
other things, could also cause us to terminate delivery of network signals to a
material portion of our subscriber base, which could cause many of these
subscribers to cancel their subscription to our other services. While the
networks have not sought monetary damages, they have sought to recover attorney
fees if they prevail. We have sent letters to some of our subscribers warning
that their access to distant broadcast network channels might be terminated and
have terminated ABC, NBC, CBS and Fox programming to many customers. Such
terminations will result in a small reduction in average monthly revenue per
subscriber and could result in increased subscriber turnover.
Satellite Insurance
As a result of the failure of EchoStar IV solar arrays to fully deploy and
the failure of 24 transponders to date, a maximum of approximately 16 of the 44
transponders on EchoStar IV are available for use at this time. Due to the
normal degradation of the solar arrays, the number of available transponders
will further decrease over time. In addition to the transponder and solar array
failures, EchoStar IV experienced anomalies affecting its thermal systems and
propulsion system during 1999. There can be no assurance that further material
degradation, or total loss of use, of EchoStar IV will not occur.
In September 1998, we filed a $219.3 million insurance claim for a
constructive total loss under the launch insurance policies covering EchoStar
IV. The satellite insurance consists of separate identical policies with
different carriers for varying amounts which, in combination, create a total
insured amount of $219.3 million.
The insurance carriers offered us a total of approximately $88 million, or
40% of the total policy amount, in settlement of the EchoStar IV insurance
claim. The insurers allege that all other impairment to the satellite occurred
after expiration of the policy period and is not covered. We strongly disagree
with the position of the insurers and we have filed an arbitration claim against
them for breach of contract, failure to pay a valid insurance claim and bad
faith denial of a valid claim, among other things. There can be no assurance
that we will receive the amount claimed or, if we do, that we will retain title
to EchoStar IV with its reduced capacity.
At the time we filed our claim in 1998, we recognized an impairment loss of
$106 million to write-down the carrying value of the satellite and related
costs, and simultaneously recorded an insurance claim receivable for the same
amount. We continue to believe we will ultimately recover at least the amount
originally recorded and do not intend to adjust the amount of the receivable
until there is greater certainty with respect to the amount of the final
settlement.
As a result of the 1999 thermal and propulsion system anomalies, we reduced
the estimated remaining useful life of EchoStar IV to approximately 4 years
during January 2000. This change will increase depreciation expense to be
recognized by us during the year ending December 31, 2000 by approximately $9.6
million. We will continue to evaluate the performance of EchoStar IV and may
modify our loss assessment as new events or circumstances develop.
The in-orbit insurance policies for EchoStar I, EchoStar II, and EchoStar
III expired July 25, 2000. The insurers have to date refused to renew insurance
on EchoStar I, EchoStar II and EchoStar III on reasonable terms. Based on, among
other things, the insurance carriers' unanimous refusal to negotiate reasonable
renewal insurance coverage, it is our belief that the carriers colluded and
conspired to boycott us unless we accept their offer to settle the EchoStar IV
claim for $88 million.
Based on the carriers' actions, we have added causes of action in our
EchoStar IV demand for arbitration for breach of the duty of good faith and fair
dealing under Colorado Statutes, and unfair claim practices in violation of
Colorado Statutes. Additionally, we have filed a lawsuit against the insurance
carriers in the United States District Court for the District of Colorado
asserting causes of action for violation of Federal and State Antitrust laws.
While we
24
<PAGE> 27
PART II - OTHER INFORMATION
believe we are entitled to the full amount claimed under the EchoStar
IV insurance policy and believe the insurance carriers are in violation of
Antitrust laws and have committed further acts of bad faith in connection with
their refusal to negotiate reasonable insurance coverage on our other
satellites, there can be no assurance as to the outcome of these proceedings.
We are subject to various other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to those actions will not materially affect our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted upon at the annual meeting of shareholders
of EchoStar Communications Corporation held on April 28, 2000:
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 2001 annual meeting of shareholders, and
b. The ratification of the appointment of Arthur Andersen LLP as
independent auditors for Echostar Communications Corporation for the
year ending December 31, 2000.
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 2,467,807,230 -- 1,003,039
James DeFranco 2,467,807,108 -- 1,003,161
David K. Moskowitz 2,467,807,230 -- 1,003,039
Raymond L. Friedlob 2,467,806,490 -- 1,003,779
O. Nolan Daines 2,467,806,470 -- 1,003,799
Ratification of the appointment
of Arthur Andersen LLP as
independent auditors for
Echostar Communications
Corporation for the year
ending December 31, 2000 2,467,662,686 142,226 5,357
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27+ Financial Data Schedule.
------------
+ Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of 2000.
25
<PAGE> 28
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 1, 2000
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
